If you've ever shopped for a home mortgage, you probably recognize — perhaps with a knot of fear in your gut — these two federally mandated pieces of paperwork: the two-page Truth in Lending disclosure, and the three-page Good Faith Estimate form. They are, despite their sweet-sounding names, daunting loan documents for consumers about to make the largest financial commitment of their lives.
The government has long required banks to present these papers to potential home buyers to help them grasp the full consequences of loans and all the sneaky fees that go with them. Over the years, the forms have been studied and fought over and adjusted, rarely to the satisfaction of consumer advocates.
"The mortgage paperwork battle that consumers fight is enormous," said Ed Mierzwinski, who directs the consumer program with the U.S. Public Interest Research Group. "And it's something that HUD and the Fed have been wrestling with since before I came to Washington 21 years ago now."
This convoluted paperwork problem exacerbated the mortgage crisis. And now the government's new Consumer Financial Protection Bureau, created in the wake of the economic meltdown, is attempting to overhaul the loan documents in a way that would dramatically simplify mortgage shopping — and that could, in the process, set a new standard for how the government designs consumer tools.
The bureau has asked consumers to weigh in on a pair of designs for a revamped two-page form that would combine the Truth in Lending and Good Faith Estimate documents. As part of the "Know Before You Owe" campaign, the bureau sought online feedback on the two options (check them out here and here) through last month, and will use that American Idol-style feedback to craft improvements that will also be crowd-sourced and consumer-tested over the next 18 months.
"It is true that if you give people too much information, information overload tends to serve the lender's interest more than anybody else's," said Diane Thompson, an attorney with the National Consumer Law Center. "If you have too much information, people have trouble figuring out what the right information is."
Some research even suggests that the more information you give people, the more money they end up paying for credit because the process becomes confusing. A single streamlined federal document — and Thompson believes all the truly critical information could be condensed onto two pages — could take advantage of what researchers know about how consumers make decisions.
Cognitively, Thompson said, a list of individual fees looks smaller to us than a single, larger number that aggregates them all. This can skew how consumers make decisions when comparing two different products. Even in a transaction as complicated as selecting a mortgage loan, most of us will also base our selection on only two or three decision points. And we're likely to focus on the factors that are most familiar to us — for instance, on the interest rate in a loan offer, and not the more comprehensive annual percentage rate that factors in all the additional fees that come with loans.
"Mortgages are probably the most complicated financial transaction that most of us experience in our lives," Thompson said, "and most of us don't do it very often, so we don't have a chance to get good at it."
A well-designed document that reflects research on how consumers think, and how best to help them make a good decision, could go part of the way toward addressing that. Studies of the years leading up to the mortgage crash, for instance, suggest that more than half of the consumers who received subprime loans should have qualified for better ones that lenders failed to mention.
"If those consumers had had better information, they might have been able to compare loans," Mierzwinski said.
The public process the Consumer Financial Protection Bureau is using to now design that information represents a significant break in how government typically shapes such regulation.
"The first thing they always do is talk to the industry lawyers, and that tends to warp their thinking," Mierzwinski said. "They worry about compliance, not clarity. They worry about bank concerns rather than consumer concerns. And because they're in rooms with lawyers every day of their lives, they don't think like consumers."
This campaign suggests, Mierzwinski said, that the bureau has new ideas — "and the new ideas don't just extend to fixing forms, they extend to fixing government."
The central idea here doesn't sound all that radical — asking the public to compare two documents and pick the one that's easier to understand. But in all the years of wrangling with mortgage disclosure, its one idea the government hasn't tried.
"One of the reasons this reform has been so long in coming, and so hard to do, is because mortgage products have become so complicated because no one understands them," Thompson said. "We've found that we are suffering a global economic collapse because mortgage products got so complicated that not even sophisticated financial markets correctly priced the risk associated with them."