Macey Throws Some Cold Water on the CFPB’s New Mortgage Disclosures

Josh Wright —  18 July 2012

In the WSJ, Professor Macey takes measure of the CFPB’s new mortgage disclosures and finds them lacking:

The CFPB is proposing to revise the old forms into a new Loan Estimate Form and Closing Disclosure Form. The old loan form had been five pages; according to the agency website, the new one is three. The closing form remains at five pages. That’s a net savings of two pieces of paper. But the agency rules required to implement the new forms weigh in at an astonishing 1,099 pages.

In evaluating the substance of the new disclosure themselves, Macey concludes the new forms are likely to harm consumers rather than help them.

Do the new rules expand consumer choice? They would forbid many borrowers from making smaller payments every month, followed by a single, one-time balloon payment to retire the principal at the end. They also would cap late fees—which means borrowers would be unable to get a lower interest rate on a loan by agreeing to pay a penalty if they don’t make their payments on time.

The new rules restrict loan-modification fees, which means mortgagors will offer fewer options to do so. They restrict penalties on borrowers who pay off their home loans early. These prepayment fees compensate lenders for the risk of lower returns on their loans. Without this protection they will either decline to offer loans to some borrowers or charge a higher interest rate.

The government’s proposed rules require high-risk customers in high-cost loan markets to meet with financial counselors before taking out a loan. The regulators also want to expand dramatically the number of mortgages classified as high cost. But financial counselors will have to be compensated, whether their advice is good or bad. The law deprives these consumers of the right to do their own homework.

Oddly, hidden on the new disclosure forms is the Annual Percentage Rate. For decades the APR was front and center on government-mandated disclosure documents. It is the single number that shows borrowers the cost of borrowing including such factors as the interest rate, certain fees, and the maturity structure of the loan.

The CFPB claims its consumer testing showed people didn’t understand the APR. Yet if someone is trying to compare two loans—one with a lower interest rate and $15,000 in fees, the other with lower fees but a higher interest rate—it’s not possible to determine which loan is cheaper without the APR.  The new rules do not attempt to generate a single number that can be used for comparison purposes and instead focus on various components of the loan such as fees, penalties, interest rates and maturity separately. This makes it harder, not easier, for borrowers to compare mortgage options.

Ultimately, we will be able to evaluate the impact of these new disclosures empirically by watching the results of the CFPB’s “experiment.”

2 responses to Macey Throws Some Cold Water on the CFPB’s New Mortgage Disclosures

    Information Overload 19 July 2012 at 7:10 am

    I agree with the sentiments of Northfolk investor, and I agree with Josh that ultimately it’s a wait-and-see empirical question. However, I take issue with Macey’s emphasis on “consumer choice.” He assumes that consumer choice is always good, and more choice is better. More is not always better, as demonstrated by countless information overload studies. The point at which this overload occurs is an empirical question. Still, someone loses credibility with me when they take a “more is always better” approach to consumer choice.

    northfork investor 19 July 2012 at 5:50 am

    Macey is a contemporary of mine but I sometimes challenge his experience factor. Has he refinanced using the new forms? I am not a stranger to modern day finance (or even that of 40 years ago). The old disclosure forms were impossible to decipher and substantially no mortgage broker understood them either. Forget how many pieces of paper there are. The new forms are easier to understand and the numbers on them actually mean something.

    Some of the consumer choices Macey is concerned about reducing are empirically limited to very few people. Restricting loan modification fees is not a big deal particularly given the difficulty in actually getting a loan modified. Unless your bank owns and services and hasn’t packaged your loan, you cannot get one done period (without some sort of governmental assistance or mandate). I have tried to negotiate interest rate adjustments to market in return for fees several times over the last 30 years and instead have always had to exercise my zero cost call option to refinance. The swap products that are sometimes offered are a sucker’s product of hidden costs and fees. That’s a dead weight loss. Similarly restricting interest-only products (because virtually no such products contractually obligate balloon payments except for structured products that cannot be packaged) affect only a very small (and rich) group of borrowers whose loans will be held by their underwriters to maturity.

    Finally APR. Reducing all the cost factors of a mortgage to a single factor was always an exercise in absurdity for different mortgage products. APR simplifies the calculations so much as to be virtually worthless. Focusing on the various components of the loan product is exactly what consumers need to do and allow individual preferences to choose the product that best suits them particularly when optionality and risk management is so important for individual household decisions.