Five Republicans joined Senate Democrats voting in favor of an amendment to Wall Street reform legislation that will ban "liar's loans" and kickbacks for loan originators based on the terms of the loan -- practices widely believed to have inflated the housing bubble and worsened the ensuing crash.
"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.), who co-authored the amendment with Sen. Amy Klobuchar (D-Minn.), in a statement.
"We took a huge stride forward today in the fight to restore fairness for homeowners and strengthen the financial foundations of our families," Merkley said. "I look forward to seeing this amendment become law so that never again will hidden steering payments put millions of homeowners on the fast track to foreclosure."
During the housing bubble, banks' massive appetite for residential mortgage debt, which they repackaged and sold to investors, encouraged loan originators to push the biggest loans possible onto as many homeowners as possible, regardless of their ability to repay. In a liar's loan, also called a "no-doc" or stated income loan, borrowers say what they earn but provide no proof.
In November, HuffPost profiled a mortgage gone wrong on Ordinary Road in Mineral, Va., where a brokerage encouraged Virginia and Donald Naill to refinance into an adjustable-rate loan they couldn't possibly afford once the two-year teaser rate ended. Court documents show that the broker knew Virginia Naill wanted a fixed-rate loan and that she couldn't afford the ARM she was given. (It had been the broker's habit to offer another refinance whenever a loan adjusted, a scheme that worked until housing prices stopped rising.)
"There were a number of options that were available, including fixed, and they put her in the option that was not the best option for her," said Tom Domonoske, an attorney with the Virginia Legal Aid Justice Center who is working with the Naills, who have had to fight off a series of foreclosure notices to stay in their home.
The Republicans who supported the amendment in the Senate were Chuck Grassley (Iowa), Susan Collins (Maine), Scott Brown (Mass.) Olympia Snowe (Maine), and Richard Lugar (Ind.). The House of Representatives passed a more comprehensive anti-predatory lending bill that include bans on liar's loans and steering payments last year.