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Summary of Findings:
Design and Testing of
Truth in Lending Disclosures
for Closed-end Mortgages
July 16, 2009
Submitted to:
Board of Governors of the
Federal Reserve System
Submitted by:
ICF Macro
TABLE OF CONTENTS
Executive Summary ....................................................................................................... i
Background and Description of Project....................................................................... i
Summary of Methodology ..........................................................................................iii
Summary of Key Findings..........................................................................................iii
Chapter I: Introduction.................................................................................................. 1
Background................................................................................................................ 1
Overview of the Project.............................................................................................. 2
Recruitment of Research Participants........................................................................ 3
Structure of this Report .............................................................................................. 4
Chapter II: Findings About Mortgage Shopping......................................................... 5
Shopping for a Mortgage ........................................................................................... 5
Important Factors to Consumers When Shopping ..................................................... 6
Education about Mortgage Process ........................................................................... 6
Frustrations and Surprises......................................................................................... 7
Chapter III: Testing of Current and Previously Proposed Disclosure Forms .......... 9
Transaction-Specific Disclosures ............................................................................... 9
ARM Loan Program Disclosure................................................................................ 17
CHARM Booklet....................................................................................................... 19
Chapter IV: Guiding Principles for Disclosure Design............................................. 23
Chapter V: Development And Testing of Revised TILA Statements....................... 25
Introduction .............................................................................................................. 25
Round 8: Atlanta, Georgia (November 2008)........................................................... 25
Objectives and Methodology............................................................................ 25
Key Interview Findings..................................................................................... 26
Subsequent Design Decisions ......................................................................... 31
Round 9: Bethesda, Maryland (January 2009) ........................................................ 33
Objectives and Methodology............................................................................ 33
Key Interview Findings..................................................................................... 34
Subsequent Design Decisions ......................................................................... 40
Round 10: Dallas, Texas (February 2009) ............................................................... 43
Objectives and Methodology............................................................................ 43
Key Interview Findings..................................................................................... 44
Subsequent Design Decisions ......................................................................... 49
Round 11: Providence, Rhode Island (March/April 2009) ........................................ 51
Objectives and Methodology............................................................................ 51
Key Interview Findings..................................................................................... 52
Subsequent Design Decisions ......................................................................... 56
Round 12: Denver, Colorado (April 2009)................................................................ 58
Objectives and Methodology............................................................................ 58
Key Interview Findings..................................................................................... 59
Subsequent Design Decisions ......................................................................... 64
Round 13: Bethesda, Maryland (May 2009) ............................................................ 67
Objectives and Methodology............................................................................ 67
Key Interview Findings..................................................................................... 68
Subsequent Design Decisions ......................................................................... 73
Chapter VI: Development and Testing of Other Types of Mortgage Disclosures.. 75
New Early Disclosures about Mortgage Risks ......................................................... 75
Mortgage Risk Worksheet................................................................................ 75
Key Findings ............................................................................................ 75
Subsequent Design Decisions ................................................................. 77
“Key Questions to Ask About Your Mortgage” Disclosure ............................... 77
Key Findings ............................................................................................ 77
Subsequent Design Decisions ................................................................. 78
Revised ARM Loan Program Disclosure.................................................................. 79
Key Findings .................................................................................................... 79
Subsequent Design Decisions ......................................................................... 80
New Early Disclosure: “Fixed vs. Adjustable Rate Mortgages” ................................ 80
Key Findings .................................................................................................... 80
Subsequent Design Decisions ......................................................................... 81
ARM Adjustment Notice........................................................................................... 81
Key Findings .................................................................................................... 81
Subsequent Design Decisions ......................................................................... 82
Payment Option Monthly Payment Disclosure......................................................... 82
Key Findings .................................................................................................... 82
Subsequent Design Decisions ......................................................................... 82
New Early Disclosure: Mortgage Shopping Checklist .............................................. 83
Key Findings .................................................................................................... 83
Subsequent Design Decisions ......................................................................... 84
Chapter VII: Summary................................................................................................. 85
Appendices:
Appendix A: Research Timeline
Appendix B: Sample Recruitment Screener
Appendix C: Participant Demographic and Background Information
Appendix D: Disclosure Forms Used in Testing
EXECUTIVE SUMMARY
BACKGROUND AND DESCRIPTION OF PROJECT
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
lenders to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the “Board”) the responsibility of implementing TILA, and
the Board currently does so through its Regulation Z.
