Filter Results CategoriesCart
Highlight Updates

1.3.3.2 Mere Disclosure As a Cure for the Problem

Disclosure is not an adequate counterweight to creditor overreaching when consumers face a product as complex as a home mortgage.270 The disclosures required prior to the foreclosure crisis utterly failed to explain the pricing of these products. For example, the federal Truth in Lending Act (TILA) disclosure requirements did not keep pace with the complex products that were sold in large numbers during the period 2000–2007. During the peak mortgage lending years of 2005 and 2006, the market share of securitized adjustable rate mortgage loans was 45.1% and 44.1%, respectively.271 The TILA disclosure forms at the time did not include any clear information about the effect that changes in the interest rates would have upon the monthly payment (based upon certain assumptions). Lenders could hide beyond the obscurity of the TILA disclosures and make loans whose interest rates and monthly payments would increase substantially after some initial period, to the surprise of the borrowers.272

Disclosures generally, while necessary, are no match for the perverse market forces which produced the foreclosure crisis.273 Nor can any disclosure, on its own, compete with oral claims made by salespeople, who are paid on commission to sell loans.274 Making matters worse, disclosure regimes were often watered down over the years, as happened with the annual percentage rate (APR) disclosure required by TILA.275

Finally, borrowers who do not know they are eligible for credit on better terms are unlikely to profit from most disclosure regimes. Some disclosure regimes could actually facilitate fraud, as has commonly been the case with the early disclosure of closing costs in mortgage transactions. More often than not these disclosures understated the costs, leading to bait-and-switch schemes.276 While post-Dodd-Frank Act changes are designed to eliminate the bait-and-switch schemes, it is too early to know whether they will succeed.

Few if any of the proponents of a disclosure-based model of regulation make any effort to ensure that disclosure is done in a meaningful way. There is little market incentive to produce effective disclosures.277 In fact, most of the cost disclosures required prior to the foreclosure crisis were functionally ineffective.278

Footnotes

  • 270 {270} See A. Mechele Dickerson, Bankruptcy and Mortgage Lending: The Homeowner Dilemma, 38 J. Marshall L. Rev. 19, 42–47 (2004) (discussing limitations of financial literacy and disclosures due to cognitive biases); Patricia A. McCoy, A Behavioral Analysis of Predatory Lending, 38 Akron L. Rev. 725 (2005) (discussing the cognitive barriers to decision making in the predatory lending context); Ronald H. Silverman, Toward Curing Predatory Lending, 122 Banking L.J. 483, 546 (2005) (borrowers, due to a variety of psychological effects, tend to underestimate the risk of foreclosure). See also Kathleen C. Engel & Thomas J. Fitzpatrick IV, Complexity, Complicity, and Liability up the Securitization Food Chain: Investor and Arranger Exposure to Consumer Claims, 2 Harv. Bus. L. Rev. 345, 351–365, 377–390 (2013) (discussing strategies to hold securitizing entities liable for the actions of lenders and, thereby, creating an incentive to encourage market participants to police the market). Cf. Patricia A. McCoy, Rethinking Disclosure in a World of Risk-Based Pricing, 44 Harv. J. on Legis. 123, 128–138, 142–143 (2007) (discussing limitations of current disclosure regime in providing relevant, binding information in a timely and useful manner).

  • 271 {271} Inside Mortgage Market Finance, The 2008 Mortgage Market Statistical Annual Vol. II, at 251 (2008) (these percentages include both agency and non-agency securitizations, that is both Fannie Mae, Freddie Mac, Ginnie Mae, and subprime securitizations).

