Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to Enable Shrewd Consumer Decision-Making

Abstract

Congress and the Consumer Financial Protection Bureau (the “Bureau”) have taken major steps under the Dodd-Frank Wall Street Reform and Consumer Protection Act to begin to meaningfully address the predatory practices that led to the mortgage loan crisis. However, most of the legal reforms enacted to help consumers are more in the nature of a “nudge” than outright prohibition of predatory practices. Consequently, home loan disclosure forms and disclosure rules remain the primary method under federal law to enable borrowers to avoid entering into predatory loans. And while the new home loan disclosure forms created by the Bureau are a vast improvement over the forms used prior to 2010, we argue that the Bureau’s new Loan Estimate form is doomed to fail many consumers due in large part to: (i) pernicious practices that mortgage brokers and lenders commonly engage in when presenting the forms to the borrower (including saying “sign here” rather than “please carefully review this form” causing many consumers not to carefully read or to only skim over the form), (ii) the complicated nature of the home loan decision making process and the high level of financial illiteracy of many consumers (as evidenced in the results from a financial literacy test that we gave experiment participants), and (iii) certain cognitive phenomena we describe that impede rational decision making in this context. We hypothesize that revising the Loan Estimate form to make it “interactive” in the manner we propose will better address the afore-described barriers to consumers’ effective use of the disclosure forms. In addition, we report on two experiments we ran that demonstrate that one major change the Bureau made to the Loan Estimate form (to greatly de-emphasize the “APR”) was a major step backward. Experiment participants using the Bureau’s new Loan Estimate form were able to identify the lower of two offered home loans at only chance level (44%) compared with 74% who were able to do so with our proposed enhanced APR disclosure. Consequently, we urge the Bureau to revise the Loan Estimate Form before it becomes effective in August 2015 to reflect the enhanced APR disclosure we designed together with certain interactive features we propose.

Keywords: Dodd-Frank, Home Loan Disclosure Forms, Loan Estimate, Consumer Protection, Interactive Legal Forms, Law Reform, Real Estate Finance