FTC Staff Comment Before the Federal Reserve Concerning Proposed Illustrations of Consumer Information for Subprime Mortgage Lending

1 Proposed Illustrations of Consumer Information for Subprime Mortgage Lending,
72 Fed. Reg. 45495 (Aug. 14, 2007).
2 The Subprime Statement provides federally regulated depository institutions and
certain affiliates guidance about certain subprime products that can give rise to payment shock.
Drawing on the banking agencies’ safety and soundness concerns as well as their consumer
protection objectives, the Subprime Statement sets forth standards for such loans’ issuance,
underwriting, loan workouts or modifications, consumer protection principles, and control and
monitoring systems. Statement on Subprime Mortgage Lending, 72 Fed. Reg. 37569-75 (July
10, 2007). The Statement’s “Consumer Protection Principles” include “Providing information
that enables consumers to understand material terms, costs, and risk of loan products at a time
(continued...)
UNITED STATES OF AMERICA
FEDERAL TRADE COMMISSION
WASHINGTON, D.C. 20580
Bureau of Economics
Bureau of Consumer Protection
Office of Policy and Planning
October 30, 2007
Jennifer J. Johnson
Secretary
Board of Governors of the
Federal Reserve System
20th Street and Constitution Avenue, N.W.
Washington, D.C. 20551
Re: Docket No. OP-1292
Dear Ms. Johnson:
The Federal Trade Commission (FTC or Commission) staff appreciates the opportunity to
comment to the Office of the Comptroller of the Currency, Treasury (OCC); the Board of
Governors of the Federal Reserve System (Board); the Federal Deposit Insurance Corporation
(FDIC); the Office of Thrift Supervision, Treasury (OTS); and the National Credit Union
Administration (NCUA) (collectively, the Agencies) on the Agencies’ notice of Proposed
Illustrations of Consumer Information for Subprime Mortgage Lending (the Notice).1 The
Agencies seek comment on two documents that would, if adopted, provide examples of
consumer information disclosures that would be consistent with the guidance provided in the
Agencies’ Statement on Subprime Mortgage Lending (Subprime Statement).2 The Agencies

2 (...continued)
that will help the consumer select a product.” Id. at 37574.
3 72 Fed. Reg. 45495, 45497.
4 15 U.S.C. § 1601-1666j (requiring disclosures and establishing other requirements
in connection with consumer credit transactions).
5 15 U.S.C. § 1639 (amending TILA to provide additional protections for
consumers who enter into certain high-cost refinance mortgage loans).
6 15 U.S.C. § 45(a).
2
also request that commenters “provide information on any consumer testing that they have
conducted in connection with comparable disclosures.”3
The FTC staff supports the Agencies’ effort to develop mortgage disclosures to help
subprime borrowers make better informed decisions. For the reasons set forth below, the FTC
staff recommends that the Agencies consider conducting consumer research to confirm that the
proposed disclosures will benefit consumers. The Commission staff also recommends that the
federal agencies consider undertaking a more comprehensive effort to improve federal mortgage
disclosures. Our research suggests that consumers would benefit most from the development of a
single mortgage disclosure document that consolidates information on the key costs and features
of their mortgages.
I. FTC Experience
As the primary federal agency that enforces consumer credit laws with respect to non-
depository institutions, the Commission has wide-ranging responsibility regarding consumer
financial issues in the home mortgage market, including those involving mortgage lenders,
brokers, servicers, and advertisers. The FTC enforces a number of federal laws governing
mortgage lending, including the Truth in Lending Act (TILA)4 and Home Ownership and Equity
Protection Act (HOEPA).5 The Commission also enforces Section 5 of the Federal Trade
Commission Act (FTC Act), which prohibits unfair and deceptive acts and practices in the
marketplace, generally.6
The Commission’s law enforcement actions have targeted deception and other illegal
practices used in the marketing, advertising, and servicing of mortgage loans, focusing in
particular on the subprime mortgage market. In recent years, the agency has brought 21 actions

