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Summary

Recent unsettling developments in the subprime home loan market have triggered concern in Congress and among the public as to whether borrowers were fully informed about the terms of their mortgage loans. Some observers have suggested that numerous borrowers in the subprime market may have been victims of predatory lending practices or other discriminatory activity. Several bills have been introduced in the 1 loth Congress that would seek to remedy these perceived abuses. Senate bills S. 1222 (Senator Barack Obama et al.), S. 1299 (Senator Charles Schumer et al.), S. 1386 (Senator Jack Reed et al.), and House bill H.R. 2061 (Representative Stephanie Tubbs Jones et al.) include both suitability and disclosure approaches for addressing these concerns. This report focuses on borrower disclosure, in particular with respect to making all pertinent information about loan terms and settlement costs transparent, so consumers can make well-informed financial decisions when choosing mortgage products. The Real Estate Settlement Procedures Act (RESPA) of 1974 requires standardized disclosures about the settlement or closing costs of residential mortgages. The Department of Housing and Urban Development (HUD) has proposed changes to RESPA designed to facilitate better understanding of mortgage terms as well as to enhance the ability of borrowers to shop for better terms. These changes include (1) a new, standardized good faith estimate (GFE) form; (2) changes in how the yield spread premium (YSP) or broker compensation would be disclosed to the borrower; (3) modifications to the HUD-1 settlement statement; (4) a reading of the mortgage terms to the borrower at the closing table; and (5) allowing for discount pricing of settlement services that would potentially benefit borrowers. HUD plans also to seek legislative changes to enhance its enforcement authority of RESPA. After reviewing specific regulatory reforms, this report provides some survey evidence on the extent of consumer shopping behavior prior to entering into such expensive financial transactions. While there has been concern about lenders not doing enough to provide affordable mortgages, it is also arguably in the best interest of borrowers to shop diligently for the best credit terms. Even if borrowers are made aware of the costs, they may still elect to obtain less affordable mortgages over the entire loan term. Hence, disclosure reform as a way to influence affordability still depends upon the judgement of consumers.

Related Legislation:
• S.1222
• S.1299
• S.1386
• H.R.2061

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