With Democrats now in control of Congress, the Mortgage Bankers Association, like any lobbying group, is tweaking the messages it sends to Washington.
With predatory lending possibly on the federal agenda this year, the trade group is trying to make its case for omitting a so-called suitability standard from any legislation in this area.
During the last congressional session, the mortgage industry had lobbied for a federal anti-predator standard that would have preempted various state and local measures. Now that the Democrats are in charge, lenders fear that a federal standard would go farther than any of those laws by incorporating a suitability standard.
On Monday the MBA released a policy paper that argues against creating a law that would establish a fiduciary responsibility between mortgage lenders and borrowers. Such a standard would open the industry to massive litigation and could wind up hurting minority homeownership, the group said.
“From a legal standpoint, suitability would create enormous potential liability,” Kurt Pfotenhauer, the MBA’s senior vice president for government affairs and public policy, said in an interview Monday. “It would have an impact on the types of products and credit offered to future borrowers, and we would be looking at a diminishment of the current mortgage market in terms of the number of people we are reaching.”
A federal anti-predator standard that included some form of suitability language “would effectively mandate conservative underwriting standards,” Mr. Pfotenhauer said.
The concept of a suitability standard has come into the spotlight as rising foreclosures have fueled debates on topics ranging from whether underwriting standards have loosened too much to whether borrowers fully understand the loans they are getting.
Mr. Pfotenhauer said it is “a specious argument being put forward that somehow certain products are driving up foreclosure rates.”
The 36-page paper says that the current nonprime delinquency rate is identical for both fixed-rate and adjustable-rate mortgages, at 12.5%. That figure is below the 15% delinquency rate in 2001, when the economy was coming out of a recession, the MBA said.
The main drivers of delinquencies are unemployment, death or an illness, excessive debt, and divorce, the paper said, citing a 2005 report from Freddie Mac.
In the case of mortgage lending, the concept of suitability, taken from securities law and advanced by consumer advocates, is meant to establish a fiduciary responsibility for the lender to choose the most appropriate loan for a borrower.
The paper argues that the comparison between the securities industry and the mortgage industry is a flawed one.
“The mortgage lender’s primary duty is to those who entrust the mortgage lender with the funds used to finance the mortgage — be they depositors at a bank or purchasers of mortgages in the secondary market,” the paper said. Moreover, courts “are virtually unanimous in holding that the basic relationship between lenders and borrowers is an arm’s-length transaction between creditors and debtors.”
According to the MBA, another flaw in the comparison is that there is no federal policy akin to the Fair Housing Act requiring securities firms to sell investment products in underserved neighborhoods.
The paper also cites a 2004 Government Accountability Office report on the effects of state anti-predator laws. That report found that secondary market participants “are not willing to risk having to assume liability for violations committed by originators,” and “may pull out of the market altogether,” increasing the cost of legitimate nonprime credit.
