Can Government Help Borrowers Make Better Decisions? TALC is
A large mass
of Federal legislation and regulation, with the Truth in
Lending law as the centerpiece, is based on the premise that
markets don’t work well if one group of participants, such
as lenders, knows a lot more than the other group, such as
borrowers. And therefore Government can make markets work
better by mandating that lenders disclose critical
information to borrowers.
There are two
kinds of decisions that mortgage borrowers have to make that
they frequently get wrong: these are the “which” and the
“who” of the borrowing process. Every borrower must decide
which of the several types of mortgages available to
them best meets their needs; and they must decide who
of many available loan providers will give them the best
deal on the type of mortgage they prefer.
Government-mandated disclosures can help mortgage borrowers
make these decisions more wisely if properly implemented,
but proper implementation cannot be taken for granted. The
challenge to Government is not only to identify the
information that borrowers need, but also to specify how
disclosures should be worded so that borrowers can
understand them, and at what point the disclosures must be
provided if they are to be useable.
The history of
mandatory disclosures in the home mortgage market over three
decades suggests that the Federal Government has great
difficulty in meeting this challenge. My web site has some
25 articles on mandatory disclosures written over the last
10 years, and most identify shortcomings important enough to
raise serious questions about whether the disclosures are
helping borrowers or only confusing them. My excuse for
writing a 26th is that this one is about
mandatory disclosures in the reverse mortgage market, which
I had never previously examined.
information gap between lenders and borrowers is even larger
in the reverse mortgage market than in the standard mortgage
market. The potential benefits from useful disclosures are
therefore even greater. Furthermore, the reverse mortgage
market is newer and regulators had some opportunity to learn
from their mistakes in the older market. Perhaps this time
they got it right?
centerpiece of Truth in Lending disclosures about reverse
mortgages is the Total Annual Loan Cost, or TALC. The TALC
is the reverse mortgage equivalent of the Annual Percentage
Rate (APR) disclosure required on standard mortgages.
are designed to answer the “which” and the “who” questions
of borrowers. They do this by consolidating the different
costs of a mortgage into a single composite measure. The APR
is a single rate calculated over the term of the mortgage.
TALC is calculated over three periods for three different
property appreciation rates, which results in a 9-rate
APR came first
and is largely a failure. There are a few limited situations
where it can be used effectively, but borrowers are
hard-pressed to find out what these are. (Note: One source
APR tutorial). I regret to say that the there are no
situations in which TALC provides useful information to
problem of reverse mortgage borrowers is selecting the
combination of options that best meets their needs. Seniors
can choose between upfront cash disbursement, credit line,
monthly payment for as long as they live in the house,
monthly payment for a specified term, or any combination of
cash, credit line and monthly payment. This is a critical
decision for borrowers but in making it, the TALC loan rates
play no role whatever, and shouldn’t. What matters to
borrowers is how best to meet their cash needs now and in
If TALCs were
computed for each major reverse mortgage option, it would be
the lowest on transactions in which borrowers draw the
maximum amount of cash at the outset, leaving nothing for
the future. Transactions on which borrowers take out a
credit line which they don’t draw on for many years, which
is the most prudent use of a reverse mortgage, would have
the highest TALC.
I don’t think
that is the message that the regulators who designed TALC
wanted to convey, which is perhaps why they don’t require
that it be calculated for different options. Borrowers
receive only one TALC, on the option they have already
The TALC might
nevertheless be justified if it could be used to find the
best deal from among the offerings of different lenders.
But using a 9-cell
matrix of rates to compare lender is totally fruitless, and
seniors never use the TALC for that purpose. I have
queried numerous originators and supervisors with experience
covering multiple thousands of loans, and not one could
report a single case of a borrower using TALC to shop.
In sum, the TALC does not help seniors in making either their “which” or their “who” decision. The tragedy of TALC is that it allows regulators to indulge the illusion that seniors are receiving the information they need, when they aren’t. The only ones who benefit from TALC are the firms who license the software that lenders need to calculate it.