FTC: current mortgage disclosures inadequate.

Current mortgage disclosure forms fail to convey key mortgage costs and terms to many consumers, but better disclosures can be created to help consumers understand the costs and terms of mortgages so they can make informed decisions about loan products, concluded a Bureau of Economics report released

The FTC report, Improving Consumer Mortgage Disclosures: An Empirical Assessment of Current and Prototype Disclosure Forms, noted that despite a long history of mortgage cost disclosure requirements and many legislative and regulatory proposals, little empirical evidence exists to document the effect of the current disclosures on consumer understanding of mortgage costs, consumer mortgage shopping or consumer mortgage choice.

"Mortgage disclosures designed more than 30 years ago can be confusing even for simple loans, and they do not address the variety and complexity of today's mortgage products," said FTC Chairman Deborah Platt Majoras.

"Although mortgage disclosures alone will not prevent deceptive lending practices, consumers who understand mortgage terms and choices are less likely to fall victim to these practices," she said.

The key findings were:

* Prototype disclosures developed for the study significantly improved consumer recognition of mortgage costs, demonstrating that better disclosures are feasible.

* Both prime and subprime borrowers failed to understand key loan terms when viewing the current disclosures, and both benefited from improved disclosures.

* Improved disclosures provided the greatest benefit for more complex loans, where both prime and subprime borrowers had the most difficulty understanding loan terms.

The study was based on 36 in-depth interviews with recent mortgage customers and testing of disclosure forms with 819 mortgage customers. The potential for improving consumer understanding of mortgage costs was tested using prototype disclosures developed for fixed-rate loans, including those with interest-only and balloon payments.

"Further development of the disclosures may provide additional improvements that better convey these costs to even more consumers," the study noted. "Better cost disclosures have the potential for providing greater consumer understanding of loan costs, more efficient comparison shopping, reduced vulnerability to deceptive lending practices and enhanced competition in the marketplace," according to the study.