7 FTC v. Mortgages Para Hispanos.Com Corp., No. 06-00019 (E.D. Tex. 2006);
FTC v. Ranney, No. 04-1065 (D. Colo. 2004); FTC v. Chase Fin. Funding, No. 04-549 (C.D.
Cal. 2004); United States v. Fairbanks Capital Corp., No. 03-12219 (D. Mass. 2003); FTC v.
Diamond, No. 02-5078 (N.D. Ill. 2002); United States v. Mercantile Mortgage Co., No. 02-5079
(N.D. Ill. 2002); FTC v. Associates First Capital Corp., No. 01-00606 (N.D. Ga. 2001); FTC v.
First Alliance Mortgage Co., No. 00-964 (C.D. Cal. 2000); United States v. Action Loan Co.,
No. 00-511 (W.D. Ky. 2000); FTC v. NuWest, Inc., No. 00-1197 (W.D. Wash. 2000); United
States v. Delta Funding Corp., No. 00-1872 (E.D.N.Y. 2000); FTC v. Barry Cooper Prop., No.
99-07782 (C.D. Cal. 1999); FTC v. Capitol Mortgage Corp., No. 99-580 (D. Utah 1999); FTC v.
CLS Fin. Serv., Inc., No. 99-1215 (W.D. Wash. 1999); FTC v. Granite Mortgage, LLC, No. 99-
289 (E.D. Ky. 1999); FTC v. Interstate Res. Corp., No. 99-5988 (S.D.N.Y. 1999); FTC v. LAP
Fin. Serv., Inc., No. 99-496 (W.D. Ky. 1999); FTC v. Wasatch Credit Corp., No. 99-579 (D.
Utah 1999); In re First Plus Fin. Group, Inc., FTC Docket No. C-3984 (2000); In re Fleet Fin.,
Inc., FTC Docket No. C-3899 (1999); FTC v. Capital City Mortgage Corp., No. 98-00237
(D.D.C. 1998).
8 FTC, BUREAU OF ECONOMICS STAFF REPORT, JAMES M. LACKO AND JANIS K.
PAPPALARDO, IMPROVING CONSUMER MORTGAGE DISCLOSURES: AN EMPIRICAL ASSESSMENT OF
CURRENT AND PROTOTYPE DISCLOSURE FORMS (2007), available at
http://www.ftc.gov/os/2007/06/ P025505mortgagedisclosurereport.pdf (Mortgage Disclosure
Study); and FTC, BUREAU OF ECONOMICS STAFF REPORT, JAMES M. LACKO & JANIS K.
PAPPALARDO, THE EFFECT OF MORTGAGE BROKER COMPENSATION DISCLOSURES ON
CONSUMERS AND COMPETITION: A CONTROLLED EXPERIMENT (2004), available at
http://www.ftc.gov/os/2004/01/030123mortgagefullrpt.pdf (Mortgage Broker Compensation
Study).
9 Education materials on mortgage issues are available at the Commission’s web
page. FTC, CREDIT AND LOANS (2007), available at
http://www.ftc.gov/bcp/menus/consumer/credit/mortgage.shtm. The materials include brochures
such as Mortgage Payments Sending You Reeling? Here’s What to Do, High-Rate, High-Fee
Loans (HOEPA/Section 32 Mortgages), and Reverse Mortgages: Get the Facts Before Cashing
In On Your Home’s Equity.
3
against companies and principals in the mortgage industry.7 Several of these cases have resulted
in large monetary judgments, collectively returning more than $320 million to consumers. The
Commission also conducts research on home mortgage lending issues, including two recent
studies of consumer mortgage disclosures,8 develops consumer and business education
materials,9 responds to inquiries about these matters from consumers, industry and the media, and
works with other federal and state law enforcement entities to protect consumers from unfair or
deceptive mortgage lending and servicing practices.

