Mortgage Suitability

March 9, 2007

Consumer groups believe that lenders should not allow borrowers to take mortgages that aren’t suitable for them. Lenders who do allow it should be held liable. Kenneth Harney reports that "suitability" could be the hottest buzzword in the home mortgage market this year.

The case for suitability looks both simple and plausible. A Federal suitability rule has worked in the securities industry, or so goes the argument, so why wouldn’t it work with home mortgages?

Consumer groups propose a loan suitability standard as a remedy for the following problems that beset the home loan market:

*Bad mortgage selection

*Unaffordable loans

*No-benefit refinances

*Steering to high-price loan providers

My procedure in this paper will be to examine each of these problems; ask whether a suitability standard is an appropriate remedy; and if suitability would not work, whether there is another remedy that would work.

I Suitability and Bad Mortgage Selection

The Problem

I begin with the problem of bad mortgage selection. This is the closest analogue to the securities market problem, because bad mortgage selection in many cases means placing borrowers in mortgages that are too risky for them.

The following letter is a composite of many I have received recently from borrowers who took out option ARMs in 2005 and 2006.

"I took this loan because the monthly payment was much lower than any of the alternatives…The interest rate was only 1% because I qualified for a special program…I was led to believe that it would last for 5 years…I realize now that it didn’t and that my loan balance has been going up every month…I am afraid that next year my payment is going to increase so much I won’t be able to afford it…How do I get out of this mess? Do I have recourse against the loan officer (broker) who talked me into it"

OAs along with interest-only mortgages (IOs), which have some similar features, are marketed to borrowers who are attracted by the lower payments. In all too many cases, however, they don’t understand why the payments are lower, and are not prepared for the risks of higher payments in the future.

Until recently, bad mortgage selection was a minor problem. That changed in 2005 and 2006, however, when the volume of OAs and IOs exploded.

The marketing of these mortgages, furthermore, is often based on deception. The most blatant piece of deceit, which I have seen time and time again, is to lead or allow the borrower to believe that the very low quoted rate on an OA holds for 5 years, when it actually holds for one month.*

[*In 2007, a version of option ARM appeared with the rate fixed for 5 years, with the payment calculated at a rate 3% below the actual rate. This has comparable potential for future “payment shock” but the informed borrower who always makes the minimum payment can know exactly when the shock will occur and how large it will be.]

Two remedies have been proposed for this problem. One, which is being pushed by consumer groups, is the imposition of a standard of suitability for all home mortgages. The second, advanced by Federal regulators from 5 agencies, is to impose a new set of disclosure requirements on lenders. These two approaches are discussed in turn.

A Suitability Standard

If lenders were held liable for making unsuitable mortgages, they would have to delegate operating responsibility to those who deal directly with borrowers: loan officers and mortgage brokers, who I will call "loan providers". This wouldn't work, because the loan providers are not objective, and usually don't have the necessary information.

Loan Providers Have a Personal Stake in the Outcome: Having loan providers judge suitability would be like having the coach of a contending team also serve as the referee.

Loan providers have a personal financial interest in the outcome. Their business is selling loans. Judging that a loan is not suitable for a borrower would cost them money.

What has made the suitability standard workable in the securities industry is that the short-term interest of brokers in selling unsuitable securities is usually over-ruled by their long-term interest in maintaining a roster of satisfied clients. While transactions-oriented operators looking for the fast-buck exist, some of them operating out of the proverbial boiler rooms, they are on the periphery of the industry.

In the home mortgage market, in contrast, client-oriented loan providers are the minority group. The majority sell loans. To force their loan officers to do their job, lenders would have to hire an army of inspectors; the prospect would be a nightmare. Furthermore, there is no one to ride herd on most mortgage brokers, who are independent contractors.*

[*Large broker firms could monitor their loan officer employees as lenders do, but most are in small firms without the capacity to monitor. Any monitoring would have to be done by the wholesale lenders with which they do business, and that is equally unworkable. The ones who tried to do it would lose business to the ones that just went through the motions.]

Loan Providers Don't Have the Necessary Information: Determining mortgage suitability by a referee wouldn’t work even if the referee was uninvolved in the outcome. Determining the suitability of an investment or a mortgage requires balancing the objectives of the client against the risk of the instrument. In the case of investments, this is relatively easy because the client’s objective can almost always be framed in terms of rate of return.

The objectives of mortgage borrowers, in contrast, are diverse, complex, and often not known by the loan provider. Here are 5 objectives that have been reported to me by borrowers who have selected IOs and OAs.

