Building Sustainable Homeownership:
Responsible Lending and Informed Consumer Choice
Federal Reserve Bank of Atlanta
1000 Peachtree Street N.E., Atlanta, Georgia 30309
July 11, 2006
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Pages 1-25 | 26-50 | 51-75 | 76-100 | 101-125 | 126-150 | 151-175 | 176-200 | 201-226
| Transcript | Line | Page |
|---|---|---|
| more like a HUD-1, which to me makes it sound like it's | 1 | 176 |
| going to be more detailed and more complex. And I thought | 2 | 176 |
| there was some consensus about making the GFE simpler and | 3 | 176 |
| less complex. | 4 | 176 |
| MS. KLEIMANN: Right. | 5 | 176 |
| MR. MICHAELS: And so -- You can see where I'm | 6 | 176 |
| going with this. And so, my question is going to be, when | 7 | 176 |
| you're talking about something like a yield spread premium, | 8 | 176 |
| which seems to me an inherently complex concept to ask | 9 | 176 |
| consumers to understand, you know, are we really talking | 10 | 176 |
| about making the consumer disclosures more understandable, | 11 | 176 |
| or, you know, do consumers need that level of information? | 12 | 176 |
| Are they looking to comparison shop based on, you know, the | 13 | 176 |
| bottom line cost, which can be fairly simple, or do they | 14 | 176 |
| really need to have it broken down with that level of | 15 | 176 |
| specificity at the good faith estimate? | 16 | 176 |
| MS. KLEIMANN: Now you're asking me to talk | 17 | 176 |
| outside my area of expertise, and I guess I need my | 18 | 176 |
| disclaimer, which is I'm not talking for HUD. I'm talking | 19 | 176 |
| in terms of language. I don't know the answer to your | 20 | 176 |
| question. I think that is the fair thing to say. | 21 | 176 |
| I think what we could see is that it didn't affect | 22 | 176 |
| performance on the study. Now, the question of should it be | 23 | 176 |
| there or shouldn't it be there, do they need it or don't | 24 | 176 |
| they need it, that's really a policy question. What we're | 25 | 176 |
| trying to do is if this is the policy and you want to show | 1 | 177 |
| it, then please show it correctly. | 2 | 177 |
| And just to kind of pick up on something else you | 3 | 177 |
| said, no, the good faith estimate should not look like the | 4 | 177 |
| HUD-1. The HUD-1 needs to be cleaned up. That document is | 5 | 177 |
| a disaster. And so, consumers -- Oh, sorry. Consumers | 6 | 177 |
| can't really can't -- | 7 | 177 |
| MS. BRAUNSTEIN: Is there anybody here from HUD? | 8 | 177 |
| MS. KLEIMANN: Consumers can't process that | 9 | 177 |
| information. I don't know that the HUD people would | 10 | 177 |
| disagree with that. I mean, it's really -- It's a very | 11 | 177 |
| complicated document, very difficult to process. And at | 12 | 177 |
| this point, the good faith estimate actually bears little | 13 | 177 |
| resemblance to it, and it should. | 14 | 177 |
| MS. MCCOY: Jim, a couple of points just to think | 15 | 177 |
| about in terms of this -- what I think is a difficult issue | 16 | 177 |
| with YSPs. One is in situations in which the YSP resulted | 17 | 177 |
| in a higher nominal interest rate than the one the lender | 18 | 177 |
| otherwise was willing to accept, that to me is the economic | 19 | 177 |
| effect that's pernicious and that a consumer want to know. | 20 | 177 |
| Right now, the YSP disclosure does not reveal that | 21 | 177 |
| interaction between the YSP and the nominal interest rate. | 22 | 177 |
| The other thing is, speaking for the legal | 23 | 177 |
| vantage, is that -- that YSP disclosures are useful in | 24 | 177 |
| documenting what happened in the transaction and the | 25 | 177 |
| dynamics if later there's a problem. And I certainly know | 1 | 178 |
| when I've been asked as an expert to look at predatory | 2 | 178 |
| lending cases and I can actually see the moving target | 3 | 178 |
| problem where the YSP negotiations going on behind the scene | 4 | 178 |
| ended up in a really significantly higher interest rate. | 5 | 178 |
| It's very useful to be able to testify about that, and the | 6 | 178 |
| disclosure gives me the ability to connect the dots. | 7 | 178 |
| MR. MICHAELS: You took that in the direction I | 8 | 178 |
| wanted it to go, so I thank you. Because I think one of the | 9 | 178 |
| things I wanted to ask is you're here talking about, you | 10 | 178 |
| know, what is effective consumer disclosure. And I think | 11 | 178 |
| there's a school of thought that says, you know, sometimes | 12 | 178 |
| the disclosures aren't there merely to inform and educate | 13 | 178 |
| the consumer. The disclosures are to bring some discipline | 14 | 178 |
| to the transaction to create some transparency, which | 15 | 178 |
| effects the way the industry prices the products and sells | 16 | 178 |
| the products. And so the question is: To what extent is | 17 | 178 |
| that a legitimate school of thought or do we need to focus | 18 | 178 |
| more on disclosures as just information for the consumers | 19 | 178 |
| and not try to make them do double duty in terms of trying | 20 | 178 |
| to hold the industry to a different standard on how it | 21 | 178 |
| operates? | 22 | 178 |
| MS. MCCOY: It is a good question. There's | 23 | 178 |
