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Federal consumer watchdog digging into mortgage disclosures

by Broderick Perkins

(5/23/2011) Chronic confusion about home loans has prompted a new federal consumer agency to attempt what has been impossible -- create mortgage disclosures that clearly explain the true cost of borrowing.

The new Consumer Financial Protection Bureau (CFPB) recently released two draft mortgage disclosure forms designed to take some of the hair pulling and teeth gnashing out of learning what your mortgage really costs.

The consumer watchdog agency is asking you, consumers, and mortgage professionals to participate in getting it right. This is a sterling example of social networking at its finest. The agency wants you to take a look at the two forms and provide feedback, telling the government exactly what you think.

"Know Before You Owe," is an example of the new consumer watchdog's effort to put true clarity in "transparency" when it comes to financial disclosure forms.

Mortgage disclosures are a top priority for many reasons.

• Buying a home is the most expensive acquisition or investment most consumers will ever undertake. A home is often a consumer's or family's most valuable asset. You have a right to know what your home truly will cost.

• Ignorance, due to poor disclosures (in addition to outright deception, as well as consumers' own lack of due diligence) gets some of the blame for housing's crash and the worst recession since the Great Depression.

• Consumers have been complaining about mortgage disclosures and the difficulty they have understanding a home loan contract for eons.

"Most consumers have a tough time wading through all the fine print typically found on mortgage documents and other financial disclosure forms," said Norma Garcia, senior staff attorney for Consumers Union, the nonprofit publisher of Consumer Reports.

Among other elements, CFPB's forms include a clear statement, explaining that the borrower is under no obligation to choose a loan product. That helps take away undue influence which has been common in the mortgage lending process.

"This statement will help encourage consumers to shop and compare products, which will have the added benefit of increasing competition among lenders for borrowers' business," Garcia said.

Chronic confusion

A litany of studies reveal just how little consumers know about mortgages.

• Five years ago, just about the time the nation discovered Chicken Little wasn't crying "Wolf!" the AFL-CIO and BankRate issued studies that revealed mortgage consumers were confused, concerned and craving more regulatory protection.

The AFL-CIO found 73 percent of adjustable rate mortgage (ARM) holders, didn't have a clue how much their monthly mortgage payment will increase or decrease the next time their rate adjusts. Nearly half, 49 percent, said they weren't very informed about their mortgage's terms and conditions. One in five did not know their current interest rate.

Bankrate.com found more than one in three homeowners didn't even know what kind of mortgage they had, a fixed-rate mortgage (FRM) or an ARM.

• A November 2010, Consumer Reports national poll found that 76 percent of respondents wanted the CFPB to make clearer mortgage and financial disclosures a priority. The majority, 84 percent who had applied for or received a loan or credit card in the past 12 months indicated difficulty with financial disclosures; 31 percent described the disclosures as not clear or easy to understand.

• Early this year a MortgageMatch survey noted the mortgage application process was so excruciating, 21 percent said the ordeal was more stressful than waiting to hear if they got a job. Technical jargon was too much for 21.6 percent of those surveyed and 20.7 percent said it was a challenge to find a lender who was easy to work with. More than 32 percent of survey respondents ranked the application process more challenging than getting the mortgage itself (23 percent) or negotiating the sale price on the home (25.3 percent).

• Finally (but probably not), this month, after years of attempts to overhaul the mortgage industry, not only isn't greater transparency inducing consumers to shop around for mortgages, Zillow Mortgage Marketplace found many home buyers are still miserably in the dark about mortgages.

The Zillow-surveyed group was wrong 46 percent of the time when asking basic questions about mortgage information. More than half, 57 percent of prospective home buyers did not understand how ARMs work. Nearly half, 45 percent, believed they should always buy mortgage discount points. More than one third, 34 percent, did not understand that lender fees vary by lender and are negotiable.

"The draft mortgage disclosure forms prepared by the CFPB will help borrowers compare loans more easily and help eliminate surprises at closing and during the life of the loan. But it's important to remember that consumers need strong protections against shady mortgage practices not just improved disclosure," she added.

For sure.

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