ROBERT SIEGEL, host:
Listen to these stories of alleged abuses in the subprime mortgage market and you'll hear a common complaint. A mortgage borrower says, when I signed that loan, no one made it clear to me that the rate would rise after however many years and the monthly payment would be more than I could afford. Well, there are regulations that govern what a buyer must be told at a closing. There are federal rules and some states have their own too.
Kurt Eggert knows all about them. He's a professor at Chapman University's School of Law. He also sits on the Consumer Advisory Council for the Federal Reserve Board.
Professor KURT EGGERT (Chapman University): If you're buying a house, you should've gotten some disclosures before you're actually sitting at the closing. As you're sitting there, you should be getting a truth in lending notice of the annual percentage rates, which is supposed to give you an idea of how mush your loan will cost you. The problem is, though, that many of the loans are so complicated that people sitting at the closings, I think, often have really not much idea of what they're getting into.
SIEGEL: Well, if the rate is to be variable, can you be told at closing what it's going to be?
Prof. EGGERT: Well, the essence of a variable rate is that it's hard to predict what it's going to be. The problem is the disclosures on that are really - they don't work at all, or they work very poorly. And so most people have no idea how high their loan payment could get.
SIEGEL: But if somebody who is attending to this closing, the lawyer, or if it's a mortgage broker, if somebody does not come clean and says don't worry about it, here is what the payment will be at the beginning (unintelligible) from what I read in the Wall Street Journal, it's not going to happen. Is that a violation of any law if one skimps on that obligation? Or is it simply bad practice?
Prof. EGGERT: Well, you have to separate if you have somebody there that is truly representing the borrower or not. If the borrower were to have a lawyer there, the lawyer should describe to them what could happen. Mortgage brokers, however, often give borrowers the idea that they're representing them or they are looking out for them, but in fact mortgage brokers aren't, typically. They are mostly looking after themselves making the loan and getting their cut of it.
SIEGEL: I've been describing to you the hypothetical of buying a house and taking out a mortgage. Many people, obviously, refinance their homes. Is there anything different typically about the prices of refinancing from buying initially?
Prof. EGGERT: One of the big differences is when your disclosures can be given. If you're buying a house, you're supposed to get some sort of truth in lending disclosures shortly after you apply for the loan, within three days of application. For refinances, however, you can get your truth in lending disclosures essentially right at the closing. And so as long as you get them before you sign your loan documents, it'll be assumed that you got your disclosures and you knew what you're shopping for. That's a terrible way to shop, though. I mean imagine any other significant product where you don't get to find out how much it costs until the moment you agreed to buy it.
SIEGEL: A closing typically involves initialing about nine thousand entries on multiple copies of many, many forms. Do you think that this is a problem of those forms not stating clearly what the lending terms are, or simply of consumers not having the wherewithal or the confidence or the ability to decipher what's in the forms that they're initialing?
Prof. EGGERT: Well, I think there are actually three things going on. One is that the forms can be excessively complicated. There should be an organized attempt to streamline them so that consumers see the most important things that they need to make their decisions. We also need to increase the financial literacy of consumers so that consumers have a better idea what they're shopping for as they're shopping. And the third point is that many of these sub-prime, exotic loans are so complicated that I don't think many of the people who take these loans really understand them. And it's difficult, if not impossible, to shop for a product that you fundamentally don't understand.
SIEGEL: Well, Professor Eggert, thank you very much for talking with us.
Mr. EGGERT: Thank you.
SIEGEL: That's Chapman University Law School Professor Kurt Eggert. He also sits on the Federal Reserve Board's Consumer Advisory Council, and you can find their guidance on sub-prime loans, as well as a primer, at npr.org.
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