Washington, DC, January 30, 2007--The Mortgage Bankers Association released a new policy paper examining the effects that imposing a suitability standard on mortgage lenders would have on consumers.
The paper concludes that a law requiring mortgage lenders to subjectively evaluate whether a loan product is best suited for a borrower would limit the availability of credit and increase the cost to consumers.
“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,” said Kurt Pfotenhauer, MBA’s senior vice president of Government Affairs. “After 25 years of the industry developing increasingly sophisticated and objective underwriting standards, a suitability standard would turn back the clock on fairness in lending by virtually requiring lender subjectivity in the lending decision.”
While a specific proposal for a suitability standard does not yet exist, the MBA policy paper is intended to develop a thoughtful and meaningful dialogue on an issue that--if legislated – would have severe unintended consequences.
Most discussions about suitability propose more rigid, prescribed underwriting standards, a subjective evaluation of whether a loan is suitable for the borrower, establishment of a fiduciary obligation by the lender to the borrower, and a private right of action to address any violations.
“The lender is obligated to determine that a borrower will repay their loan before the lender extends the loan,” continued Pfotenhauer. “The borrower, however, is best qualified to determine whether a loan that he qualifies for is suitable. To legally obligate the lender to determine suitability would limit credit to all but the most financially secure Americans.”
The policy paper concludes that Congress should resist pressure to enact a suitability standard and should instead focus on establishing clear, objective restrictions--including a uniform national lending standard--to stop lending abuses without impeding the market and its ability to innovate to benefit consumers.
