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1.3.3.2 Mere Disclosure Cannot Cure the Problem

Disclosure is not an adequate counterweight to creditor overreaching when consumers face a product as complex as a home mortgage.236 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.237 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.238

Disclosures generally, while necessary, are no match for the perverse market forces which produced the foreclosure crisis.239 Nor can any disclosure, on its own, compete with oral claims made by salespeople, who are paid on commission to sell loans.240 Making matters worse, disclosure regimes were often watered down over the years, as happened with the annual percentage rate (APR) disclosure required by TILA.241

Finally, borrowers who do not know they are eligible for credit on better terms or who receive their disclosures only at the closing table are unlikely to profit from most disclosure regimes. Some disclosure regimes may 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 understate the costs, leading to bait-and-switch schemes.242

Few if any of the proponents of a disclosure-based model of regulation have made any effort to ensure that disclosure is done in a meaningful way. There has been little market incentive to produce effective disclosures.243 In fact, most of the cost disclosures required prior to the foreclosure crisis were functionally ineffective.244

In 2011, the Consumer Financial Protection Bureau (CFPB) embarked on an extensive project, including consumer testing, to fulfill the Congressional mandate to create “a single, integrated disclosure” combining the existing HUD-1 settlement statement and TILA disclosure form.245 This process included a qualitative study246 that led to the publication of proposed forms, followed by a quantitative study to evaluate the effectiveness of the proposed forms.247 In addition, the CFPB utilized a web-based initiative known as “Know Before You Owe” to directly solicit input on the forms from the general public.248 Despite this enhanced testing process, critics point out that: (1) the CFPB failed to set a benchmark for the required level of comprehension needed to justify the adoption of the proposed disclosures; (2) comprehension in a controlled testing environment does not represent comprehension in a real life situation, for a variety of reasons; (3) the testing focused primarily on applicants’ ability to replicate information in the disclosure without necessarily showing understanding of the information or of the relative importance of the information; and (4) comprehension does not necessarily lead to improved decision making.249 For a discussion of the TILA/RESPA legal requirements, see NCLC’s Truth In Lending.250

Footnotes

  • 236 {173} 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).

  • 237 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).

  • 238 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); 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. See 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).

  • 239 {175} 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, U.S. 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.”).

  • 240 {176} 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).

  • 241 {177} 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).

  • 242 {178} 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) (finding that, 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).

  • 243 {179} 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).

  • 244 {180} 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).

  • 245 Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. No. 111-203, § 1098, 124 Stat. 1376 (July 21, 2010) (codified at 15 U.S.C. § 1604(b)).

    Congress also required the CFPB to conduct cost benefit analyses and to validate proposed disclosures through consumer testing. 12 U.S.C. §§ 5512(b)(2)(A), 5532(b)(3).

  • 246 See Kleimann Commc’n Grp., Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 47–154 (July 9, 2012), available at www.consumerfinance.gov; Patricia A. McCoy, Public Engagement in Rulemaking: The Consumer Financial Protection Bureau’s New Approach, 7 Brook. J. Corp. Fin. & Com. L. 1, 7 (2012) (in this phase, “trained interviewers met one-on-one with 92 individual consumers and 22 lenders and mortgage brokers, for a total of 114 participants. Each consumer was asked a series of questions to determine whether the draft forms disclosed information in ways that allowed them to understand different loan features, compare those features, and notice changes in terms and features during the loan process. Our object in designing the questions was to discover what helped consumers understand and use the information, not just what they liked. The interviewers asked lenders and brokers a different set of questions, which included asking them to explain the loans as they would to a customer and identify implementation problems.”).

  • 247 Kleimann Commc’n Grp., Know Before You Owe: Quantitative Study of the Current and Integrated TILA-RESPA Disclosures viii–ix (Nov. 20, 2013), available at www.consumerfinance.gov (the study used in-person, small-group, proctored sessions with 858 participants divided into roughly two equal groups of experienced and inexperienced consumers in 20 locations across the U.S.; using either the current or proposed disclosures, the participants answered a questionnaire containing 48 questions in a controlled setting during a 60-minute period; the questions almost exclusively tested for comprehension and accuracy; participants also were asked to choose between two mortgages when presented with their initial disclosures and justify their choice).

  • 248 Patricia A. McCoy, Public Engagement in Rulemaking: The Consumer Financial Protection Bureau’s New Approach, 7 Brook. J. Corp. Fin. & Com. L. 1, 7–9 (2012).

  • 249 Talia B. Gillis, Putting Disclosure to the Test: Toward Better Evidence-Based Policy 36, 39–41, 45–46 (Aug. 2015), available at http://papers.ssrn.com (forthcoming in Loyola Consumer Law Review)); Lauren E. Willis, The Consumer Financial Protection Bureau and the Quest for Consumer Comprehension 3–4, 7, 32–33, (Loyola Law School Legal Studies Paper No. 2016-2), available at http://papers.ssrn.com (forthcoming in Financial Reform: Preventing the Next Crisis (Michael S. Barr, ed. 2016)). See also Debra Pogrund Stark, Jessica M. Choplin, Mark LeBoeuf & Andrew Pizor, Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to Enable Shrewd Consumer Decision-Making, 27 Loy. Consumer L. Rev. 95 (2014) (arguing that the new loan estimate needs to be dramatically enhanced to address the lack of financial literacy among consumers, and the cognitive barriers and deceptive mortgage sales practices consumer face; relegation of the APR to the last page is a step backward); Jesse Eisinger, In an Era of Disclosure, an Excess of Sunshine But a Paucity of Rules, N.Y. Times, Feb. 11, 2015 (disclosure can work only when the transaction is simple, not in the case of, for example, a mortgage transaction; otherwise, disclosure can provide a safe harbor for bad practices, it may mislead, and it can devolve into a tool that gives advantage to the well educated over the poor and disadvantaged; quoting Professors Adam Levitin and Ben-Shahar).

  • 250 National Consumer Law Center, Truth in Lending § 5.11.2 (9th ed. 2015), updated at www.nclc.org/library.