When I queried Fed staff about this in years past, the typical response was that any change would require new legislation, and the board’s political capital was too valuable to use on this issue. But the current board proposals would eliminate the exclusions and make the APR the comprehensive measure it was always supposed to be.
Further, it turns out that this would not require new legislation — the board had the legal authority to do it all along!
Adjustable-rate mortgage (ARM) disclosures are another horrible example of the board’s historical unwillingness to confront the obvious. The volume of ARMs exploded in the early 1980s and the disclosure problems associated with them became glaringly evident soon thereafter.
The Fed response was to mandate that lenders show either historical or worst-case examples of what can happen to the rate and payments on a "representative" ARM — not the borrower’s ARM! In my assessment of ARM disclosures in 2005, I remarked that "the full absurdity of this is difficult to grasp."
In connection with the current TILA proposals, the board contracted with a consumer testing agency, which "indicated that consumers overwhelmingly find the current ARM loan program unclear and not useful … they would prefer more information specific to their potential loan." What a surprise!
Give the current board credit for facing up to the problem, but it took five years and is not an argument for its retaining authority over consumer protection.
The work done over that period could be taken over by a new agency, along with the board’s Division of Consumer and Community Affairs, which was largely responsible for developing the proposals.
Nest week: The Fed’s proposal to encourage borrowers to shop.
The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at www.mtgprofessor.com.
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