WASHINGTON – Taking aim at deceptive lending, the Senate on Wednesday voted to ban mortgage brokers and loan officers from getting greater pay for pushing loans with higher interest rates, 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 an 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 efforts to exclude auto dealerships that offer car loans from the oversight of a proposed consumer financial protection bureau. 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.

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.

On Wednesday, Holly Petraeus, wife of U.S. Central Command chief Gen. David Petraeus, made a plea for the bill’s consumer protections to apply to car buyers.

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Petraeus, director of the Council of Better Business Bureau’s Military Line Program, said financial counselors at military installations find many of their customers in financial trouble with their auto payments, locked into loans of 15 percent or higher.

In a statement, Brownback argued auto dealers are already regulated by the Federal Trade Commission and by local and state agencies.

“If any service member is the victim of predatory lending while trying to buy a car,” he said, “I encourage him or her to seek out local and state authorities which already handle these investigations and can take care of the problem.”

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 many of the Fed’s 12 regional banks with few 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.

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Senators voted 63-36 to amend an underlying financial regulation bill to place restrictions on how mortgage brokers and bank loan officers get compensated.

The measure’s lead sponsor, Sen. Jeff Merkley, D-Ore., 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 Sen. Bob Corker, R-Tenn., 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 and their concern that the downpayment mandate would hurt lower income families.

Mortgage brokers opposed Merkley’s measure, arguing it would create a two-tiered system separating mortgage brokers from bank lenders.

 


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