Will the "Financial Stability Act of 2010" Improve Mortgage Disclosures?

July 26, 2010

The existing system of mortgage disclosures in the US has long been a disgrace. Borrowers are inundated with garbage disclosures and often the few pieces of critical information they need are either not there, or concealed by the garbage.

As an illustration, a large proportion of the consumers who took option ARMs during the go-go years leading to the crisis believed that the initial interest rate, in many cases as low as 1%, held for 5 years. In fact, that rate was good for only the first month.

Borrowers taking option ARMs received a booklet about ARMs in general, a description of all ARM programs in which they expressed an interest, and historical or worst cases examples of how ARMs work. But the one piece of information they needed to avoid a horrendous mistake was not there. The default rate on option ARMs today is horrendous, and it is expected to be higher next year.  

Divided Responsibility For Mortgage Disclosures

A major reason why government-mandated mortgage disclosures are so bad is that there are too many agencies involved in the process. One consequence of multiple agencies is excessive disclosures, as each agency focuses on its own with little or no regard for the requirements imposed by the others. Voluminous disclosures tax the absorptive capacity of borrowers, and make it hard for them to find what is really important, because it may be concealed in a sea of garbage.

Multiple agencies also lead to inconsistencies between the disclosures required by the different agencies, to the befuddlement of borrowers. For several decades now, borrowers have had to live with the Good Faith Estimate required by HUD and the Truth in Lending statement required by the Federal Reserve, with no way to reconcile or connect the two.

But perhaps the worst result of having too many cooks is a lack of clear accountability for the total package of disclosures. Since no one agency is responsible for keeping disclosures up to date, they are always behind the curve in responding to market developments. 

Wrong Agencies Have Responsibility For Mortgage Disclosures  

Two of the cooks should not be in the disclosure business. By far the worst is the Congress, which is the least competent and the least responsive to the need to stay current. The original Truth in Lending legislation in 1968 included specific mandated disclosures that are as inane today as they were then. Once specific disclosures are mandated by law, it seems impossible to get rid of them, no matter how useless they are or become.

I don’t believe the Federal Reserve should be in the consumer disclosure business either. While the Fed has always been the most competent of the Federal agencies, it has done a wretched job with disclosures. The problem has been that consumer protection has had the lowest priority among its diverse responsibilities, and properly so. Monetary policy and bank regulation are its major concerns, and going forward its responsibilities in these areas will only get larger as it becomes the key player in dealing with issues connected to systemic vulnerability.

The third agency involved in mortgage disclosures is HUD, which is highly bureaucratic and politicized but at least its responsibilities for mortgage disclosure are consistent with its overall mission and other responsibilities. The new Good Faith Estimate that became effective this year against fierce opposition is a substantial improvement over the old one, but it took forever.

Disclosures Under the “Restoring American Financial Stability Act of 2010”

Given this backdrop, the creation of a new consumer protection agency under the “Restoring American Financial Stability Act of 2010” appears to herald a new beginning. The agency will assume authority for disclosures in all consumer markets, absorbing the disclosure responsibilities of the Fed and HUD. Indeed, the new agency is instructed to “combine the disclosures required under the Truth in Lending Act and the Real Estate Settlement  Procedures Act of 1974 into a single, integrated disclosure…” [Sec. 1032 (f)]

However, while the agency would take over disclosure responsibilities from the Fed and HUD, Congress does not deal itself out of the disclosure picture. On the contrary, the Act may have more new mandated disclosures than the original Truth in Lending Act. Some of these are sensible, such as providing an early warning of a pending rate increase on ARMs, and the Act could have instructed the new agency to implement a disclosure for that purpose. Instead, the Act specifies exactly what the disclosure must be, making the agency responsible for a disclosure it did not design.

And it gets worse, because some of the specific mandated disclosures in the Act are nonsensical and will prejudice the ability of the new agency to do its job. For example, lenders will be obliged to disclose the “wholesale rate of funds”, whatever that is. They must also disclose the total amount of interest paid over the life of the loan as a percent of the loan amount, which is a useless number for any borrower making a financial decision. I could go on at great length. The Act, instead of using the creation of a new agency as the occasion for eliminating the role of Congress as a source of mandated disclosures, reinforces that role.

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