Children, Can You Say "Suitability"

If Congressman Barney Frank has his way, all mortgage originators will have to utter those words in the back of their minds when considering loan options for their clients.   Frank is not just any member of Congress, he happens to be the new chairman of the House of Financial Services Committee and his top priority is to create national laws to protect consumers from predatory mortgage practices.

Recently, on The Perennial Borrower post, I was asked by RCG readers how do I determine what loans are right for clients with all the options that are available in today’s mortgage marketplace.  It takes a great deal of determining what the available financing options are, what their financial plans are and then what mortgage makes the most sense, or is the most “suitable”.   This doesn’t happen automatically for every borrower with every loan originator.   Which is why states like Washington are now licensing Mortgage Brokers and Congress is looking into the same on a nationwide basis.  Currently, when we have subprime lenders calling on our office, they promote “how low they can go” in the borrower pool.   55% debt to income ratios are common–heck, you hardly have to be re-established out of your bankruptcy if you don’t mind the interest rate.  Can’t document your income, assets…don’t have a job but your credit is good–fantastic, we have a loan for you!  It’s true, there are a lot of mortgages that seem crazy and while they may not make sense for some, they do for other clients.  Suitability.

According to Kenneth R. Harvey’s article last Saturday, “…a new national standard might require loan officers to determine an applicant’s suitability for a particular loan program based on:

• Employment status, income level, assets and likelihood that income or employment could change;

• Other recurring expenses and the effect they could have on the borrower’s capacity to repay;

• The potential for higher future monthly payments based on the structure of the loan.

A suitability standard might also ban brokers and others from steering less-sophisticated borrowers to higher-cost mortgages than they qualify for, such as pushing them into complicated higher-rate subprime loans when they could qualify for prime rates and simpler programs.”

This sounds great…however; there is always another side to the story.  NAMB is concerned this could “lead to accusations of discrimination.”  I agree, I mean, are loan originators to provide IQ test to borrowers before determining if they truly understand a more sophisticated loan?  Who are we to judge?   Many times, this surprises me, I may not physically meet my client.  The entire transaction may take place over the phone or internet.  You do get a “feel” for whether or not a person understands the mortgage product by the questions they ask, but how do you really know?   If you’re a borrower who wants an option ARM and a lender (deciding you are less-sophisticated) insists on giving you a 30 year fixed, have you been discriminated against?

2007 should be a very interesting year in the mortgage industry.

34 thoughts on “Children, Can You Say "Suitability"

  1. Ahhhh! Ahhh! Ahhhhhhhhhhhh!

    I opened up RCG and Fred Rogers was staring at me! All of the sudden I was in third grade (and on vacation) and being needled by the neighborhood kids because I had to watch this with my little sisters. Congratulations, Rhonda! My pshrink thanks you for the $6,000 I’m about to spend.

    Suitability is not necessarily a bad thing. I, for one, have practiced it for years and it’s cost me some five figures in GCI. I wish we were inclined to say “NO” more emphatically in our industry. Unfortunately the Clinton/Bush “No Renter Left Behind” initiative heas spawned an entitlement minset in the first time homebuyer.

  2. “55% debt to income ratios are common–heck, you hardly have to be re-established out of your bankruptcy if you don’t mind the interest rate.”- Rhonda

    Heck, we’ve closed transactions where the borrower is 1 yr out of a prior foreclosure. What did they do? Bought a new construction home, 100% financed. I suppose there is a loan suitable for everyone, but you think there is a limit to the absurdity of who can get a loan. Nope.

  3. A solution, which I have been co-advocating for years now, is for mortgage loan originators to become professionals who would owe fiduciary duties to clients.

    In your examples, a professional such as a doctor does not just have the duty of “disclosing” information about a medical procedure, a doctor has the absolute highest duty TO MAKE SURE THE PATIENT UNDERSTANDS the medical procedure.

    Mortgage lending has become very complex, with so many possible consequences that an average, random consumer might not be aware of, when a consumer makes a choice.

    I see a future where there would be tiers of professional loan originators.

    Miminum competency standards
    Such as a Bachelor’s degree in finance or economics
    Passing a national AND state licensing test which would be way longer than 3 hours. Perhaps a two day test where one entire day is devoted to ethics.

