Mortgage News Home

Saturday July 19, 2008

Home Page   26,235 Active Members   Register Welcome, Guest    Sign In  

Home

Latest Headlines

Popular Stories

Bookmark Us

Reader Comments

SUBSCRIBE

SEARCH OUR SITE

RSS News

Mortgage Rates
  30 Yr Fix 6.37% 0.02%
  15 Yr Fix 5.91% -0.01%
  1 Yr ARM 5.17% 0.00%
  5/1 ARM 5.82% 0.04%
  30 Yr Tres 4.47% -0.05%
  Fed Prime 5.00% -0.25%
MND Features

- Wiki
- Video News
- Mortgage License Information
- Real Estate License Information
- Mortgage Content Syndication
- Mortgage Fraud
- Housing Bubble
News Archives

Submit A News Tip
or Story Idea
 

Free Subscription To News Alerts
Stay up to date on breaking news with our free News Alert Service.


MBA Urges Regulators To Avoid Invoking Suitability Standards

6076 Views - Printer Friendly - Email This Story To A Friend
 
RSS COMMENTS(24) LINK HERE ADD NEWS TO YOUR WEBSITE

The Mortgage Bankers Association (MBA) recently made a preemptive strike against what it obviously perceives as the next threat against the mortgage industry - "suitability standards."

It is suggested by some consumer advocacy organizations that such standards should be imposed on the lending industry to insure that borrowers are obtaining mortgages that are in their best financial interests.

The driving force behind any demands that may be made by consumer groups is, of course, the proliferation of "exotic" mortgages such as interest only loans and option arms of which we have written frequently. Consumer groups are apparently seeking regulatory oversight of underwriting standards to insure that borrowers are only given mortgages suitable to their financial situation.


Striking back, probably even before most people, even industry insiders have even heard of the suitability issue, the MBA published a report titled Suitability - Don't Turn Back the Clock on Fair Lending and Homeownership Gains which argues that the mortgage industry should not be subject to restraints similar to those that have long been in place for securities dealers.

The association points to the increased availability and affordability of mortgages and homeownership and states that the greatest gains have been among minority and first-time homeowners. The report claims that these opportunities have been made possible because of fair lending and anti-redlining laws such as the Equal Credit Opportunity Act, the Fair Housing Act, and the Community Reinvestment Act.

Thus, the Association states the debate is no longer about whether credit is sufficiently accessible to borrowers but whether loans are in specific consumers' best interests. "While a specific proposal for a suitability standard...is not yet fully formed, a variety of approaches have been suggested." MBA maintains that most of these approaches would require more "rigid, prescribed underwriting standards, a duty of fair dealing at the inception of the loan, a subjective evaluation by the lender whether a product is best suited for that borrower, the establishment of a fiduciary obligation by the lender to the borrower, and a private right of action to redress any violations." There is also a suggestion, the association states, that a regulator be empowered to specifically outline such requirements.

Rigid underwriting standards would result in some borrowers being denied credit. If a subjective suitability standard is put in place a lender might find himself caught between a suitability standard and longstanding requirements of equal credit laws and/or community investment rules. Even if the lender complies with all of these, he could be accused by a borrower who later gets into trouble with his loan of failing to follow suitability standards.

The risks of these competing requirements may force lenders to leave the business or protect themselves against increased liability; this could impact competition, ration credit, and increase prices.

The report asserts that product choices are not the primary cause of defaults, instead it is "life events" such a job loss, a medical crises or family problems that most often lead to bankruptcy and/or foreclosure.

The report reviews various Securities and Exchange Commission rules and regulations which impute a suitability requirement to securities market professionals. The requirement results from an agency theory that such professionals act as agents on behalf of the customer and thus should be "expected to only recommend securities that are suitable to the customer's financial means and investing goals." Brokerage houses typically do this by requiring new customers to submit financial statements and indicate their investment goals. While this usually seems to be a pro forma adherence to the regs, some companies do refuse to allow certain customers to invest in commodities, options, or other more risky markets.

