Simpler Mortgage Forms Help Borrowers, but Sound Advice Still Needed Says John Marshall Law School Professor

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New home loan disclosure forms might help borrowers better understand the terms and conditions of their loans, but research by a professor at The John Marshall Law School in Chicago finds that borrowers can still be deceived even with the best of forms.

New home loan disclosure forms might help borrowers better understand the terms and conditions of their loans, but research by a professor at The John Marshall Law School in Chicago finds that borrowers can still be deceived even with the best of forms.

Evidence gathered after the mortgage crisis has shown that borrowers had trouble understanding what was in their lending documents, but Professor Debra Pogrund Stark of The John Marshall Law School in Chicago believes even with revisions to the forms borrowers still need the advice and assistance of an attorney or mortgage lender.

Making the forms simpler is an essential change, but so is requiring “an unbiased expert who already possesses the relevant information to assist the borrower in making a wise home loan decision,” Stark stresses.    

She bases her position on two years of study to determine how potential borrowers read, understand and recall the information on the forms.

The federal Consumer Financial Protection Bureau has recently proposed rules relating to the use of new home loan disclosure forms intended to enable borrowers to better understand the terms and costs of the loans they have applied for.

The studies undertaken by Stark and Dr. Jessica Choplin of DePaul University, Department of Psychology, used eye tracker technology. Their findings showed that even when presented with more “user friendly” home loan disclosure forms, if participants in the experiment were distracted while they read through the forms, they were less able to recall key terms of the loan and less able to evaluate the riskiness of the loan.

“Even with the best of forms, if the borrower is distracted they can fall prey” to what she describes as interjected distractions. “All it takes is someone asking a question or making a comment not related to the document” and the borrower can miss important information. “These types of distractions routinely occur at closings,” noted Professor Stark, who practiced real estate law prior to becoming a law professor.

The experiments Stark and Choplin have run so far have also found that prior misleading information can cause consumers to focus on the wrong sections of the form and come to incorrect conclusions about how the loan is structured.

For the past two years, Stark and Choplin have been conducting experiments, funded by the National Science Foundation, to pinpoint how borrowers read, assess and recall important information on home loan disclosure forms; what information they understand from the forms; and how unscrupulous mortgage brokers and lenders can take advantage of consumers’ cognitive limitations as they read through the disclosure forms in order to steer them into overpriced or otherwise unsuitable home loans.

The professors’ initial set of experiments have focused on the impact of confirmation biases and dual tasking on the effectiveness of home loan disclosure forms that Congress has relied upon in the past to protect consumers.

Participants first were tested using the pre-2008 Truth in Lending Act (TILA) and Real Estate Settlement Procedures Act (RESPA) disclosure documents and compared those results with the post-2008 forms. The research found that consumers’ recall of important loan terms, even after receiving prior misleading statements of a key loan term, was stronger with the new forms. This finding supports the concept that better forms lead to better consumer understanding.

However, Stark said additional experiments with potential borrowers distracted as they read through the new forms, showed the participants engaged in a higher level of confirmation bias. Results also showed a far weaker recall of loan terms and an ability to evaluate the loan summarized in the disclosure forms. Participants without exposure to distractions had a higher recall.

Stark applauds the efforts of the Consumer Financial Protection Bureau in attempting to create better home loan disclosure forms as one step in addressing the numerous concerns about mortgage lending that came from the 2008 financial crisis, but she adds this caveat: Congress needs to take an additional step and require professional assistance for borrowers.

Based upon the continuing complexity of the loan products—including the information contained in the proposed home loan disclosures—and the results of her experiments, Stark believes “Congress needs to require that all federally insured home loan borrowers hire a specially-trained attorney or mortgage loan counselor to review the home loan disclosures with the borrower.

“That will help ensure that the loan is not overpriced or otherwise unsuitable for the borrower’s needs. It also gives the attorney or counselor the opportunity to answer questions and otherwise give sound advice to the borrower,” she stressed.

Stark lamented that “the Consumer Financial Protection Bureau spent more than 1,000 pages explaining the new forms. Its summary noted the difficulty of having the forms contain all of the key information a borrower would need without the forms leading to ‘information overload.’ Yet, the answer to that conundrum is clear: require that an unbiased expert who already possesses the relevant information assist the borrower in making a wise home loan decision.”

About The John Marshall Law School

The John Marshall Law School, founded in 1899, is an independent law school located in the heart of Chicago’s legal, financial and commercial districts. U.S. News & World Report America’s Best Graduate Schools 2012 ranks John Marshall in the top tier of law schools. Its Legal Writing Program is ranked sixth and Intellectual Property Law is ranked 17th in the nation. John Marshall offers the nation’s only graduate Employee Benefits Program. Its program in Information Technology and Privacy Law remains the only graduate law program in the country that emphasizes privacy as part of its core curriculum.

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Marilyn Thomas
John Marshall Law School
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