Regulating Understanding: Can new loan disclosures solve the subprime woes?

As anyone who recently borrowed money to buy a house or refinanced their mortgage can tell you, the stack of paperwork required by the banks is staggering. The “closing package” is so complete (and I use that term loosely), even the loan processors rarely understand what it all means. How then can regulators insure that borrowers understand the trouble they are getting into?

The Federal Trade Commission has determined that the current disclosure forms for consumer loans don’t get the job done, and that better forms would better inform the consumer. See the June 13 FTC report here.

The unfortunate reality is that banks and mortgage companies never REPLACE anything, they only ADD to what is already there. Old, outdated and stale paperwork is commonly required. When informed of the superfluous nature of their documents, the reaction is usually the overused refrain – it’s the lawyers fault.

Given this reality, adding BETTER forms will likely only increase the confusion. If they are truly used properly, new improved forms may help.

A better possible solution for subprime mortgage loans is to require the new and improved forms to guide the consumers’ understanding through a counseling process like that used for reverse mortgages.

It would slow the process down, add checks to make sure consumers understand the risks and ensure that the loan documentation is clear before sitting down at the closing.