What is a Liar Loan?
A liar loan is a type of mortgage that demands little to no documentation of income and assets. Borrowers aren’t required to provide proof such as W-2 forms or income tax returns, making the lender rely entirely on the information given. This risky practice can lead to significant issues, which we explore further.
Key Takeaways
- A liar loan requires minimal documentation from the borrower to verify income and assets.
- Initially designed for those unable to provide traditional income proofs, like business owners or those with irregular income sources.
- Overuse and abuse of liar loans significantly contributed to the 2007-2008 financial crisis.
- Mortgage brokers often pushed these risky loans due to soaring property values, leading many to take on unsustainable mortgages.
- Regulatory measures, like the Dodd-Frank Act, now ensure lenders rigorously assess a borrower’s ability to repay.
How a Liar Loan Works
Certain low-documentation loans like stated income/stated asset mortgages (SISAs) just note income and assets without verification. No income/no asset mortgages (NINA) don’t even require disclosure of financial details.
Some versions, known as NINJA loans (No Income, No Job, No Assets), leave the door open for unethical practices by both borrowers and lenders. This led to numerous foreclosures and financial instability.
Originally, these loans aimed to assist those with non-conventional income sources (e.g., freelancers, small business owners).
Most such loans fall under the Alt-A mortgage lending category, relying heavily on a borrower’s credit score and loan-to-value ratio rather than verified income.
How Borrowers and Brokers Use Liar Loans
The term implies deceit because minimal documentation tips the scale towards misrepresentation by borrowers, brokers, or lenders aiming to qualify borrowers for larger mortgages.
During the pre-2008 housing bubble, these loans fueled over-valuation in real estate, contributing about 20% to the total losses during the financial crisis.
Post-crisis, reforms like the Dodd-Frank Act mandate that lenders verify a borrower’s repayment ability using good faith and due diligence.
Frequently Asked Questions (FAQs)
Is Lying on a Loan Application Illegal?
Yes, intentionally providing false information on a loan application is illegal and can lead to criminal charges.
What Happens if You Lie on a Loan Application?
Potential repercussions include loan rejection, demand for immediate repayment, and criminal penalties, including imprisonment.
Are Stated Income Loans Illegal?
Stated income loans, where income proof isn’t mandatory, are illegal today under current regulations, aimed at preventing deceitful lending practices.
The Bottom Line
Liar loans omit the thorough verification of a borrower’s financial claims, risking financial instability. While they once facilitated various borrowers to secure homes, stricter regulations now require authentic proof of income, credit scores, and assets.
Related Terms: stated income loans, Alt-A lending, NINJA loans.
References
- Consumer Financial Protection Bureau. “Prepared Remarks of Richard Cordray at the Ability-to-Repay Rule Field Hearing”.
- Stanford University. “Sizing Total Exposure to Subprime and Alt-A Loans in U.S. First Mortgage Market as of 6.30.08”. Pages 2, 3, and 15.
- Thomas Herndon. “Liar’s Loans, Mortgage Fraud, and the Great Recession”, Page 1.
- Consumer Financial Protection Bureau. “Ability to Repay and Qualified Mortgage Standards Under the Truth in Lending Act (Regulation Z)”.
- Experian. “What Happens If You Lie on a Loan Application?”
