Markets Wired

The Federal Trade Commission today released staff comments to the federal banking agencies – the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of Thrift Supervision, and the National Credit Union Administration – in response to their request for comments on proposed illustrations of consumer information for subprime mortgage lending. In their comments, FTC staff support the agencies’ efforts to develop mortgage disclosures to help subprime borrowers make better informed decisions. FTC staff also recommend that the agencies consider testing the effectiveness of their proposed new disclosures and consider undertaking a more comprehensive effort to improve federal mortgage disclosures.

The comments describe two studies conducted by FTC staff that demonstrate the potential benefit of using consumer research to test mortgage disclosures. One study included several dozen extended interviews and systematic testing with more than 800 mortgage customers. Findings from the study are striking – current mortgage disclosures frequently fail to convey key information to consumers, often are misunderstood, and may contribute to information problems in the mortgage market. These findings apply to both prime and subprime borrowers, and to the evaluation of simple, fixed-rate mortgages. As part of the study, FTC staff also developed a new prototype disclosure document consisting of a one-page, comprehensive summary of key loan information and two pages of additional loan details. Tests of the prototype disclosure document revealed significant improvements in consumer recognition of mortgage costs, demonstrating the feasibility and potential benefits of a single, comprehensive, consumer-friendly disclosure document. A second study found that adding more information to disclosures does not always improve consumer understanding. The mortgage broker compensation disclosures tested in the study led to misunderstanding of loan costs and biased loan choices.

Based on staff’s research, the comments state that consumers likely would benefit from one clear disclosure document that alerts them to the major costs and features of a mortgage – a document that significantly reduces the cost of obtaining information about the true value of different mortgage options, is noticeable and easy to read and understand, summarizes key loan features up-front to facilitate informed comparison shopping, and makes clear what a consumer is getting into before signing. The comments also note the importance of consumer research and express the staff’s readiness to participate with other federal agencies in a more comprehensive effort to improve federal mortgage disclosures.

The Commission vote to authorize the filing of the staff comments was 5-0. Copies of the comments can be found as a link to this press release on the Commission’s Web site. FTC File No. V080000; the staff contact is Janis K. Pappalardo, Bureau of Economics, 202-326-3380.

The views expressed in the comments are those of the staff of the FTC’s Bureau of Economics, Bureau of Consumer Protection, and Office of Policy Planning, and do not necessarily represent the views of the FTC or any individual Commissioner.

Copies of the documents mentioned in this release are available from the FTC’s Web site at
http://www.ftc.gov and the FTC’s Consumer Response Center, Room 130, 600 Pennsylvania Avenue, N.W., Washington, DC 20580. Call toll-free: 1-877-FTC-HELP.