In 2004, the Board began the process of reviewing Regulation Z to determine whether revisions
were necessary. In January 2009, the Board finalized amendments to Regulation Z’s rules
applicable to open-end (not home secured) credit (e.g., general purpose credit cards, merchantspecific credit plans, and overdraft lines of credit).1 The Board is currently in the process of
reviewing disclosures under Regulation Z related to home-secured open-end credit—namely,
home equity lines of credit, and closed-end mortgage disclosures. This report is related to the
Board’s review of disclosures for closed-end mortgage loans. (ICF Macro has prepared a
separate report relating to home-equity lines of credit).2 One of the goals of this review is to
ensure that the amended regulations lead to improved disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
Currently, Regulation Z requires that potential borrowers be given three types of disclosures
before consummation of a closed-end mortgage loan. The first is a Board publication titled
“Consumer Handbook on Adjustable Rate Mortgages.” This publication (referred to in this
report as the “CHARM booklet”) must be provided to potential borrowers who inquire about
applying for an adjustable rate mortgage (ARM) at the time they are provided with an
application form or are charged a nonrefundable fee, whichever is earlier. The CHARM booklet
provides general information about how ARMs work, but does not provide any transaction- or
program-specific information.
Regulation Z also requires every creditor to provide an ARM loan program disclosure under the
same circumstances and at the same time as the CHARM booklet for each ARM program in
which the consumer expresses an interest. The program disclosure gives details about a specific
loan program, including the index used to determine adjustable rates, how often the index is
adjusted, and any caps that apply to increases in the rate. It also includes a table showing a
historical example of how rates and payments would have varied over the past 15 years for a
hypothetical loan of $10,000. Regulation Z currently prescribes no mandatory format for the
ARM program disclosure except that it must be “clear and conspicuous,” in writing, and in a
form that the consumer may keep.
1
As of the writing of this report, the Board is in the process of reviewing these rules in light of legislation passed by
Congress in May 2009.
2
Disclosures for reverse mortgages and rescission were not included in this stage of the review of Regulation Z
mortgage disclosures.
i
Finally, Regulation Z requires that consumers applying for a closed-end mortgage loan receive a
TILA statement that provides detailed transaction-specific information on the terms of their loan
offer. This disclosure is provided to prospective borrowers within 3 days of application and
typically again before loan closing.3 Among other things, this disclosure includes the annual
percentage rate (APR), finance charge, amount financed, total of payments, and a payment
schedule that shows the number, timing and amounts of payments.
In addition to these pre-consummation disclosures, Regulation Z also requires creditors to give
borrowers notice after consummation when the interest rate on an ARM changes. Currently, the
content of this notice is prescribed, but no mandatory formatting is required.
In December 2007, the Board contracted with ICF Macro, an ICF International company, to
assist it with its review and revision of closed-end mortgage disclosures. ICF Macro is a research
and evaluation company with expertise in the design and cognitive testing of effective consumer
communication materials. ICF Macro worked with the Board on its review of credit card
disclosures and is also currently contributing to its review of TILA regulations related to home
equity lines of credit.
ICF Macro’s work thus far has consisted of two phases. In the background research phase,
ICF Macro conducted four focus groups and six rounds of cognitive interviews, which were
primarily focused on gaining knowledge about how consumers use the mortgage disclosures that
they now receive, as well as revised disclosures that have been previously proposed. Through the
focus groups, which took place in Greenbelt, MD, and Los Angeles, CA, ICF Macro gathered
information about mortgage shopping, the types of information that consumers currently use for
financial decision-making, and their perceptions of disclosures that are currently in use. Through
the in-depth cognitive interviews, ICF Macro gathered more detailed information about how
participants read disclosures and their level of comprehension of the content.
The second phase of the project was devoted to the development and testing of revised forms.
