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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Authors

7 Comments

  1. Christi Dean said:

    Most people don’t take the time to really read what they are signing an dmost forms are laid out to not be understood.

  2. Gary Anderson said:

    Vince: No, the buyers initial those disclosures to get the doc’s, and the wait, done.
    Greg: Yes, exactly correct.

  3. Greg Karr said:

    Couple of errors. Line 2… they read. Line 3 as good as.

  4. Greg Karr said:

    Most folks do not read the fine print. Some folks read everything. Some will even ask you questions. Some folks actually understand what the read. All agents know this.

    Personally I think the mortgage loan disclosure statement is about as it’s going to get. Of course it will be revised in the future because someone needs to do it, to keep their job. It summarizes the costs very well and explains the mortgage the best it can.

    But, let’s accept the underlying reason for financial disclosure in the first place. Consumers were getting cheated (by their broker, lender, and seller) because they didn’t have the experience or knowledge to get a fair shake. Borrowers, buyers, and renters need our protection. I’m glad they do. If they don’t think so, I take the opportunity to remind them that they do. It’s one of the sales tools I use to justify my existence.

    Granted, it takes time to explain disclosures (not just the MLDS); so, let’s accept one other thing. Do you even ask your clients if they would like some explanation about the MLDS, or any other disclosure for that matter? Or do you say, I’ll just leave the MLDS to the lender or mortgage broker to explain. Odds are you do. How many of us can actually explain the disclosures we deal with?

    Agents don’t protect their clients and ask if they understand what they have just signed because the agent has an eye on the commission, and at the bottom of it all, really doesn’t care about protecting the client or even doing a thorough job. It takes time to explain disclosures (not just the MLDS) and most agents are too lazy to explain them.

    AGENTS UNITE. TAKE IT UPON YOURSELF TO EDUCATE YOUR CLIENT. CARE ABOUT YOUR CLIENT AND GET A PEACEFUL NIGHT’S SLEEP.

    geeze, i hope this comment doesn’t have too many spelling errors

  5. Vince said:

    I don’t want to confuse different issues – of course the documents provide the information borrowers NEED to have but like the others mention, they have to actually read it. If they are too confusing it’s up to the agent to educate them, that is if they understand the docs themselves, which is repeated throughout the article.

    I can’t believe the author has the audacity to claim that “Disclosures hardly included information beyond the fact that funds were used to buy a home”. If you only read your name and the property address, sure, that’s all you get out of it. Who in their right mind invests hundreds of thousands of dollars on anything at all without reading the fine print? As far as I’m concerned many of these now-dead mortgages were scams from the beginning, get house, get inflated valuation not to long thereafter, remove equity, spend said equity money on other stuff, repeat. It was like running a Ponzi scheme on yourself. Why isn’t anyone talking about investigating the borrowers who took advantage after advantage with nary a thought as to who would be holding the bag in the end?

    All this nonsense over the past few years about loans adjusting to dollar amounts that borrowers couldn’t afford? – every Reg Z both initial and at time of funding lays out the scenarios over the out years and does so in a worst case scenario. Never has an old quote been more appropriate – you can lead a horse to water but you can’t make them drink.

  6. Mary De Luca said:

    none of my clients understand what they are signing, way too confusing!

  7. Nancy Mitchell said:

    Because buyers don’t want to read the documents. Very simple. The “government” is under the impression that all buyers sit around reading these things. They don’t.

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