The U.S. of Representatives moved to protect borrowers and improve lending disclosure by passing the Mortgage Reform and Anti-Predatory Lending Act late yesterday. Democrats were joined by 64 Republicans to pass the much needed bill by 291 to 127. Mortgage brokers and bank loan officers will have to be licensed and will have to register to be involved in mortgage lending - something that's been needed for years - if the legislation becomes law. No longer will they be able to make deals behind the scenes that cost borrowers more money for years in higher interest payments without fully disclosing the costs.

The bill, if passed by the Senate, would bar a lender from making a loan unless the borrower has a reasonable ability to pay and would set clear federal standards that apply to all lenders. The bill would also prohibit financial incentives to sell mortgages at higher rates than the borrower qualifies for. Brokers defend these incentives, known as yield spread premiums, as worthwhile for borrowers who want to finance certain expenses to hold down closing costs. But the higher rates cost them much more money over the life of loan. Many times the yield spread premiums are not even disclosed to the borrower. The bill's chief proponent, Rep. Barney Frank, said the bill will allow these premiums provided the borrower knowingly agrees to the higher rates.

The bill would also make Wall Street banks responsible for lending practices that violate this law even if their only involvement with the mortgage was to package and sell it as a security. This provision certainly will make banks much more cautious before putting together these securitized mortgage pools. But, banks must abide by Fannie Mae or Freddie Mac standards to sell the loans to these government-chartered entities, so a similar underwriting process is already in place and practiced regularly by the banks.