This phase consisted of six additional rounds of cognitive interviews in different locations:
Atlanta, GA; Bethesda, MD; Dallas, TX; Providence, RI; Denver, CO; and Bethesda, MD. For
each round, ICF Macro developed a set of model disclosure forms to be tested. Interview
participants were asked to review these forms and provide their reactions, and were then asked a
series of questions designed to test their understanding of the content. Data were collected on
which aspects of each form were most successful in providing information clearly and
effectively. The findings from each round of interviews led to revisions to the models for the
next round.
The findings from the consumer testing informed the Board’s proposed revisions to Regulation Z
rules for closed-end mortgages, which the Board will publish for public comment in July 2009.
The revised disclosure forms that were developed and refined through the testing will be
included as model forms and clauses with the proposal.
3
Currently, only applicants for home purchase loans would receive the disclosure within three days of application.
Applicants for home equity loans or refinancing would receive the disclosure at closing. Under the Mortgage
Disclosure Improvement Act amendments to TILA, all applicants must receive the disclosure within three business
days of application, effective July 30, 2009.
ii
SUMMARY OF METHODOLOGY
Research participants were recruited by telephone using a structured screening instrument.
Almost all participants had obtained a home mortgage in the past 2 years, either for the purposes
of a home purchase or for refinancing. In later rounds, several participants were also recruited
who were actively shopping for a mortgage but had not yet obtained one. The purpose of this
was to evaluate the extent to which the forms were clear and informative for people who had not
yet gone through the mortgage process.
The screening instrument included questions to ensure a range of participants in terms of gender,
age, and ethnicity. It also included questions about respondents’ current interest rates, as well as
whether they had experienced a recent financial hardship or been denied credit or discouraged
from applying. These criteria were used as proxies to ensure the inclusion of both prime and
subprime borrowers as participants in the study. Since consumers’ understanding of ARMs was a
particular focus for this project, over half of participants had experience with an ARM, either as
their current mortgage or a mortgage they had within the previous 5 years.
SUMMARY OF KEY FINDINGS
The following is a summary of key findings from the cognitive testing, as well as the most
significant design decisions. Some of the research focused on very specific aspects of the content
or format of these forms, but this summary focuses primarily on the broader issues that were
addressed during the testing process.
Mortgage Shopping Behavior
•
Only about half of research participants consulted more than one lender or broker when
looking for a mortgage loan. The two most common reasons that participants did not shop
more actively were a) because they trusted a particular lender or broker due to a personal
relationship or prior business relationship; and b) because they were referred to a particular
lender (e.g., by a real estate agent or home builder) and did not think to consult others.
•
When participants were selecting lenders to contact, trust was one of their most important
considerations. Most participants either began the mortgage shopping process by visiting
their current lending institution to look at offers or going to a lender or broker recommended
by friends, family members, or their realtors.
•
Even among participants who shopped for mortgages, the shopping process almost always
ended at the point of loan application. In some cases this was because of the cost in time and
money required to complete another application; other participants who had found the
shopping process tiring or frustrating seemed reluctant to revisit the process once they had
applied; and a few were concerned that their credit scores would decrease as a result of
multiple applications for credit. Whatever the reason, once a loan application was completed
and accepted, very few participants ever revisited the shopping process and talked to other
lenders—even after they learned that the loan they had been offered had terms they did not
like, or that the terms of the offer had changed.
iii
•
Participants were most likely to select loans based on interest rate, monthly payment, and
loan type (i.e., fixed rate vs. adjustable rate). Interest rate and monthly payment were by far
the two most common terms that focus group and interview participants compared between
lenders or brokers when shopping. The amount of closing costs and the presence of a
prepayment penalty were other terms participants frequently mentioned considering during
the shopping process.
•
When participants were asked what was most difficult about their mortgage experience, the
most frequent answer was the amount of paperwork involved. Many commented that because
they were shown so many papers at closing they did not read any of them carefully—
including their TILA and HUD-1 statements.4 Some also complained about the amount of
information lenders or brokers requested during the loan application process.
•
Some participants felt external pressure to find a loan quickly, which limited their ability to
shop. These participants included those who had found a home they wanted to purchase and
had a limited amount of time before closing, and those who needed to refinance an ARM
before the interest rate adjusted.
