Stricter Standards Sought for Lenders, Brokers
For the American mortgage market, it could be the hottest buzzword of the year: Suitability.
That's because Congress has a new top legislator for mortgage matters, Rep. Barney Frank (D-Mass.), who believes, "You shouldn't lend [home buyers or refinancers] more than they can afford to pay back, and you don't lend them more than their house is worth."
Frank is the new chairman of the House Financial Services Committee, the primary originator of banking and mortgage-related federal legislation. In an interview, he made it clear that a top priority this year will be enacting a nationwide lending-standards law designed to protect consumers from deceptive, unfair and predatory mortgage practices.
With foreclosures rising and many credit-stressed homeowners facing imminent rate resets on "payment-option" and other adjustable-rate loans, pressure is building on Capitol Hill for tougher rules for mortgage brokers and lenders.
A recent study by the Center for Responsible Lending predicted that as many as one of every five subprime borrowers who took out reduced-payment, low-documentation mortgages from 1998 to mid-2006 could ultimately lose their homes because of steep payment increases and penalties they can't handle.
Proponents of a suitability standard would require loan officers, whether mortgage brokers or retail lenders, to make certain that applicants are financially capable of handling a particular loan before and after payment increases, and also that the applicants fully understand the cons as well as the pros of the mortgage they select.
"It's nothing more than an appropriateness test," said John Taylor, chief executive of the National Community Reinvestment Coalition. "Lenders need to be absolutely certain that the loan they're putting somebody into really makes sense . . . not just that it makes money for the lender or broker."
Stockbrokers have been required for decades to make suitability determinations when customers seek a specific trade or investment. Under securities-market rules, even if a brokerage customer has expressed interest in a transaction, the broker should not recommend it if the broker knows it is too high-risk for the client's financial situation or level of sophistication.
The analogue for the mortgage market might be: Even if applicants are willing to sign up for home loans that are clearly beyond their financial capabilities or knowledge, the loan officer should not go along.
According to a white paper issued by the nonprofit Northeast-Midwest Institute, a new national standard might require loan officers to determine an applicant's suitability for a particular loan program based on:
· Employment status, income level, assets and likelihood that income or employment could change.
· Other recurring expenses and the impact they could have on the borrower's capacity to repay.