Fed Should Teach Consumers Which Questions to Ask

For many years, the Federal Reserve and other federal agencies with responsibility for formulating required disclosures of financial information were tone deaf. They decided on the information borrowers should have without ever asking borrowers what they wanted, and without testing to see whether the information was useful or even understood.

But this has changed. In recent years, the Federal Reserve in particular has gotten religion. Many of the Fed's proposals are the direct result of listening to consumers, and their latest proposals to reform the Truth in Lending Act are replete with references to the results of consumer testing.

In a recent article on Federal Reserve proposals for amending the Truth in Lending Act, I commented favorably on a proposal for early disclosures designed to encourage borrowers to shop loan providers. Most of the mandated information that lenders now provide borrowers need not be placed in their hands until days after they have submitted an application, which in most cases is too late to help in shopping. Consumers rarely disengage from a lender once they have submitted an application.

The proposed new disclosures will be required at the point of application. This is a great idea -- if the required information reveals differences between lenders that will cause borrowers to prefer one over another.

My previous article criticized the Fed's proposed questions because they all applied to mortgage types or options. For example, if the question were "Can my interest rate increase?" all lenders would answer the same way, making that question useless to borrowers trying to select among different lenders. Such questions would just add to the pile of useless paper.

After my article was published, Fed sources told me that their proposed disclosures were the direct result of giving consumers the information that those questioned by the Fed said they wanted.

I was not surprised to hear that the consumers queried by the Fed requested information that would not help them. I have been fielding questions from borrowers for 12 years, and I learned early on that the information they seek from me often is not the information they would have sought if they had understood their situation better.

What surprised me was that the Fed accepted it as their charge to give consumers the information the consumers said they wanted, even when it was clear that this information would not help borrowers shop alternative loan providers.

When a consumer asks me a question that I suspect is not relevant to his situation, I give back the information that, if my suspicions are right, causes him to reformulate the question. Helping people realize what the right questions are is a critical part of what we call "education."

Truth in Lending should be educational, too. It should provide information that consumers will recognize as relevant to their situation when they see it, even though they did not realize its relevance when they participated in a Federal Reserve focus group.

My critical article offered seven questions that would help borrowers select from among different lenders because they applied to important lender policies. One of them was, "Do you allow your loan officers to charge 'overages' -- a price higher than the price the lender will accept?"

Of course, very few consumers on their own would mention overage policy as something they would like to know about, simply because they are not aware that such practices exist. My experience has been that once consumers become aware of overages, the issue jumps to the top of their concerns.