Are Disclosures Enough? Part II
The FTC has just published a study detailing how well (or, as the case may be, poorly) consumers understand mortgage contracts. The results are astonishing: over half of consumers surveyed could not even identify for what amount the loan was for, and nearly 80% could not explain why the interest rate and APR of the loan might be different. So I ask again: are disclosures enough? One industry observer raised a very interesting point in response to the study's findings...
The FTC's study did have some encouraging news: consumers who were given a simplified disclosure form faired better in understanding the mortgage terms. But interestingly, one mortgage industry follower observed in the Los Angeles Times that better or more disclosures might not be enough to solve the specific mortgage comprehension problem, because there is no penalty for providing inaccurate or late details of the mortgage until closing.
This only highlights the complexity of the problem. Disclosures and financial literacy are tools - valuable tools - for consumers to use to negotiate. But all of these tools are aimed at the demand side of the equation. Perhaps this is an example of an area where we could benefit from "supply-side" policies."They can make disclosures more clear all they want, but if there is no penalty if you don't comply, what does it matter?" he asked. "Until there is a penalty for being late or inaccurate, it's business as usual."
This is a great topic to explore. Personally, I believe the disclosures do more to protect lenders than it does borrowers. The problem is not as much financial literacy as it is knowledge of the law. Our laws have become so complex, and the contracts for loans have also become so incomprehensible, that consumers are at a distinct disadvantage. They are required to understand their rights and the law to the extent that they can make a rational decision. However, it is unrealistic these days. Also, one of the reasons people don't think to much about the unfair terms in the contract is that it seems impractical to turn down a contract for a contract term they believe will never be enforced. People believe that lenders will be reasonable when problems arise. So they sign contracts with unbelievable terms, like it is merely a formality that means little. Also the assumption is that if you make your payments on time, you won't default on your agreement. They don't understand there are many other ways to default.
Disclosures are by no means the solution to lenders taking advantage of consumers.
Jim Anderson
The Truth About Credit
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June 19, 2007 8:28 PM | Reply | Permalink