How to Improve Mortgage Disclosures

Memo to Elizabeth Warren: Maybe we don't need a strong new federal regulator, so much as we just need better disclosure. Kenneth Harney has found an FTC study with some startling findings:

In a study involving 819 recent prime and sub-prime mortgage customers in 12 locations around the country, the Federal Trade Commission found that, using current truth-in-lending and good faith estimate disclosures:
• Nearly nine out of 10 borrowers could not identify the correct amount of upfront charges connected with a loan.
• Four out of five had trouble understanding why the stated interest rate on the loan note was different from the "annual percentage rate" highlighted in the truth-in-lending disclosure.
• Two-thirds did not know that they would incur a substantial penalty if they refinanced within the first two years...
FTC researchers Janis Pappalardo and James M. Lacko tested the latter hypothesis by developing a new, combined disclosure form that focused on the main functional categories of costs — and potential consumer snares — in mortgage originations and settlements...
Eighty percent of those using the new form could answer 70% or more of all questions about their mortgages correctly, compared with only 29% of those using the current disclosures.

The executive summary of the report is here, and the full report is here (both in PDF format). The full report is very long (282 pages), but it's worth skimming for some of the eye-opening anecdotes from the interviews conducted. It's definitely worth checking out the last three pages of the executive summary, which give an example of the proposed new disclosure form – a model of clarity and excellent information design. Any reputable mortgage lender should start implementing this standard immediately, even if they're not officially required to by the FTC.

(Via Alea)