    Interns, who might work under more experiened LOs.

    General LOs

    Highly Specialized LOs
    This is the group that would be deemed competent and ethically educated enough to originate high risk loans.

    All LOs would owe the highest duty of good faith to the consumer, including a duty to put the consumer’s interests above his or her own interests (which unfortunately for some LOs (not all) dissolve into egoistic self-interest of making as much money as possible.)

    I have met MANY loan originators who work at all institutions: banks, credit unions, and mortgage brokerage firms, who ALREADY DO operate their business in a way that resembles what I’ve described above.

    Since I’m dreaming, what I’d also like to see in our perfect world would be the discontinuation of allowing consumer finance companies to use the word “mortgage” in describing what they do.

    Let’s stop blaming the consumer, and stop blaming the wholesale lenders. The wholesale lenders have a job: To maximize profits for their shareholders (within the bounds of the law).

    If the mortgage industry doesn’t self-regulate for competency and ethics, our federal and state regulators are going to slam down even harsher regulations that what we have coming from Barney Frank.

  4. 55% debt ratio, if all of that is housing payment MAY be appropriate for some. Those who come from other countries who value owning property moreso than some Americans CAN do it and should be allowed to do so.

    They use one pork chop to feed 20 people. They can cook a meal for a buck and feed the masses.

    Remember…not everyone is buying lattes and many homes are multi generational with more wage earners in the house besides the one buying it.

    Make room for diversity…no one size fits all real estate anymore people. If it’s right for your client…it’s right.

  5. Exactly, Ardell, and those who came from America might also be able to afford higher debt ratios. My dad still tells stories of being a kid during the great depression and eating dinners that consisted of nothing but corn, his parents talking seriously during dinner about getting the money together at the end of that year to pay the interest on “the note” to the bank.

    Every consumer is different. Suitability standards would make the job of a mortgage loan originator much more challenging.

    What I like about Barney Frank’s proposal is that it opens up space for dialogue about possible solutions.

  6. The solution is the agent has to be the agent and know all the circumstances of their client and be in the room with the client and the lender like the “good old days”. 🙂

    Only one person represents the buyer in ALL things…the real estate agent…now if they would just stop delegating their duties, and if States would just stop downgrading their duty to the public…we could back on track!!

    Brokers are looking for less liability, and cutting out all of the stuff we get the big bucks for! and when the client doesn’t need that level…the agent needs to scale the fee to the service. Because the fee is for the whole nine yards…not the cover your butt version.

  7. Jillayne,

    I had to “front” my Mom’s mortgage when my Dad died because they didn’t believe she could pay it. She can squeeze a dime harder than anyone I know and even though she’s been on Social Security for many years, she has more money than all of us LOL

    Sometimes it does take a co-signer if they tighten things up again. That’s how we used to do it. I co-signed with my Mom. They thought I was a man and Lyn and Ardell were husband and wife, so they approved it 🙂 Back then there were points taken off for women borrowers.

  8. Word.

    Damn straight Ardell…not only are they not buying lattes…they are not buying 40″+ flatscreens, $200+ jeans with the matching $75 t-shirts, Blahniks (sp?) or all of the other “luxury” goods that so many people deem necessary these days.

    Dining out actually “is” a luxury for many of these people from other cultures. It used to be the same within America…but hell…we kissed those values away long ago…all in the name of “efficiency”…first it was the T.V. dinner…now…most of us are so lazy that eating out is the way we live…we no longer “make meals”…rather we “go get dinner”…yet we all want a Viking range and a Sub-Zero fridge…we don’t even put them to use…but they sure look pretty don’t they?

    There is true value in real estate…however…the ones in this day and age that will be able to afford it are going to be the ones that eschew all the useless “small shiny objects” with TRULY trumped up values.

    We’re like raccoons.

  9. The raccoon analogy is that of when a small shiny object is placed in a box with a small hole in it, a raccoon will reach for the shiny object and attempt to obtain said object. However…when the raccoon has closed his greedy little paw around the object he cannot fit it back through the hole of the box…hence trapped.

