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States Weigh Mortgage Loan Suitability Standards
What’s next for the mortgage lending industry, beset by deepening accusations of predatory lending and mortgage fraud?
Well, several states are considering the creation of suitability standards, similar to what stock brokers and investment advisors live with in the securities industry. If this movement takes shape, mortgage lenders might be required to furnish evidence that the loan program recommended was suitable for the client’s needs, level of understanding, and sophistication.
However, Kurt Ptotenhaur, senior vice president of the government affairs for the Mortgage Bankers Association (MBA) argues that Making the lender responsible for determining which loan is suitable for a borrower will limit consumer choice and could deepen the slowdown in the housing market,” and may result in discrimination at worst and subjected decisions made by the lender about who should have access to certain loan programs. See the MBAs Policy Paper for more.
On the flip side, Rep. Barney Frank believes that you shouldn’t lend (homebuyers or refinances) more than they can afford to pay back, and you don’t lend them more than their house is worth. Frank chairs the House Financial Services Committee that makes bank and mortgage laws. He made it clear that a top priority will be enacting national lending standards to protect consumers. Read the National Consumer Law Centers rebuttal to the MBAs Policy Paper for more.
Daily Real Estate News February 13, 2007Politicians Weigh Laws to Protect Borrowers
Congress and several states are contemplating laws that would require mortgage brokers and lenders to make sure that a loan is suitable for a borrower just as stockbrokers must make sure an investment is suitable for a client.
Tennessee has already passed a law that prevents lenders from refinancing a mortgage thats less than 30 months old unless the refinancing provides a reasonable benefit to the borrower.
A new Ohio law imposes a duty of fair dealing on non-bank mortgage lenders and requires mortgage brokers to secure loans with advantageous terms for the borrower.
Laws like these require loan officers to ask potential borrowers a series of detailed questions about things like their financial goals and their tax status. And if the loan they make turns out to be inappropriate, or not advantageous definitions will have to be decided by the court the lender could be open to a lawsuit, or even a prison term, says Kurt Pfotenhauer, chief lobbyist for the Mortgage Bankers Association.
If Congress passes its proposed law, it would dramatically change business models, just because of the litigation risk,” Pfotenhauer predicts.
Source: Forbes Inc., Matthew Swibel (02/26/07)
For an unusually insightful discussion of this issue, read Wright Andrews’s article Is Suitability Suitable for Mortgage Lending. Mr. Andrews is a Washington lobbyist and Executive Director for the Coalition for Fair and Affordable Lending.
At the heart of the issue lies a) the question of whether the lender has a fiduciary duty to the client, and b) the debate over whether loan originators should be held accountable when loans go bad. Predatory lenders practice business in a way that begs for more consumer protection.
On the other hand, career-oriented mortgage advisors are all about suitability for their clients. And layering on more laws can have unintended consequences. Will suitability standards protect consumers or bar the doors to home ownership?
Leave a comment below and let me know what you think.
February 16th, 2007 at 7:33 am
My thoughts on suitability are contained in the following article:
http://www.nationalmortgagenews.com/plus/?show=plus186.htm
February 16th, 2007 at 2:43 pm
The entire mortgage industry brought this on itself. If they would police themselves and not offer home owners and buyers loans they cannot afford, like Option ARMs and 125% financing to any person that can breath, then the the government and consumer groups would not have any reason to step in.
February 16th, 2007 at 8:21 pm
Wright, thanks for weighing in. Your article is insightful and eloquent, and I’ve placed a reference and link within my post.
Chris, thanks for the comment. I would agree that the mortgage industry created the hand basket in which we are all going to hell. But let’s not forget that the borrowers jumped in like lemmings with a lot of encouragement from Realtors and real estate “investors” peddling their books, CD’s and seminars about how to get rich speculating on real estate.
My point is simply that everybody shares responsibility for what is happening now.
March 14th, 2007 at 11:53 pm
Marc:
Lenders do not have a fiduciary responsibility to the customer; that can be established if the customer signs an exclusive brokerage agreement.
It is good business practice for an originator to adopt that approach but until we eliminate a borrower’s ability to “double app” a loan, we will never be true fiduciaries.
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