*Reduce cash outflow to invest the excess in securities

*Reduce cash outflow to pay down a second mortgage

*Pay principal when convenient

*Buy more house

*Reduce payment to avoid default

I sometimes get involved in an interchange with borrowers on whether their particular objectives are worth the risk, and sometimes I express my opinion to them quite forcefully. I would not want the legal right to over-rule them, however, because I am not that smart.

Let’s look at the first because it is the case most analogous to the securities market model, and it illustrates clearly why the model can’t be extrapolated to home mortgages.

Many borrowers tell me that they took an IO or OA so they could invest the saving in monthly cash flow relative to other mortgages. Given this objective, whether or not the mortgage is suitable for the borrower depends on whether a) they have the discipline required to invest the savings every month rather than spend it; and b) they have access to investments that will yield a return higher than the mortgage rate without taking excessive risk.

A loan provider typically has no knowledge of the securities a mortgage borrower plans to acquire. Contrast that to a securities broker, who knows the risk of the investments being offered to his client because the broker himself is offering them. Furthermore, the mortgage loan provider has no special expertise for analyzing the wisdom of the borrower’s decision, and no special insight into whether the borrower is a disciplined investor.

An alternative approach to the problem of bad mortgage selection has recently been proposed by an inter-agency group of Federal regulators.

New Disclosure Requirements

Federal regulators from 5 agencies have proposed a new set of disclosure requirements on lenders.* Instead of trying to amend existing requirements, which is badly needed even without the challenges posed by the new instruments, they would simply add the new requirements to the pile. The rationale for that is the need to get something out fast.

[*Proposed Illustrations of Consumer Information For Nontraditional Mortgage Products, Comptroller of the Currency, Office of Thrift Supervision, Board of Governors of the Federal Reserve System, Federal Deposit Insurance Corporation, and National Credit Union Administration, September 25, 2006.]

While the agencies have developed a set of suggested disclosures, lenders are free to develop their own. Realistically, however, all or virtually all lenders will adopt the suggestions because it is their best protection against liability.

The suggestions include textual descriptions of IOs and OAs, and several illustrative tables. I have not critiqued these materials, which are pretty good, because they won’t accomplish their purpose no matter how good they are. Their only material impact will be to raise lender costs. I doubt that they will save a single borrower from folly.

The new disclosures will simply be added to the pile of existing disclosures, which are largely ignored by most borrowers. They ignore disclosures because too many hit them at one time, much of it is useless garbage, and few borrowers can extract the useful nuggets from the garbage. So all get short shrift, which would also be the fate of the new disclosures.

Unless, that is, there is someone directly involved in the process who tells the borrower “Read this one before you sign on, it is truly important.”

But there isn't! The loan officers and mortgage brokers with whom borrowers deal have a financial incentive to do just the opposite. They sell IOs and OAs. Expecting them to promote disclosures that will raise questions and perhaps thwart a deal is like expecting an automobile salesman to call attention to low gas mileage or poor collision performance. The inter-agency group blinds itself to this reality by constantly referring to disclosures being provided by "institutions".

In refinance deals particularly, loan providers are not going to do anything more than the law requires. In dealing with a home purchaser, they can often afford to be neutral because the borrower who doesn’t take one instrument will take another. But in the refinance market, IOs and OAs are usually sold as a way of reducing payments, and if disclosures pointing up risks and future costs make the payment reduction less attractive, the result may be no deal at all.

Given the way in which mortgages are sold, a new disclosure added to the morass of existing disclosures can be effective only if it hits mortgage shoppers between the eyes, and cannot be swept aside by loan officers and mortgage brokers. My proposal is the following very simple rule:

Whenever a shopper is quoted a monthly payment, he must also be shown the highest monthly payment possible on that loan, and the month it would be reached, assuming the borrower always makes the minimum payment allowed.

The analogue to this proposed disclosure rule is the APR rule, which says that whenever an interest rate is quoted, an APR must also be shown. When the rate quote (payment) changes, the APR (highest payment/month) will also change. The difference is that because most borrowers don’t know what the APR means, that rule does very little good, whereas borrowers do understand what "highest payment" means.

This rule focuses on the primary motivation for taking IOs and OAs: the lower initial payment. By showing what can happen to the payment, it forces borrowers to acknowledge that the loans have a down side that should be considered. The rule would put borrowers on their guard, which is what a disclosure rule is designed to do.