MBA argues that mortgage lending is not analogous to the securities industry, primarily because securities dealers function as intermediaries between the customer and the market and represent themselves as investment consultants. Mortgage lenders conversely represent the investors and companies which provide mortgage funds and thus do not have a fiduciary responsibility to borrowers; in fact they probably cannot have a fiduciary relationship with a borrower because one already exists with their investors. Also, investors in securities usually develop a long-term relationship with their investment advisors but borrowers tend to shop among many brokers for the best deal. MBA also speculates that the suitability standard may not be working well in the securities industries as evidenced by the "magnitude of claims brought against brokers based upon suitability."

Instead of suitability requirements, the report states that it is to the benefit of all parties, consumers, advocacy organizations, regulators, and mortgage lenders that borrowers obtain loans they can repay but that the goal should be to make the lending process understandable and abuse-free and that Congress should resist pressure to enact a suitability standards that would remove the current "arms length" model in the mortgage industry. Congress, federal regulators, industry and consumer organizations should work to "create a uniform national lending standard, improving financial literacy and licensing, simplifying the mortgage process, streamlining disclosures, and establishing clear, objective restrictions to step lending abuses without destroying the market's ability to innovate for the benefit of consumers."



Story Views: 6076 | Permalink

Story Tools



Email This Story To A Friend

Subscribe To News Alerts
 

Related Tags

Select a Tag for more information related to that Tag. (View All Tags)
 
mba mortgage bankers association

 

Comments (24)

Post Comment Comments RSS


I believe that borrowers are 100% responsible for their own choices in the financing selected. The industry (with its different financial options) should not be penalized for those who have gone beyond their means. Personally, I have tried educating people on fixed,conventional,bi-weekly and simple interest loans but people have shopped me around and opted for option arm programs. Most people know what they are getting into and now they want to play victims.

Above Posted By: Araceli Ferrera | Fri, 9 Mar 2007 13:22:30 EST

If any of you Loan Officers out there who DON"T already think you have a Fiducuary Responibility to put your borrowers in a loan that is best suited for their financial condition and best interests (and some of you have posted comments here), you ARE the reason this Suitability Issue regulations are being considered.

Above Posted By: Leee J. DeMeo | Mon, 26 Feb 2007 14:47:31 EST

This just gives borrowers someone else to blame for their actions. I don't know about you, but someone else cannot convince me to go into debt. Borrowers do understand what they are getting into, at the time, they just don't care. When they realize what greed has cost them, they start pointing the fingers. We just need a better option available to get "shady" originators out of the biz & protect the honest ones from "shady" borrowers that are not willing to accept responsibilty.

Above Posted By: Kandyb | Thu, 22 Feb 2007 14:33:53 EST

Suitablity standards can have its pros & cons. It will weed out all those "shady" originators that are hurting our biz & approving peeps that should have been denied. However, it won't stop borrowers from being greedy & unreasonable. As an originator, I have found that people want that "million" $ home at any cost. I make my $ by helping borrowers, I like to sleep at night. Bottomline: People will always want more than they can afford, to blame mortgage lenders for this is absolutely absurd.

Above Posted By: Kandyb | Thu, 22 Feb 2007 14:22:22 EST

Borrowers have to take responsibility for themselves. I am soo tired of buyers saying "Well I just signed where I was told to do so...". Why would you sign something you didn't understand? I am tired of people using the system because they want more than they can afford, and/or lie to get it and scream foul when they can't make ends meet. Has anyone at the top of the "food chain" thought about the rate of defaults is increased because of HIGH gas prices and credit card pymnt increases?

Above Posted By: Lisa | Sun, 18 Feb 2007 15:11:06 EST

In my opinion not all mortgagees are as savy as so many people think they are. We still have people who are buying homes with only a high school education, at best. Many of us are still gullible enough to buy into the hype of shady lenders, hoping somehow that their lifetime investment will be secure enough to last long enough to get us to solid sole ownership. I feel that deregulation of the mortgage industry has lead the unscrupulous to act like "Snidley Whiplash" to "Sweet Nell"

Above Posted By: connie | Wed, 14 Feb 2007 12:26:54 EST

Mike, I don't really think Reverse Mortgages belong in this conversation ... while I agree many people (including the forward mortgage loan officers/brokers/lenders) don't really understand the product or market, I don't think a suitability test is warranted for these applicants as they already are required to go through counseling - HUD approved, no less, if they choose the HECM and I advise to always go that route. If anything the people that sell them should go through a suitability test.