10 See generally the FTC Staff’s Mortgage Disclosure Study and the Mortgage
Broker Compensation Study, supra note 8. See also FTC, RULEMAKING ON THE EFFECTIVENESS
OF ENERGY LABELING (2007), at http://www.ftc.gov/appliances/ (particularly the Background
Information for Consumer Research section). These materials discuss recent consumer research
conducted by Commission staff to evaluate alternative designs for new Energy Guide labels prior
to issuing the final amendments. See also Press Release, Concluding Two-Year Rulemaking,
FTC Announces New EnergyGuide Label (Aug. 7, 2007),
at http://www.ftc.gov/opa/2007/08/energy.shtm (explaining two-year review of the rule,
consumer testing, and final amendments to 16 C.F.R. Part 305).
11 The guidance on consumer protection principles also stated that loan approvals
should be based on the borrower's ability to repay the loan according to its terms, that the period
in which a prepayment penalty is assessed should not exceed the initial reset period, and that, in
general, borrowers should be given a reasonable period of time before the reset date to refinance
without penalty. 72 Fed. Reg. 37569, 37571-72.
12 The guidance provided in the Subprime Statement applies only to certain loans
made to subprime borrowers considering adjustable rate mortgages (ARMs). However, the
Subprime Statement also notes that “institutions generally should look to the principles of this
Statement when such ARM products are offered to non-subprime borrowers.” Id. at 37571.
13 The following list is taken verbatim from the statement. Id. at 37574 (citations
(continued...)
4
In fulfilling its dual mission to protect consumers and promote competition, the
Commission has studied the role of consumer information, and information regulations, in a
broad range of markets. Two lessons are clear. First, markets work better if consumers
understand what they are buying and how much they are paying. Second, although disclosures
can help consumers understand the products offered for sale and their price, they need to be
carefully crafted to work as intended. Disclosures often need to be tested, using standard
marketing research techniques, to ensure they will effectively communicate the intended
messages to the target audience.10
II. Proposed Illustrations
The Agencies’ Subprime Statement, among other things, outlined consumer protection
principles relevant to the underwriting and marketing of certain mortgage loans, and one of these
principles focused on information to be provided to borrowers.11 The Agencies stated that clear
and balanced information should be provided to borrowers. This information should enable
borrowers to understand the material terms, benefits, costs, and risks of loan products at a time
that will help them select a loan product.12 The statement specifies that consumers should be
informed of:13

13 (...continued)
omitted).
14 Copies of the documents are provided in Appendix A of this letter. See also
Subprime Statement, supra note 2.
15 72 Fed. Reg. 45497.
16 Id.
5
! Payment Shock. Potential payment increases, including how the new
payment will be calculated when the introductory fixed rate expires.
! Prepayment Penalties. The existence of any prepayment penalty, how it
will be calculated, and when it may be imposed.
! Balloon Payments. The existence of any balloon payment.
! Cost of Reduced Documentation Loans. Whether there is a pricing
premium attached to a reduced documentation or stated income loan
program.
! Responsibility for Taxes and Insurance. The requirement to make
payments for real estate taxes and insurance in addition to their loan
payments, if not escrowed, and the fact that taxes and insurance costs can
be substantial.
The proposed illustrations, which consist of two documents, would provide a safe-harbor
to institutions seeking to meet the consumer information guidance described in the Subprime
Statement.14 The documents would be provided in addition to the other disclosure documents
currently required under federal, state, and local laws.
The first illustration is described as a “narrative explanation of some of the key features
of certain ARM loans that are identified in the Subprime Statement . . . [that] seeks to provide
both the general and loan-specific information contemplated in the Subprime Statement.”15 The
second illustration, which compares the payment streams for two hypothetical mortgages, is
described as a “chart with numerical examples that is designed to show the potential
consequences of payment shock in a concrete, readily understandable manner for a loan
structured with a discounted interest rate for the first two years.”16

17 For example, the illustration notes that the loan has a reduced initial interest rate,
but does not specify the maximum note rate or monthly payment; it notes that a prepayment
penalty exists, but does not specify the amount of the prepayment penalty or the conditions that
would trigger the penalty; it alerts consumers to the fact that the monthly payment will not
include an amount to cover required taxes and insurance, but does not provide an estimate of the
additional amount that would be necessary to cover these expenses, or the total amount for
principal, interest, taxes and insurance (PITI); and it notes that the loan contains a balloon
payment, but not size of the balloon or the date on which it is due.
18 72 Fed. Reg. 37574.
6
The information in the illustrations is largely general and often hypothetical. As noted,
the second illustration is purely a hypothetical example. The first illustration provides some
information about the loan attributes highlighted in the Subprime Statement, but includes few
loan-specific details.17
Consumers would receive the disclosures while they are still shopping for mortgages, but
the precise timing within the shopping process is not clear. According to the Subprime
Statement: “This information should be provided in a timely manner to assist consumers in the
product selection process, not just upon submission of an application or at consummation of the
loan.”18 This early timing may account for some of the lack of specificity in the disclosures.
III. Analysis
A. Role of Disclosures in the Mortgage Market
The Commission staff shares the Agencies’ concerns about recent mortgage market
turmoil and its effects on individuals, families, neighborhoods, and the overall economy. Some
of the current problems in mortgage markets may be attributable to consumers not receiving
information they need to make well-informed decisions. The FTC staff is very concerned about
the extent to which consumers misunderstand critical aspects of their mortgages, and supports
public and private efforts to provide mortgage customers with the information they need.
The Commission staff commends the Agencies’ efforts to develop disclosures that might
improve consumer information in the mortgage market. Information policies that make mortgage
characteristics and costs more transparent to consumers can help to prevent deception and make
markets more efficient. However, experience and research at the FTC indicate that consumers
likely benefit more from a comprehensive review and reform of federal mortgage disclosures,
including giving serious consideration to creating a single disclosure document that summarizes
all of the key features and costs of a mortgage.

