Mortgage Broker

indecentdisclosure 22 | fall 2015 mbabc.ca MORTGAGEBROKER However, research shows that enhanced disclosure in the mortgage shopping process not only fails to result in better decision- making amongst mortgage borrowers, it also confuses them and leads them to opt for significantly more expensive loans. In 2002, the Department of Housing and Urban Development (HUD), in the United States, proposed to require that mortgage brokers disclose an estimate to mortgage borrowers of compensation received from lenders. e proposed disclosure was motivated by a concern that brokers were placing borrowers in loans with higher than par interest rates without their knowledge and keeping yield spreads as extra compensation rather than passing on reduced interest rates to borrowers. e Federal Trade Commission (FTC) is an independent agency of the United States government which has existed since 1914 and is established by federal statute. e goal of the FTC is to promote consumer protection in commerce. Its particular focus is on the prevention of deceptive or unfair business practices in the consumer marketplace, including the sale of financial products. It has the power to commence investigations and take enforcement action against offenders. e FTC is therefore an experienced and objective adjudicator of consumer protection measures. It initially supported the HUD proposal to require the disclosure of mortgage broker fees to borrowers. However, it did not make any assumptions and decided to test whether the proposal would actually benefit consumers by conducting a rigorous study of its efficacy, with detailed experiments involving mortgage customers from various geographical areas in the United States. The FTC released a comprehensive report in 2004. In particular, the FTC found (at page 45) that: Mortgage broker compensation disclosure proposed by HUD is likely to confuse consumers, cause a significant proportion to choose loans that are more expensive than the available alternatives, and create substantial consumer bias against broker loans, even when the broker loans cost the same or less than direct lender loans. e FTC conducted a variety of tests to evaluate the hypotheses that originator fee disclosure benefits mortgage consumers. In one test, it created two sample loans: one with a cheaper mortgage brokered loan; and the other with a more expensive lender direct loan, which did not involve a mortgage broker. It asked a control group and a test group that received fee disclosure to identify the more expensive loan. About 90 per cent of subjects in the control group correctly identified the more expensive loan. However, only 71 per cent of the subjects who were given fee disclosure could correctly identify the more expensive loan. In another test in which two loans cost the same to the borrower, a control and test group were asked to identify whether the loans cost the same. In the control group between 95 and 99 per cent of the subjects were able to correctly conclude that both loans cost the same. However, when test subjects were provided

• Cover