One-page form thinks outside the loan doc
When banking expert Alex J. Pollock started looking at mortgage disclosure forms, even he had trouble understanding them. Pollock, a former banking industry executive who now serves as a fellow at the American Enterprise Institute, a Washington, D.C.-based think tank, thought the poorly constructed documents might be one source of the nation’s sub-prime banking problems. We talked with him about his recent proposal to simplify disclosures using a simple, one-page sheet. Here is an edited transcript of his comments:
Question: What’s the biggest problem you see with the current methods of disclosure?
Answer: Disclosures are far too detailed. They’re long, the language is difficult and the relevant information is scattered all over the place. Worst of all, they’re not focused on the actual impact of the loan on the individual’s finances, so it can be difficult even for a professional to figure out what consequences a loan will have. It’s clear from studies such as the Federal Trade Commission’s that many people can’t figure out even the basic structures of their loans.
As you try to disclose more and more details, there’s actually less and less communication. What people need to know are the relevant facts -- not all the facts. If you try to provide every detail, people’s minds just turn off. Then they end up buying a more expensive house than they can afford.
Question: You’ve designed a one-page form to deal with these issues. How does it work?
Answer: I designed my page as the sub-prime bust was just getting underway. It was becoming clear that a lot of people had taken out loans without understanding them. I thought about how I could set out all the information someone entering into a loan really ought to know, in as straightforward a way as possible. I gave myself a limit of one page so that it wouldn’t get too complicated. I tested it out on all different kinds of people, especially ones who knew nothing about the mortgage business.
It’s very simple: It gives people all the information they need, including the type of loan, the indexed interest rate and any special factors that would usually be hidden in fine print. At the bottom, I wrote in bold, “Do not sign this if you do not understand it!”
For most people, taking out a mortgage is the biggest financial transaction they’ll ever do in their life. They need to be sure they get it right.
Question: If every loan offer came with your disclosure form, how would that change the way mortgage deals are made?
Answer: I think the form would cause conversations to take place between loan brokers and their customers, which would clarify everything that the borrower is unsure of. Consumers’ increased knowledge could change the nature of the entire industry, and decrease the number of sub-prime loans being offered.
Question: No matter how well mortgages are explained, some consumers will still enter into loans that aren’t appropriate for them. Why not just have the government regulate what kinds of loans can be offered?
Answer: It would be very optimistic to think that any solution could fix 100% of the problem. I prefer my proposal to direct regulation because people across the political spectrum can agree that it’s the right thing to do. Our system relies on the free market -- it’s composed of voluntary contracts that people are entering into. Our goal is to make sure that borrowers know what they’re doing. We want to arm them so that they can take care of themselves and have personal responsibility for their finances.
Question: You’ve advocated that Congress make your disclosure form -- or something like it -- mandatory for all mortgage loans. Do you think it’ll happen?
Answer: I think we’ve got a chance -- stay tuned.
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