Liar Loan
Candlefocus EditorPrior to the 2007-2008 Financial Crisis, liar loans became increasingly popular, in part because they often allowed borrowers to obtain mortgages where they would have not normally qualified. During this period of time, the value of properties skyrocketed and this encouraged brokers to push these types of loans even more.
When the Financial Crisis hit, liar loans were revealed to be an unsound financial practice – when property values dropped, individuals were left in a situation where they owed more for their properties than they were worth. As a result of this, many people defaulted on their mortgages, leading to a sharp increase in foreclosure rates and the almost collapse of the country's economy.
The Regulation on Unfair, Deceptive, or Abusive Acts or Practices (UDAAP) was introduced in response, which is governed by the Consumer Financial Protection Bureau. Under the regulations introduced by Dodd-Frank, lenders must take reasonable steps to ensure that borrowers are able to repay their loans. This has included tighter lending standards and more stringent vetting processes, with fewer low-documentation and no-documentation loans being made available.
Despite the increased regulation, unfortunately, there are still lenders who are willing to offer these loans. Borrowers who are considering applying for one of these should be aware of the risks they pose and should closely examine their ability to repay the loan.