    I use this analogy because with our “consumer is king” mentality that is pervasive throughout every socioeconomic level in our society…we lust after those “small shiny objects” and grab for them not realizing what the ultimate “cost” will be. We as humans *should* be able to grasp the concept that many of these small shiny objects are things that we should really pay no attention to…just as the raccoon should have paid no attention to that object in the box.

    Maybe we’re just really no smarter than raccoons in some aspects.

    Oh…yeah…and I learned about the raccoon thing in Yosemite from a park ranger as a child.

  10. EconE

    Nice analogy. Sometimes people haven’t developed the cognitive ability to realize that what they desire is a trap. Want a good excuse to see a movie analogy? Go see Alpha Dog for a great example of how a group of young adults makes some decisions without fully pondering all the possible consequences.

    As the world currently exists (before Barney Frank signs anything new) If one of Rhonda’s clients wants an “unsuitable loan” that looks like a shiny thing in a box, what does a loan originator (or Realtor for that matter, the agent selling the consumer the house) do?

    Does the Realtor just not sell the house to the racoon?
    Does a loan originator tell the client, “you are reaching into a trap.”

    Is it the job of government to tell a consumer they can’t have the shiny thing, or is it the job of the corporation, or is it the job of the consumer to develop his or her brain……or is it just the subtle balance of all three and maybe more that I have failed to mention.

    Teach me something, EconE. I’m a sponge and you’re the professor.

  11. I do not know if the Feds really are seeing things, as most consumers in today’s society are – that I will agree with Rhonda on and politicians rarely really do.

    Lending products have become so varied and the language used in documentation is hard for a lot of people to understand so consulting should be a demand on the institution that is issuing the loan. Michigan does not require loan originators to be licensed and yet they have the ability to guide customers in directions that may make major plays in their life, how good the consulting is no one can really say because there are no requirements other then the federal fair housing and normal disclosures. Washington State has just put licensing into play and may have different state laws, so I think that there is some room for improvements on a Federal level there.

    On the other hand as far as gauging suitability while still being fair and non discriminatory, maybe some of the old factors that use to be used should come back into play. Like time and experience. 20 some years ago when I went to buy my first new car, the lender put terms on me based on the fact that I had never made a major loan before. A rank, as a number not based on anything other then my age really and ok today we see the same thing taking place in many States where if a person is certain age they are not allowed to drive with so many people, at a time of the day, or other allowances.

    While I use the driving experience as an example, what I am really asking is what happened to the type of loan that a person could qualify for based on experience and history. I guess that it will just come down to be just spin on Washington D.C.’s part but if they do put pressure on the lending institutions to make changes I hope that they do not decide to use a color code system for suitability risk.

  12. The stories he tells are passed down from generation to generation. My daughters and nephews all hear those stories. One of my favorites is when his shoes were so worn down that his feet were getting wet. They cut pieces of cardboard to fit inside their shoes until there was money for new shoes.

    Stories are passed down from generation to generation and fit within a family’s culture. The stories are now part of his grandchildren’s psyche.

    But every family culture is different, so let’s be social scientists and look at US culture. Our media is placing ads out there from corporations whose sole job is to return a profit to shareholders. I don’t see a change coming anytime soon that would remove “capitalism” from American culture. Therefore,


    Either loan originators will be told by a regulator (state or fed) that you cannot make that loan, and your competitor also won’t be able to make that loan.


    The industry itself will decide that some loan originators, based on higher levels of competency, experience, and prescribed ethical duties, will be allowed to help that consumer and some won’t.

    IF LOAN ORIGINATORS ELEVATE THEMSELVES INTO PROFESSIONAL STATUS, then what you would say, is “I cannot make this loan for you because based on my experience, knowledge, and based on my high ethical duty to put your interests above my interests, purchasing this home (or refinancing for the sixth time) will cause you financial harm.”

    Said in a more graphic way: If your client want’s to jump off a cliff, you would not let them. Your high ethical standards would dictate not helping them and certainly not making money off their financial suicide.

    Most loan originators who read this might think that conducting business in this way would mean earning less money, but actually the opposite is true, you will be able to charge more for your services because the consumer will value you higher for your honesty.

    There are some loan originators who already do work in this way, and those clients probably thank them for the brutal, honest, and compassionate wakeup call.

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