19 See, e.g., FTC, STAFF COMMENT TO TH E DEPARTMENT OF HOUSING AND URBAN
DEVELOPMENT ON PROPOSED AMENDMENTS TO THE REGULATIONS IMPLEMENTING THE REAL
ESTATE PROCEDURES SETTLEMENT ACT CLAIMS (Oct. 28, 2002), available at
http://www.ftc.gov/be/v030001.pdf; FTC, STAFF COMMENT TO FOOD AND DRUG
ADMINISTRATION ON TRANS FATTY ACIDS IN NUTRITION LABELING: CONSUMER RESEARCH TO
CONSIDER NUTRIENT CONTENT AND HEALTH CLAIMS AND POSSIBLE FOOTNOTE ON DISCLOSURE
STATEMENTS (Oct. 9, 2003), available at
http://www.ftc.gov/os/2003/10/fdafattyacidscomment.pdf; and FTC, STAFF COMMENT TO FOOD
AND DRUG ADMINISTRATION ON ASSESSING CONSUMER PERCEPTIONS OF HEALTH CLAIMS (Jan.
17, 2006) available at http://www.ftc.gov/be/V060005.pdf.
7
As noted above, it is often critical to test disclosures to determine whether they will
benefit consumers and make markets work better. The likely impact of disclosures for complex
products, such as a mortgage, is difficult to predict without conducting consumer research.
Marketing research is routinely conducted to ensure that consumers understand advertising
campaigns as intended, and similar research is also often needed to ensure that public sector
communications will be understood as intended by the target audience of consumers. Research
at the FTC has illustrated the importance of applying standard marketing research methods to the
analysis of disclosures. The FTC has previously advocated this type of research for the evaluation
of information disclosures in a variety of markets.19
B. Recommendations for Testing the Effectiveness of Proposed Disclosures
In addition to our general recommendation to test the proposed disclosures, we also
recommend that the research include procedures to evaluate how well the illustrations address the
problems described in the Subprime Statement. One concern is that the illustrations provide
general rather than transaction-specific information about mortgage offers. Even if consumer
research were to demonstrate that consumers understand the information in the illustrations, it is
unclear whether this information would substantially help consumers understand the terms of
their loans and thereby avoid the payment shock and other problems discussed in the Subprime
Statement. Consumer testing should be designed to evaluate whether the illustrations materially
improve understanding of the overall mortgage transaction, not merely whether consumers
understand the disclosure language. For example, a form may clearly and conspicuously disclose
to borrowers that their mortgage payments do not include escrow amounts for taxes and
insurance. Even if borrowers understand this disclosure, however, they may not understand that
this means they are obligated to pay a sizeable amount of money separately at the end of the year
for their local property tax bill. Thus, testing should try to discern whether consumers
understand the implications of the disclosures for their particular future financial obligations.
Another recommendation is to design research that will examine the role of the proposed
disclosures within the overall mortgage disclosure environment. These disclosures would be
added to the many disclosures that consumers already receive. One concern, discussed below, is

20 See FTC, COMMENT FROM THE COMMISSION TO FEDERAL RESERVE BOARD ON
HOME EQUITY LENDING MARKET (Sept. 14, 2006), available at
http://www.ftc.gov/os/2006/09/docketop-1253commentfedreservehomeeqlendimagev.pdf. This
comment also discusses the benefits of testing mortgage disclosures to ensure that they are
understood as intended.
21 FTC Staff, Mortgage Disclosure Study, supra note 8.
22 FTC Staff, Mortgage Broker Compensation Study, supra note 8.
8
that current disclosures are often ineffective, and sometimes seriously misunderstood. Consumer
research designed to evaluate the likely effect of the proposed disclosures should include
procedures to evaluate the likely role of the new disclosures within the current, overall mortgage
information environment.
C. FTC Experience Testing the Effectiveness of Mortgage Disclosures
In recent years, Commission staff have completed two research projects that evaluate the
effectiveness of mortgage disclosures. The studies were conducted, in part, because the
Commission’s experience has demonstrated that current mortgage disclosures are often
ineffective in preventing deception. This conclusion is drawn from numerous law enforcement
investigations through which it became clear that consumers were deceived even though they
properly received all federally required mortgage disclosures.20 The Commission’s interest in
conducting consumer research on mortgage disclosures is also derived from its experience using
consumer research to evaluate consumer comprehension of advertising claims and information
disclosures in other markets.
The recently completed Mortgage Disclosure Study, discussed below, revealed that two
principal disclosure documents are frequently misinterpreted by consumers.21 These disclosures
may not only fail to convey the desired information to consumers and help to prevent deception,
but also may contribute to information problems in the mortgage market. This research project
also included the development of a new summary disclosure document that combines
information about all key mortgage attributes and costs. Tests of the new prototype disclosure
demonstrated the potential benefits of designing a single, comprehensive mortgage disclosure
document. An earlier study, the Mortgage Broker Compensation study, illustrated that more
information is not always better than less. The tested broker compensation disclosures led to
incorrect understandings of loan costs and biased loan choices.22 Both projects demonstrate the
potential benefit of testing mortgage disclosures prior to implementation.
The Mortgage Disclosure Study, which employed standard marketing research
techniques, consisted of two phases. The first phase included extended interviews with several
dozen recent borrowers who discussed their own mortgage shopping experiences, reviewed their