•
A number of participants indicated that they were informed only at loan closing that the
terms of their loan offer had changed. In almost all cases, these participants still completed
the loan transaction despite any reservations they had. The most frequent reason mentioned
was that they did not feel they had any options at that point in time—particularly in the case
of home purchase loans. In other cases, participants accepted loans because they believed, or
were advised by lenders, that they could easily refinance to better terms in the near future.
Finally, several participants said they felt intimidated and rushed during the closing process
and as a result found it difficult to object or raise questions.
•
While most participants were satisfied with the loans they had received and said they would
not have done anything differently when shopping for a loan, others said they wished they
had spent more time shopping among lenders to obtain a better loan. Several had more
serious concerns. For example, some had mortgage payments they were struggling to afford.
Others had ended up with mortgages that included terms they had originally not wanted, such
as adjustable rates, prepayment penalties, private mortgage insurance, and points paid at
closing, which increased the costs of their loans.
TILA Statements
•
Almost all participants indicated that the interest rate was one of the most important terms
they would consider when evaluating a loan offer. Several were confused by the fact that the
interest rate was not included on the current TILA statement, or incorrectly assumed that the
Annual Percentage Rate (APR) was the interest rate. As a result, the revised TILA statement
displays the contract interest rate.
4
Under HUD’s regulations implementing the Real Estate Settlement Procedures Act (RESPA), mortgage borrowers
receive a Good Faith Estimate (GFE) of settlement costs after submitting a loan application and a HUD-1 statement
of settlement costs at loan closing.
iv
•
Participants were generally confused by the fact that their contract loan amount was not
displayed on the current TILA statement, and many incorrectly assumed that the “amount
financed” was the amount of money they were borrowing. As a result, the loan amount was
added into the Loan Summary section of the revised TILA statement.
•
Participants consistently indicated they would want an estimate of their settlement charges as
early as possible, and that it would be helpful to have these charges displayed in the context
of their other loan terms (rather than on a separate document, such as their HUD-1
statement). As a result, settlement charges were added into the Loan Summary section of the
revised TILA statement.
•
Participants indicated that they would find the maximum interest rate and payment—two
terms that are not disclosed on the current TILA statement—to be very helpful in assessing
the affordability and riskiness of a loan offer. As a result, these terms were included in the
proposed model forms and clauses.
•
Three of the terms disclosed most prominently on the current TILA statement—the number
of payments, total of payments, and finance charge—were not seen by participants as useful
or important to their decision-making. In addition, almost all participants were confused by
the “amount financed” and did not understand what the figure signified. As a result, these
four terms are disclosed less prominently on the second page of the revised TILA statement.
•
The meaning of the APR was generally not understood by participants. Almost all either
assumed that this rate was the same as their interest rate, or understood that the two terms
were different but could not explain how. Participants believed a change in the APR would
not make much of a difference in their payment. Throughout multiple rounds of testing,
ICF Macro designers attempted to clarify the meaning of the APR by using alternative labels
and explanations, but were largely unsuccessful at improving participants’ comprehension of
the term or concept. The TILA statement being proposed, therefore, focuses on providing
context for consumers as to how the APR on their loan compares to others being offered to
borrowers with similar loans nationwide. This context is based on the “Average Prime Offer
Rate” (APOR) for mortgages of a comparable type (fixed or ARM) and maturity. The APOR
is calculated weekly and provided on the Federal Financial Institutions Examining Council
(FFIEC) website and is described on the form as “the average APR on similar loans offered
to borrowers with excellent credit.” The proposed statement uses both a graphic scale and a
narrative description to describe both the APOR and a “high cost zone,” which begins at
1.5 percentage points above the APOR for first lien loans.5
•
Participants were generally confused by the payment schedule shown on the current TILA
statement. For example, in examining a TILA statement for a hybrid ARM, several
participants incorrectly assumed that the fact that payments in the table varied over time
meant that they already reflected future changes in interest rates. As a result, the payment
table was revised to demonstrate more explicitly the relationship between interest rates and
payments. The table in the proposed model form and clauses for a hybrid ARM displays
5
For subordinate lien loans, the high cost zone would begin at 3.5 percentage points above the APOR. ICF Macro
and Board staff did not construct any tests involving subordinate lien loans.
