What is Mortgage Suitability
Mortgage suitability describes the degree to which a mortgage loan applies to a consumer’s financial situation.
BREAKING DOWN Mortgage Suitability
Mortgage suitability broadly represents the degree to which a loan matches a borrower’s needs. Standards for mortgage suitability would theoretically provide a framework to which mortgage lenders must adhere when directing consumers toward a mortgage loan. The general argument for such a standard seeks to hold mortgage lenders liable for steering consumers toward an unsuitable mortgage. Lenders and their affiliate groups, such as the Mortgage Bankers Association, tend to oppose such standards, suggesting they would unnecessarily complicate the loan process and lead to higher fees. To date, no federal mortgage suitability standard exists in the United States.
In the absence of regulatory requirements for mortgage suitability, consumers must be prepared to make their own determination when shopping for a loan that fits their specific financial circumstances. Mortgage financial literacy plays a major role in this area, as the more a consumer knows about the various types of loans and the repercussions of cost, the more likely they will be to find a suitable solution. Wise borrowers will also be sure to shop around for a mortgage broker who will address their concerns about suitability and act in the borrower’s best interest.
Suitability Standards for Financial Institutions
Regulations governing suitability do exist in other areas of consumer finance, particularly among investors and financial advisers. The Investment Advisers Act of 1940 established a fiduciary standard of care requiring that financial advisers prioritize the best interest of their clients above any other concerns. Similar suitability standards govern the actions of broker-dealers, who must be able to explain why a recommended investment suits a particular client. The Financial Industry Regulatory Authority (FINRA) holds its members to a suitability rule that requires investment firms to obtain information about their customers’ investment preferences, experience and risk tolerance. This information gives firms a basis on which to demonstrate the suitability of transactions or investments they recommend to customers.
The fiduciary rule does not generally apply to mortgage lenders. Whether mortgage brokers have a fiduciary duty to borrowers remains more of an open question, with some legal precedent to suggest the fiduciary standard may apply to them. While the fiduciary standard does not necessarily produce a de facto suitability standard, to the extent it legally applies to mortgage brokers it does require them to act in the borrower’s best interest. For example, a broker who steered borrowers toward loans that delivered the highest fee or commission payments to the broker without regard to their suitability for the investor would violate the fiduciary standard.