Pending suitability regulations leave mortgage lenders exposed to potential violationsMortgagePress.comsuitability regulations, mortgage lenders, Larry Platt, Linda Simmons, Overture Technologies, Mozart Decisioning Suite
Claims that loan originators have failed to consider the
interests of their customers have proliferated over the last few
years, particularly in the sub-prime arena. The result is a wave of
proposed and enacted laws mandating lenders to ensure that certain
types of residential mortgage loans benefit borrowers, in states
that include New York, Massachusetts, Maine, Ohio, Minnesota and
North Carolina. So far, "duty of care" or suitability
regulationsthose that mandate lenders to act in the borrowers
interestare currently imposed at the state level, but that may
change as Congress continues to consider federal regulations
focused on mortgage loan reform.
"Suitability has become a big focus for 2008, but as many
lenders are finding, its hard to implement and enforce," explains
Larry Platt, a Washington DC-based attorney with K&L Gates who
specializes in residential mortgage lending law. "Regulators want
to ensure that borrowers are not put into loans that aren't good
for them. Suitability can mean different things to different
people. In this case, regulators want to ensure that the mortgage
loan provided to the borrower offers a net tangible benefit to the
borrower; that the loan originator hasn't been steering or
directing a borrower into a loan program that's not as beneficial
to the borrower as it could be; and that the borrower has a
reasonable ability to repay the loan. Depending on the law in
question, failure to satisfy legal requirements could result in
monetary damages and in some cases, rescission of the loan."
In the majority of instances, mortgage loans are selected for
the borrower based on the borrower's stated preferences and the
loan officer's personal evaluation, which is not the optimum way to
find the best, most suitable loan for the borrower.
"Regulators want loan originators to question a borrower's
judgment, because borrowers don't always know each product on the
market, and won't always know what's best for them," explains
Platt. "Suitability is in the eyes of the beholder and requires a
subjective judgment for which there is no legal certainty.
Establishing a good faith, objective evaluation method can only
help reduce the risk of a legal violation because it gives lenders
a uniform way of making a decision, so theres more consistency and
less of a margin for error."
Lenders face a multi-faceted challenge in addressing the
policies underlying the current suitability regulations, as well as
in preparing for pending changes. In order to meet these
challenges, lenders need to adjust their assessment methods away
from evaluating loans based on the borrower's or loan officer's
choosing. First, lenders must quantify net tangible benefits and
distribute these calculations enterprise-wide to insure consistent
application; second, they should use a completely transparent
automated decisioning process to determine the borrower's ability
to repay; and third, lenders must begin evaluating each borrower
against all available loan products and pricing so that they can
get an objective determination of which loan is best suited for the
"Most lenders follow a loan origination process that pushes the
decisioning processor decisioning iterationstowards the end of the
mortgage cycle," says Linda Simmons, senior vice president of
business development for Overture Technologies, the mortgage
industry's leading developer of decisioning technology. "This
approach puts the emphasis on the three suitability criteria days
and weeks after the borrower initiates the process, which is not
good because these delays can interfere with those criteria being
achieved. However, a decision-centric approachwhere the decisioning
is moved up to the front of the lending process and drives the
processbetter supports the good faith evaluation method.
Decisioning technology can support net benefit and ability to repay
calculations while facilitating a level of transparency and
consistency that work for both the borrower and the lender.
Implementing objective loan evaluation practices and staying one
step ahead of regulations is a wise idea. The last thing lenders
need is to be unprepared in the face of change."
Certain technologies, such as Overture's Mozart Decisioning
Suite, work to help lenders with their suitability challenges.
Using a decision-centric approach, Mozart can evaluate the
borrower's loan application against every available lender program,
rather than merely trying to match the borrower's application to
the loan program that the borrower or loan officer deems best.
Additionally, Mozart also tracks all loans presented, as well as
all decisions considered, adding to the transparency and
consistency the suitability legislation demands. Mozart provides
sophisticated English-language rules-writing capabilities for net
benefit and ability to repay calculations. It is also well suited
to interface directly with compliance solutions that specialize in
the relevant calculations.
In short, technologies such as Mozart serve to take subjectivity
out of the equation and provide the lender with an objective
ranking of the loans that are best for the borrower. "Using
technology to identify suitable loans is no longer an option, its a
necessity," adds Simmons.