The limits of disclosure

July 20, 2012 | By | 1 Reply More

The Consumer Financial Protection Bureau (CFPB) recently proposed “easier-to-use mortgage disclosure forms that will help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table. The aim of the CFPB is to expand protections for “high-cost” mortgage loans.

Mortgage transactions are inherently complex, however.  The CFPB has done some great work proposing the new forms. (to compare, here is a guide to the current version of the document many people struggle to understand, the real estate Settlement Statement — HUD-1).  One might fairly ask whether it is even possible to make these forms (which are still not simple) any easier to read or comprehend.  In fact, this is the question asked by Jeff Sovern in a NYT Op-Ed piece, “Help for the Perplexed Home Buyer.”  Sovern applauds the excellent work of the CFPB, but then gives a brief tour of the proposed new forms:

The loan estimate, which consumers receive early in the application process, spans three pages and includes more than 100 disclosures about things like monthly payments and taxes. That’s a lot for consumers to take in, and if they use the information to comparison shop, as Congress intends, they will multiply the number of disclosures with every loan they consider. The closing disclosures, which include the final loan terms, are even longer, at five pages. . . The newest forms try to address overload by packing the most important information into the first page — but that first page includes more than 40 disclosures, and it still doesn’t tell borrowers the total amount they will pay over the life of the loan or the late payment penalty . . . There’s no way around it: mortgage transactions are complex and involve a tremendous amount of information.

Sovern suggests that written disclosures can only go so far, at least in complex transactions like these.   He proposes that the problem can be lessened somewhat, but not completely cured, by making consumer counseling available.

I agree with this analysis and this approach, and I also applaud the work of the CFPB.   I would add that one of these reasons that this issue of communicating financial information to consumers is that so many of them are afflicted with innumeracy. I’ve spoken with many consumers as part of my law practice, and I must report that many of them would struggle with 4th grade math.  I’ve had clients who have no conception of how to calculate a simple interest rate (one client couldn’t tell me how much interest would accrue in one year based on $100 principal and 10% interest rate). I wish I could hold that hope that any written disclosures could solve this problem, but I assume my anecdote has already made it clear that the problem is multifaceted, involving consumer education and the policing of the mortgage industry.

The above discussion also makes me wonder whether we couldn’t simply the system much further, and whether path dependence keeps us in the mindset that all of these numbers need to be sprayed all over several pages. When you go to the grocery store, you ask for the price of box of cereal, and you are told a price. You are not told about all of the numbers that go into that price, such as transportation, handling, taxes, mid-level distributors, etc. I am not claiming that I have done any work on this issue of trying to simplify mortgage forms, but I wonder whether a solution might reside in forcing lenders or brokers to figure the many factors internally, and simply give the consumer a price. Then again, that is what the CPFB has done on the first page of the proposed new form. Perhaps my thinking is tainted by my conviction that many system are made to be complex in order to make them opaque to some people and profitable to others (those with teams of lawyers and accountants). Complexity is often not an accident or a necessity. It is often a tactic.

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Category: Communication, Consumer Protection

About the Author ()

Erich Vieth is an attorney focusing on consumer law litigation and appellate practice. He is also a working musician and a writer, having founded Dangerous Intersection in 2006. Erich lives in the Shaw Neighborhood of St. Louis, Missouri, where he lives half-time with his two extraordinary daughters.

Comments (1)

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  1. Tony says:

    That jungle is intentional. Here in Germany, there is a regulation that the lender has to advertise the “effective rate of interest” (and this rate also goes prominently in the contract). Let’s say you borrow $10.000 for five years and you will pay back $15.000 in total (including *ALL* costs, like any additional fees, insurances etc.), then the effective rate of interest would be 10% ($5.000 over 5 years, that is $1.000 per year or 10% of the money borrowed). So with the effective rate of interest and the lending period you can pretty well compare different lenders.

    Another thing is that rates of interest are usually fixed during the lending period, and only under certain conditions can they go up.

    Mind you, lenders still find ways to f#ck people over, like advertising one rate and then up-selling people for various reasons to more costly credit plans.

    My view is that lenders are shameless capitalists and the government sits in their pockets. It quite prominently shows that the “free market” and “market transparency” mantras are just propaganda when it comes to strong-arming the people to get money from them. Unless the government is pushed by the people to do something, this will stay as it is.

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