Fixing Consumer Protection Laws So Borrowers Understand Their Payment Obligations

Abstract

The millions of consumers who defaulted on their mortgages in recent years should all have received disclosures mandated by the federal Truth in Lending Act (“TILA”), which requires that lenders inform borrowers of certain loan terms including monthly payments required. Yet many of those borrowers seem not to have understood what their payment obligations were. In fact, TILA, which was intended to enable consumers to borrow wisely, not only failed the subprime borrowers in that goal, but was interpreted to require lenders to provide misleading disclosures that might have persuaded borrowers that their loans were more affordable than they would turn out to be. This article attempts to substantiate the claim that the laws in place during the years in which the subprime loan buildup occurred did not provide the aid consumers needed in making borrowing decisions, and explores strategies to improve the disclosure environment.

Small‐Dollar Credit Lending: The Effect of Financial Burden on Personal Asset Misvaluation

“…One significant solution to predatory small‐dollar credit lending starts in the form of increased lending disclosure and consumer financial literacy (Drever et al ; Lee and Hogarth ; McKernan, Ratcliffe, and Quackenbush ; Sovern ). Prior research suggests that truth‐in‐lending transparency and increased financial disclosure are significant beginnings to reforming abusive small‐dollar credit lending practices (Perry and Blumenthal ; Sovern ). However, our research also suggests that the psychological mechanisms underlying consumers' cognitive constraints may guide consumer‐centric financial literacy programs toward responsible borrowing.…”

“…One significant solution to predatory small-dollar credit lending starts in the form of increased lending disclosure and consumer financial literacy (Drever et al 2015;Lee and Hogarth 1999;McKernan, Ratcliffe, and Quackenbush 2015;Sovern 2014). Prior research suggests that truth-in-lending transparency and increased financial disclosure are significant beginnings to reforming abusive small-dollar credit lending practices (Perry and Blumenthal 2012;Sovern 2014).…”

Government and Consumer Economic Wellbeing

“…Consumer credit laws may need to be revised too to better protect consumers. A law researcher argues that the Truth in Lending Act (TILA) that is intended to enable consumers to borrow wisely not only fails the subprime borrowers in that goal, but is interpreted to require lenders to provide misleading disclosures that might have persuaded borrowers that their loans are more affordable than they would turn out to be and proposes strategies to improve consumer disclosure environments (Sovern 2014 ).…”

An Exploratory Study of Regulatory Failure in the Australian Home Mortgage Market

“…In the terms of home loans, some researchers suggest that lenders can use these systematic biases to manipulate “initial teaser rates, extended loan maturities, balloon clauses, and adjustable rate mortgages” such that monthly repayments seem reasonable (McCoy , 731). In these situations borrowers often do not understand the main terms of their loan (e.g., Orszag ; O'Shea ; O'Shea and Finn ; Sovern ) with Goldstein (, 16) even going so far as to report that outside observers (settlement agents) contend home loan borrowers “generally have no idea at all what they are getting into.” In the most egregious cases, the result is predatory home lending practices (e.g., Eggert ; Engel and McCoy ). Australian consumer research into home loans (prior to the introduction of KFS) corroborates the international experience that the length, complexity, and design layout of home loan contracts hampers consumer understanding of the agreement.…”

“…The article concludes by considering policy reforms that might better achieve the stated outcome of improved home loan credit market. The key insight of our studies is that “disclosure is an intermediate step” on the road to comprehension (Sovern :28) and only one component of a complex decision‐making process. Any policy review should consider the borrowing decision in totality, rather than in a stylized or piecemeal fashion if we are to successfully address an area “growing in importance from both a marketing and public policy perspective” (Estelami , 63).…”