Based on past experience, the lender and broker trade groups will find this proposal unacceptable – because it emphasizes the negative. They believe that mandatory disclosures should be "balanced", showing the good news as well as the bad.

But potential borrowers are besieged with good news, they hear about the possibility of "borrowing $150,000 for just $500 a month" from TV, radio, newspapers, and the internet. Many also hear it from their loan providers. To be effective, mandatory disclosure has to be negative because it is designed as a corrective to an onslaught of hype.

II Mortgage Suitability Applied to Unaffordable Loans

The Problem - Is There One?

While there is a wide agreement that bad mortgage selection has become a serious problem, the proposition that unaffordable loans have become a problem is questionable.

Those who see unaffordable loans as a serious problem identify it with high foreclosure rates. Foreclosures impose a high cost on the individuals who are foreclosed upon, and their communities may suffer as well. Further, the more liberal underwriting standards that have emerged in recent decades, which have made it possible for households with weaker financial credentials to become homeowners, have also increased the potential for higher foreclosure rates.

Perhaps this process has gone too far, but nobody has developed a persuasive analysis that this is in fact the case.

The community group proponents of suitability argue that loan providers should be held responsible for making loans that borrowers cannot afford. But what exactly does that mean?

A Suitability Standard: No Loans Based Solely on Collateral

There are two kinds of unaffordable loans. The first kind is based solely on the collateral, so it may or may not be affordable. In underwriting the loan, affordability does not enter the picture. Suitability proponents believe that such loans should never be made, and that view has been echoed by regulators from the 5 Federal agencies.

In my view, the claim is wrong. There are many types of mortgage loan where the borrower is qualified based solely on collateral value, which are in the borrower’s interest. The loans may or may not be affordable.

The best example is reverse mortgage loans, which are growing rapidly in popularity. Affordability is not an issue with reverse mortgages because the loan will be repaid out of the eventual sale of the property.

Reverse mortgages are not an exception that proves the rule. I have encountered numerous situations where collateral lending was clearly in the interest of the borrower. Some are based on the same premise that the loan will be repaid by sale of the property.

In one case, described in detail in Can I Live Off My House, I worked with a mortgage broker to keep a low-income widow in her home for the 5 more years she wanted to stay there. She had a lot of equity but couldn’t afford the taxes. The mortgage that allowed her to stay in the house would not meet any affordability test.

Other cases involve financial stringencies viewed as temporary by the borrowers, which collateral-based loans allow them to weather. Because of the collateral, the lender need not second-guess the borrower’s judgment that the stringency is temporary, a critical point when the loan amount is too small to justify high origination costs.

A large proportion of HELOCs is collateral based, because they are usually second-mortgages, often for small amounts, and high origination costs would make them unprofitable.

People who move to a new community without a job there sometimes take HELOCs on their existing house. This gives them the funds they need to make a substantial down payment on a collateral-based loan in the new community. The loan is unaffordable because when they buy it they have no income, yet the borrower is 99% sure that they will have income shortly.

If collateral-based lending was ruled illegal for institutions, the borrowers who need them will have nowhere to go except to the "hard-money lenders" – individual investors who specialize in collateral lending at high prices.

A Suitability Standard: Affordability Established After the Fact?

The second type of unaffordable loan is not known to be unaffordable when it is made, but proves to be unaffordable in the event. Nobody makes loans known to be unaffordable at the outset except collateral lenders, as discussed above, and perpetrators of fraud. In all other cases, loans are considered affordable when they are approved, but some turn out to unaffordable. We find out about this when the borrower defaults.

Is the volume of unaffordable loans too large? That would mean that underwriting requirements are too liberal. Underwriting requirements are the rules that must be met for loan approval. These rules cover the down payment, housing expense-to-income ratios, property type, documentation of income and assets, credit score, loan purpose, and other factors.

Are they? There is no question that the standards have become more liberal over the years, as lenders have learned how to offset high-risk factors with low-risk factors, and to price for varying degrees of overall risk. The positive side of this is that millions of households have become homeowners who in earlier decades would have been shut out of the market.

Perhaps the costs associated with borrowers who fail, both to them and their communities, more than offsets the benefits to those who make it. The inter-agency group set up last year to provide guidance on "Nontraditional Mortgage Product Risks" recommended a number of measures to restrict underwriting standards. However, they provided no evidence that existing standards are too lax.

My major concern is that a suitability standard of affordability will be applied after the fact to make lenders responsible for failed loans. Most failed loans had weaknesses when they were made, so it is all too easy, with the benefit of hindsight, to argue that they never should have been made.