23 See Appendix B for an example of the FTC staff prototype disclosure document.
24 The GFE provides an itemized disclosure of several dozen individual settlement
costs. The disclosures must be provided within three days of receiving a consumer’s written
application. See generally DEPARTMENT OF HOUSING AND URBAN DEVELOPMENT (HUD),
RESPA – REAL ESTATE SETTLEMENT PROCEDURES ACT (2007), at
http://www.hud.gov/offices/hsg/sfh/res/respa_hm.cfm.
25 See Appendix C for an example of the tested TILA and GFE disclosures.
9
own mortgage documents, and reviewed a new prototype mortgage disclosure developed by FTC
staff. The second phase included quantitative testing with over 800 recent mortgage customers;
roughly half examined examples of current mortgage disclosures, while the other half reviewed
the new prototype disclosure. The new prototype disclosure consists of a comprehensive one-
page summary of key loan information, and two pages with additional details.23 The prototype
design is based on lessons gleaned from deceptive lending cases, first principles of consumer
finance, and first principles of consumer communications design.
Findings from the study are striking. The failure to convey key mortgage costs and
features was evident across a wide range of loan characteristics and among substantial
proportions of study participants, both prime and subprime. Many of the problems highlighted in
the Subprime Statement were apparent during the consumer interviews. Recent borrowers could
not determine if their own mortgages had prepayment penalties, even when examining their own
Truth-in-Lending documents. Consumers with adjustable rate mortgages were not always aware
that their monthly payments could increase, or the extent of such increases. Confusion about the
inclusion of taxes and insurance in monthly payment amounts was also revealed.
The extended interviews also suggested that some standard terms in current required
disclosures promote misunderstanding. For example, the “Amount Financed” on the TILA
statement was typically interpreted as the loan amount, rather than the loan amount minus
prepaid finance charges. This misunderstanding sets the stage for possible confusion regarding
the total mortgage fees and the extent to which mortgage fees are financed. The “Discount Fee”
on the Good Faith Estimate (GFE) was often misinterpreted as a discount to the borrower, rather
than a payment from the borrower to the lender in exchange for the given contract interest rate.24
Systematic testing with over 400 recent mortgage customers confirmed that current
disclosures are confusing and often misunderstood. Respondents were given information about
hypothetical mortgages using examples of current TILA and GFE disclosures, given time to
examine the disclosures in a quiet setting, and asked objective questions about the mortgages.
The forms used for the test provide more information than currently required under federal law.25
Even with these enhanced disclosures, mortgage customers could not identify critical mortgage
features:

