In a classic case of “too little, too late”, the U.S. Senate voted to ban “liar loans” as part of the financial regulatory reform bill and require lenders to fully document a borrower’s income before approving a loan.

From a CNNMoney report:

This would effectively end the origination of no-doc or stated-income mortgages, which many call “liar loans” because borrowers did not have to prove their income. Housing experts point to these mortgages as one catalyst for the housing collapse.

The bill would also prohibit lenders from giving brokers incentives for steering customers to loans with higher interest rates or prepayment penalties.

“Deceptive mortgage practices like hidden steering payments directly led to the Wall Street meltdown and resulted in millions of families losing their homes,” said Sen. Jeff Merkley, D-Ore., co-author of the bill.

The provisions build on Federal Reserve regulations that required lenders to verify the income and assets of subprime borrowers. Those rules, which went into effect in October, did not ban incentive payments, called yield-spread premiums.

“This should make the mortgage market a safer place for consumers,” said Julia Gordon, senior policy council for the Center for Responsible Lending.



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