But a very large proportion of mortgage loans have weaknesses when they are made, yet the great majority of those pay on schedule. Making lenders responsible for those that don’t would be a back-door way to force a tightening of underwriting requirements. This would reduce the availability of loans to the weakest categories of potential borrowers, most of whom repay their loans. They are a silent majority.*

[*Using after-the-fact information to force a restriction of underwriting requirements should not be confused with after-the-fact analyses to determine whether or not loan originators have conformed to the existing requirements. In a system where most loans are sold by originators, who implement the underwriting rules of the investors to whom they will be sold, the investors must monitor to assure compliance.]

III No Benefit Mortgage Refinancing

The Problem

Refinances that are not in the borrower’s interest are a problem. Many borrowers write me about potential refinance deals that would make them poorer, but they don’t realize it. I also receive mail from borrowers who now realize they made a mistake when they refinanced, asking how to undo the mistake or whether they have any recourse against the loan provider.

The problem of refinances that involve no benefit to the borrower is associated with aggressive merchandising by mortgage brokers and loan officers. They drum up refinance business among borrowers who otherwise might never have given it a thought.

Interest-only mortgages and option ARMs are their tools of choice. The first line of their pitch is often some variant of "Mrs Jones, how would you like to reduce your payment from $1200 to $600?"

Applying the "Net Benefit" Rule of Suitability

Proponents of a suitability standard would make loan providers responsible for assuring that a refinance provides a net tangible benefit to the borrower. The "net" is critically important. All or virtually all refinanced mortgages provide tangible benefits, otherwise borrowers wouldn’t do them. The worst example of a predatory loan I ever saw – a borrower refinanced a zero rate loan into a 13% loan – put some cash in the borrower’s pocket.

Under a suitability rule, the loan provider must determine whether or not the benefit outweighs the cost. This would make loan providers responsible for something over which they have little or no control. This becomes evident when we look at the different reasons borrowers refinance.

Cost-Reduction: If the purpose of the refinance is to reduce the borrower’s cost, the new interest rate or mortgage insurance premium must be lower than the existing one. Ordinarily, however, the borrower must incur an upfront cost.

For there to be a net benefit, therefore, the borrower must have the mortgage long enough for the monthly cost reductions to exceed the upfront costs of the refinance. Only the borrower has any idea of how long the mortgage may last.

Raising Cash: Suppose the purpose of the refinance is to raise cash. The tangible benefit of the cash is clear, but the cost may be very high.

I recently reviewed a cash-out refinance in which the borrower paid about $12,000 in refinance costs and a ¼% rise in rate on a loan of $150,000, in order to raise $4500 in cash. Was there a net benefit?

There is no objective way for the loan provider to answer the question. While the price is very high, maybe the borrower needs the cash to pay for life-saving medicine for his children?

It could be argued that whether or not there is a net benefit also should depend on whether the borrower could raise the cash elsewhere at a lower cost. It is neither fair nor feasible, however, to make loan providers responsible for assessing their customers’ options.

Reduce Payment: If the purpose of the refinance is to reduce the mortgage payment, this almost always comes at the cost of a reduction in future wealth. Whether there is a net benefit depends in good part on how critical it is to the borrower to lower the payment. Perhaps the alternative to a payment reduction is default. Only the borrower knows.

Convert ARM into FRM: Suppose the purpose of the refinance is to convert rate uncertainty on an existing ARM into rate certainty on an FRM. The borrowers making the switch are willing to pay a higher rate now in exchange for future rate certainty. Whether there is a net benefit depends in part on the value the borrower attaches to future rate certainty. Once again, loan providers are in no position to substitute their judgment for the borrower’s.

In sum, regardless of why borrowers refinance, the question of whether they receive a net benefit from it is for borrowers alone to answer. Loan providers do not have the information needed to second-guess them.

On the other hand, borrowers often make their decisions on the basis of incomplete and sometimes misleading information. Instead of requiring lenders to assume responsibility for borrowers’ decisions, let’s make them responsible for providing borrowers with the information they need to make better decisions. This idea is discussed in V below.

IV Mortgage Over-Charges

The Problem

Borrowers are over-charged when they pay more for a given product and/or service than they would if they had the information needed to shop alternative sources effectively. For example, you pay 6% and 1 point whereas if you had known where and how to shop you could have paid 5.875% and 1 point. Over-charging in this market is common.

Suitability and Other Approaches to Over-charging

I examine three categories of over-charging: lender steering, excessive broker fees, and loan officer overages.

