July 18, 2012
The Feds’ New Mortgage Disclosures Are a Bust—A Commentary by Jonathan Macey ’82
The following commentary was published in the Wall Street Journal on July 18, 2012.
The Feds’ New Mortgage Disclosures Are a Bust
By Jonathan Macey ’82
The Consumer Financial Protection Bureau's "Mortgage Disclosure Team" just came out with two proposed forms that are supposed to make things easier for borrowers. It took CFPB a year and half of research, drafting and field testing to produce the new documents. The results shine a light on how the Dodd-Frank Wall Street Reform and Consumer Protection Act, which created the CFPB, operates.
Agency head Richard Cordray claimed in the press release accompanying the new disclosure forms that they give "consumers greater power over the exciting and daunting process of buying a home." They won't. The rules that accompany the new forms reduce the power of consumers to choose the product that they want from the widest array of alternatives.
The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That's a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.
Will they make it easier for consumers to get a loan? The nonprofit Habitat for Humanity is concerned that they will impede its "ability to enable low-income families to become homeowners." Why? Because any lender, including organizations such as Habitat, is at legal risk if they try to help low-income borrowers who lack the ability to repay their loans. (Habitat lends money to people so they can buy the houses they help build. It uses the monthly mortgage payments to help build still more houses.)
Do the new rules expand consumer choice? They would forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end. They also would cap late fees—which means borrowers would be unable to get a lower interest rate on a loan by agreeing to pay a penalty if they don't make their payments on time.
The new rules restrict loan-modification fees, which means mortgagors will offer fewer options to do so. They restrict penalties on borrowers who pay off their home loans early. These prepayment fees compensate lenders for the risk of lower returns on their loans. Without this protection they will either decline to offer loans to some borrowers or charge a higher interest rate.
The government's proposed rules require high-risk customers in high-cost loan markets to meet with financial counselors before taking out a loan. The regulators also want to expand dramatically the number of mortgages classified as high cost. But financial counselors will have to be compensated, whether their advice is good or bad. The law deprives these consumers of the right to do their own homework.
Oddly, hidden on the new disclosure forms is the Annual Percentage Rate. For decades the APR was front and center on government-mandated disclosure documents. It is the single number that shows borrowers the cost of borrowing including such factors as the interest rate, certain fees, and the maturity structure of the loan.
The CFPB claims its consumer testing showed people didn't understand the APR. Yet if someone is trying to compare two loans—one with a lower interest rate and $15,000 in fees, the other with lower fees but a higher interest rate—it's not possible to determine which loan is cheaper without the APR.
The new rules do not attempt to generate a single number that can be used for comparison purposes and instead focus on various components of the loan such as fees, penalties, interest rates and maturity separately. This makes it harder, not easier, for borrowers to compare mortgage options.
There were plenty of dodgy mortgage practices in the housing-bubble years. "Pick-a-pay" mortgages were sold without adequately telling borrowers that the amount they owed on their loans would increase rather than shrink every month. Loans featured misleading, short-term "teaser" rates that were peddled to borrowers on forms that described these teaser rates as the "interest rate" on the loan. However, the problem was not the government's then-required disclosure forms, but the chicanery of the lenders who filled them in.
The government's new rules probably will not protect against fraud. But they will reduce the range of consumer choice.
Mr. Macey is a professor of law at the Yale Law School and a member of the Hoover Institution Task Force on Property Rights.