Loan Terms and Cost are Baffling Borrowers !
June 25th, 2007 categories: Buying San Diego Real Estate, San Diego Real Estate, San Diego Real Estate News
Kenneth Harvey, a syndicated columnist with the Washington Post wrote a great article on this conundrum of current borrowers with mortgage delinquencies and looming foreclosures. Kenneth’s article deserves a closer examination. He uses in his research a study recently completed by federal researchers. They examined the 819 recent prime and sub prime mortgage customers and came up with some surprising findings. The FTC found that using the current “Truth-in-Lending” and “Good Faith Estimate” disclosures that are required by RESPA ( Real Estate Settlement Procedures Act):
9 out 10 borrows could not identify the correct amount of up front charges associated with the loan . 4 out 5 had trouble understanding why they stated interest rate on the loan was different than the annual percentage rate ( APR) . 2 out 3 did not identify a substantial penalty if they refinanced within two years . Nearly 1 in 4 could not correctly identify the total amount of settlement charges for their own loan. In a separate series of 36 selective interviews, the researches also found that the borrows didn’t understand the disclosures mandated by Federal Law. Many didn’t understand the costs and many had loans that were significantly more costly than they has believed. Even more troubling was the fact that the borrows were often saying they had no idea of their own costs and terms until they went to closing and some claimed they learned for the first time during the interviews. In response, FTC researchers, Janis Pappalardo and James Lacko tested the hypothesis by developing a new combined form that focused on the main categories of costs and potential trouble causing snares in the loan terms and costs. The new disclosure forms were simpler to understand and included graphics in its content. The results were startling. 80 % of those using the new disclosure forms could answer 70 percent of the questions in comparison to 29% of those using the Truth-in Lending and Good Faith Estimate disclosures . The bottom line is that the current mortgage disclosures fail to convey costs and terms in ways that are understood by the borrowers. The FTC and the Department of Housing are currently trying to streamline the entire set of these mandatory disclosures. The best scenario for a fix would be to change the disclosures to be more clear and have the Lender or Lenders representative be at the loan documents signing to go over the disclosures again at the time of signing the loan documents.
