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Much the best way to protect consumers in the home loan market is to simplify the structure of the market so that borrowers have direct access to the information they need without government intervention.

This could be done by creating direct links between the primary market where loans are originated and the secondary market where they are priced.

I noted in a previous article in this series that borrowers in Denmark can borrow at a rate equal to the current yield on the secondary market price of their loan, which they can easily find online, plus a standard 0.5 percent markup.

This leaves only upfront lender fees to be negotiated on a case-by-case basis, and these are set competitively because borrowers are fully capable of distinguishing higher fees from lower fees. There is no required Truth in Lending or Good Faith Estimate documents because none are needed.

Another important simplification would be to require that all third-party services required by lenders, such as title insurance and appraisals, be purchased by lenders, with the cost included in lender fees.

This would eliminate multiple costs and transactions that needlessly confuse borrowers while reducing the cost of these services. In contrast to borrowers, lenders are knowledgeable purchasers and can purchase in quantity.

In Denmark, third-party costs associated with mortgages are inconsequential. The Danish government guarantees the accuracy of title registration records, making private title insurance unnecessary. Costs of appraisals and registration fees are borne by lenders and passed on to borrowers in lender fees, which is how it ought to be done here.

But I don’t fool myself into believing that these badly needed changes will be enacted. Legislation covering mortgages is lobbied mainly by the mortgage banking industry and the consumer groups, and while they differ on many issues, neither would support the reforms described above.

The mortgage bankers wouldn’t support them because they would reduce the profitability of mortgage banking, and the consumer groups wouldn’t support them because they would reduce or eliminate the need for consumer groups.

This raises the question of how best to protect borrowers within our existing market structure? Borrowers today are exposed to an army of loan originators who know vastly more about the products, prices and procedures than they do, and who generally use that information to their own advantage.

We have looked to government to redress this information imbalance by enacting mandatory disclosure rules, but for the most part this effort has failed. In counseling thousands of borrowers on disclosure issues, I find that the number of borrowers benefitting from the disclosures is no larger than the number confused by them, and a much larger group ignores them altogether.

The major shortcoming of existing mortgage disclosure rules is that critical information that borrowers could use often is not disclosed, or is not disclosed early enough to be useful, and when it is disclosed, it tends to get lost in a torrent of garbage disclosures. Borrowers are swamped with information they cannot use.

Why? A major reason is divided responsibility. At the federal level, responsibility is divided between HUD and the Federal Reserve, which do not coordinate, while state disclosures add to the pile. Divided responsibility encourages disclosure overload, because no one agency has responsibility for the totality of disclosures. In addition, inconsistencies arise between disclosures mandated by the different agencies.

A second reason for the failure of mandatory disclosures is that the agencies with disclosure responsibilities are burdened with other more pressing responsibilities. This is particularly the case with the Federal Reserve, whose major priority has been monetary policy and its second priority has been the safety and soundness of the banking system.

Consumer protection has been a poor third, with the lowest claim to the board’s attention. Those priorities are not going to change.

Indeed, with the Fed assuming more responsibility for the stability of the nonbank financial sector — de facto if not yet de jure — consumer protection is likely to have an even lower priority in the future.

These are the reasons I have supported the administration’s proposal for a new Consumer Financial Protection Agency (CFPA). The agency would replace the existing system of fragmented responsibility, and it would not be burdened with responsibilities other than consumer protection. The administration’s proposal for CFPA is discussed in detail on my website.

The writer is professor of finance emeritus at the Wharton School of the University of Pennsylvania. Comments and questions can be left at


What’s your opinion? Leave your comments below or send a letter to the editor. To contact the writer, click the byline at the top of the story.

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