Consumers got a break in the Senate today, as an amendment to the Wall Street reform bill from Jeff Merkley and Amy Klobuchar passed by a 63-36 count would impose tough new standards on the mortgage lending industry.
The amendment, borrowed from the lending rules governing many states, has two major parts. One, it establishes underwriting standards that forces lenders to take into account ability to pay from income and other assets when making loans to borrowers. Second, and more important, it makes illegal the practice of “steering payments,” where lenders actually get a bonus for pushing their customers into high-risk loans with high reset rates. It prohibits the loan originator from receiving kickbacks from other parties on loans as well. This is from the press release:
“This predatory subprime mortgage practice directly led to the collapse of our largest financial firms and resulted in millions of lost jobs and foreclosed homes,” said Merkley. “I urge my colleagues on both sides of the aisle to join this effort to put an end to deceptive mortgage practices that hurt our economy and threaten the livelihood of families in communities across the country.”
Under the current rules, mortgage lenders and loan originators are allowed to steer families into high-cost and riskier loans, even when they qualify for affordable loans. A Wall Street Journal study found that 61 percent of the subprime loans that originated in 2006 went to families who qualified for prime loans. This practice was a key driver of the housing bubble and, ultimately, the foreclosure crisis that has devastated communities across the nation.
If the Wall Street reform bill passes, the environment for buying a home will be mildly safer and less deceptive. Merkley already had added a provision in the bill to ban pre-payment penalties. And banning steering payments would help put families into more solid loans at the outset. The problem we have right now, of course, is with families already in their home loans and struggling to pay them. The foreclosure prevention program put forward by the Obama Administration has been a complete failure. So we still need to deal with the current housing crisis. But this amendment at least would try to arrest the lax lending standards that helped cause the problem.
A more stringent amendment from Bob Corker, which would force a certain amount of capital payments on any home buyer, is up for vote right now.
UPDATE: Two things. The Corker amendment failed, 42-57.
Also, an amendment adopted last night by voice vote actually un-appropriated $150 billion from the TARP, making it a $550 billion dollar program. The Treasury never spent the full amount of TARP, and while this new amendment allows a small cushion for the Treasury in case more trouble comes to the financial system, but pulls back the rest of the money.
UPDATE II: Grassley, Collins, Scott Brown, Snowe and Lugar voted for the Merkley/Klobuchar amendment. It’s interesting to see Grassley move to the left during this debate. Right now an amendment from Isakson and Landrieu are on the floor that would increase risk for lenders, presumably to make them careful in their underwriting. It would force 20% equity in a down payment, either in cash or insurance on the loan. Senators appear somewhat serious about tightening lending standards.
UPDATE III: All of these lending pieces and more are mirrored in the House version of the bill. Here’s an abstract of that.