MOVE AFOOT TO ENSURE MORE SUITABLE LOANS.

Byline: GREGORY J. WILCOX

It's called suitability, and it has nothing to do with haberdashery. But suits will certainly clash over the concept.

There's a movement under way in the nation's capital to impose a suitability standard on mortgage lenders. This simply means that it would be the responsibility of the lender to make sure a loan product is the one best-suited to each buyer.

Rep. Barney Frank, D-Mass., the new chairman of the House Financial Services Committee, which churns out banking and mortgage legislation, is leading the charge.

``You shouldn't lend (homebuyers or refinancers) more than they can afford to pay back and you don't lend more than their house is worth,'' he told the Baltimore Sun newspaper last month.

One of Frank's goals is enacting a nationwide law to protect consumers from shady lending practices.

It's a noble effort but comes too late to help homeowners who already hold a toxic loan that's about to explode.

Home sales are well off their peak, and appreciation rates have flattened out. Lots of buyers who jumped in near the price peak used a variety of loan products that resulted in low initial payments.

A clear picture will emerge as interest rates reset. But there is evidence a bad situation could result.

For example, in December, the Center for Responsible Lending released a grim analysis of the nation's home-loan pool.

It showed that 2.2 million American households will lose their homes and as much as $164 billion because of foreclosures in the subprime mortgage market.

The center said this was the first comprehensive, nationwide review of millions of subprime mortgages made from 1998 through the third quarter of last year.

The research indicates that risky lending practices have triggered the worst foreclosure crisis in the modern mortgage market and projects that one out of five subprime loans issued during 2005-2006 will fail.

California is one of the states that's expected to see a sharp spike in loan failure rates.

``In the subprime sector, the most vulnerable borrowers are sold the most dangerous loans,'' Mike Calhoun, the center's president, said at the time the study was released.

Not surprisingly, the center is a proponent of a suitability standard.

Center spokeswoman Sharon Reuss said the organization believes that home loans should be suitable for homebuyers. And some lenders don't always have the borrowers best interest in mind.

``I think frankly sometimes the choice has been made by the lender with the consumer not knowing the type of loan they have been placed in and the riskiness of the loan,'' she said. ``I think that some unscrupulous lenders have been making choices for borrowers.''

Also, not surprisingly, the Washington, D.C.-based Mortgage Bankers Association doesn't think suitability is suitable for this industry.

They've countered with a policy paper titled ``Don't Turn Back the Clock of Fair Lending and Homeownership Gains.''

It concludes that any law requiring mortgage lenders to subjectively evaluate whether a loan product is best suited for a borrower would limit the availability of credit and increase the cost to consumers.

The MBA noted that most discussions about suitability propose more rigid, prescribed underwriting standards, a subjective 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.

``Making the lender responsible for determining which loan is suitable for a borrower will limit consumer choice and could deepen the slowdown in the housing market,'' Kurt Pfotenhauer, MBA's senior vice president of government affairs, said in a statement.

``The borrower, however, is best qualified to determine whether a loan that he qualifies for is suitable.''

greg.wilcox(at)dailynews.com

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