The Consumer Financial Protection Bureau said it will soon begin writing and testing a simplified mortgage-disclosure form aimed at making it easier for borrowers to compare deals from different lenders.
The bureau expects to award a contract to develop the form by the end of the month, making it one of the first projects of the new agency, according to a bidding document given to vendors in November and reviewed by Bloomberg News.
More concise disclosure is one of the main stated goals of Elizabeth Warren, the Obama administration adviser charged with setting up the agency established by the Dodd-Frank Act. Simpler forms that can be directly compared may make the market less lucrative for lenders such as Bank of America Corporation, Wells Fargo & Company, JP Morgan Chase & Co. and Citigroup Inc.
“If buyers are better informed and understand the financial commitments they are entering into, they will be better able to make comparisons among lenders and the market will be more competitive,” said Alex Pollock, a former banker who is a resident fellow at the American Enterprise Institute. “In competitive markets, profit margins are -- and should be -- driven down to the level of the cost of capital.”
Academic studies have shown that comparison shopping aided by the emergence of the Internet helped cut prices for consumer products including term life insurance in the 1990s. That squeezed profits, said Edward Graves, an associate professor of insurance at The American College in Bryn Mawr, Pennsylvania.
Lost Margins
“When you see what’s gone on in terms of prices, the insurers have lost a lot of margin in this product,” Graves said in an interview.
Bob Davis, an executive vice president at the American Bankers Association, said short disclosure forms might not simplify the process as much as Warren suggests, because of the “interconnected requirements” imposed by federal law.
“It’s not so simple as creating two pieces of paper,” Davis said in an interview. Bankers agree with Warren’s “starting point,” he said.
Warren has said she would like to see a standard document of one or two pages to replace about 80 percent of the mortgage disclosures mandated by the Truth In Lending Act and the Real Estate Settlement Procedures Act. The current “pile of papers” confuses consumers and is costly to business, Warren has said.
Smaller community banks might become more competitive with Wall Street if new regulations succeed in reducing costs, Davis added. “The compliance process lends itself to certain scale and big technology solutions,” Davis said.
Mortgage Unit Head
Along with the credit-card division, the new bureau’s mortgage unit may have the most immediate impact on consumer financial services. A candidate to run the mortgage section is Patricia McCoy, a University of Connecticut law professor who has been working with Warren part-time, according to a person briefed on the matter who spoke on condition of anonymity because the matter isn’t public.
McCoy, 56, is a former corporate litigator who was a partner at Mayer, Brown & Platt during the savings and loan crisis in the early 1990s. Based in Washington, she represented bank auditors and examined residential loans and underwriting standards. She co-wrote a book published this month on the subprime lending crash.
The contract to create a new disclosure form was advertised to selected vendors in November by the Bureau of Public Debt at the Treasury Department, where the consumer bureau is housed until it becomes an independent entity in July. It calls for firms to bid on providing “support services to assist with the design of a model disclosure form, including assessment of the form through consumer testing and revisions to the form resulting from the testing and public comments,” according to the copy obtained by Bloomberg News.
January Contract
Bids had to be in by Dec. 14, and the contract will be awarded before the end of January, according to the proposal document. The vendor must complete the work by Jan. 15, 2012 or a year after the contract is awarded, whichever is earlier.
Dodd-Frank requires the bureau to propose regulations on mortgage disclosures for public comment by July 21, 2012. The bidding document indicates that the bureau intends to move more quickly, saying its goal is to issue proposed regulations “as soon after” July 21, 2011, “as possible.”
The bid request also emphasizes the role of field tests in the bureau’s decision-making, a point Warren raised at a Dec. 6 symposium at Treasury, according to one attendee, Ira Rheingold, executive director of the National Association of Consumer Advocates.
Warren told the audience that “we’re going to be data- driven. We’re going to test things, and figure out what people respond to,” Rheingold said in an interview.
‘Asking a Lot’
Not everyone studying the mortgage industry believes that simpler forms will translate into more comparison shopping by borrowers.
“It’s asking a lot for a piece of paper to change actual consumer behavior,” John Kozup, an associate professor of marketing at Villanova University and director of the Villanova Center for Marketing and Public Policy Research, said in an interview. “It could be a decision aid but that is it.”
Kozup, who also attended the Dec. 6 symposium, said that by the time applicants get a mortgage pre-approval and find a house, they “have a psychological commitment to a certain bank or broker, and no kind of disclosure is going to change that.”
To contact the reporter on this story: Carter Dougherty in Washington at cdougherty6@bloomberg.net.
To contact the editor responsible for this story: Lawrence Roberts at lroberts13@bloomberg.net.
