Consumer Groups Worried by ARM Payment Adjustments.(use of adjustable rate mortgages leads to concept of suitability)

WASHINGTON -- 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.