The CFPB’s Proposed Mortgage Disclosures and the De-Emphasizing of the APR

by Jeff Sovern

One of the big changes in the CFPB's proposed mortgage disclosure forms is the de-emphasis of the APR.  The APR has historically been one of the most central Truth in Lending disclosures.  For example, for closed-end loans, it must be clear and conspicuous and appear in the "Federal Box" under 12 C.F.R. 1026.17 (formerly 226.17).  But the proposed forms relegate the APR disclosure to page three, behind dozens of other disclosures. This has drawn opposition from both conservatives and liberals.

Why did the Bureau propose this change?  Because the firm the Bureau engaged to perform consumer testing reported that

[Consumers] often do not grasp the basics of Annual Percentage Rate (APR). They often confused it with the loan’s interest rate. Across the rounds, we worked with various definitions, but found none worked as well as the simple statement of “This is not your interest rate.” Obviously, that statement did not tell consumers what the APR was, but it minimized the confusion with the interest rate.

 Kliemann, Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 303 (2012). 

So that leaves the Bureau in a quandry.  Does it make sense to take up valuable disclosure real estate with a disclosure that consumers don't understand?  It seems to me that the answer depends on whether consumers will use the disclosure to make borrowing decisions.  It is possible that consumers could use a disclosure that they don't fully understand (after all, many drivers don't understand the internal combustion engine but don't let that keep them from getting behind the wheel).  All consumers really need to know is that the lower the APR, the less they will pay in interest and fees. 

But my (only-partly informed) intuition is that consumers don't use the APR all that much.  Some of that can be laid to the feet of the industry; consider, for example the predatory lender (quoted in my Ohio State article) who told consumers "I told the consumer that the interest rate was what the consumer and I care about, that the APR is what the federal government cares about, and that the bank cares about the yield.  I told consumers that APR was just an estimate and that it is always higher than the interest rate." But I suspect there's more to it than that and that even if lenders had not undermined the APR disclosure, consumers might not use it much (though ideally, we would have more consumer testing to determine whether that is so).  If I am right about that, then the Bureau faces two choices: either try to educate the public about the APR or de-emphasize it (or both, which seems to be what the Bureau will try to do).  The Bureau has chosen to downplay it for now.  Maybe over time, if the Bureau can increase awareness of the APR's significance, it would make sense to change that, but for now, I can't argue with the Bureau's decision.  It is not in fact clear that consumer education will help on this one; Lauren Willis's work has raised questions about the efficacy of consumer education. 

All this reflects an underlying problem in consumer protection. Too often, in my view, consumer protection efforts assume that consumers will use protections (chiefly, though not only disclosures) that they may not in fact use.  Before we create and perpetuate consumer protections, it would be preferable to verify, to the extent possible, that consumers will actually take advantage of the protections. Otherwise, much energy may be devoted to creating unhelpful protections and the problem they are intended to correct will continue.

But I should emphasize (and this is wishy-washy, but that's an academic for you), it is not crystal clear (to me, anyway), that consumers don't/won't use the APR on mortgages, and so the argument that the APR should be de-emphasized is not a slam-dunk.  Another argument for maintaining it front and center is that some consumers may use it, even if others do not, and such consumers may suffer if it is moved to page three.  But (another speculation) the consumers who use it are likely to be sufficiently careful that they can find it on page three.

0 thoughts on “The CFPB’s Proposed Mortgage Disclosures and the De-Emphasizing of the APR

  1. Michelle Pandy says:

    I have enjoyed reading your blog. I have worked in the mortgage industry for the last 13 years. I think you are exactly right and that there are disadvantages either way. However this issue could be solved by requiring education with a simple 30 to 45 min. video just like we require in the student loan market. Then you could require the borrower to answer questions. However you may want to ask, do the people in this business really want to educate their borrowers. As you can see from our website, we are very interested in educating our borrowers. We are one of few lenders in our community that put calculators (free) right on our website. Please visit us at http://www.emortgageLouisville.com

  2. Michelle Pandy says:

    I have enjoyed reading your blog. I have worked in the mortgage industry for the last 13 years. I think you are exactly right and that there are disadvantages either way. However this issue could be solved by requiring education with a simple 30 to 45 min. video just like we require in the student loan market. Then you could require the borrower to answer questions. However you may want to ask, do the people in this business really want to educate their borrowers.

  3. Barry says:

    New Zealand followed America in the 1980’s by adopting a requirement that an analogue of the APR be disclosed: there was little difficulty for lenders to calculate it, but as of 2003 we abandoned any reliance on disclosure of annual rates, and went for disclosure of the dollar amounts for the costs of credit together with control over the size of all costs, except interest. I worked with our Ministry of Consumer Affairs, who actually have people on the ground dealing with vulnerable borrowers: for them the APR was meaningless.

Leave a Reply

Your email address will not be published. Required fields are marked *