| attention there, obviously, if we're trying to simplify | 24 | 178 |
| disclosures. I think the way that I would probably mediate | 25 | 178 |
| that one is to have, again, a simpler disclosure before the | 1 | 179 |
| closing that's separate. But go ahead and have | 2 | 179 |
| documentation of the YSP at the closing so that it would be | 3 | 179 |
| in the loan documents. | 4 | 179 |
| MS. BRAUNSTEIN: Do you -- I'm back kind of at | 5 | 179 |
| this end of the table, although you guys are welcome to jump | 6 | 179 |
| in, too. I know you're doing -- Maybe in the kind of | 7 | 179 |
| research you do this isn't relevant. But one of the -- the | 8 | 179 |
| things that we always face in terms of designing disclosures | 9 | 179 |
| is that we also hear from the industry side, who has to give | 10 | 179 |
| the disclosures, and we hear a lot about burden. | 11 | 179 |
| And one of the things that struck me along those | 12 | 179 |
| lines was something -- excuse me -- that Vanessa said in her | 13 | 179 |
| opening remarks about the importance of it being personally | 14 | 179 |
| relevant. And I think that -- I mean, for one thing, that's | 15 | 179 |
| kind of to me common sense, but that's a lot -- it's going | 16 | 179 |
| to mean a lot more to me in a disclosure if it's relevant, | 17 | 179 |
| if it's transaction specific to what I'm doing as opposed to | 18 | 179 |
| some generic kind of information. | 19 | 179 |
| But then we hear from the industry that making | 20 | 179 |
| those kinds of disclosures transaction specific, you know, | 21 | 179 |
| is a huge burden for them to do. And I was just wondering | 22 | 179 |
| if you have any comments about that or if you've encountered | 23 | 179 |
| that in -- when you've done research, that issue. | 24 | 179 |
| MS. PERRY: I certainly haven't even thought about | 25 | 179 |
| that, except that, I think, actually in the earlier panel | 1 | 180 |
| somebody was talking about -- there was sort of a discussion | 2 | 180 |
| about sort of hypothetical situations being used. And I | 3 | 180 |
| think that's fine because the purpose is not necessarily to | 4 | 180 |
| communicate specific information. It is to motivate the | 5 | 180 |
| consumer to seek specific information. | 6 | 180 |
| So there's nothing -- So when you look at it that | 7 | 180 |
| way, the disclosure itself doesn't necessarily have to be | 8 | 180 |
| finely tuned to the specifics of a particular loan | 9 | 180 |
| transaction. It just has to be close enough that it | 10 | 180 |
| resembles something that will resonate with the consumer so | 11 | 180 |
| that the consumer will, again, read the fine print. | 12 | 180 |
| MS. BRAUNSTEIN: Except that you also said don't | 13 | 180 |
| make them do math. And that's what we're talking about in | 14 | 180 |
| some of these is that it's a generic kind of disclosure that | 15 | 180 |
| would cause somebody to have to do math to get to their | 16 | 180 |
| specific transaction. | 17 | 180 |
| MS. PERRY: I just have to share this study I | 18 | 180 |
| found. It was posed by Associated Press. A recent study | 19 | 180 |
| found that more than 50 percent of students at four-year | 20 | 180 |
| schools -- these are colleges and universities -- and more | 21 | 180 |
| than 75 percent at two-year colleges lack the skills to | 22 | 180 |
| compare credit card offers with different interest rates and | 23 | 180 |
| annual fees. And I bring that up just to say, we cannot ask | 24 | 180 |
| people to do math. | 25 | 180 |
| MS. BRAUNSTEIN: But to me -- | 1 | 181 |
| MS. PERRY: Even, you know, educated ones. | 2 | 181 |
| MS. BRAUNSTEIN: -- that kind of violates what you | 3 | 181 |
| initially said to motivate them to look further because in | 4 | 181 |
| some cases, looking further means having to do math -- | 5 | 181 |
| MS. PERRY: Well, yeah, but -- | 6 | 181 |
| MS. BRAUNSTEIN: -- and other kinds of things. | 7 | 181 |
| MS. PERRY: -- you could do that with an estimated | 8 | 181 |
| monthly payment or an estimated payment increase or | 9 | 181 |
| something like that. It doesn't necessarily have to be a | 10 | 181 |
| sophisticated computation, just something -- enough to cause | 11 | 181 |
| the person to take a second look. That's all. | 12 | 181 |
| MS. MCCOY: Sandy? | 13 | 181 |
| MS. BRAUNSTEIN: Yeah. | 14 | 181 |
| MS. MCCOY: If I could play out your question in | 15 | 181 |
| the context of a possible worst-case payment disclosure. | 16 | 181 |
| I've recently been studying automated systems. And there | 17 | 181 |
| are all sorts of automated systems that lenders can use and | 18 | 181 |
| do use to automatically compute the APRs, finance charges, | 19 | 181 |
| etc. Those can be easily programmed to compute an actual | 20 | 181 |
| worst-case monthly payment scenario for resets. | 21 | 181 |
| Because people focus on monthly payments, that | 22 | 181 |
| probably would be highly salient to them. And it seems to | 23 | 181 |
| me that you might have -- The way that you could structure | 24 | 181 |
| it is that you give the maximum reset for every contractual | 25 | 181 |
| reset date up to the cap in the loan because all these loans | 1 | 182 |
