Mortgage “Suitability” Push Gains Strength On Capitol Hill
For the home mortgage market, it could be the buzzword of the year: Suitability.
That’s because Congress has a new top legislator for mortgage matters, Rep. Barney Frank (D-Mass.), who believes strongly that “you shouldn’t lend (U.S. 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, a 14-term House veteran, is the new chairman of the House Financial Services Committee - the primary originator of banking and mortgage-related federal legislation, the Baltimore Sun reports today.
In an interview, he made it clear that a top priority this year will be enactment of a nationwide lending-standards law designed to protect consumers from deceptive, unfair and predatory lending practices.
With foreclosures rising and many stressed homeowners facing imminent rate resets on controversial payment-option, adjustable-rate and interest-only mortgage products, 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 1 of every 5 sub-prime (or bad credit mortgage) borrowers who took out low payment, low-documentation (or no doc loans) between 1998 and mid-2006 could ultimately lose their homes because of steep increases and penalties they can’t handle.
Proponents of a suitability standard would require loan officers - whether it’s a mortgage broker or retail lenders - to make certain that applicants are financially capable of handling a particular home loan before and after payment increases, and that they fully understand the cons as well as the pros of the mortgage type they select.
“It’s nothing more than an appropriateness test,” said John Taylor, the CEO of the National Community Reinvestment Coalition. “Lenders really need to be absolutely certain that the home loan they’re putting somebody into really makes sense … not just that it makes money for the lender or broker.”
The analogue for the mortgage market might be: Even if the 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.
That’s what many consumer advocates are pushing for, and a new national standard might require any mortgage loan officer to determine an applicant’s suitability for a particular program based on the following:
- 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.
- The potential for higher future monthly payments based on the structure of the mortgage loan program itself.
A suitability standard might also prohibit mortgage brokers and others from steering less-sophisticated borrowers to higher-cost mortgages than those for which they could otherwise qualify, such as pushing them into risky, complicated bad credit home loans when they could qualify for better rates and programs.
Steve O’Connor, Senior V.P. for the Mortgage Bankers Association, says that while every loan officer has the responsibility to make sure a borrower has the capacity to repay the loan, a federally imposed suitability standard inherently would be “vague and subjective,” and limit borrowers’ ability to shop for mortgages that fit their objectives as they see fit.
Worse yet from a mortgage lending perspective, a suitability test could lead to accusations of discrimination, some say. It would blanket U.S. mortgage loan origination sources such as mortgage brokers and lenders with the fear of being sued, cause a number of good loans to be declined, and lead to limited.
Frank, the Massachusetts Democrat who heads the House Financial Services Committee, said specific elements and tests in creating the national consumer protection standards for the mortgage field are still under discussion.