26 The prototype combines information about the loan features, such as the interest
rate and monthly payments with information about the costs of acquiring the loan. Under current
regulations, information about the loan appears on the TILA statement and information about the
costs obtaining the mortgage appears in the GFE. Combining key elements of both documents
should make it easier to shop for the best deal and to verify verbal claims by a mortgage
originator.
10
! About a fifth of the respondents viewing the current disclosure forms could not
correctly identify the APR of the loan, the amount of cash due at closing, or the
monthly payment (including whether it included escrow for taxes and insurance).
! Nearly a quarter could not identify the amount of settlement charges.
! About a third could not identify the interest rate or which of two loans was less
expensive, and a third did not recognize that the loan included a large balloon
payment or that the loan amount included money borrowed to pay for settlement
charges.
! Half could not correctly identify the loan amount.
! Two-thirds did not recognize that they would be charged a prepayment penalty if
in two years they refinanced with another lender (and a third did not even
recognize that they “may” be charged such a penalty).
! Three-quarters did not recognize that substantial charges for optional credit
insurance were included in the loan.
! Almost four-fifths did not know why the interest rate and APR of a loan
sometimes differ.
The Mortgage Disclosure Study also showed that consumers would benefit substantially
from a single mortgage disclosure like that tested in the study. The prototype mortgage
disclosure document received enthusiastic reviews during the extended interviews from
consumers.26 Quantitative testing verified that the prototype disclosure substantially improves
consumer recognition of key loan features. The roughly 400 respondents who examined loans
using current forms answered an average of 61 percent of the test questions correctly. In
contrast, the roughly 400 respondents who examined the same loans using the prototype form
answered 80 percent of the questions correctly – a 19 percentage point improvement.
The prototype disclosures provided improvements across a wide range of loan terms and
for substantial proportions of respondents. The improvements provided by the prototype form
included:

11
! 66 percentage point increase in the proportion of respondents correctly identifying
the total amount of up-front charges in the loan.
! 43 percentage point increase in the proportion of respondents recognizing that the
loan contained charges for optional credit insurance.
! 37 percentage point increase in the proportion correctly identifying the amount
borrowed.
! 24 percentage point increase in the proportion recognizing that a prepayment
penalty would be assessed if the loan was refinanced in two years.
! 21 percentage point increase in the proportion correctly identifying why the APR
and interest rate may differ in a loan.
! 16 percentage point increase in the proportion correctly identifying the APR
amount.
! 15 percentage point increase in the proportion correctly identifying the amount of
settlement charges.
! 13 percentage point increase in the proportion correctly identifying which of two
loans was less expensive.
! 12 percentage point increase in the proportion correctly identifying the interest
rate amount.
! 9 percentage point increase in the proportion recognizing that settlement charges
were financed and included in the loan amount.
! The prototype form also conveyed the correct prepayment penalty amount to 59
percent of the respondents, and the correct amounts of property taxes and
homeowner's insurance charges for a loan in which the charges were not included
in the monthly payment to 79 percent of the respondents. This information is not
included in the current forms.
The new prototype disclosure developed and tested at the FTC addresses several of the
serious problems highlighted in the Subprime Statement, which advises: “Information provided
to consumers should clearly explain the risk of payment shock and the ramifications of
prepayment penalties, balloon payments, and the lack of escrow for taxes and insurance as

27 72 Fed. Reg. at 37574.
28 Many key loan features, identified as a source of concern, are not required in any
of the federally required disclosures. Lenders are not currently required to specify the nature of
prepayment penalty obligations, the absence of escrow payments for taxes and insurance in
monthly payment estimates, the maximum monthly mortgage payment amount for loans with
adjustable rate features, or total up-front costs of obtaining a mortgage.
12
necessary.”27 For example, the prototype addresses prepayment penalty misunderstanding with a
demonstrably clearer and more comprehensive prepayment penalty disclosure. The prototype
addresses concern about escrow misunderstanding by explicitly indicating whether escrow
payments for taxes and insurance are included in the monthly payment estimates.28 More can be
done to make the prototype more responsive to the concerns raised in the Subprime Statement.
The prototype did not include an adjustable interest rate disclosure, although one could readily be
included to disclose key aspects of adjustable rate mortgages. The testing also revealed room for
improving the balloon payment disclosure. Further testing and development can uncover
remaining deficiencies and solutions, yielding even better results.
IV. Conclusion
The FTC staff supports the Agencies’ effort to develop mortgage disclosures to help
subprime borrowers make better-informed decisions. As shown by the Commission’s research
and enforcement experience, however, required mortgage disclosures, even those for simple,
fixed-rate, fully amortizing loans, often confuse consumers in both the subprime and prime
markets. FTC staff therefore recommend that the Agencies consider conducting tests of the
effectiveness of the proposed new disclosures. Such research would be particularly useful to
policymakers if the testing simulated the overall information environment and employed
measures to evaluate how well the proposed disclosures meet the objectives set forth in the
Subprime Statement.
In addition to considering testing these disclosures, FTC staff also recommend that
federal agencies consider undertaking a more comprehensive effort to improve federal mortgage
disclosures. The proposed disclosures might not substantially improve a borrower’s overall
understanding of his actual loan choices. The disclosures include only a partial list of potentially
costly loan attributes, and little loan-specific detail about these attributes. In addition, the
proposed disclosures would be added to the often-confusing disclosures that consumers already
receive. Based on Commission staff’s research, consumers likely would benefit from one clear
disclosure document that alerts them to the major costs and features of a mortgage; will
significantly reduce the cost of obtaining information about the true value of different mortgage
options; is noticeable, easy to read, and easy to understand; summarizes key loan features up-
front to facilitate informed comparison shopping; and makes clear what a consumer is getting
into before signing on the dotted line. FTC staff research also indicates that such a document

