Feds ask: Is that mortgage really right for you?
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Consumer advocates believe that lenders should subject that last group to some sort of suitability test -- "some duty to the borrower to make sure they're not put in a loan that's not appropriate," says Stella Adams, executive director of the North Carolina Fair Housing Center.

Adams imagines a trade group coming up "with a general script that explains the differences between the products and is uniformly applied, so that people can hear an explanation. I tell you, three-page disclosures with 'wherefores' and 'therefores' don't cut it."

Screening out the worst
A suitability standard "would put some obligation on some part of mortgage lenders and mortgage brokers to not squeeze people into loans where they have no reasonable prospect of being able to repay them," says Allen Fishbein, director of housing and credit policy for the Consumer Federation of America.

If that sounds imprecise, that's because it is. A suitability standard would be applied subjectively in a lot of cases. It would screen out egregiously risky loans.

Adams and Fishbein spoke in favor of suitability tests at the FTC workshop. Bankers countered that the lending industry has built-in suitability standards. Riskier borrowers pay higher interest rates and sometimes must buy mortgage insurance. Mortgages are bundled together and sold on the secondary market to investors, who have powerful analytical tools to gauge just how risky a particular pool of loans is.

"If loans are being underwritten that will inevitably fail, there will be no buyers for those loans on the secondary market," says Robert McKew, general counsel for the American Financial Services Association. "The secondary market acts as a regulator in addition to government regulation."

But consumer advocates argue that the secondary market allows the mortgage industry to view foreclosures as just another cost of doing business. One foreclosure in a package of hundreds of loans is a blip on an investor's computer screen, but it's long-lasting trauma to the family that loses a house.

Businesses can insulate themselves from high-risk loans, but the same can't be said for homeowners, Alys Cohen, staff attorney for the National Consumer Law Center, said at the workshop. "Should all the risk be on the borrower?" she asks. "Is that a fair assumption in light of the market today?"

Ultimately, burden falls to consumers
No, it's not a fair assumption, says Peter Macdonald, general counsel for LendingTree Loans. Lenders bear reputational and regulatory risk, he says: The press and the government jump on lenders' backs if they are poor citizens.

"Ultimately, suitability is about financial literacy," Macdonald says. "That can't be just within the industry. The American public can and will rise to the challenge of learning how these loans work."

Michael Williams, vice president for legislative affairs for The Bond Market Association, agrees that "you have to put the burden on the consumer to be educated." On the other hand, he says, people don't want to be educated. They just want the loan.