Above Posted By: Jeff | Wed, 14 Feb 2007 12:10:11 EST

It is funny to me how people talk about how bad these "exotic loans" are. The fact is that these loans, Neg-Am and Interest Only, make up less than 20% of all mortgages and have the lowest percentage of delinquency and foreclosure compared to fixed rate loans. If someone can not understand what "Interest Only" means, and doesn't bother to find out before they sign, they should take a 30 year fixed rate with a higher payment. It's not rocket science. Maybe all borrowers should be tested at close.

Above Posted By: Mike | Tue, 13 Feb 2007 08:14:23 EST

I currently manage a mortgage company that has elected to not originate sub prime, option arms, and reverse mortgages due to the lack of full understanding of these products by most borrowers. Buying a home is an emotional process that can lead to poor decisions when the prospect of being told 'you don't qualify' happens after you have announced to family and friends of your purchase. It's time we take responsibility for our actions and best serve our customers!

Above Posted By: Anonymous | Thu, 8 Feb 2007 13:10:00 EST

WOW!!! 'Closed minded' is an understatement! I have been in the 'origination' side of things. LOL...cut throat!!! That's how they make their living. Knowing the processes of these procedures and how lenders think, you have some bad people playing 'GOD'. The processor and underwriter are going to decide your fate.

Above Posted By: Audrey | Thu, 8 Feb 2007 09:31:45 EST

The article was informative but the comments were more educational. Sounds like half these people never had to bury a loved one or made a bad decision. Or maybe I really make so little money I live paycheck to paycheck but my kids are fed and taken care of. Making loans easy to understand in english not bank talk would be great.

Above Posted By: real life | Wed, 7 Feb 2007 18:42:56 EST

People need to take responsibility for themselves. They need to understand that credit has to be repaid. They need to understand that they cannot afford the big house, the two new cars and a mountainload of credit cards. Instead of suitability for mortgage bankers, there should be suitability for borrowers. The borrowers are the ones who keep spending when they don't have the money and then send the keys back to the lender. Take responsibility, people!

Above Posted By: sy | Wed, 7 Feb 2007 13:59:19 EST

Lindsey - I think you are thinking a little close-minded. I purchased a home using 100% financing about 2 years ago. If I had waited till I had saved up $40,000 to purchase the home I would still be years away, and my home has already appreciated that much, so to live in the same house I would now have to save an additional $8000. I have no trouble making my payments and I am paying less per month than it would cost me to rent. Why don't I deserve my home?

Above Posted By: Georgia Homeowner | Wed, 7 Feb 2007 11:00:43 EST

I think mortgages should only go to those who have saved and invested 20% of their hard-earned capital towards home ownership. If people can't do that much, they don't deserve to be homeowners and should continue renting.

Above Posted By: Lindsey | Tue, 6 Feb 2007 17:09:01 EST

I'd also like to direct anyone who reads this to Deb's comment. I can only show my borrower(s) the door. I can't make them go through it. Yes, there are people who only care about their paycheck but there are some of us who care about our clients. I don't lie to anyone and I fully explain every mortgage but LIFE can get in the way and people don't like to sacrifice to have anything.

Above Posted By: Oreogn LO | Tue, 6 Feb 2007 08:45:41 EST

I have read some of the comments below. I understand what they are trying to do with the rulings but at the same time they will be denying someone who can afford the loan. Let's say you are fresh out of college and got a decent job with your degree and 2 friends are moving in with you. You get an Interest Only ARM because 1. you are doing 100% and 2. you wanted a little nicer home because you will be moving up in the company and getting a raise in the near future. Is it fair to deny him/her?

Above Posted By: Oreogn LO | Tue, 6 Feb 2007 08:43:06 EST

It is somewhat absurd that there are so few standards. The MBA should be supporting such standards as it is clear that to be a professional you have to have some skills besides selling skills. Just look at the regulation required to sell stocks, bonds, and mutual funds and compare those with the mortgage business and you will see that the mortgage business is substantially lacking. Not even close.

Above Posted By: Financial Advisor | Tue, 6 Feb 2007 06:39:31 EST

I don't understand how invoking suitability standards would require a rigid underwriting guidelines, as far as the loan origination process in concerned, the product is decided before the underwriting which only evaluates the suitability of borrower against that particular product.

