Protecting Home Loan Consumers Starts with Simplifying Disclosures

by devteam March 18th, 2011 | Share

Elizabeth Warren, Special Advisor to the Secretary of thernTreasury for the Consumer Financial Protection Bureau (CFPB), told a House subcommittee yesterdayrnthat “A simple, straightforward and consistent presentation of a creditrnagreement is the best way to level the playing field between consumers andrnlenders – and among different types of lenders – and foster honest competition.”rn  </p

Warren updated the Subcommittee on Financial Institutionsrnand Consumer Credit on the progress of the new bureau which she will berndirecting but without the title of director. rnIn lengthy testimony she covered the staffing, budget, and outreach alreadyrnconducted to explain the Bureau to military families, faith-based groups, andrnstate attorneys general.  </p

Many people, Warren said, assumed the Bureau would seek tornaccomplish its goals by issuing waves of new regulation there is a better way. “Puttingrndown rules here and there can be like putting down fence posts on thernprairie:  They can be too easy to runrnaround.”  The lawyers soon showrneveryone how to jog around the fence posts, she said, so the regulator respondsrnwith more rules.  Pretty soon there arernso many that newcomers are scared off before they start and small competitorsrncan’t afford an army of lawyers which puts them at a competitiverndisadvantage.  </p

Warren envisions the agency as providing a level playingrnfield, one that gives consumers the information they need to chose between twornproducts and encourages personal responsibility and rewards smart choices.  One lesson of the past five years is that wernall lose when consumers cannot readily determine whether they can afford to payrnback their loans and when lenders sell credit in ways that make it hard to seernthe risks and costs.  “A simple,rnstraightforward, and consistent presentation of a credit agreement is the bestrnway to level the playing field between consumers and lenders – and amongrndifferent types of lenders – and foster honest competition,” she said.  Clear and simple presentations of termsrnbenefit not only customers but lenders who want to compete fairly and investorsrnwho want to be assured that industry profits are never again based on crazyrnproducts that no one can understand.</p

Government regulation has also played a role in makingrncredit products more opaque with mandated disclosures in obscure language and producedrnin small type that have often imposed a burden on lenders while providing nornbenefit to consumers.  “It should bernthe job of the consumer bureau to revise and update outdated regulations andrnuseless disclosures as aggressively as it monitors the fine print layered on byrnlenders.”</p

Warren told the committee that the new agency has multiple priorities,rnmortgages, credit cards, financial education, consumer complaints and itsrnexamination and enforcement responsibilities. rnThe current economic crisis began one bad mortgage at a time and ifrnthere had been basic rules of the road in places for mortgages, consistentlyrnenforced at the federal level by an agency fully accountable for protectingrnconsumers, it never would have developed as it did.  Transparency is critical and today much ofrnthe paperwork associated with a mortgage is far too confusing and comes toornlate.  Preparing the paperwork requiredrnfor a loan today has a real cost to the lender but the results are toorncomplicated and the consumer receives the papers too late for them to bernhelpful.  When it comes to mortgagerndisclosures, she said, “We want to hit a regulatory sweet spot – more valuernfor the borrower and lower costs for the lender.”</p

Credit cards are the most commonly used form of consumerrncredit so changes that make this market more transparent can echo throughoutrnthe economy.  “If the costs andrnrisks of credit card products are clearer, consumers will be able to makernstraight-up comparisons among cards – and make the best decisions forrnthemselves and their families.” rnThis may mean some families will purchase less, pay with cash, or use arndifferent financial instrument or pay down their credit card debt.  Some may go the other way, but clearrninformation about prices and risks would make it easier for consumers to sortrnthrough their options.</p

Making credit cards easier to understand and compare can spurrninnovation.  Card issuers would havernincentives to produce innovations that are attractive to customers rather thanrnever more complicated cards with hidden fees and surprises.  The year-old Credit Card AccountabilityrnResponsibility and Disclosure Act (CARD) pushed in the right direction bringingrnabout significant reforms in pricing practices and information provided tornconsumers.  There is still room for betterrncard-to-card comparisons and CFPB is working hard on ideas about how to do thisrnwith without an overreliance on rules. </p

It is also important that the Bureau work to make the costsrnand risks of other products such as payday loans and prepaid cards clear andrnup-front.  “Recent experience hasrntaught us that American families need an agency that is actively monitoringrnfinancial markets to ensure that they are fair, transparent, and competitive.</p

The Dodd-Frank Act required CFPB to establish an Office ofrnFinancial Education which will be a resource for consumers who are looking tornbetter understand how different products and services work.  The Bureau is working with other agencies torndo this while avoiding overlapping or redundant government efforts and withrnleaders in the field of financial education to explore what works and where bothrnthe gaps and duplicative efforts exist.</p

The agency plans to launch a consumer response center laterrnthis year to receive complaints and help consumers find answers for questionsrnabout products and services.  Almost asrnsoon as CFPB began its implementation process Warren said it started receiving complaintsrnand to date has received approximately 300. rnMost fall into four categories; mortgages and home loan complainsrnaccount for about one-half of the total and credit cards about 10 percent.  The other two large sources of complaints arerndeposit products and consumer loan products at five percent each.  </p

The Bureaus supervision and enforcement responsibilities includernnon-bank financial companies that provide financial products and services suchrnas mortgage brokers, lenders and servicers; payday lenders, and private studentrnloan provides – the first time that many have faced any type of federalrncompliance examinations.  The agency alsornhas examination authority over depository institutions and credit unions withrn$10 billion or more in assets. </p

Warren said that building an agency from scratch has givenrnher and her team an opportunity to re-think the role that technology and datarncan play. For example, she said, the Bureau can empower a well-informedrnpopulation to help expose, early on, consumer financial tricks.  “If rules are being broken,” shernsaid, “we don’t need to wait for an expert in Washington or the nextrnscheduled examination to recognize the problem.”  </p

READ MORE: Treasury Moves to Revise RESPA Forms and Simplify TILA Disclosures  

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About the Author


Steven A Feinberg (@CPAsteve) of Appletree Business Services LLC, is a PASBA member accountant located in Londonderry, New Hampshire.

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