13
could be developed using principles from consumer finance, communications design, and
consumer research. The Commission staff stands ready to participate with other federal agencies
in a more comprehensive effort to improve federal mortgage disclosures.
The Commission appreciates your consideration of its views. If any other information would
be useful regarding these matters, please contact Janis K. Pappalardo, staff economist, at (202)
326-3380.
Sincerely,
Michael Baye, Director
James M. Lacko
Janis K. Pappalardo
Bureau of Economics
Lydia B. Parnes, Director
Peggy Twohig, Associate Director
Thomas Pahl
Allison Brown
Bureau of Consumer Protection
Maureen K. Ohlhausen, Director
Christopher M. Grengs, Attorney Advisor
Office of Policy Planning

APPENDIX A
Disclosure Illustrations Proposed by the Agencies

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APPENDIX B
Example of Comprehensive Disclosure Prototype Developed and Tested by FTC Staff
(Fixed-Rate Loan)

Mortgage Loan Offer
JL Mortga ge Co m pany LOAN “K”
123 Main Street
Mortgagetown, Virginia 22189
(703) 555-2767 Page 1 of 3
Borrower: James and Clara Borrower Offer Date: October 14, 2005
Property Location: 123 Your Street, Hometown, VA 22189
This page provides a summ ary of your loan, our charges for the loan, and your loan payments. See
pages 2 and 3 for important details on each of these items.
YOUR LOAN
Loan T ype Sum m ary
Loan Amount
Loan T erm
30 yea r fixed -rate
$ 175,425.00
30 years (360 monthly payments)
OUR LOAN CHARGES
Intere st Rate
Up-Front Charges
Monthly-Billed Charges
6.20% Fixed rate
$ 5,303.39 Total settlement charges
$ 0.00 Charges for optional products and services
----------------
$ 5,303.39 Total up-front charges
None
Annua l Perc entage R ate
(APR)
6.38% The cost of credit, including both interest payments and
other finance charges, expressed as an annual rate.
YOUR LOAN PAYMENTS
Cash Due at Closing
Mo nthly Payments
Balloon Payment
$ 5,303.39
$ 1,074.42 Payments number 1–360 (Does NOT include required
paym ents for prope rty taxes and hazard insuran ce.)
None
PENALTIES AND LATE FEES
Prepaym ent P ena lty
Late Fee
A penalty of four percent (4%) of the prepaid loan balance will be
cha rged if the loan is paid off during the first five years. An imm ediate
refinancing of the loan would result in a penalty of $7,017.00.
A 5% late fee will be charged on payments m ore than 7 days late.

JL Mortgage Company LOAN “K” Page 2 of 3
This page and the next provide explanations and important details about your loan amount, our charges
for the loan, and you r loan paym ents . See page 1 fo r a su m m ary of these item s.
LOAN AMOUNT DETAILS
Loan Amount $ 150,000.00 Refinance current mortgage loan
$ 20,000.00 Cash paid to borrower
$ 5,425.00 Con solidation of borrowe r’s other de bts
$ 0.00 Financed settlement charges
$ 0.00 Financed charges for optional products and services
-----------------
$ 175,425.00 Total Loan Amount
OPTIONAL CHARGES DETAILS
Optional Products and
Services Charges
None
CASH DUE AT CLOSING DETAILS
Cash Due at Closing $ 5,303.39 Settlement charges
-----------------
$ 5,303.39 Total cash due at closing
MONTHLY PAYMENT DETAILS
Monthly Payment Itemization of initial monthly payment
$ 1,074.42 Principal and interest
$ 0.00 Property tax escrow
$ 0.00 Hazard (homeowners) insurance
$ 0.00 Priva te m ortga ge ins uran ce (P MI)
$ 0.00 Monthly-billed optional products or services
------------------
$ 1,074.42 Total initial monthly payment
Taxes and Insurance Property tax es and haza rd insurance are NO T included in your m onthly
loan payment. You will be responsible for paying these additional
required costs yourself. Your additional monthly costs will be:
$ 145.83 Property taxes
$ 60.00 Hazard insurance
------------------
$ 205.83 T otal ad ditional monthly costs

