Lenders don't have to warn you about unsuitable loans
It still comes as a surprise to many borrowers: Although mortgage lenders and brokers often take care to line them up with loans that best suit their financial interests, there is no legal requirement that they do so. At least at the moment.

Lenders don't have to warn you about unsuitable loans
Bob Tedeschi, New York Times
Sunday, January 7, 2007

It still comes as a surprise to many borrowers: Although mortgage lenders and brokers often take care to line them up with loans that best suit their financial interests, there is no legal requirement that they do so.

At least at the moment.

In response to a stream of reports suggesting a rise in so-called predatory lending practices, in which unscrupulous brokers or lenders place borrowers in unduly risky loans simply to earn a quick commission, some regulators and advocacy groups have begun calling for laws making lenders more responsible for protecting borrowers' interests.

Mortgage executives say that such measures are unnecessary and are bracing for a legislative battle that could shape the way borrowers shop for mortgages.

This issue turns on "suitability standards," which lenders would follow to find loans that fit borrowers' needs. The model is the relationship between investors and stockbrokers, who, by law, must act with their clients' best interests in mind.

Many lenders and brokers pride themselves on finding good loan terms for clients, in the interest of building a good reputation with prospective borrowers. But they earn money mostly on commissions for loans they broker or by reselling packages of loans to investors. So, when deciding whether to make a good commission selling a loan to a borrower who, although qualified, may be taking a huge risk, some would rather take the commission than warn the borrower.

The federal government in recent months has adopted rules that, some say, are close to suitability standards, while stopping short of mandating that lenders make only loans that best suit their customers' interests. In late September, federal lending regulators began requiring lenders to do more to ensure that borrowers taking out certain loans understand the risks and are able to repay the debt.

Ohio has passed a law assigning a "duty of fair dealing" to those who sell loans to consumers.

Uriah King, a policy analyst for the Center for Responsible Lending, an advocacy group in Durham, N.C., said that Ohio regulators were still formulating guidelines for what constitutes "fair dealing" by lenders, so it was too soon to describe Ohio's new law as a suitability standard. But, King said, other states are watching Ohio to see how they might enact similar regulations.

Kurt Pfotenhauer, the senior vice president for government affairs and public policy at the Mortgage Bankers Association, said he expected more discussion of suitability standards when the next Congress convenes. "But we believe the consumer is the best one to determine the loan product that's best for their individual circumstances," Pfotenhauer said.

"Frankly, both parties in the transaction have obligations," he added. "If it's the biggest purchase of your life, you have some responsibility to define your needs realistically and learn about your options. The lender has the obligation to make sure it's easy for people to learn their options. They also have enormous economic incentive to make a successful loan."

King said some lenders had begun suffering economic repercussions from making loans to those who could not repay -- particularly those in the so-called subprime market serving those with poor credit.

"But I'm not convinced that'll be enough for the market to clean itself up," King said. "And in the meantime, millions of folks may well lose homes. And remember, particularly for working families, the only real asset they have is equity in their home."
http://www.sfgate.com/cgi-bin/article.cgi?f=/c/a/2007/01/07/REGP4NDBGD1.DTL