| have caps about how far the adjustable rate can go. And do | 2 | 182 |
| it according to the amortization schedule. So all of that | 3 | 182 |
| is -- is already laid out in the loan terms and that can | 4 | 182 |
| just be quantified, programmed, put into the computer | 5 | 182 |
| program and printed out just the way the APR's calculated. | 6 | 182 |
| MR. KOZUP: I just wanted to add a couple things. | 7 | 182 |
| First of all, with this whole idea of disclosure, it's a | 8 | 182 |
| segmentation issue in the fact that, you know, one size | 9 | 182 |
| can't fit everybody with these disclosures. And when you | 10 | 182 |
| look at it, people can't do math. I think the conclusion of | 11 | 182 |
| this, people can't do math. | 12 | 182 |
| What companies have done and when I talk to folks | 13 | 182 |
| about disclosure from a lot of organizations, they talk | 14 | 182 |
| about the Web. We've got this great interactive program. | 15 | 182 |
| Our consumers can go to our website. Does that help people | 16 | 182 |
| in the subprime market, you know, the traditional client | 17 | 182 |
| base in the subprime? | 18 | 182 |
| In 30, 40 years, we might not have to have this | 19 | 182 |
| discussion anymore because our kids know a heck of a lot | 20 | 182 |
| more about computers than we do, and they're looking to the | 21 | 182 |
| Web for everything. But you're looking at basically a | 22 | 182 |
| tiered populous right now. So how do you manage that? Do | 23 | 182 |
| you give some general guiding principles to companies based | 24 | 182 |
| on the segmentation, who they consider their core clients | 25 | 182 |
| and then let them run with it? I don't know. | 1 | 183 |
| But looking at it -- And the companies have the | 2 | 183 |
| data. They know their customers. Maybe the disclosure | 3 | 183 |
| construction could work on an interactive basis for those. | 4 | 183 |
| And maybe prime markets have a more fluent customer base, | 5 | 183 |
| more educated, younger, etc. But in other situations, | 6 | 183 |
| there's going to be print and maybe you also have to throw | 7 | 183 |
| in the additional counseling and education efforts on top of | 8 | 183 |
| it. | 9 | 183 |
| But that might be a way -- Does it seem more | 10 | 183 |
| burdensome if you gave enough leeway to the companies to do | 11 | 183 |
| this? Not necessarily, came up with some guiding principles | 12 | 183 |
| on how they feel they can most effectively reach their | 13 | 183 |
| customers. Just a thought. | 14 | 183 |
| MR. CHANIN: Let me turn back to this issue of | 15 | 183 |
| timing, and let's take a simple scenario, which obviously is | 16 | 183 |
| not going to be true but just for purposes of kind of | 17 | 183 |
| focusing in on timing. Let's assume you could have the | 18 | 183 |
| exact same information, and let's say it's fairly specific. | 19 | 183 |
| And during the mortgage process there's given the time frame | 20 | 183 |
| that could be given early or later, for example, a few days | 21 | 183 |
| after application, some point later than that, or close to | 22 | 183 |
| the closing. Which of those time frames -- If you can | 23 | 183 |
| answer this, which of those time frames works best in terms | 24 | 183 |
| of consumers looking at the information, either using it to | 25 | 183 |
| shop or using it to better understand their products, | 1 | 184 |
| everything else being equal, that is, the format, the | 2 | 184 |
| content, the little language used, and so forth? | 3 | 184 |
| MR. KOZUP: That's tough. Earlier in the process, | 4 | 184 |
| yeah, it's potentially better. But then, see, I have a | 5 | 184 |
| problem with this one because we talk about giving | 6 | 184 |
| disclosure. And I know you're worried about cost, | 7 | 184 |
| application fees, etc. I'm worried about people pulling | 8 | 184 |
| bureaus. If the consumer's comparison shopping and you're | 9 | 184 |
| pulling multiple bureaus, their score's going to take a hit. | 10 | 184 |
| So you know, but then there's a level of | 11 | 184 |
| specificity in terms of the risk pricing and some of the | 12 | 184 |
| other things with the loans. How specific can you get up | 13 | 184 |
| front? It depends on what you're going to give the | 14 | 184 |
| consumer. I would argue that if you can do something up | 15 | 184 |
| front, you know, and maybe not with the level of | 16 | 184 |
| specificity, but just to engage them in the process of | 17 | 184 |
| acquiring information. Forget the disclosure. Get them -- | 18 | 184 |
| Get them thinking about this process and maybe then when | 19 | 184 |
| they have the disclosures, they'll attend to those key | 20 | 184 |
| pieces of information better. | 21 | 184 |
| MR. CHANIN: Any other thoughts? | 22 | 184 |
| MS. MCCOY: Yeah. The -- I agree that if you're | 23 | 184 |
| going to do meaningful comparison shopping, you have to have | 24 | 184 |
| the shopping information before you actually pay an | 25 | 184 |
| application fee. That's the sort of meaningful time to be | 1 | 185 |
| doing -- comparison shopping before you've written a check | 2 | 185 |
| for $300 or whatever. And then the issue is do you have | 3 | 185 |
| some sense that you're giving the right number, that it's a | 4 | 185 |