Shouldn't it require more flexible underwriting guidelines to make sure that even after deciding on a product earlier, the borrower gets the product in his/her best financial interest?

Above Posted By: AM | Tue, 6 Feb 2007 05:31:19 EST

The MBA is only looking out for their clients' (mortgage originators) best interests. They've been getting people into suicide loans, and telling the borrowers they could "just refi" when the loans reset. Every time a borrower was FORCED to refi (because they couldn't afford the original loan), everyone in the mortgage chain made money off the dupes. The end effect will be a foreclosure "crisis" brought on by these mortgage slugs.

Above Posted By: CA renter | Tue, 6 Feb 2007 03:23:32 EST

It's time to put some controls on the real estate industry. It has operated in total anarchy for 40 years and we are now seeing the results of not "Turning back the clock". Of course the MBA doesn't like the idea. they want loans whether they're good or not.

Above Posted By: Anonymous | Mon, 5 Feb 2007 23:01:15 EST

The MBA is out of its wits. Sure, more applicants will be turned down, but that is how it should be. I read an article that 10% of subprime borrowers are defaulting. And this despite the unemployment rate being at low levels. Mortgage bankers, seen with the benefit of hindsight, lacked an adequate lending standard, as is evident from their easing their criteria when application fell in the middle of 2006. It is better not to offer one than to take it away afterwards: it's moral cost is smaller.

Above Posted By: Teddy | Mon, 5 Feb 2007 17:15:12 EST

What Consumer Groups are you speaking of in the article?

Above Posted By: Mike R. | Mon, 5 Feb 2007 14:06:19 EST

If the Mortgage Broker and Loan Officer would be held responsible for the "financial advise" they give their borrowers maybe they would think in the best interest of the borrower and not the size of their check at closing. Where is the Mortgage Broker and Loan Officer when the borrower is saying "I didn't know this" when their payments change. The Broker is too quickly out of the picture and these borrowers have to deal with large uncaring co.

Above Posted By: anonymous | Mon, 5 Feb 2007 13:05:38 EST

Great article! I feel more people have difficulties paying their loans because they don't know how to budget properly. They keep on spending (charging), thinking they can have it all without sacrificing. When they need a new roof or furnace, or experience a divorce, disability or job loss, the whole "house of cards" comes crashing down on them. Has less to do than type of mortgage, unless they set out to be deceptive. Are we to ask,"How's your marriage", in case they're headed for divorce?

Above Posted By: Deb | Mon, 5 Feb 2007 12:02:38 EST


Post A Comment

Please fill out the form below to submit a comment.

Name: 
(Required - Type Anonymous or Use First Name Only if Private)
Email Address: 
(Not Required So No Fake Emails Please.)
URL or Weblog:
(Leave Blank If You Don't Have One - Use http://)
Comments: 
(Please keep comments on topic. No HTML Allowed. No Advertisng.)
Please Note: Due to Comment Spam, all comments are reviewed by hand. Most comments will appear shortly after submission but it may take up to 12 hours to appear. If you would like to come back, click here to Bookmark the page.
PLEASE DO NOT USE ALL CAPS


Character Count =     (5000 Character Limit)

If you would like to leave a longer comment, please submit your comments in 5000 character increments and we will merge your comments.
Notify me via email when my comment is approved.


Note: Please don't bother spamming. All submissions are reviewed by our our editorial staff. Comment spam and irrelevant links will not be approved.

 




NEW VIDEO
Trump Talks Economy, Oil and Real Estate
New Evidence of Deceptive Practices at Countrywide


Reader Comments (More)
It is true that there have been unfair or deceptive acts and practices by sub-prime Lenders although, not necessarily by Lenders o...
Read
The solution to the housing and foreclosure mess is that lenders and borrowers be forced by law to work out new loan agreements, t...
Read
WOW. If history repeats itself, what will other customers do in other banks should the economy get worse and other banks start to ...
Read
Home - Contact - Sitemap - Disclaimer - Privacy Statement - Advertising
All Content Copyright © 2003 - 2008 Brown House Media, Inc. All Rights Reserved.
Reproduction in whole or in part in any form without the express written permission of MortgageNewsDaily.com is prohibited.