House votes to outlaw 'liar loans'

[May 08, 2009]  WASHINGTON (AP) -- The House voted Thursday to outlaw "liar loans," ballooning mortgage payments and other bank practices that lawmakers say preyed on consumers who couldn't afford their homes.

The proposal, by North Carolina Democratic Reps. Brad Miller and Melvin Watt, is one of several that Democrats are pushing to tighten controls on an industry that critics say undermined the economy by underwriting risky loans, then passing them off to investors.

The bill passed 300-114, with many Republicans contending it would limit consumers' options and restrict credit.

Democrats said it would ban only the most egregious lending practices and wouldn't keep most people from getting a mortgage they can afford.

"The simple fact is that our laws and enforcement efforts did not keep pace with the complexities of a global economy and a financial industry where the greed of some trumped common sense," said House Speaker Nancy Pelosi, D-Calif.

Under the bill, banks offering other than traditional fixed-rate mortgages would have to verify a person's credit history and income and make a "reasonable and good faith determination" that a loan can be repaid. This provision is aimed at eliminating high-risk credit lines that became known as "liar loans" because they required little or no documentation.

Banks also would have to make sure the loan provides a "net tangible benefit" for the consumer.

Mortgage brokers and loan officers would lose incentive to steer consumers to more costly loan options. Under the bill, a broker would receive the same compensation for selling a 30-year, fixed-rate loan as he would a riskier adjustable-rate mortgage.

The legislation also would place new restrictions on banks wanting to sell nontraditional mortgages to Wall Street by requiring they retain at least a 5 percent stake in the loan. Proponents say doing so would further deter banks from lending to people with risky credit.

Another measure would prohibit mortgage payments from adjusting to more than twice their average amount.

The Senate does not have a similar bill in the works, leaving in question when final legislation could reach the president.

Rep. Barney Frank, D-Mass., chairman of the House Financial Services Committee, said he plans to take up in June a broader overhaul of the nation's financial regulations. That bill is expected to decide who in government should monitor risk across the financial system and who should be able to shutter firms whose failure poses too much risk.

[Associated Press; By ANNE FLAHERTY]

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