| firm or semi-firm quote if you, as the consumer, have given | 5 | 185 |
| truthful information? | 6 | 185 |
| And those -- Right now in subprime, those are real | 7 | 185 |
| challenges. I don't think they're insuperable. But if we | 8 | 185 |
| can -- if we can accomplish that, it would be to me the Holy | 9 | 185 |
| Grail. | 10 | 185 |
| MR. CHANIN: And let me follow up on that because, | 11 | 185 |
| obviously, the earlier you go in the process the less likely | 12 | 185 |
| the information's going to be correct or, at least, perfect. | 13 | 185 |
| Is there a risk -- Let's assume it's not literally on the | 14 | 185 |
| Web page, which is not going to be very specific in terms of | 15 | 185 |
| your particulars. But let's assume it's a few days after | 16 | 185 |
| application, is there a risk if you give that information | 17 | 185 |
| and it's not going to be perfect that the consumer reads | 18 | 185 |
| that and then is alienated? That is, that they see that | 19 | 185 |
| information and then a few weeks into the process they call | 20 | 185 |
| the lender and find out things have been changed, is it | 21 | 185 |
| worse to get that information early and not have it be as | 22 | 185 |
| accurate than not to get it at all? | 23 | 185 |
| MR. KOZUP: Ask easier questions. | 24 | 185 |
| MR. CHANIN: All right. That'll be my last | 25 | 185 |
| question. | 1 | 186 |
| MR. KOZUP: The only thing I would say to this, it | 2 | 186 |
| depends on what you give them. I mean, really we don't have | 3 | 186 |
| to give specific disclosures up front. I'm saying, take | 4 | 186 |
| them through a process and educate them up front. There | 5 | 186 |
| should be some other document, you know, that's a bit more | 6 | 186 |
| general in nature. And then have them attend to the | 7 | 186 |
| consumers -- attend to the information throughout. | 8 | 186 |
| The other thing I ask, we don't know how much | 9 | 186 |
| sticks. We just -- We had a little note discussion. How | 10 | 186 |
| much memory testing's been done on the existing disclosures? | 11 | 186 |
| Have we run a 15-minute distracter test and measured their | 12 | 186 |
| knowledge afterwards? Have we run a one-day, a three-day, a | 13 | 186 |
| five-day? We don't know. And until we know that and we | 14 | 186 |
| know what key pieces of information are actually sticking | 15 | 186 |
| over time, we can't make -- judge it. | 16 | 186 |
| MS. BRAUNSTEIN: Jan -- | 17 | 186 |
| MS. PAPPALARDO: I tell you, I came to working in | 18 | 186 |
| this area after working in health claims for many years. | 19 | 186 |
| When I was first asked to look at the mortgage area, the | 20 | 186 |
| thing that struck me is that there's very little publicly | 21 | 186 |
| available research on the role of disclosures in the | 22 | 186 |
| consumer shopping process and how consumers make financial | 23 | 186 |
| decisions. | 24 | 186 |
| And I think it'd be great if more researchers are | 25 | 186 |
| involved in this area. I don't know why it seems to be so | 1 | 187 |
| under studied. But for such a big budget, big ticket, | 2 | 187 |
| important item, it's remarkably under studied. And to just | 3 | 187 |
| bring more research like what Susan's been working on, more | 4 | 187 |
| controlled testing research to the table is just a great | 5 | 187 |
| contribution for any researchers out there. | 6 | 187 |
| MS. BRAUNSTEIN: Amen. Jim, you had some | 7 | 187 |
| questions. | 8 | 187 |
| MR. MICHAELS: First of all, I feel like I cut you | 9 | 187 |
| off before when I was talking about how much detail | 10 | 187 |
| consumers need in terms of their shopping. Was there some | 11 | 187 |
| other point you wanted to make? | 12 | 187 |
| MS. PAPPALARDO: Well, I would just say, again, | 13 | 187 |
| these are all testable things. You know, we're trying to do | 14 | 187 |
| some research at the FTC, more on about how consumers search | 15 | 187 |
| for mortgages and look more big picture. I think that this | 16 | 187 |
| is one of those areas, again, very much like health claims | 17 | 187 |
| was maybe 15 years ago where it's time for people to step | 18 | 187 |
| back and basically put on their thinking caps and say if you | 19 | 187 |
| were shopping for a mortgage and we didn't have the | 20 | 187 |
| regulatory world that we have with competing regulations, | 21 | 187 |
| let's go back to first principles, what is it that consumers | 22 | 187 |
| need to know and can we develop a form and test it. | 23 | 187 |
| I think that's really where we need to begin. And | 24 | 187 |
| I would -- Also, I'd hearken back to this lovely 1998, I | 25 | 187 |
| believe it is, the HUD Fed report, which is a wonderful | 1 | 188 |
| report if you haven't seen it, that talks about disclosure | 2 | 188 |
| issues and it's a great reference point and a starting place | 3 | 188 |
| for anybody who wants to work in the area. | 4 | 188 |
| MR. CHANIN: Jim told you to say that; didn't he? | 5 | 188 |
| MS. PAPPALARDO: No, he didn't. | 6 | 188 |
| MS. BRAUNSTEIN: He had a lot to do with writing | 7 | 188 |
| that report. | 8 | 188 |
| MS. PAPPALARDO: I have two copies. | 9 | 188 |
| MR. MICHAELS: I have more than that. Let me come | 10 | 188 |
