The financial reform legislation passed on May 20 by the U.S. Senate contains an amendment to address certain mortgage lending practices. The Merkley-Klobuchar amendment, which was approved on May 13, would end prepayment penalties and yield-spread premiums. It effectively bans yield-spread premiums by prohibiting brokers or any loan originator from compensation that varies based on any term of the loan except the principal amount.

The amendment would also require lenders to ensure a borrower’s ability to repay a mortgage for five years based on verifiable income documentation. Lenders are presumed to have properly underwritten loans if they followed that requirement and if each loan’s total points and fees do not exceed 3% of the loan amount. Borrowers could sue if total points and fees exceed that level. Lenders could be liable for actual damages and enhanced damages, which appear to bear no relationship to actual harm. Regulations implementing this provision would be left to a proposed consumer protection bureau to write and enforce. The Merkley-Klobuchar amendment moves the Senate bill closer to the House bill, which contains measures for sweeping new mortgage standards, including banning prepayment penalties and requiring a minimum debt-to-income ratio.