Protecting Home Loan Consumers Starts with Simplifying Disclosures

By: Jann Swanson • Thu, Mar 17 2011, 12:01 PM

Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau (CFPB), told a House subcommittee yesterday that "A simple, straightforward and consistent presentation of a credit agreement is the best way to level the playing field between consumers and lenders - and among different types of lenders - and foster honest competition."

Warren updated the Subcommittee on Financial Institutions and Consumer Credit on the progress of the new bureau which she will be directing but without the title of director. In lengthy testimony she covered the staffing, budget, and outreach already conducted to explain the Bureau to military families, faith-based groups, and state attorneys general.

Many people, Warren said, assumed the Bureau would seek to accomplish its goals by issuing waves of new regulation there is a better way. "Putting down rules here and there can be like putting down fence posts on the prairie: They can be too easy to run around." The lawyers soon show everyone how to jog around the fence posts, she said, so the regulator responds with more rules. Pretty soon there are so many that newcomers are scared off before they start and small competitors can't afford an army of lawyers which puts them at a competitive disadvantage.

Warren envisions the agency as providing a level playing field, one that gives consumers the information they need to chose between two products and encourages personal responsibility and rewards smart choices. One lesson of the past five years is that we all lose when consumers cannot readily determine whether they can afford to pay back their loans and when lenders sell credit in ways that make it hard to see the risks and costs. "A simple, straightforward, and consistent presentation of a credit agreement is the best way to level the playing field between consumers and lenders - and among different types of lenders - and foster honest competition," she said. Clear and simple presentations of terms benefit not only customers but lenders who want to compete fairly and investors who want to be assured that industry profits are never again based on crazy products that no one can understand.

Government regulation has also played a role in making credit products more opaque with mandated disclosures in obscure language and produced in small type that have often imposed a burden on lenders while providing no benefit to consumers. "It should be the job of the consumer bureau to revise and update outdated regulations and useless disclosures as aggressively as it monitors the fine print layered on by lenders."

Warren told the committee that the new agency has multiple priorities, mortgages, credit cards, financial education, consumer complaints and its examination and enforcement responsibilities. The current economic crisis began one bad mortgage at a time and if there had been basic rules of the road in places for mortgages, consistently enforced at the federal level by an agency fully accountable for protecting consumers, it never would have developed as it did. Transparency is critical and today much of the paperwork associated with a mortgage is far too confusing and comes too late. Preparing the paperwork required for a loan today has a real cost to the lender but the results are too complicated and the consumer receives the papers too late for them to be helpful. When it comes to mortgage disclosures, she said, "We want to hit a regulatory sweet spot - more value for the borrower and lower costs for the lender."

Credit cards are the most commonly used form of consumer credit so changes that make this market more transparent can echo throughout the economy. "If the costs and risks of credit card products are clearer, consumers will be able to make straight-up comparisons among cards - and make the best decisions for themselves and their families." This may mean some families will purchase less, pay with cash, or use a different financial instrument or pay down their credit card debt. Some may go the other way, but clear information about prices and risks would make it easier for consumers to sort through their options.

Making credit cards easier to understand and compare can spur innovation. Card issuers would have incentives to produce innovations that are attractive to customers rather than ever more complicated cards with hidden fees and surprises. The year-old Credit Card Accountability Responsibility and Disclosure Act (CARD) pushed in the right direction bringing about significant reforms in pricing practices and information provided to consumers. There is still room for better card-to-card comparisons and CFPB is working hard on ideas about how to do this with without an overreliance on rules.

It is also important that the Bureau work to make the costs and risks of other products such as payday loans and prepaid cards clear and up-front. "Recent experience has taught us that American families need an agency that is actively monitoring financial markets to ensure that they are fair, transparent, and competitive.

The Dodd-Frank Act required CFPB to establish an Office of Financial Education which will be a resource for consumers who are looking to better understand how different products and services work. The Bureau is working with other agencies to do this while avoiding overlapping or redundant government efforts and with leaders in the field of financial education to explore what works and where both the gaps and duplicative efforts exist.

The agency plans to launch a consumer response center later this year to receive complaints and help consumers find answers for questions about products and services. Almost as soon as CFPB began its implementation process Warren said it started receiving complaints and to date has received approximately 300. Most fall into four categories; mortgages and home loan complains account for about one-half of the total and credit cards about 10 percent. The other two large sources of complaints are deposit products and consumer loan products at five percent each.

The Bureaus supervision and enforcement responsibilities include non-bank financial companies that provide financial products and services such as mortgage brokers, lenders and servicers; payday lenders, and private student loan provides - the first time that many have faced any type of federal compliance examinations. The agency also has examination authority over depository institutions and credit unions with $10 billion or more in assets.

Warren said that building an agency from scratch has given her and her team an opportunity to re-think the role that technology and data can play. For example, she said, the Bureau can empower a well-informed population to help expose, early on, consumer financial tricks. "If rules are being broken," she said, "we don't need to wait for an expert in Washington or the next scheduled examination to recognize the problem."