| back to another point Vanessa raised about having an | 11 | 188 |
| attention grabbing disclosure or something that grabs | 12 | 188 |
| people's attention up front. And I asked this question this | 13 | 188 |
| morning, so I wanted to repeat it this afternoon. There's | 14 | 188 |
| been talk about, you know, giving consumers information | 15 | 188 |
| about the worst-case payment scenarios and, particularly, | 16 | 188 |
| with respect to non-traditional mortgages, if not ARMs | 17 | 188 |
| generally. | 18 | 188 |
| My question would be is that an example of a sort | 19 | 188 |
| of a attention grabbing disclosure in and of itself or is | 20 | 188 |
| that something that consumers can actually evaluate? Does | 21 | 188 |
| that give them cost information they can actually use in | 22 | 188 |
| terms of being able to relate, you know, information that | 23 | 188 |
| may be relevant five years, seven years, ten years down the | 24 | 188 |
| road or is that just merely a sort of a scare tactic and | 25 | 188 |
| attention grabber? | 1 | 189 |
| MS. MCCOY: Well, at this point it's neither | 2 | 189 |
| because the disclosures at closing, it's buried in all of | 3 | 189 |
| the rest of the closing documents, and it's either a | 4 | 189 |
| hypothetical -- the $10,000 hypothetical, the house of my | 5 | 189 |
| dreams, or it's this historical set of -- of interest rate | 6 | 189 |
| movements. And so right now, it's not being absorbed at | 7 | 189 |
| all. | 8 | 189 |
| MR. MICHAELS: But I guess my question is, if | 9 | 189 |
| you're -- if you give consumers up front information about | 10 | 189 |
| what's the worst thing that might happen to you five, seven, | 11 | 189 |
| or ten years from now, can they actually relate to and use | 12 | 189 |
| that information or do they just not have the ability to | 13 | 189 |
| because you're talking about a hypothetical world where | 14 | 189 |
| other variables change, not just the amount you might have | 15 | 189 |
| to pay? | 16 | 189 |
| MS. MCCOY: I think I'd echo Jan and say we need | 17 | 189 |
| to test that. But we really -- We really do need to test | 18 | 189 |
| it. It's such an important thing because it's the reset | 19 | 189 |
| shock that for many people puts them into default, so the | 20 | 189 |
| stakes are high. | 21 | 189 |
| MS. PERRY: I think that I -- First of all, I'm a | 22 | 189 |
| big fan of testing. I think everything needs to be tested | 23 | 189 |
| so there's -- everything related to disclosures. So that's | 24 | 189 |
| definitely the case. But in theory, a worst-case scenario | 25 | 189 |
| estimate serves as a reference point -- a point of | 1 | 190 |
| reference. It gives people a basis of comparison. | 2 | 190 |
| And so, you know, again, it doesn't necessarily | 3 | 190 |
| have to be perfect. But it can shock, if you will, a | 4 | 190 |
| consumer into paying more attention to additional disclosure | 5 | 190 |
| information. And so it serves that kind of purpose, as | 6 | 190 |
| well, even if it's not perfectly accurate or perfectly | 7 | 190 |
| reflective of their situation or the future. | 8 | 190 |
| MR. KOZUP: I would only add one thing. I think | 9 | 190 |
| testing's a great idea on this. I wonder how it's going to | 10 | 190 |
| impact comparison shopping. I really wonder how it would | 11 | 190 |
| impact comparison shopping when you have this negative | 12 | 190 |
| reference point that's just screaming, oh, I could lose my | 13 | 190 |
| -- you know, however you frame it. | 14 | 190 |
| So that's -- Definitely test one would be quite | 15 | 190 |
| interesting and layering some scenarios on top of those | 16 | 190 |
| types of things, too, in terms of different -- consumers' | 17 | 190 |
| different goals and seeing how those interact. That could | 18 | 190 |
| make for some very interesting research questions. | 19 | 190 |
| MS. KLEIMANN: Well, I think there's another issue | 20 | 190 |
| that's going on here. There's a difference between an | 21 | 190 |
| expert user and a less expert user. And one of the big | 22 | 190 |
| differences that we see just across any field, especially | 23 | 190 |
| composition processing is that expert users often have very | 24 | 190 |
| well developed frames that they can dip into and are able to | 25 | 190 |
| see implication. So they can take an abstract and make it | 1 | 191 |
| very concrete. | 2 | 191 |
| One of the things that these kinds of scenarios | 3 | 191 |
| can do for a consumer -- and again, I'm not advocating using | 4 | 191 |
| a worst case -- but part of what you're trying to do is take | 5 | 191 |
| a user who is not necessarily an expert user for any variety | 6 | 191 |
| of reasons. And those types of scenarios can give them a | 7 | 191 |
| way of seeing the abstract made concrete and seeing | 8 | 191 |
| implication. And that's one of the problems we have with | 9 | 191 |
| people who just aren't as expert. | 10 | 191 |
| And again, I'm not talking about an education | 11 | 191 |
| level or a literacy level. That's true for any of us. You | 12 | 191 |
| know, put me into a room of physicists and I'm not going to | 13 | 191 |
| be an expert user. So, you know, that idea of making it | 14 | 191 |