v
these terms at three points in time: the introductory rate and payment, the maximum at first
adjustment, and the maximum ever.6
•
The revised TILA statement includes a new section labeled “Key Questions about Risk,”
which provides information about up to nine potentially risky or costly features of mortgage
loans, such as: adjustable interest rates; potential changes to payments; prepayment penalties;
interest-only payments; balloon payments; negative amortization; whether the product is a
“no-documentation” or “low-documentation” loan; whether the loan has a demand feature;
and equity sharing. For each of these features, the form lists a question (e.g., “Can my
interest rate increase?”) and the answer (either “Yes” or “No”).7 All affirmative answers are
accompanied by further explanation. This section of the form was received very positively by
participants, who found the format clear and easy to understand.
•
In the final two rounds of testing, ICF Macro tested a TILA statement that described a
payment option mortgage. Because the details of payment option mortgages are so complex,
ICF Macro and Board staff focused on developing a statement that would communicate to
consumers that a) if they made the minimum payment their loan balance would increase; and
b) their minimum payment can increase dramatically in the future. While interview
participants did not necessarily understand exactly how payment option ARMs worked based
on their review of the form, the statement was largely successful at meeting its two primary
communication objectives.
•
The proposed TILA model forms and clauses incorporate some of the technical information
that is currently provided on ARM loan program disclosures—including information about
the frequency of interest rate changes, caps on interest rates, and how the interest rate is
calculated. This decision was made in part because the Board staff believes that this
information was important for consumers to have when considering a specific loan offer, and
in part because background research showed that consumers were unlikely to notice or use
the information when it was included on the program disclosure.
Other Mortgage Disclosures
•
Participants who were shown the CHARM booklet generally indicated that they found the
document useful and thought the information it contained was important – particularly for
consumers with little experience with mortgages. However, a significant number of
participants indicated that they would be unlikely to read the booklet because it was too long.
Several participants indicated that they would be more likely to read a shorter and more
concise disclosure.
6
The payment tables that are being proposed for loans other than hybrid ARMs (e.g., fixed rate loans or payment
option ARMs) have a slightly different structure, reflecting the differences in the payment schedule for these products.
7
Three of these features—adjustable interest rates, potential changes to payments, and prepayment penalties—are
displayed on all TILA statements. The remaining six questions are included only the form only if they apply to the loan
being described.
vi
•
As a result, ICF Macro developed a new one-page early disclosure titled “Key Questions to
Ask About Your Mortgage.” The goal was to summarize the most important information in
the CHARM booklet in a shorter, more consumer-friendly format, and to warn consumers of
certain risky loan features. This form lists seven questions related to potentially risky or
costly features that prospective borrowers should ask their lenders about any loans they are
offered. These questions pertain to interest rate, monthly payment, loan balance reduction,
loan balance increase, prepayment penalty, balloon payment, and loan documentation. The
questions on this disclosure are repeated on the TILA statement along with loan-specific
answers to each question, to ensure that borrowers have information they need to determine
whether to get that loan before they are committed. The Key Questions disclosure tested
extremely well with participants; all indicated that they would find it useful, and almost all
found it very clear and easy-to-read. As a result, the Board is proposing to require that
lenders provide the Key Questions document to prospective borrowers before they submit a
loan application.
•
Participants who were shown a sample of a current ARM loan program disclosure found the
document very difficult to read and understand. They found the narrative format difficult to
navigate and the terminology extremely complicated. A large number misinterpreted the
historical example table in the disclosure; for example, some thought that the historical rates
shown in the table would apply to their loan in the future. As a result, ICF Macro developed a
simpler revised program disclosure that focuses on four important distinguishing
characteristics of an ARM program: the length of introductory period, the frequency of rate
change, the index used to calculate the interest rate, and limits on rate changes. The revised
program disclosure does not include a historical example table, but does include productspecific answers that parallel the Key Questions provided at application on the TILA
statement.
•
Along with the Key Questions document, ICF Macro developed another new early disclosure
titled “Fixed vs. Adjustable Rate Mortgages.” This publication, which the Board is proposing
be provided to all prospective borrowers, describes the features of ARMs and their relative
advantages and disadvantages in relation to fixed-rate loan products. Interview participants
found the form easy to understand, and indicated that it would be useful to them.
