The first article of this series argued that information disclosed to borrowers after they apply for a loan cannot help borrowers to shop effectively. The new disclosure proposed by the Consumer Financial Protection Bureau (CFPB) will do no better in this regard than the existing Truth in Lending (TIL) and Good Faith Estimate (GFE) disclosures.

The proposed disclosure, however, will be far better than the TIL and GFE in helping borrowers select the right type of mortgage.

The focus of this article is what the new disclosure would or would not do to protect borrowers against two hazards to which they are exposed between the time they apply for the loan and the time the loan closes. The hazards are overcharges by third-party service providers, and overcharges by lenders.

Overcharges for services required in connection with the mortgage arise because the service providers are generally selected by the lender, or in some cases by the real estate agent. As a result, the selection process is aimed at generating benefits for the referrer rather than minimizing cost to the borrower.

The best policy for dealing with this problem is to require lenders to purchase all such services and include the prices in their own fees, but this approach has never acquired any political traction. Good disclosures are a second-best approach.

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