The Federal Trade Commission told banking regulators Thursday that a single mortgage disclosure document would be beneficial to homeowners, bucking the recent trend which calls for additional mortgage disclosures.
The FTC believes complicated documentation is one reason many borrowers are in bad loans and facing foreclosure, as they didn’t fully understand the terms on the mortgages they agreed to.
The agency proposed a single, clear document that summarizes all the critical information borrowers need to be aware of, instead of adding another document to the growing pile of mandatory loan disclosures.
The proposed document would clearly state the interest rate, monthly mortgage payment, and closing costs, and would also include information regarding payment shock, impounds, balloon payments, and prepayment penalties.
In recent months, the Federal Reserve Board, Federal Deposit Insurance Corporation, Office of Comptroller of the Currency, and other banking regulators have called for increased disclosure to stem the origination of bad loans.
But a recent study conducted by the FTC found that a good deal of borrowers were already confused by their existing loan documents.
“Systematic testing with over 400 recent mortgage customers confirmed that current disclosures are confusing and often misunderstood,” the FTC said in comments submitted to banking regulators.
Per the study, half of the customers failed to identify the correct loan amount, while almost a quarter failed to identify the amount of settlement charges.
Interestingly, many borrowers felt the “discount fee” was a cost reduction, failing to realize that it’s actually a payment from the borrower to the bank or mortgage lender.
Makes you wonder what they thought yield spread premium meant?
It does seem that enhanced disclosure would make a lot more sense than additional disclosure, especially if no one understands the current paperwork to begin with.
The result could actually increase borrower accountability, lessen bank and mortgage broker liability, and reduce the amount of steering and bad lending.