Consumer Groups Worried by ARM Payment Adjustments

The increasing use of adjustable-rate mortgage products is leading consumer advocates to consider the concept of suitability as a way to hold lenders accountable and to secure redress for borrowers that are harmed.

"The explosion of ARMs in the subprime market has raised the issue again of high risk home loans being made that are not really suitable for families that are struggling with debt," said Deborah Goldstein, executive vice president at the Center for Responsible Lending.

"Expectations that these ARMs are going to reset and families are not going to be able to afford them," she said, "leads to the question are these loans really suitable for borrowers."

The mortgage industry generally considers suitability standards to be a liability trap. But the concept is being discussed in Congress. And new state predatory lending laws in Ohio and Rhode Island have provisions that border on suitability standards.

The Ohio law prohibits state licensed mortgage lenders from making "unfair" "unconscionable" loans. The Ohio statute, which goes into effect Jan. 1, says it is "unconscionable" to make a loan that a borrower does not have a reasonable probability of repaying or refinancing a loan that does not have tangible net benefit to the borrower considering all their circumstances.

Ron Bridges with AARP Ohio said the borrower benefit standard evolved out of a need to create an effective private right of action for victims. Existing laws, including the federal Home Ownership and Equity Protection Act, requires a pattern and practice that is difficult to prove or enforce.

"So we looked for other remedies," he said, to protect credit worthy families from being sold "expensive or risky loan products." Mr. Bridges is associate director for government affairs and advocacy at AARP Ohio.

The Mortgage Bankers Association is very leery of suitability standards and the lack of objective standards in the Ohio and Rhode Island predatory lending laws.

"The net tangible benefits standards are not defined, they are very broad and very subjective," MBA senior director Paul Richman said. "It will clearly open up lenders to increased risks of litigation."

He also warned that these laws are creating a lot of uncertainly among lenders and secondary market investors. Unlike other predatory lending laws, some of the prohibitions in the Ohio and Rhode Island laws apply to all loans, not just high-cost loans.

However, some consumer advocates are quick to point out that buying a home is the biggest investment many low- and moderate-income borrowers ever make.

These days' borrowers are confronted with a bewildering array of mortgage products. Yet they rely on mortgage professionals who are not obligated to provide a loan that is in their best interest, according to Allen Fishbein, director of housing policy at Consumer Federation of America.

"As a result, you get people taking on more debt than they can afford and concerns about foreclosures are rising," he said

Wright Andrews, a Washington lobbyist for several subprime lending groups, said congressmen are beginning to take a look at and discuss broader approaches to stopping predatory lending.

"Suitability is clearly on the table," he said, as well as a range of protections that apply to most, if not all loans. Mr. Andrews is with the law firm Butera & Andrews.

He noted the HOEPA approach based on points and fee triggers only provides protections for borrowers with the most costly loans.

"I think people are coming to recognize that you need to devise a system with safeguards that apply to all borrowers regardless of triggers and regardless of whether the lender is a federally or state-chartered entity," Mr. Andrews said. (c) 2006 Mortgage Servicing News and SourceMedia, Inc. All Rights Reserved. http://www.mortgageservicingnews.com http://www.sourcemedia.com

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