Clarifying foggy financial agreements

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Do you think mortgage disclosures convey meaningful loan information to homebuyers?

  • No (65%, 44 Votes)
  • Yes (35%, 24 Votes)

Total Voters: 68

If you answered “No,” comment below to tell us what’s missing or wrong.

Want to know the first step in creating better-informed consumers? Better disclosures!

Professors at Harvard, New York and Oxford Business Schools examined the results of the Consumer Financial Protection Bureau’s (CFPB) newly required disclosure on credit card statements. They found consumers who received  revised credit card statements comparing the effect of making minimum monthly payments to that of making larger monthly payments responded by making larger monthly payments more frequently than those who were not provided with the revised credit card statements. So far, so good.

Unfortunately, the new disclosures provided a new 36-month calculation every month, meaning recommended payments were readjusted each month with a new goal date 36 months from the latest credit card statement. Thus, while consumers assumed the clock on their 36-month payment plan began immediately and ticked in one direction, credit card companies were continually winding the clock back, extending the pay period by recalculating payments based on a new principal each month.

Though the study above focused on credit card company disclosures, its preliminary findings beg for application to mortgage lenders, whose foggy disclosures have been the impetus for several recent lawsuits.

first tuesday take: As shown by the credit card study, consumers actually act upon the information they are given. This ability to act on information is only beneficial if the information is meaningful and sufficient for a borrower to digest, but ambiguous or incomplete disclosures of the past are dishonest. Thus enters the Consumer Financial Protection Bureau, to demand meaningful disclosures (in spite of lender outcry.)

As credit card holders or borrowers respond to information, they also respond to its absence. The financial empowerment of the uninformed borrower contributed to California’s now foreclosure-riddled housing market. During the boom years, many now-defaulted borrowers agreed to loan terms without receiving sufficient information relevant to loan consequences. Disclosures hardly included information beyond the fact that funds were used to buy a home. [For more information regarding the lack of financial understanding among homeowners, see September 2010 first tuesday article, The era of the financially illiterate homebuyer.]

It is the buyer’s real estate agent’s responsibility to ensure his client is sufficiently well informed regarding loan options and the responsibilities of homeownership to be able to make an intelligent decision. Borrowing big bucks requires big thinking by the buyer’s agent. Who else in the sales transaction has any duty to look out for the buyer?

Part of this duty is performed during initial agent-client counseling prior to applying for a home loan, but an agent’s duty also compels him to demand fair play from lenders in the form of consequential disclosures in loan agreements.

As the gatekeepers of real estate, agents might take advantage of the current opportunity provided by the Consumer Financial Protection Bureau to weigh in on a revised Truth in Lending disclosure form. Your clients will thank you with more closings, as they sense the extent of your involvement in their cause. [For more tips on arming your client with financial know-how, see May 2011 first tuesday article, Financially illiterate homebuyers in distress — agents to the rescue!]

Re: “JPMorgan, Citi, BofA Sued for $949 Million by Sealink” and “Disclosures Are Found to Change Financial Behavior” from The New York Times.

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