Lender Steering refers to the unsavory practice of soliciting borrowers for loans priced higher than those for which the borrower would qualify. Steering is often associated with prime borrowers targeted by sub-prime lenders and being charged sub–prime prices.

No suitability rule can deal effectively with steering. It is neither fair nor feasible to hold lenders responsible for posting higher prices than other lenders, or for lending to particular borrowers at prices that are higher than those available to the borrower elsewhere. There is no way to monitor and enforce such rules.

The best way to protect borrowers against aggressive solicitors of high-priced loans is to provide them with recommended alternatives. Vulnerability to solicitations is high when the soliciting loan provider is the only one the borrower knows about. If the borrower is even dimly aware that there is a group of loan providers that has been certified by a trusted source, vulnerability declines sharply.

I have tried to stimulate the development of certification as an accepted part of the home mortgage market by starting Upfront Mortgage Brokers (UMBs) and Upfront Mortgage Lenders (UMLs). These certified loan providers agree that they will not use their superior information to disadvantage borrowers. UMBs meet that charge by setting a fixed fee for their services upfront. UMLs do it by maintaining web sites that disclose all the information borrowers need to shop effectively.

At this writing, there are about 200 UMBs and 4 UMLs. Other certification initiatives are in the works, though none are from the ranks of the consumer groups advocating suitability as a remedy.

Excessive broker fees arise primarily from the lack of transparency in broker pricing. Most broker fees are paid by the lender as a rebate or "yield spread premium" (YSP). For example, the wholesale lender who quotes a rate of 6% at zero points might pay a YSP of 1.6 points for a 6.375% mortgage. The borrower pays the higher interest rate but no cash out-of-pocket, and is either not aware of the YSP or becomes aware of it too late to do anything about it.

Dealing with this problem by applying a suitability standard to broker fees means making judgments about whether the fee in any particular case is too high. I find this idea morally repugnant: as long as society is not passing judgment on lawyer’s fees or doctor’s fees, it has no business passing judgment on mortgage broker fees.

Yet a very high mortgage broker fee differs in an important way from, say, a very high lawyer fee. The lawyer’s client always agrees to the fee whereas, unless the broker is a UMB, the broker’s client usually doesn’t.

The appropriate solution is not fee-setting but transparency. If borrowers know what the broker will make on their transaction, they will prevent over-charges far better than any suitability-based system for controlling fees.

One way to provide transparency is to require all brokers to operate as UMBs, which set their fees explicitly at the outset of the transaction. Another workable remedy is to require that YSPs be credited to borrowers, who would have to agree to sign them over to the broker.

Whatever rule is adopted should apply to any transaction on which the loan provider receives YSPs from a wholesale lender. The legal status of the loan provider should not matter. It thus would cover the so-called correspondent lenders who operate just like brokers, and compete with them, except that they close loans in their own names. If the rule only applied to brokers, there would be a massive movement of brokers to join correspondent lender groups designed to accommodate them, sometimes referred to as "net branches".

Loan officer overages are an amount above the prices posted by a lender to its loan officers. The posted price is the acceptable price, the overage is gravy. For example, the lender posts a price of 6% and 1 point but the loan officer gets the borrower to agree to pay 2 points. The additional point is the overage.

Overages should be made illegal. Lenders should remain free to charge what they want, but their loan officers should not be free to take advantage of ignorance and naïveté to charge some borrowers more than others just because they can.

V Mortgage Suitability as a Remedy For Bad Disclosures

The Problem

The existing mandatory disclosure rules have imposed significant costs on lenders and provided little if any benefit to borrowers.

The conventional wisdom, which I shared for a long time, is that Government should formulate and enforce disclosure rules because that assures uniformity of disclosures across the market. But if the disclosures mandated by Government are useless or worse, which is the case, uniformity does not help borrowers.

Here are some of the problems with the existing system of Federal disclosures.

Excessive Number of Disclosed Items: Disclosures are so voluminous that borrowers are overwhelmed, unable to extract what might be useful from what is garbage.

It is as if the policy was, "If there is doubt, disclose it." This ignores the fact that borrowers have limited attention spans. Disclosing everything has much the same effect as disclosing nothing. Indeed, excessive disclosures can be worse than no disclosures because they may lull borrowers into a false sense of security.

Poor Selection of Disclosed Items: Here are a few of the worst:

*On option ARMs and HELOCs, lender must disclose the initial rate, which may hold for one month, but not the margin, which affects the rate for the remainder of the term.