JL Mortgage Company LOAN “K” Page 3 of 3
SETTLEMENT CHARGES DETAILS
This page lists the settlement services included in the settlement charges shown on page 1. ALL of the
settlem ent services you need to close the loan a re included.
Settlement Services
Package
$5,065.00 This package includes the following services:
Origination and lender services Title services
Loa n origination Settlem ent agen t
Appraisal Title search and examination
Credit report Title document preparation
Lender’s property survey Lender’s title insurance
Lender’s property inspection Attorney services
Pest inspection Notary fee
Government taxes and fees
County recording fee State and local tax stamps
Interest Charge for Partial
Mo nth
$ 238.39 This charge is for the daily interest charges from the
day of your settlement until the end of the month. For this
loan this amount is $ 29.7982 per day for 8 days (if your
closing date is 10/24/05 ).
Prepaid Items $ 0.00 Property taxes ( months at $ per month)
$ 0.00 Hazard insurance ( months at $ per month)
Reserves Deposited
with the Lender
$ 0.00 Property taxes ( months at $ per month)
$ 0.00 Hazard insurance ( months at $ per month)
Total Settlement Charges $5,303.39 Total Settlement Charges
HOW TO PROTECT YOURSELF
C O M PAR IS ON SH O P T O FIN D T HE BE ST DE AL — The lender or broker providing this loan is not
nec ess arily shopping on your beha lf or pro viding you with th e lowest cost loa n.
D O NO T RE LY O N O R AL PR O M IS ES TO C HAN G E T HE SE TE RM S — Obtain all changes in writing.
SAVE THIS OFFER SHEET AND COMPARE TO DOCUMENTS AT CLOSING — Before you sign any
papers at your loan closing (loan settlement), mak e sure that the costs have not been increased.
Federal law requires that this offer sheet be provided to the borrower within three (3) business days after the borrower has
applied for a loan. If the loan terms change prior to acceptance by the borrower, a new offer sheet must be provided. Notify the
Federal Trade Commission (FTC) if the lender does not abide by the terms set forth in this offer or does not provide this offer
sheet within three days of application: Federal Trade Commission (FTC), 600 Pennsylvania Avenue, N.W., Washington D.C.,
20580, telephone (877) FTC-HELP (382-4357), web site www.ftc.gov.

1 The current disclosure forms tested in the study the FTC study consisted of the
Truth-in-Lending Act (TILA) statement that is required for closed-end, fixed-rate residential
mortgages under the Truth in Lending Act, and the Good Faith Estimate of Settlement Costs
(GFE) required under the Real Estate Settlement Procedures Act (RESPA). The GFE used in the
tests was an enhanced version that included information not required by the current regulations,
including the amount of money borrowed, the interest rate, the total monthly payment amount, an
itemization of the monthly payment, the cash due at closing, and the total settlement charges.
Many lenders use some variation of an enhanced GFE that goes beyond the regulatory
requirements. The form used in the tests followed this practice so that it would more closely
reflect the information that many consumers actually receive. The use of an enhanced GFE
implies, however, that the test results will understate any problems that consumers may have
with a GFE that merely complies with the regulations.
APPENDIX C
Example of Current Disclosure Forms Tested by FTC Staff1
(Fixed-Rate Loan)

10/14/05
21782
James and Clara Borrower
123 Your Street
Hometown, VA 22189
6.38 	214,725.92 	172,066.61 	386,792.53
X
360 	1,074.42
5.00
X
X
Monthly beginning 12/01/05
X 	the property located at 123 Your St., Hometown, VA 22189
LOAN "K"
X
X
Proprietary form used in the consumer testing

JL Mortgage Company
123 Main Street
Mortgagetown, VA 22189
James and Clara Borrower
123 Your Street
Hometown, VA 22189
$175,425.00
$175,425.00
Fixed Rate
10/14/05
6.20% 	30 Year
2,400.00
200.00
50.00
Administrative Fee
Doc Prep Fee
Courier
450.00
100.00
50.00
200.00
75.00
10.00
540.00
Title Binder 	50.00
50.00
100.00
250.00
275.00	County Tax	8 	29.7982 	238.39
120.00
5,303.39
5,065.00
238.39
5,303.39
1,074.42
1,074.42
Flood Certification 	20.00
1004
125.00
LOAN "K"
Proprietary form used in the consumer testing