In a Sea of Loan Forms, Disclosure Proposal Offers Possible Rescue

What is a point? What is a margin? What does "due on sale" mean? Did you comparison shop and review the APR? What's APR, anyway?

When you obtain a mortgage loan, you will sign many documents, all of which contain terms that are a mystery to many homse buyers. There's a good-faith estimate, a truth-in-lending statement, a financial information form, a promissory note, a deed of trust and a HUD-1, also called a settlement statement.

You will also sign other documents, most of which are designed to protect the lender against future claims that you did not fully understand the terms and conditions of the loan.

And to make matters worse, you will be asked to sign a power of attorney authorizing the lender (or the title company) to make corrections should errors be found later.

Did you understand what you signed? Did you comprehend the terms of that adjustable-rate mortgage? If you sell your house or win the lottery and want to pay off your loan, will you have to pay a prepayment penalty?

Foreclosures are rising rapidly. This is being blamed on subprime lenders that made high-interest, risky loans to consumers who could not afford them in the first place. But foreclosures are taking place with other kinds of loans as well. Clearer disclosure ensuring that borrowers actually understand their loans is one step that could help prevent problems.

Alex J. Pollock, a former chief executive of the Federal Home Loan Bank of Chicago who is now a fellow at the American Enterprise Institute in Washington, thinks he has a solution. It's a simple one-page disclosure document that he calls "the Pollock prototype."

"A good lender wants the borrower to understand what the loan agreement is. In particular, it is essential to disclose simply and clearly any prepayment penalties and the pattern of interest rate changes, if any, to which the loan is subject," Pollock said during recent testimony on Capitol Hill.

Pollock lamented that the documents most lenders use do not meet this objective. "Most of us have had the experience of being overwhelmed and befuddled by the huge stack of documents full of confusing language in small print presented to us for signature at a mortgage closing. The complexity results from legal and compliance requirements. Ironically, past regulatory attempts to insure full disclosure have made the problem worse."

His one-page disclosure, which is accompanied by two pages of definitions of terms, states in simple English what he says are the "essentials of the loan."

For example:

· If you are considering an adjustable-rate mortgage, the disclosure form would tell you what your beginning interest rate is, how long it will stay in effect, and (more important) what the maximum possible rate will be.