It's not that too much or too little is disclosed about home loans.
It's that the disclosures themselves need a disclosure form alerting consumers to the fact they are old, outdated and not very revealing.
That irony recently appeared on the front lines of the war against predatory lending when the Federal Trade Commission released a report "Improving Consumer Mortgage Disclosures -- An Empirical Assessment of Current and Prototype Disclosure Forms".
In plain language, the report says today's outdated mortgage disclosure forms fail to convey key mortgage costs and terms to most consumers.
"Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today's mortgage products," according to FTC chair Deborah Platt Majoras.
"Although mortgage disclosures, alone, will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices," she added.
Consumer education has long been heralded as key to acquiring the best deal on a home loan, to acquiring a loan that best fits the household budget and, ultimately, to homeownership survival.
Unfortunately, today's disclosures, supposedly designed to enlighten consumers at a crucial point in the home purchase transaction, do just the opposite.
Some change is coming.
A final provision in the "Interagency Guidance on Nontraditional Mortgage Product Risks", which federal monetary agencies adopted to strengthen mortgage consumer protection late last year, is a voluntary mortgage disclosure form.
The forms are designed to ensure that consumers have clear and balanced information about nontraditional mortgages before choosing a mortgage product or before selecting a payment option for an existing mortgage.
Lenders can choose from among three types of new disclosures, which the federal agencies provided in illustrations; a narrative explanation of nontraditional mortgage products; a chart comparing interest-only and payment option adjustable rate mortgages (ARMs) to a traditional fixed-rate loan; or a table that could be included with monthly statements for a payment option ARM showing the impact of various payment options on the loan balance.
Lenders can opt to provide information based on the disclosure illustrations or provide the consumer information described in the guidance in an alternate format.
The FTC found, that by using an updated disclosure prototype in its report, disclosures can be designed to do what they are supposed to do -- inform, rather than baffle.
A test of more than 800 recent mortgage customers, half of whom read current disclosure forms, found among those reading current mortgage disclosures:
Those in the study who used prototype disclosures were much less baffled.
The prototype disclosures were used for fixed-rate loans, including those with interest-only and balloon payments, but the report's authors say the prototype disclosures in the study could easily be extended to incorporate the key features of adjustable-rate, hybrid, and payment option loans.
"Better disclosures can significantly help consumers recognize loan costs, which can result in more efficient comparison shopping, reduced vulnerability to deceptive lending practices, and enhanced competition in the marketplace," the study concluded.
