Memo to Elizabeth
Warren: Maybe we don’t need a strong new federal regulator, so much as we
just need better disclosure. Kenneth
Harney has found an FTC study with some startling findings:
In a study involving 819 recent prime and sub-prime mortgage customers in
12 locations around the country, the Federal Trade Commission found that,
using current truth-in-lending and good faith estimate disclosures:
• Nearly nine out of 10 borrowers could not identify the correct amount
of upfront charges connected with a loan.
• Four out of five had trouble understanding why the stated interest
rate on the loan note was different from the "annual percentage rate"
highlighted in the truth-in-lending disclosure.
• Two-thirds did not know that they would incur a substantial penalty
if they refinanced within the first two years…
FTC researchers Janis Pappalardo and James M. Lacko
tested the latter hypothesis by developing a new, combined disclosure form
that focused on the main functional categories of costs — and potential
consumer snares — in mortgage originations and settlements…
Eighty percent of those using the new form could answer 70% or more of all
questions about their mortgages correctly, compared with only 29% of those
using the current disclosures.
The executive summary of the report is here,
and the full report is here
(both in PDF format). The full report is very long (282 pages), but it’s worth
skimming for some of the eye-opening anecdotes from the interviews conducted.
It’s definitely worth checking out the last three pages of the executive summary,
which give an example of the proposed new disclosure form – a model of
clarity and excellent information design. Any reputable mortgage lender should
start implementing this standard immediately, even if they’re not officially
required to by the FTC.