•
In addition to those disclosures described above, ICF Macro developed and tested two
additional disclosure forms and clauses to be provided after loan closing that the Board will
propose in July 2009. The first is an ARM adjustment notice that would be provided to
consumers at least 60 days before terms of their ARM changed and would explicitly describe
the change to their interest rate and payment. The second is a disclosure to be included on
periodic statements for loans with negative amortization, such as payment option ARMs.
This monthly disclosure highlights the consequences that consumers’ payment decisions will
have on their loan balance. In both cases, these disclosures tested extremely well—
participants had little difficulty understanding their content, and indicated that the
information would be meaningful and important to them.
vii
CHAPTER I: INTRODUCTION
BACKGROUND
In 1968, Congress enacted the Truth in Lending Act (TILA) to protect consumers by requiring
lenders to provide key pieces of information to consumers at various points in time. Congress
assigned the Federal Reserve Board (the “Board”) the responsibility of implementing TILA, and
the Board currently does so through its Regulation Z.
In 2004, the Board began the process of reviewing Regulation Z to determine whether revisions
were necessary. In January 2009, the Board finalized amendments to Regulation Z’s rules
applicable to open-end (not home secured) credit (e.g., general purpose credit cards, merchantspecific credit plans, and overdraft lines of credit).8 The Board is currently in the process of
reviewing disclosures under Regulation Z related to home-secured open-end credit—namely,
home equity lines of credit and close-end mortgage disclosures. This report is related to the
Board’s review of disclosures for closed-end mortgage loans.9 One of the goals of this review is
to ensure that the amended regulations lead to improved disclosures that consumers would most
likely pay attention to, understand, and be able to use in their decision-making.
Currently, Regulation Z requires that potential borrowers be given three types of disclosures
before consummation of a closed-end mortgage loan. The first is a Board publication titled
“Consumer Handbook on Adjustable Rate Mortgages.” This publication (referred to in this
report as the “CHARM booklet”) must be provided to potential borrowers who inquire about
applying for an adjustable rate mortgage (ARM) at the time they are provided with an
application form or are charged a nonrefundable fee, whichever is earlier. The CHARM booklet
provides general information about how ARMs work, but does not provide any transaction- or
program-specific information.
Regulation Z also requires every creditor to provide an ARM loan program disclosure under the
same circumstances and at the same time as the CHARM booklet, for each ARM program in
which the consumer expresses an interest. The program disclosure gives details about a specific
loan program, including the index used to determine adjustable rates, how often the index is
adjusted, and any caps that apply to increases in the rate. It also includes a table showing a
historical example of how rates and payments would have varied over the past 15 years for a
hypothetical loan of $10,000. Regulation Z currently prescribes no mandatory format for the
ARM program disclosure except that it must be “clear and conspicuous,” in writing, and in a
form that the consumer may keep.
8
As of the writing of this report, the Board is in the process of reviewing these rules in light of legislation passed by
Congress in May 2009.
9
Disclosures for reverse mortgages and rescission were not included in this stage of the review of Regulation Z
mortgage disclosures.
1
Finally, Regulation Z requires that consumers applying for a closed-end mortgage loan receive a
TILA disclosure that provides detailed transaction-specific information on the terms of their loan
offer. This disclosure is provided to prospective borrowers within 3 days of application and
typically again before loan closing.10 Among other things, this disclosure includes the annual
percentage rate (APR), finance charge, amount financed, total of payments, and a payment
schedule that shows the number, timing and amounts of payments.
In addition to these pre-consummation disclosures, Regulation Z also requires creditors to give
borrowers notice after consummation when the interest rate on an ARM changes. Currently, the
content of this notice is prescribed, but no mandatory formatting is required.
In December 2007, the Board contracted with ICF Macro, an ICF International company, to
assist it with its review and revision of closed-end mortgage disclosures. ICF Macro is a research
and evaluation company with expertise in the design and cognitive testing of effective consumer
communication materials. ICF Macro worked with the Board on its review of credit card
disclosures and is currently contributing to its review of TILA regulations related to home equity
lines of credit.11
The findings from ICF Macro’s work informed the Board’s proposed revisions to Regulation Z
rules for closed-end mortgages, which the Board will publish for public comment in July 2009.
