MBA: Suitability Standard Would Have ‘Severe’ Consequences

The Mortgage Bankers Association said yesterday that imposing a proposed suitability standard on mortgage lenders would have a chilling effect on consumers and on an already troubled housing market. Suitability standards would require mortgage lenders to subjectively evaluate whether a loan product is best suited for a borrower, which the trade organization said will limit the availability of credit and increase costs to consumers. “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,â€? said Kurt Photenhauer, MBA’s senior vice president of government affairs. The issue of suitability has been a hot topic on Capitol Hill lately, with many legislators musing publicly that lenders should do more than tighten their belts in underwriting. Some have suggested the need for legislation that holds lenders responsible for determining which loan product is most suitable for a particular borrower. Most discussions about suitability have proposed more rigid, prescribed underwriting standards, an 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. While a specific proposal for a suitability standard does not yet exist, the MBA released a policy paper Monday intended to develop dialogue on the issue. If legislated, the trade organization said suitability requirements would have severe unintended consequences. “The lender is obligated to determine that a borrower will repay their loan before the lender extends the loan,â€? 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.â€? 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. For more information, visit http://www.mortgagebankers.org.