| concrete, whether it's highly negative or just very | 15 | 191 |
| concrete, I think, is an important piece that we would want | 16 | 191 |
| to consider. | 17 | 191 |
| But again, I'm going to echo Jan. Don't do this | 18 | 191 |
| without testing it. I mean, you've got to see what happens | 19 | 191 |
| when consumers encounter this. I mean, what I'm talking | 20 | 191 |
| about is, in fact, an abstract. It's an abstract principle | 21 | 191 |
| that we know is true, but we've got to see how it works in | 22 | 191 |
| the concrete. | 23 | 191 |
| MR. CHANIN: Let me talk about something I think | 24 | 191 |
| Jim eluded to -- excuse me -- in a slightly different way. | 25 | 191 |
| Part of the function or maybe the primary function of these | 1 | 192 |
| disclosures is shopping, though there's an education | 2 | 192 |
| component. And we know there's a trade off and some tension | 3 | 192 |
| in terms of getting information out early to consumers to | 4 | 192 |
| allow them to shop because there's some question about how | 5 | 192 |
| specific that can be. | 6 | 192 |
| But the question is: Should we focus as much on | 7 | 192 |
| repetition, and not repetition of disclosures but of | 8 | 192 |
| consumer behavior? For example, the first time a consumer | 9 | 192 |
| buys a home, he or she is going to get lots of information | 10 | 192 |
| today. Hopefully that's going to be improved in the future. | 11 | 192 |
| Maybe it'll come early on in the process. | 12 | 192 |
| But will the consumer, if we do this right, is | 13 | 192 |
| there the possibility that the consumer may or may not use | 14 | 192 |
| this to shop for his or her first loan, but should we keep | 15 | 192 |
| our eye on future behavior? And that is, say, the | 16 | 192 |
| consumer's now going to know, they're going to get this | 17 | 192 |
| information sometime after they apply -- three days after | 18 | 192 |
| they apply. So in the future, they are more likely to use | 19 | 192 |
| this and understand that process. Is there any research on | 20 | 192 |
| that if you understand where I'm getting at in terms of | 21 | 192 |
| focusing not on using it for shopping at the onset, but | 22 | 192 |
| rather as a behavior changing mechanism, I guess? | 23 | 192 |
| MS. BRAUNSTEIN: We got silence. | 24 | 192 |
| MS. PERRY: That's a difficult -- Your question | 25 | 192 |
| really relates to sort of cumulative effects of -- | 1 | 193 |
| MR. CHANIN: Right. Exactly. | 2 | 193 |
| MS. PERRY: -- learning and -- | 3 | 193 |
| MS. CHANIN: And is there that and can we hope | 4 | 193 |
| that occurs by focusing people at an early time? | 5 | 193 |
| MS. PERRY: That's hard. I know I just recently | 6 | 193 |
| read a study sponsored by Bankrate that showed that mortgage | 7 | 193 |
| customers -- nearly a third of existing mortgage customers | 8 | 193 |
| failed sort of a test of basic financial principles that you | 9 | 193 |
| would expect them to be able to pass given their experience | 10 | 193 |
| with mortgages. I'm not sure, but one implication may be | 11 | 193 |
| that this kind of information just doesn't stick because you | 12 | 193 |
| don't get mortgages -- you don't go through this process all | 13 | 193 |
| that terribly often. | 14 | 193 |
| So now I have to say this before I say everything, | 15 | 193 |
| this is something that needs to be tested. But you know, | 16 | 193 |
| who knows? It may be the case that there's just too much of | 17 | 193 |
| -- it's too stressful and there's too much of a span of time | 18 | 193 |
| between these kinds of transactions for people to really | 19 | 193 |
| carry any learning over. You know, who knows? | 20 | 193 |
| MR. KOZUP: And plus, what's the consumer's | 21 | 193 |
| preferred method of acquiring knowledge? I mean, you might | 22 | 193 |
| be doing repetition effects with print, and it's not going | 23 | 193 |
| to take because they're Web based or they developed those | 24 | 193 |
| skills or techniques over time. | 25 | 193 |
| MS. MCCOY: A couple of other thoughts. Sometimes | 1 | 194 |
| while you may learn about the transaction, the next time you | 2 | 194 |
| do it, if you can't get the information you'd really like up | 3 | 194 |
| front, then -- then you're -- you've been educated, but you | 4 | 194 |
| still can't use it. And the other thing, I went for ten | 5 | 194 |
| years between applying for mortgages. And in that time | 6 | 194 |
| period, the market had changed from manual underwriting to | 7 | 194 |
| automated underwriting. And I barely recognized the process | 8 | 194 |
| the last time I did it. So the process may itself change. | 9 | 194 |
| MR. CHANIN: So it sounds like that our focus, at | 10 | 194 |
| least without some further evidence, may not be on this long | 11 | 194 |
| term cumulative effect, at least in mortgages. Now, maybe | 12 | 194 |
| in credit cards or other products there's more usability in | 13 | 194 |
| that context. | 14 | 194 |
| MR. KOZUP: Usability, though, with a disclosure | 15 | 194 |
| that's a six point font, and a lot of the statements and | 16 | 194 |
| other things. I mean, we've -- Susan, go ahead. This is | 17 | 194 |
| your -- | 18 | 194 |
