Board of Governors of the Federal Reserve System

July 23, 2009

We are meeting today to consider two proposals that would significantly improve consumer disclosures for all mortgage transactions. These proposals are the result of a comprehensive review conducted by the Board's staff, including extensive consumer testing. The proposals also include robust new consumer protections to prohibit unfair practices that allow mortgage brokers and other loan originators to increase consumers' loan costs unnecessarily.

In recent years, consumers have been presented with a wider choice of mortgage products. Although this has helped many consumers find a loan tailored to their specific needs, it has also added complexity. This complexity can make it difficult for consumers to understand and compare different loans. The regulatory proposals we are considering this morning would require consumer disclosures that better reflect the complex features and the risks of today's mortgage products.

Both proposals would be issued under the Truth in Lending Act (TILA). The first proposal would make sweeping changes to the disclosures for home-purchase loans, refinance loans, and other fixed-term, closed-end mortgage loans. The second proposal would enhance the disclosures for open-end, home equity lines of credit (known as HELOCs).

Consumers need the proper tools to determine whether a particular mortgage loan is appropriate for their circumstances. The Truth in Lending disclosures provide consumers with key information they need to evaluate their options. It is often said that a home is a family's most important asset, and it is the Federal Reserve's responsibility to see that borrowers receive the information they need to protect that asset. Our consumer testing is designed to ensure this information will be presented in language consumers understand, in a format that is easy to use, and at a suitable time.

When disclosing the details of complex financial transactions, there is necessarily a trade-off. While attempting to provide complete and accurate information, we must not overload consumers with excess information they cannot use. Our consumer testing has aided us in striking a proper balance. But we have also learned that the one-page Truth in Lending disclosure that lenders currently use is not adequate to convey the features and risks of today's complex products. Because the proposed new disclosures are more risk-focused, in some cases they are lengthier. Our consumer testing shows, however, that the length of these disclosures is not as important as their functionality and usability.

The Board will continue to test these model disclosure forms with actual consumers. In refining the model disclosures we will follow the same multi-disciplinary approach that was used to develop these proposals. To achieve the most effective results, we combine our consumer testing results with research on financial markets and industry operations, our experience in bank supervision and handling consumer complaints, and our expertise in consumer education. In addition, we conduct extensive outreach to other government agencies, consumer and community groups, academia, and industry to gain a broad range of perspectives that inform our policy decisions.

We will also work with the Department of Housing and Urban Development to make our disclosures, mandated by the Truth in Lending Act, and HUD's disclosures, required by the Real Estate Settlement Procedures Act, compatible and complementary; potentially developing a single disclosure form that creditors could use to satisfy both laws. This could help reduce information overload by eliminating some duplicative disclosures.

We realize that disclosures alone may not always sufficiently protect consumers from unfair practices. Last year, we issued rules prohibiting unfair practices in underwriting higher-priced subprime mortgages. In addition, the Board's rules addressed abuses by loan servicers and improper appraisal practices. The Board also committed to study ways to resolve concerns about lenders’ payment of "yield spread premiums" to mortgage brokers and other loan originators. These payments by lenders increase loan originators' compensation when the originator arranges a loan that has a higher interest rate than the rate the consumer was qualified to obtain.

Consumers rely on the professional expertise of brokers and other loan originators and expect that they will act fairly. Consumers' expectations of fair treatment are not met, however, when they are steered by their loan originator to more expensive loans. Accordingly, the proposal we are considering today would go beyond disclosures and adopt new substantive protections. One aspect of the proposal would require the loan originator to receive the same compensation from a particular creditor regardless of the loan's rate or terms. Another provision would seek to prevent loan originators from steering consumers to lenders offering more expensive loans that are not in the consumer's interest so that the originator can increase its own compensation.

In closing, I want to thank the many members of the Board's staff from several divisions who contributed to these proposals, but particularly staff in the Board's Division of Consumer and Community Affairs who put forth tremendous effort in developing these important improvements in consumer protection.

I will now turn to Governor Duke, who chairs the Board's Committee on Consumer and Community Affairs, to discuss the proposals in greater detail.