FTC Pushing for Disclosure Revisions

In testimony before the Housing Committee on Financial Services, FTC Chairman Deborah Platts Majoras briefed the politicians on the agency’s efforts to combat unfair, deceptive, and other illegal practices in the consumer financial services industry, according to a FTC transcript. She emphasized actions taken within the mortgage industry and highlighted a recent study’s findings that found many borrowers are not understanding loan terms and costs under current disclosure requirements.

“Protecting consumers of financial services from harm is an important and growing priority for the Commission,” Majoras said. “The FTC will continue to target deceptive and unfair practices by actors in the financial marketplace.”

Unlike banks, savings and loan institutions, and federal credit unions, the FTC’s jurisdiction covers non-bank financial companies, including mortgage companies and brokers.

The commission has brought 21 actions against mortgage-related companies in the past decade, focused particularly on the subprime market, and returned more than $320 million to consumers, according to the testimony. These actions have targeted deception and illegal practices in all stages of mortgage lending — from advertising and marketing through loan servicing — and most have addressed deceptive advertising or marketing of subprime loans.

The FTC noted it has taken several recent enforcement actions against mortgage brokers — which account for 65 to 70 percent of mortgage originations — that deceived consumers about key loan terms.

In 2006, the FTC sued Mortgages Para Hispanos.com Corp. for allegedly misrepresenting key loan terms to Hispanic consumers, speaking almost entirely in Spanish about loan terms until the closings when English documents with less favorable terms were presented. The broker settled the suit by agreeing to pay $10,000 in consumer redress and to a permanent injunction prohibiting him from misrepresenting loan terms.

The litigation the FTC brought against Chase Financial Funding in June 2004 and is still ongoing alleged that the mortgage broker did not offer the “3.5% fixed payment loans” it promised in direct mail pieces because such rate was for an introductory period only and adjusted thereafter.

Another of the 21 actions involved a complaint against Associates First Capital Corp. and Associates of North America that resulted in a record-setting $215 million in consumer redress settlement. The suit alleged subprime loans were marketed with false and misleading statements about costs, such as failing to reveal that borrowers would pay only interest and still owe the entire principal amount in a balloon payment at the end of the loan term.

For an example of servicing-related action, Majoras cited the $40 million settlement with Fairbanks Capital Corp., now called Select Portfolio Servicing Inc., and its parent company in November 2003. The FTC alleged Fairbanks failed to post consumers’ payments upon receipt, charged unauthorized fees, used dishonest or abusive tactics to collect debts, and knowingly reported inaccurate consumer payment information to credit bureaus.

Majoras also pointed out the FTC engages in broad-based research and policy development concerning financial services. For example, following an FTC public workshop on nontraditional mortgages last year, the commission filed comments with the Federal Reserve Board “emphasizing that consumers must obtain all of the relevant information needed to make an informed choice at each stage of the mortgage process, especially for nontraditional mortgage products,” according to an announcement.

Majoras then went on to cite today’s release of a study by the FTC’s Bureau of Economics confirming the need to improve mortgage disclosures to help consumers understand the costs and terms of mortgages.

“Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today’s mortgage products,” Majoras said in an announcement of the study. “Although mortgage disclosures, alone, will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices.”

The study, Improving Consumer Mortgage Disclosures – An Empirical Assessment of Current and Prototype Disclosure Forms, examined how consumers search for mortgages, how well they understand mortgage cost disclosures and the terms of their own recently obtained loans, and whether better disclosures could improve their understanding of mortgage costs, shopping for loans, and ability to avoid deceptive practices.

The study was based on 36 in-depth interviews, of borrowers who had obtained a mortgage within the previous four months and on quantitative consumer testing on 819 recent borrowers on the extent to which they could understand and use current mortgage cost disclosures and prototype disclosures developed for the study. The borrowers obtained a wide variety of loan types, including fixed- and adjustable-rate loans with interest-only and balloon payments. Prime lenders issued about half of the loans and subprime lenders the other half.

A prototype mortgage cost disclosure form disclosed key mortgage costs that consumers need to understand when obtaining a loan while less important or confusing information was excluded; costs were conveyed in “simple, easily-to-understand language;” and the form was organized so that various costs could be easily recognized and identified. For example, the form provided a number of cost disclosures not required in the current TILA and GFE forms, including disclosure of the total loan amount, rather than the “amount financed,” and an itemization that divided the total into the categories of money borrowed to purchase or refinance a home, cash for debt consolidation or a home equity loan, financed settlement charges, and financed charges for optional products or services, according to the report.

One of the main findings was that current federally-required disclosures fail to convey key mortgage costs to many consumers.

Among the observations leading to that conclusion was that, in viewing current disclosure forms, about a fifth of the respondents could not correctly identify the APR, cash due at closing, or the monthly payment, the report said. Also, nearly a quarter could not identify the amount of settlement charges, about a third could not identify the interest rate or which of two loans was less costly, a third did not recognize that the loan included a large balloon payment or included money borrowed to pay settlement charges, and half could not correctly identify the loan amount.

But a prototype of updated disclosures significantly improved consumer recognition of mortgage costs, demonstrating that better disclosures are feasible.

Another key finding was that both prime and subprime borrowers failed to understand key loan terms when viewing the current disclosures, and both benefited from improved disclosures, according to the report.

The study found that better disclosures provided the greatest benefit for more complex loans, in which both prime and subprime borrowers had the most difficulty understanding loan terms.

“The study also suggests that, in actual market transactions, subprime borrowers may face even greater difficulties understanding their loan terms than found in the study, and may benefit the most from improved disclosures,” Majoras stated in the prepared testimony.

Details or observations highlighted in the study were that most respondents began the interview happy with their recent mortgage experience, but the attitude of many deteriorated during the interview — as many recalled problems with their loans or realized they did not understand their loans as well as they had thought.

When shopping, a number of respondents relied primarily on the reputation of lenders, their trust on loan originators, or friends’ recommendations, rather than carefully reading and understanding loan disclosures to learn costs and terms of their loans and ensure they fit their needs.

And when it came to understanding the loan disclosures, “many respondents said that they initially were not able to understand the disclosures on their own, but relied on their originators to explain the disclosures and their loan terms,” the report said.

Among other things, Majoras testified that the FTC is currently discussing with federal and state agencies how to improve complaint sharing among law enforcers, will continue to develop policy responses on financial services issues and will hold a public workshop in October to examine changes in the debt collection industry and their impact, according to an announcement.