Mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers, according to a Federal Trade Commission study that tested forms with 819 mortgage customers.
Both prime and subprime borrowers misunderstood key loan terms, and both groups benefited from better disclosures, the study found. Better disclosures provided the greatest benefit for complex loans in which borrowers had trouble understanding the terms.
The potential for improving consumer understanding of mortgage costs was tested using prototype disclosures developed for fixed-rate loans — including those with interest-only and balloon payments. The prototype disclosures used in the study could be extended to incorporate the key features of adjustable-rate, hybrid and payment-option loans, the study’s authors said.
The report, “Improving Consumer Mortgage Disclosures — An Empirical Assessment of Current and Prototype Disclosure Forms,” was authored by James M. Lacko and Janis K. Pappalardo of the FTC’s Bureau of Economics. The view expressed in the report are those of the authors and do not necessarily represent the views of the FTC, the commission said.
But in a press release accompanying the release of the study, FTC Chairman Deborah Platt Majoras said mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, “and they do not address the variety and complexity of today’s mortgage products. Although mortgage disclosures, alone, will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices.”
Federal regulators last month released illustrations of suggested disclosures for nontraditional interest-only and payment-option adjustable-rate mortgages that compare them to traditional mortgage products. The disclosures are part of new guidance for nontraditional or “exotic” loans issued last fall. The new guidance also instructs lenders to qualify borrowers using those products at the “fully indexed” rate. Regulators are in the process of drafting similar guidance for subprime loans.
The mortgage lending industry has generally supported better disclosures while opposing tighter underwriting requirements or restrictions on specific types of loans.