Taking aim at deceptive lending, the Senate on Wednesday voted to ban mortgage brokers and loan officers from getting greater pay for offering higher interest rates on loans, and to require that borrowers prove they can repay their loans.
The Senate, however, rejected a measure that would have required homebuyers to make a minimum downpayment of 5 percent on their loans. The votes were part of the Senate's deliberations on a broad overhaul of financial regulations designed to avoid a repeat of the crisis that struck Wall Street in 2008.
President Barack Obama weighed in on the Senate debate Wednesday, criticizing a proposed amendment that would exclude auto dealerships that offer car loans from oversight from a consumer financial protection bureau that the broader legislation would create. Auto dealers -- influential figures in their communities -- have been aggressively lobbying for an exemption from the law, and the amendment, offered by Sen. Sam Brownback R-Kan., could win bipartisan backing.
"This amendment would carve out a special exemption for these lenders that would allow them to inflate rates, insert hidden fees into the fine print of paperwork, and include expensive add-ons that catch purchasers by surprise," Obama said in a statement. "This amendment guts provisions that empower consumers with clear information that allows them to make the financial decisions that work best for them and simply encourages misleading sales tactics that hurt American consumers."
The administration has fiercely tried to protect the consumer provisions of the bill. It has answered the political power of the auto dealers with an appeal on behalf of the military, arguing that soldiers and their families have been particularly targeted by deceptive dealers.
The Senate unanimously approved an amendment Wednesday that clarified any regulations or enforcement actions by the proposed consumer protection bureau would not affect merchants and retailers that do not engage in a financial services. Critics, including the U.S. Chamber of Commerce, had argued that the bill could affect small business owners such as orthodontists, who allow patients to pay over time.
Separately, the Senate overwhelmingly voted to let the Federal Reserve retain its supervision of smaller banks. The underlying regulation bill would have given the central bank oversight only over the largest financial institutions.
Regional Fed presidents have lobbied senators to allow them to continue watching over smaller bank holding companies and state-chartered community banks. Limiting the Fed's supervision only to bank holding companies with assets of more than $50 billion -- as proposed by Senate Banking Chairman Christopher Dodd, D-Conn. -- would have left most of the Fed's 12 regional banks without any institutions under their oversight.
The lending-related measures attempted to respond to one of the issues at the heart of the financial crisis -- the abundance of bad mortgage-backed securities that nearly toppled Wall Street and knocked some of the nation's largest financial institutions to their knees.
"Credit was extended to people who couldn't pay their mortgages back, and those were passed throughout the world," said Sen. Bob Corker, R-Tenn. "So we had a systemic crisis, not only in this country, but around the world."
Senators voted 63-36 to amend an underlying financial regulation bill to place restrictions on how mortgage brokers and bank loan officers get compensated. Supporters argued that consumers were steered into higher rate mortgages that they were unable to pay, resulting in foreclosures and toxic mortgage-backed securities that poisoned the markets.
Borrowers would have to provide evidence of their income, either though tax returns, payroll receipts or bank documents. That provision seeks to eliminate so-called stated-income loans where borrowers offered no proof of their ability to pay.
But the Senate voted 57-42 against a Republican amendment offered by Corker that set tougher underwriting standards, including the downpayment requirement. That measure also would have eliminated a condition that mortgage lenders retain 5 percent of any mortgages they resell in the securities market.
Democrats opposed the Corker plan, citing both their desire to have banks keep some of the risk of the mortgages they write and their concern that the downpayment mandate would hurt lower income families.
"The downpayment is only a portion of the skin in the game that such families have because there are tremendous closing costs associated with these loans that the families must bear as well," said Sen. Jeff Merkley, D-Ore., the sponsor of the competing Democratic proposal.
Mortgage brokers opposed Merkley's measure, arguing it would create a two-tiered system separating mortgage brokers from bank lenders. They noted that the amendment would permit banks to receive greater payments from investors, such as large Wall Street firms, for bundled mortgages with higher interest rates.
"It's a legal incentivizing payment for those very loans that put the industry in this mess," said Roy DeLoach, executive vice president of the National Association of Mortgage Brokers. "