ONE SOLUTION: Borrower DISCLOSURES: "TIDS" (TM) ** “BORROWER’S CONSENT ON SUITABILITY”

Failed Disclosures To The Borrowers

We know any loan may go into default or foreclosure due to known or unknown reasons. A borrower may lose a job, get sick, become disabled, die, get divorced, lose a lawsuit, incur an underinsured or uninsured event from a hurricane, tornado, water damage, auto accident, environmental and mold burden, etc. Creative or adjustable loans have added another layer of risk (RAhD, RAhC) to the borrower especially if the borrower didn’t understand or can’t afford the risk of paying the monthly burden as loans adjust or reset. These loans may in fact hold the answer, but we need better disclosures.

a. “Truly Intelligent Disclosures” (“TID”)(TM). Creative or exotic loan products and easy credit are not the problem per se, but in fact may be part of the answer per se. However, in any case, a truly uninformed borrower or misinformed borrower is truly a problem. If the system of fulfilling the American Dream includes a broker gatekeeper who holds all of the cards by virtue of the borrower’s non existent relationship with the “unknown lender” who is motivated to keep costs, fees, and more shockingly interest rates, higher (Losing Ground: Foreclosure Sub-prime Market/Cost to Homeowners, citing Jackson, Berry, Kickbacks or Compensation: Yield Spread Premiums, Harvard (Jan 8, 2002)), then the borrower has little chance to obtain the most effective or “suitable” loan package for his/her needs. Effectively, market competition may not have fully prevailed in this round of mortgage lending. In such event, we all suffer. We must refine the relationship, and better share risk and price. We should expand, not limit creative loans and available credit. However, creative loan products should require what I call: “truly intelligent disclosures” (“TID”). However, we do not need more disclosures for disclosures sake. We truly have enough paper for paper’s sake. Maybe we need less of that. We need (1) more accurate, meaningful and easy to understand disclosures, and (2) additional borrower disclosures with intelligent “underwriting business type analytics” (of the borrowers’ risks and analytical probabilities in changing and projected conditions such as the effect of declining property values on his particular loan especially with rising interest rates). Those risks need to be clearly disclosed to the borrower in a summary format. Over the last 10 years numerous third party computer information services have gathered and computerized relevant information needed to supply the borrower with an intelligent short summary form disclosure (in real time) sufficient to enhance real issue warnings and “suitability” concerns (First American, Experian, Equifax, TransUnion, PMI Group, CUNA Mutual/CMG, Mortgage Bankers Association, DataQuick, DataTree, RealtyTrack, DataPlace, Risk Profiler, GAO, FDIC, CRL, HUD, Fannie Mae (GSEs), MassHousing, BankRate.Com, HSH, etc.) If Congress or the industry mandated truly intelligent numeric summary disclosure formats (TID), I would estimate that the industry could be ready to operate with same within 18 months or so. The partial (summary) list below is a list of disclosures that were commonly insufficient in the last lending cycle (also couched as TIDs), in addition to newly suggested TIDs:

1. Lack of TID re accurate (or industry consistent) calculations of loan characteristics such as ANNUAL PERCENTAGE RATE (APR), and relevant instruction or examples on how to use or evaluate such information.
2. Lack of TID of CLEARLY LABELED FEES AND COSTS including broker yield interest rate spread compensation and junk or inflated loan costs including points or buy downs. These figures should be shown along side applicable industry norms or legally permissible charges so the borrower can make intelligent decisions concerning the cost/benefit bargain of the loan offer.
3. Lack of TID re the lender’s ACCEPTABLE MINIMUM INTEREST RATE REQUIREMENT PER APPLICABLE CREDIT SCORE for this particular loan. This would allow the borrower to know and negotiate to avoid (abusive) interest rates hikes caused by broker yield-rate spread compensation. This is not a suggestion to totally eliminate such compensation, but such compensation must be justified, the effect on the borrower must be disclosed, and it must be subject to the borrower’s rejection of those terms (or the loan offer based on those terms).
4. Lack of TID re BORROWER’S CONSENT ON SUITABILITY based on a numeric summary sheet disclosure including the EFFECT ON THE BORROWER AND PROPOSED LOAN PROGRAM(S) WHEN THE MARKET AND PROPERTY VALUATIONS CHANGE (i.e.: decline) as related to INTEREST RATE CHANGES (i.e.: rise), including but not limited to the change in monthly payment amounts, potential (non)eligibility of alternative loan payment options, loan modifications or common market loan programs, all indicating applicable Loan to Value (LTV, CLTV) and Income to Debt ratios, prepayment penalty burdens, negative amortization loans, the effect on other key eligibility barometers and LACK OF (EXIT, SALE or REFINANCE) OPTIONS over a projected 1, 3, 5 and 15 year period. Many borrowers may have a perfectly good reason to choose a negative amortization loan, interest only loan, option arm loan or other variation of them, and may in fact realize true financial and related benefits therefrom. But the borrower needs to understand them to make a proper suitability decision. Lenders and brokers must have a duty to disclose and obtain the borrower’s consent on suitability.
CRITICAL: Loan Comparison Summary Sheet Disclosure With All Common Or Applicable Loan Programs, With Mortgage Insurance & Tax Analysis: The TID re “BORROWER’S CONSENT ON SUITABILITY” must include a COMPARISON OF ELIGIBLE LOAN PROGRAMS WITH AND WITHOUT MORTGAGE INSURANCE including a COSTS/BENEFITS/LOSS analysis with PRE-TAX and AFTER-TAX EXAMPLES (showing legally deductible amounts based on tax assumptions developed by the actual numbers reported to underwriting of the borrower. For example the borrower should be able to quickly look at a summary sheet and see the estimated total loss to borrower and lender due to limited default and foreclosure, MI coverage and projected payout amounts, lender exposure and other projected Need-To-Know and What-If relationships. More importantly the borrower would be able to confirm or object to the broker’s representation that a Piggyback (80/20) loan is less expensive than a single loan with MI. Now these loan programs and concepts can truly compete because the borrower will have intelligent summary comparisons to use in making his/her decisions. Note – PMI GROUP has a computerized disclosure model that I have tested. Other mortgage insurance companies may as well. It does much of what I am concerned with, not all however. Also we need a more advanced version for professionals and a simple summary version for consumers to enhance understandability and allow a meaningful decision to be made by the borrower on “suitability”.
Lack of TID to the borrower concerning the HISTORY OR DESIRABILITY OF THE LOAN SERVICER.
Lack of TID on the truth that certain GOOD FAITH ESTIMATES may not at all be accurate and the reasons why. The industry must move to more comprehensive and automated information system with accurate estimated TIME TABLES in the loan processing itself and related parties must respond with info (payoff demands, etc.) within short legal deadlines.
HUD AMENDMENTS: Lack of TID on the HUD-1 disclosure forms reflecting and incorporating the above TIDs. The GOOD FAITH ESTIMATES and the HUD-1 disclosure should be amended to include the appropriate TIDs or appropriate summary material therefrom.