Mortgage Forms Sow Confusion

FTC researchers Janis K. Pappalardo and James M. Lacko tested the latter hypothesis by developing a new combined disclosure form that focused on the main functional categories of costs -- and potential consumer snares -- in mortgage originations and settlements.

The new disclosure is simpler to understand than the current disclosures in both language and graphical presentation. It starts with a box titled "Your Loan" -- a three-line description of the type of mortgage (for example, 10-year interest-only balloon), the loan amount and the term of the loan. The next section is a box called "Our Loan Charges," summarizing the lender's interest rate and all the upfront charges (lender fees plus all settlement costs) and the amount of any monthly billed charges. The box also includes the APR, which is the cost of the loan, interest payments and any other finance charges, expressed as an annualized rate.

Subsequent sections summarize "Your Loan Payments," "Penalties and Late Fees," and whatever taxes and insurance are included in the monthly payment. All key settlement charges are grouped in functional categories such as lender services, title-related services, and government taxes and fees.

The researchers tried the simpler, better-targeted disclosures on consumers in the study and found a big jump in understanding. Eighty percent of those using the new form could correctly answer 70 percent or more of the questions about their mortgages, compared with only 29 percent of those using the current truth-in-lending and good-faith-estimate disclosures. The performance was particularly improved when the mortgage features were more complicated -- with rate resets, variable payments and the like.

The bottom line is that "current mortgage disclosures fail to convey key mortgage costs and terms to many consumers, leaving them susceptible" to bad deals, overcharges, loan payments that explode on them and "deceptive lending practices," the authors wrote.

The FTC's findings are likely to be given serious consideration by the Federal Reserve and the Department of Housing and Urban Development, where projects are underway to streamline the mandatory disclosures consumers receive when they apply for and receive home mortgages.

In the meantime, take this message to the application desk: Home loans are inherently complicated financial instruments. Demand that the loan officer walk you through every feature. And don't sign for a debt obligation tied to your house until you understand all its mechanics, payment scenarios, risks and costs.

Kenneth R. Harney's e-mail address is KenHarney@earthlink.net.