January 19, 2012
In the Media
Academic Minute
WAMC
Albany, NY
January 19, 2012
Transcript:
When the economy improves, more consumers will want to buy homes,
and need mortgages. That means consumer-borrowers will need to know
what they are promising to pay so they can tell whether they can
keep that promise. One of the causes of the Great Recession was
that borrowers assumed debts that they not only couldn't repay, but
didn't know they couldn't repay and that led to defaults. Federal
law required lenders to give borrowers forms that supposedly told
them what they had to pay, but the forms were misleading. In
addition, mortgage brokers say that consumers didn't use the
disclosure forms to make decisions and spent little time with
them.
The Consumer Financial Protection Bureau was created in part to
help consumers understand what they are getting into when they take
out a mortgage. The Bureau has been trying to achieve that goal by
soliciting comments on new 2-page loan disclosure forms, so that
consumers could more easily understand loan terms.
Unfortunately, even two, simpler, pages may still be too complex
for some borrowers. Borrowers may still not use them, just as they
didn't use the old forms.Fortunately, another way to help borrowers
exists. Some borrowers have benefited from loan counselors who warn
them away from bad loans. A Chicago study, for example, found that
counseled borrowers were less likely to default and were more
likely to understand their loan terms.
Experiments like the one in Chicago suggest that borrowers would
benefit from a two-tier system. Those who can understand loan terms
from disclosures which they can prove by taking a test on the terms
can use them. But those who fail the test should be required to see
mortgage counselors. That will help borrowers and maybe prevent the
next Great Recession.