| MS. KLEIMANN: No, that's okay. I mean, I | 19 | 194 |
| absolutely -- Again, you've got to look at how usable that | 20 | 194 |
| document is -- | 21 | 194 |
| MR. KOZUP: Right. | 22 | 194 |
| MS. KLEIMANN: -- and whether consumers can just | 23 | 194 |
| process it, not just from the content, but process it | 24 | 194 |
| linguistically, process it in terms of its organization, | 25 | 194 |
| process it in terms of its queues. And sometimes it is as | 1 | 195 |
| basic as a six point font. Nobody's processing that, | 2 | 195 |
| including us -- including us. | 3 | 195 |
| MR. MICHAELS: All right. So you take the entire | 4 | 195 |
| discussion we've had here this afternoon. And now let's -- | 5 | 195 |
| MR. CHANIN: Don't go there, Jim. | 6 | 195 |
| MR. MICHAELS: And let's apply -- Let's apply it | 7 | 195 |
| to the electronic environment. I guess my basic question | 8 | 195 |
| is: Is have there been sufficient studies or is there | 9 | 195 |
| research that gives us some sort of broader lessons to be | 10 | 195 |
| learned about the electronic environment and how -- you | 11 | 195 |
| know, how the disclosures are effective in that environment | 12 | 195 |
| that may be different from the paper environment? | 13 | 195 |
| MR. KOZUP: I'm not familiar with it. | 14 | 195 |
| MS. KLEIMANN: I don't know that there is stuff | 15 | 195 |
| about disclosures. There certainly is a field of emerging | 16 | 195 |
| evidence and research that talks about how people encounter | 17 | 195 |
| the Web, what works, what doesn't work, the idea of how much | 18 | 195 |
| information can you put on a page. I mean, that type of | 19 | 195 |
| information is certainly out there, and there's not time to | 20 | 195 |
| go through a whole long list of that. | 21 | 195 |
| But I think some of the same principles that we've | 22 | 195 |
| been talking about here are still going to be valid | 23 | 195 |
| principles when you go to the Web. Obviously there is a | 24 | 195 |
| richness that the Web can give you in that you can chunk and | 25 | 195 |
| layer information in a way that you can't do that in a paper | 1 | 196 |
| document. And at the same time, one of the problems with | 2 | 196 |
| Web documents is you never know how big it is, so you don't | 3 | 196 |
| know how you're getting to the end and when you get to the | 4 | 196 |
| end. So you can still be lost in cyberspace. And this | 5 | 196 |
| whole idea of consumers needing to be able to relate the | 6 | 196 |
| idea of the whole and the part and understanding that | 7 | 196 |
| relationship is really a very critical aspect of being able | 8 | 196 |
| to learn, retain, and apply. | 9 | 196 |
| MR. CHANIN: Can -- Let me follow up on something | 10 | 196 |
| Pat said and mentioned about paying an application fee and | 11 | 196 |
| how at that point -- I'm not sure your exact wording, but | 12 | 196 |
| that's -- the consumer is committed. Do we have any | 13 | 196 |
| information on shopping and use of information and what | 14 | 196 |
| point is, in a sense, too late? That is, if the consumer | 15 | 196 |
| pays a fee, have they completed their shopping or is that | 16 | 196 |
| not the case? Does it matter if the fee is refundable or | 17 | 196 |
| not or is the simple payment of a fee application for | 18 | 196 |
| appraisal, so forth? Any information on that? None? Okay. | 19 | 196 |
| MS. BRAUNSTEIN: Okay. Do we have any other questions, | 20 | 196 |
| panelists, or anything else anybody would like to say on the | 21 | 196 |
| panel? All right. I'd like to thank you all very, very | 22 | 196 |
| much. This was very interesting and quite relevant, since, | 23 | 196 |
| like I say, some of us spend a large part of our lives | 24 | 196 |
| writing disclosures, so this was quite helpful. I want to | 25 | 196 |
| thank you. | 1 | 197 |
| We will end this panel now. We will take a break | 2 | 197 |
| until 3:00, at which point the sign up sheet is cut off and | 3 | 197 |
| we will start the open mike sessions. | 4 | 197 |
| (A short break was taken from 2:46 p.m. to 3:04 | 5 | 197 |
| p.m.) | 6 | 197 |
| MS. BRAUNSTEIN: We're going to get started. | 7 | 197 |
| Could I have your attention please? Okay. I want to call | 8 | 197 |
| some names and ask people to come to the front and sit -- | 9 | 197 |
| fill in some chairs. If Senator Vincent Fort is here, | 10 | 197 |
| please come forward. And you can take, like, the first | 11 | 197 |
| chair on the end there. | 12 | 197 |
| SENATOR FORT: The first chair? | 13 | 197 |
| MS. BRAUNSTEIN: Yeah, because we're going to | 14 | 197 |
| start that way. Karen Brown. Is Karen Brown here? | 15 | 197 |
| MS. BROWN: Yeah, I'm here. | 16 | 197 |
| MS. BRAUNSTEIN: Okay. Adrienne Ashby. | 17 | 197 |
| MS. ASHBY: Right here. My client is with me. | 18 | 197 |
| MS. BRAUNSTEIN: Okay. You can both come up. | 19 | 197 |
| Okay. Nancy MacLeod. Okay. And that will be it for now, | 20 | 197 |
| and then we'll call more names up. Okay. Senator Fort -- | 21 | 197 |
| Well, before you start, let me just restate the rules for | 22 | 197 |
| everybody. | 23 | 197 |
| You have three minutes for your statement. Our | 24 | 197 |
| time keeper, Wayne, will flash a yellow light after two | 25 | 197 |