  • 272 {272} Jeff Sovern, Preventing Future Economic Crisis Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, 71 Ohio St. L.J. 761, 769–75, 792–797 (2010) (describing how the TILA disclosures misled borrowers and did not give borrowers the necessary information to keep from borrowing unwisely; suggesting switching from disclosure regimes to a comprehension regime, in which lenders would be obliged to demonstrate that a certain percentage of their borrowers understand their loan terms and that consumers be tested on their comprehension of their loan terms). See also O’Donnell v. Bank of Am., 2009 WL 765670 (N.D. Cal. Mar. 20, 2009) (finding, for purposes of surviving a motion to dismiss, that a payment-option ARM payment schedule in compliance with Regulation Z is nonetheless a violation of the Truth in Lending Act (TILA)’s requirement that negative amortization by clearly and conspicuously disclosed); Amparan v. Plaza Home Mortg., Inc., 2008 WL 5245497 (N.D. Cal. Dec. 17, 2008) (applying equitable tolling to TILA damage claim because payment-option ARM disclosures confusing and denying lender’s motions to dismiss TILA claims based on failure to disclose “the true cost of the loan,” although composite APR correctly disclosed); Oren Bar-Gill, The Law, Economics, and Psychology of Subprime Mortgage Contracts, 94 Cornell L. Rev. 1073, 1143–1147 (2009) (detailing shortcomings of existing TILA APR disclosure); Patricia A. McCoy, Rethinking Disclosure in a World of Risk-Based Pricing, 44 Harv. J. on Legis. 123, 128–138 (2007) (discussing limitations of current disclosure regime in providing relevant, binding information in a timely and useful manner); James M. Lacko & Janis K. Pappalardo, Fed. Trade Comm’n, Improving Consumer Mortgage Disclosure: An Empirical Assessment of Current and Prototype Disclosure Forms, at ES-11 (2007), available at www.ftc.gov (prime borrowers have difficulty answering questions about their loans; difficulty increases as loan becomes more complex); U.S. Gov’t Accountability Office, Pub. No. GAO 06-1021, Alternative Mortgage Products: Impact on Defaults Remains Unclear, But Disclosure of Risks to Borrowers Could Be Improved 21–22, 52–54 (2006), available at www.gao.gov.

  • 273 {273} See, e.g., Truth in Lending, 73 Fed. Reg. 1672, 1675–1677 (Jan. 9, 2008) (discussing limits of disclosure in the subprime mortgage market); William C. Apgar & Christopher E. Herbert, Dep’t of Hous. & Urban Dev., Subprime Lending and Alternative Financial Service Providers: A Literature Review and Empirical Analysis § 2.2.3, at 1-15 (2006) (“Unfortunately, given the bewildering array of mortgage products available, even the most sophisticated borrower will find it difficult to evaluate the details of a mortgage.”).

  • 274 {274} See, e.g., In re First Alliance Mortg. Co., 298 B.R. 652 (C.D. Cal. 2003); Diana B. Henriques & Lowell Bergman, Mortgaged Lives: A Special Report; Profiting from Fine Print with Wall Street’s Help, N.Y. Times, Mar. 15, 2000, at A1 (reporting on allegations against First Alliance Mortgage about its sales tactics).

  • 275 {275} Elizabeth Renuart & Diane E. Thompson, The Truth, the Whole Truth and Nothing But the Truth: Fulfilling the Promise of Truth in Lending, 25 Yale J. on Reg. 181 (2008).

  • 276 {276} McClelland v. Family Dwellings, L.L.C. (In re McClelland), 2008 WL 5157685, at *5 (Bankr. W.D. Mo. June 20, 2008) (describing use of understated costs in good faith estimate to bait and switch homebuyer-borrower); Elizabeth Renuart & Jen Douglas, The Limits of RESPA: An Empirical Analysis of the Effects of Mortgage Cost Disclosures, 21 Hous. Pol’y Debate 481, 492–502 (2011) (despite the disclosure requirements imposed by the Real Estate Settlement Procedures Act, the cost of closing mortgages as percentage of the loan amount rose for both purchase and refinance loans since 1972; fee types doubled since 1972, reflecting additional changes in the market and the unbundling of origination and title-related fees; the good faith estimate accurately predicted actual closing costs in only a small percentage of cases; and HUD’s standard settlement forms did not facilitate standard disclosures of charges; using a data set that included mainly subprime mortgage loans).

  • 277 {277} Omri Ben-Shahar & Carl E. Schneider, The Failure of Mandated Disclosure, 159 U. Pa. L. Rev. 647 (2011). See Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 Minn. L. Rev. 749, 759–760 (2008).

  • 278 {278} See, e.g., Oren Bar-Gill, The Behavioral Economics of Consumer Contracts, 92 Minn. L. Rev. 749, 796–801 (2008) (discussing needed improvements in Truth in Lending Act disclosures primarily in the credit card context, including the need for binding disclosures and disclosure of use patterns); Patricia A. McCoy, Rethinking Disclosure in a World of Risk-Based Pricing, 44 Harv. J. on Legis. 123, 128–138, 142–143 (2007) (discussing limitations of current disclosure regime in providing relevant, binding information in a timely and useful manner); Elizabeth Renuart & Diane E. Thompson, The Truth, the Whole Truth and Nothing But the Truth: Fulfilling the Promise of Truth in Lending, 25 Yale J. on Reg. 181 (2008) (existing finance charge and APR disclosures do not permit consumers to shop for credit in a meaningful way). See also ICF Macro, Summary of Findings: Design and Testing of Truth in Lending Disclosures for Closed-End Mortgages 7, 10–22 (2009).