For many years, the Federal Reserve and other federal agencies with responsibility for formulating required disclosures of financial information were tone deaf. They decided on the information borrowers should have without ever asking borrowers what they wanted and without testing to see whether the information the agencies had selected for them was useful or even understood. For this they were much criticized, and rightly so.
But this has changed. In recent years, the Federal Reserve in particular has gotten religion, and their latest proposals to reform the Truth in Lending Act are replete with references to the results of consumer testing. Many of the Fed’s proposals are the direct result of listening to consumers.
In a recent article on Federal Reserve proposals for amending the Truth in Lending Act (TILA), I commented favorably on a proposal for early disclosures designed to encourage borrowers to shop alternative loan providers. Most of the mandated information that lenders now provide borrowers need not be placed in their hands until days after they have submitted an application, which in most cases is too late to help in shopping. Consumers rarely disengage from a lender once they have submitted an application.
The proposed new disclosures will be required at the point of application. This is a great idea, if it is properly implemented. Proper implementation means that the information lenders must submit at the point of application will help consumers select from among loan providers. Stated somewhat differently, the information must reveal differences between lenders that will cause borrowers to prefer one over another.
My previous article criticized the Fed’s proposed questions because they all applied to mortgage types or options, e.g., "Can my interest rate increase?" Since all lenders would answer them the same way, such questions would be useless to borrowers trying to select among different lenders. They would just add to the pile of useless paper.
After my article was published, Fed sources responded to my critique. They told me that their proposed disclosures were the direct result of giving consumers the information that the consumers questioned by the Fed said they wanted.
I was not surprised to hear that the consumers queried by the Fed requested information that would not help them. I have been fielding questions from borrowers for 12 years, and learned early on that the information they seek from me often is not the information they would have sought if they had understood their situation better.
What surprised me was that the Fed accepted it as their charge to give consumers the information the consumers said they wanted, even when it was clear that this information would not help borrowers shop alternative loan providers. …CONTINUED
When a consumer asks me a question that I suspect is not relevant to his situation, I give back the information that, if my suspicions are right, causes him to reformulate the question. Helping people realize what the right questions are is a critical part of what we call "education."
Truth in Lending should be educational, too. It should provide information that consumers will recognize as relevant to their situation when they see it, even though they did not realize its relevance when they participated in a Federal Reserve focus group and were asked what they wanted to know.
My critical article offered seven questions that would help borrowers select from among different lenders because they applied to important lender policies. One of them was, "Do you allow your loan officers to charge ‘overages’ — a price higher than the price the lender will accept?"
Of course, very few consumers on their own would mention overage policy as something they would like to know about, simply because they are not aware that such practices exist. My experience has been that once consumers become aware of overages, it jumps to the top of their concerns.
Requiring lenders to answer the question would create such awareness, which means that the disclosure would have educational value and would help borrowers in selecting loan providers. My other questions were of the same type.
In sum, the Fed seems to have swung from ignoring borrowers completely to slavishly giving them the information they say they want, even when that information is not going to help them.
Of course, if the Fed followed my practice and used its own judgment to select the information that would help borrowers, it would be criticized by others for being paternalistic, arrogant, and out of touch. There is a middle way, however: the Fed can select the information it believes will be useful, and then test it with consumers to see if it will work.
I am hopeful that the Fed will do this before issuing final rules. The Fed’s proposals are just that — "proposals" — and before they finalize them they promise to consider comments from all interested sources, including me.
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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