| minutes and then the red light when your three minutes are | 1 | 198 |
| up. You are welcome to submit written statements of any | 2 | 198 |
| length for the record. But you have three minutes for your | 3 | 198 |
| verbal -- for your oral statements. Senator Fort, would you | 4 | 198 |
| like to start? | 5 | 198 |
| SENATOR FORT: Thank you, madam. | 6 | 198 |
| MS. BRAUNSTEIN: And please start by -- by the | 7 | 198 |
| way, introducing yourself and if you represent an | 8 | 198 |
| organization for the record because we have a court | 9 | 198 |
| reporter. | 10 | 198 |
| SENATOR FORT: Thank you. Thank you, Madam Chair. | 11 | 198 |
| My name is Vincent Fort. I serve in the State Senate, 39th | 12 | 198 |
| Senatorial District which goes from the south side of the | 13 | 198 |
| metropolitan area all the way up through -- as a matter of | 14 | 198 |
| fact, you're sitting in the 39th District now. It goes all | 15 | 198 |
| the way up to Buckhead. And one of my constituents, who was | 16 | 198 |
| a victim of a predatory loan, was supposed to be here. And | 17 | 198 |
| she is, I think, running late, and maybe we can introduce | 18 | 198 |
| her at another time in a little bit when she gets here. | 19 | 198 |
| But what I want to say today right now, I | 20 | 198 |
| understand that the activity of the consumer advocates on | 21 | 198 |
| predatory lending here in Georgia has come under some | 22 | 198 |
| question today, this morning. Some people saying that the | 23 | 198 |
| Georgia law passed in 2002 was a bad law. I beg to differ. | 24 | 198 |
| It is just the kind of law that is needed to stop predatory | 25 | 198 |
| lending here in Georgia. It is a -- It was a law that | 1 | 199 |
| should have been replicated throughout the country. So any | 2 | 199 |
| insinuation that that law was a bad law is wrong. | 3 | 199 |
| And the -- Any other insinuation that it drove | 4 | 199 |
| lenders out of Georgia is also wrong. That's not true. The | 5 | 199 |
| law took effect in October of 2002, and the predatory | 6 | 199 |
| lenders went to work in January 2003 to gut that law. They | 7 | 199 |
| did it with a campaign -- a fair, a coordinated campaign | 8 | 199 |
| that went all the way up to Standard and Poor's and played | 9 | 199 |
| point on that issue for them. And I have a letter that I | 10 | 199 |
| wrote to Standard and Poor's January 28th, 2003, that I'll | 11 | 199 |
| submit into the record, ma'am, when the -- when my remarks | 12 | 199 |
| are finished. But I wanted to defend what I did and what | 13 | 199 |
| consumer advocates did from 2000 -- from April of 2000 to | 14 | 199 |
| the passage of that law in March of 2002. | 15 | 199 |
| What needs to happen is that the abuses, and I | 16 | 199 |
| hope that Bill Brennan will share with you a list of the | 17 | 199 |
| abuses that he and Karen Brown have developed over the | 18 | 199 |
| years. What needs to happen is that the abuses -- the | 19 | 199 |
| predatory lending abuses need to be made illegal for all | 20 | 199 |
| loans. We have gone down the avenue of tweaking the | 21 | 199 |
| triggers and all of that kind of stuff. But at this point, | 22 | 199 |
| we need to have -- we need to walk down a new avenue, go in | 23 | 199 |
| a new direction, though all of the abuses -- all of these | 24 | 199 |
| bad practices need to be made illegal. | 25 | 199 |
| And to be honest with you, I don't know if it's | 1 | 200 |
| something that needs to be done on the federal level. The | 2 | 200 |
| NAY (phonetic) bill that is in congress now is a bad law. | 3 | 200 |
| It would codify predatory lending. It's a bad bill. I hope | 4 | 200 |
| it doesn't go forward, and I would publicly ask my good | 5 | 200 |
| friend, David Scott -- Representative Scott in congress to | 6 | 200 |
| withdraw his support from that bill. It's a bad bill, and | 7 | 200 |
| it ought not to go forward. If necessary, we need to work | 8 | 200 |
| on the state level to pass good predatory lending laws. | 9 | 200 |
| Two, I think we need to make sure that there's | 10 | 200 |
| full assignee liability on these loans, full assignee | 11 | 200 |
| liability. We are in the -- It's almost as if we are | 12 | 200 |
| chasing shadows. When these loans are sold, chock full of | 13 | 200 |
| abuses, it's like chasing a shadow, not being able to find | 14 | 200 |
| -- not being able to hold accountable the people who own | 15 | 200 |
| these predatory loans. | 16 | 200 |
| And as I close, Madam Chair, let me say this: We | 17 | 200 |
| would hope that the Federal Reserve would not only pass | 18 | 200 |
| regulations but would use its bully pulpit in Congress -- | 19 | 200 |
| with Congress to pass, if there is a federal law passed that | 20 | 200 |
| it be a strong federal law, that it not be a law that will | 21 | 200 |
| allow my constituents who I hear from every day, that it | 22 | 200 |
| would allow a strong predatory lending law to pass on the | 23 | 200 |
| federal level if that's the case. Hopefully it won't be the | 24 | 200 |
| version that's being discussed currently. Thank you. | 25 | 200 |
Nancy Lee & Associates, Atlanta, Georgia, 404-315-8305
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