Elizabeth Warren: Mortgage Forms Should Be Comprehensible To Normal Human Beings

At yesterday’s White House Personal Finance Online Summit, Elizabeth Warren, Special Advisor to the Secretary of the Treasury on the Consumer Financial Protection Bureau, went into details about the still-nascent agency’s “Know Before You Owe” project and how the CFPB is working to simplify the documents that consumers are shown when shopping for a mortgage.

It’s a big job, but Warren said it’s her belief that by making mortgage comparison shopping easier, consumers will reward companies who offer better products.

Warren says the new form, which will combine the current 2-page Truth in Lending disclosure with the 3-page Good Faith Estimate form, will be free of “shrubbery to hide the tricks.” Her goal is to “get rid of enough fine print so that comparisons can be made.”

The new form aims to make it simple for consumers to answer the following two basic questions: “Can I afford this?” and “Is this the best deal?”

Here is a PDF of one proposed version of the revised form and here is a second version.

Pointing out that “the crisis of 2008 started one lousy mortgage at a time,” Warren laid a good portion of the blame for the mortgage meltdown on a lack of coherent disclosure of terms.

She pointed to credit unions and community banks as leaders in disclosure — simply because they are limited in the amount of customers they can “burn through” — but says these institutions struggle to compete with big lenders who engage in “back-end pricing” (where fees are hidden and/or tacked on later), a tactic that makes their product appear, at least to the average consumer, to be much cheaper .

“Risk-adjusted, it was not a cheaper product,” Warren said. “That’s not a competitive market.”

Warren likened the current state of mortgage disclosures to the pre-FDA pharmaceutical market. The FDA, she argues, was really about leveling the playing field so that companies who were putting out quality products were rewarded with customers. No longer could you just slap any old thing in a bottle and call it a drug, and more importantly, no longer did legitimate companies have to compete on the same playing field with out-right quackery.

“That worked well for people who make aspirin,” said Warren. “It didn’t work as well for the people selling snake oil.”

Warren said she was quite excited about the consumer testing and feedback programs that are currently in progress at the CFPB and that the bureau is looking for interested consumers to offer feedback on the new proposed forms.

So far, the program has thousands of responses, but the agency is hoping for many more, and for more of the feedback to come from consumers outside of the Washington, D.C. area.

To sign up for updates about the program and learn how to be a part of the next round of tests visit: www.consumerfinance.gov.