*Lender fees are itemized but not totaled, and the fees are inter-mixed with third party charges, making it difficult for users to total them. Yet the total is all that should matter to borrowers.

*The borrower is told whether in the event of early payoff the lender will refund any upfront fees, which they never do, but whether there is a prepayment penalty is totally ambiguous.

*The borrower is told what the total of payments will be if he makes the scheduled payments for the full term, a completely useless number, but is not told whether the loan requires mortgage insurance, or is simple interest.

Many more examples can be found under Mandatory Mortgage Disclosure.

Obsolescence: The disclosures are not kept up to date. For example, in 2007, the disclosures had not yet recognized the special problems associated with interest-only mortgages and option ARMs, which had been around as early as 2002. The inter-agency group of Federal regulators in late 2006 recommended that lenders voluntarily develop their own disclosures about these instruments, as opposed to revising the existing regulations, so it could get done more quickly.

The deficiencies of existing mandatory disclosures can be traced back to the ways in which they are developed.

Divided Responsibility: Responsibility for mandatory disclosure has been largely divided between the Federal Reserve System (FRS), and the Department of Housing and Urban Development (HUD). Each agency developed its own disclosure form without any consultation with the other. Broadly, the FRS form focused on the cost of credit, while the HUD form focused on real estate settlement charges. While there is overlap between them, there is no way for a borrower to reconcile the information on the two forms. Neither agency assumes responsibility for the confusion.

Uncoordinated Legislation: Mandatory disclosures arise out of the Truth in Lending Act, Real Estate Settlement Procedures Act, Equal Credit Opportunity Act, and the Gramm-Leach-Bliley Act dealing with privacy. These laws were passed at different times to deal with different problems, and assigned administrative responsibility to different agencies. None of these laws require coordination among administering agencies.

Implementing Agencies Neither Test Nor Update: The agencies with responsibility for formulating the mortgage disclosure rules do not test the disclosure forms with borrowers. Neither do they have programs for systematic updating to keep abreast of market changes.

Influence of Pressure Groups: While borrowers have little influence on the disclosures, interest groups have a great deal. In many cases, their footprints in the regulations are quite clear. While not always harmful in the instance, they are in the total, because they invariably swell the size of the disclosures.

Suitability Applied to Disclosure

Disclosure is the one area in which the concept of suitability makes a lot of sense. Lenders* could be help responsible for the adequacy of disclosures to borrowers because lenders are the experts on the mortgages they offer, and the suitability of disclosures does not depend on information about the individual borrower.

[*I use the word “lenders” here, rather than “loan providers” because it is the institution that must develop the disclosures, loan providers merely transmit them.]

This is in contrast to forcing lenders to assume responsibility for determining whether, e.g., a particular mortgage is suitable to a borrower, or whether a refinance provides the borrower with a net benefit. In these cases, suitability depends partly on information specific to the individual borrower that the lender often doesn’t know.

With lenders responsible for the suitability of disclosures, we can be sure the disclosures will be kept up to date. When a new mortgage is developed, the lender will be obliged to develop the disclosures that go with it. There would be no division of responsibility to confound the process.

However, to generate a superior product, a public entity would be needed with authority to rule whether disclosures are suitable. Otherwise, lenders would adopt the pattern that pervades securities disclosures, which is to disclose everything, including the most trivial and remote risks to the borrower. This would overwhelm borrowers (just as it overwhelms most investors), but would protect the lender against legal liability. On top of that, the disclosures would vary from lender to lender.

The public board would be charged with the responsibility of assuring that the disclosures proposed by lenders actually work for borrowers. Approval of the disclosure by this body would insulate the lender using this disclosure from liability.

If disclosures had to be approved by a public board, the major proposals would come from mortgage technology companies and the IT departments of major lenders. As particular disclosures were approved, they would quickly spread through the industry, with the result that uniformity would be widespread, if not complete.

The detailed charge to such a board, its legal basis, size, composition, method of selection, and financing, are questions for another day.

VI Concluding Comment

The suitability concept doesn’t help in dealing with bad mortgage selection, unaffordable loans, refinances that involve no net benefit to borrowers, or over-charging. Trying to apply the concept to these problems is potentially counter-productive to the degree that it results in vaguely-worded laws that make lenders responsible for things they cannot control.

The one area where the concept does make sense is disclosures, which are entirely under the lender’s control. Shifting responsibility for disclosures from the Federal Government, which has proven it is not equipped for it, to the private sector and a public board, is an idea whose time has come.