A legislatively-imposed suitability test "would set fair lending back 25 years," according to the chairman of the Mortgage Bankers Association, which is advancing the idea of a "simple, plain English" disclosure form as an alternative to regulatory benchmarks.
"There's no way a loan officer can look into the future and determine what is suitable," says San Diego-based mortgage banker John Robbins.
"This is America. Borrowers have the right to choose what they are qualified for. At the same time, we have the responsibility to do all we can do to make sure they understand" the risks of the products they are considering.
The MBA's "Project Clarity" task force is at work designing a one or two-page, color-coded form that spells out the risk of various offerings in a color-coded chart.
"Green" loans would be the least dangerous products with 30-year terms or longer. "Yellow" mortgages would include moderately perilous, yet standard adjustable rate mortgages in which the rate is fixed for an initial period and than adjusts periodically thereafter, and "red" ones would be interest-only and other extremely treacherous mortgages that could result in foreclosure if the borrower chooses incorrectly.
The form would spell out exactly what a would-be borrower's monthly payment would be under various interest rate scenarios: If the rate does not change, for example, the payment would be this. If the rate goes up from the initial rate to this rate, the payment would rise to that. And if any interest is deferred, the payment and outstanding balance would be this.
The idea for the form came from Robbins' prescription to control his high blood pressure, and he views it as an Rx for that which currently ails the lending business.
The form "would clearly spell out the benefits and risks" of various loan products "in simple, plain English," the MBA chairman says. "Lawyers would not be allowed to touch this form."
Robbins, who sold his company, the American Mortgage Network to Wachovia Bank last year and is now co-head of businesses conducted under the Wachovia Securities Wholesale Mortgage brand, believes the form "would fulfill a big part of our responsibility to make sure borrowers understand the nature of the risk" they are about to undertake.
"Then," he says, "it's up to them. This is America. (Borrowers) have the right to choose what they qualify for."
Robbins says several major lender-members of the MBA are backing the proposal as an alternative to a suitability test, which he said "sounds intelligent until you peel the onion back."
"There's no way a loan officer can look into the future and determine what is suitable" for a particular borrower, he says.
The MBA chairman also believes the tide is already swinging away from the most dangerous, so-called "toxic" loan products and back toward safer loans, and "to impose a standard at this point on an industry that is already dealing with the issue would be significantly, overly restrictive."
Besides, he adds, a suitability test "is not in the borrower's best interest" because it could wind up denying certain loans "to those who need them the most."
Pointing out that 95 percent of those who have chosen non-traditional loan products over the past few years would not be home owners without those loans, Robbins says the MBA is "absolutely opposed" to a suitability standard.
