Creating a Clearer Mortgage Disclosure

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The U.S. Treasury featured its newest employee, "Assistant to the President and Special Advisor to the Treasury Secretary" Elizabeth Warren, at a forum it held on Tuesday. Although her role remains murky, the forum's topic explains her first task: to simplify and clarify mortgage disclosures. It's hard to know if Warren herself suggested holding the event, as this goal is specifically required by the Dodd-Frank financial regulation bill passed in July.

If you've ever got a mortgage, then you probably know there's already a Truth-in-Lending disclosure you are provided that is supposed to explain your mortgage terms. The problem, however, is that mortgage loans are complicated. In fact, they get even harder to understand when products like option-adjustable rate mortgages enter the picture. Yet the form remained simple even while loans got trickier. The disclosure was really meant to accommodate pure vanilla fixed-rate mortgages, and simply didn't have the capacity to fully inform borrowers of how their loan might change with more complex products.

Considering this problem, it makes sense to try to reform mortgage disclosures. But, as mentioned, this wasn't the Treasury's idea. Dodd-Frank requires that the new Consumer Financial Protection Bureau reconcile the two forms that already exist to provide better clarity to borrowers. One disclosure is through the Truth in Lending Act of 1968 (TILA). The other is through the Real Estate Settlement Procedures Act of 1974 (RESPA).

As it turns out, both of these forms have already been revised recently, the TILA form was reformed (.pdf) by the Federal Reserve and the RESPA disclosure was re-worked (.pdf) by the U.S. Department of Housing and Urban Development (HUD). The Fed's new TILA forms will be required as of April 2011, while HUD's new rules for RESPA went into effect in January 2010.

So really, it looks like the Fed and HUD did most of the heavy lifting here already. I spoke to the Center for Responsible Lending about the two competing forms. They told me that the Fed's new rules would create different Truth-in-Lending forms for each type of mortgage product, so borrowers can better understand what they're getting into with more complicated loans. But the spokesperson I spoke with was also worried about consumers being able to understand additional detail that might be provided.

If the newly formed CFPB is to have a role here, then that concern speaks to its mission. It should try to figure out a way to help unsophisticated consumers to understand complex mortgage products. That won't be easy; in fact, it might not be possible. You can only do so much with a form if those reading it don't grasp the basics. So creating a better mortgage disclosure likely goes beyond the form itself and requires better education as well.

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Daniel Indiviglio was an associate editor at The Atlantic from 2009 through 2011. He is now the Washington, D.C.-based columnist for Reuters Breakingviews. He is also a 2011 Robert Novak Journalism Fellow through the Phillips Foundation. More

Indiviglio has also written for Forbes. Prior to becoming a journalist, he spent several years working as an investment banker and a consultant.
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