The revised disclosure forms that were developed and refined through the testing will be
included as model forms with the proposal.
OVERVIEW OF THE PROJECT
The project thus far has consisted of two phases. In the background research phase, ICF Macro
conducted four focus groups and six rounds of cognitive interviews, which were primarily
focused on gaining knowledge about how consumers use the mortgage disclosures that they now
receive, as well as revised disclosures that have been previously proposed. Through the focus
groups, which took place in Greenbelt, MD, and Los Angeles, CA, ICF Macro gathered
information about mortgage shopping, the types of information that consumers currently use for
financial decision-making, and their perceptions of disclosures that are currently in use. Through
the in-depth cognitive interviews, ICF Macro gathered more detailed information about how
participants read disclosures and their level of comprehension of the content.
The second phase of the project was devoted to the development and testing of revised forms.
This phase consisted of six additional rounds of cognitive interviews in different locations:
Atlanta, GA; Bethesda, MD; Dallas, TX; Providence, RI; Denver, CO; and Bethesda, MD. For
each round, ICF Macro developed a set of model disclosure forms to be tested. The model
disclosures described loan transactions intended to be generally realistic for participants. The
terms of the transactions were often constructed to facilitate testing of specific form elements and
10
Currently, only applicants for home purchase loans would receive the disclosure within three days of application.
Applicants for home equity loans or refinancing would receive the disclosure at closing. Under the Mortgage
Disclosure Improvement Act amendments to TILA, all applicants must receive the disclosure within three business
days of application, effective July 30, 2009.
11
ICF Macro has submitted a separate report to the Board describing its findings related to home equity lines of
credit, which will also be published with its proposed rules.
2
did not necessarily reflect actual market terms and conditions. Interview participants were asked
to review these forms and provide their reactions, and were then asked a series of questions
designed to test their understanding of the content. Data were collected on which aspects of each
form were most successful in providing information clearly and effectively. The findings from
each round of interviews led to revisions to the models for the next round.
Appendix A provides an overview of the rounds of focus groups and cognitive interviews that
have been conducted as part of this project, as well as the topics addressed in each round.
RECRUITMENT OF RESEARCH PARTICIPANTS
Interview and focus group participants were recruited by telephone using a structured screening
instrument developed by ICF Macro and Board staff. Participation was limited to people who
were the primary mortgage decision-maker in their households, and who did not work for a bank
or other financial institution or in the real estate or mortgage industry. Other questions ensured
the recruitment of participants with a range of ethnicities, ages, education levels, and mortgage
behavior. Nearly all participants had obtained a mortgage (either for a home purchase or through
refinancing) in the past 2 years. Since consumers’ understanding of ARMs was a particular focus
for this project, over half of participants had experience with an ARM, either as their current
mortgage or a mortgage they had within the previous 5 years.
In each of the last four rounds at least one participant was recruited who was actively shopping
for a mortgage but had not yet obtained one. The purpose of this was to evaluate the extent to
which the forms were clear and informative for people who had not yet gone through the
mortgage process.
The recruiting screener used for interviews conducted in Providence, RI is provided as Appendix B;
while the screener for other rounds varied slightly, the intent of the screening questions was
essentially the same. Information about the demographic and background characteristics of the
interview participants is provided as Appendix C.
One of the recruiting goals was to ensure that interviews were conducted with both prime and
subprime borrowers. Because many consumers do not know their credit scores or are reluctant to
share them, it was determined that a credit score could not be used as a screening variable for the
purposes of recruiting. Therefore, participants were defined as “subprime” if they had:
a) suffered a “financial hardship” such as bankruptcy, foreclosure, repossession or a tax lien in
the past 7 years; b) been denied credit or discouraged from applying for credit in the past 2 years;
or c) received an interest rate higher than 8 percent on their most recent first mortgage
(or 10 percent on their most recent second mortgage). These cutoff points on the interest rate
screening questions for borrowers with subprime loans were set to be roughly consistent with the
Home Mortgage Disclosure Act (HMDA) APR-based thresholds for reporting higher-priced
loans over the 2006-2007 period.12 Fifty-nine of the 134 research participants qualified as
“subprime” using the three criteria related to creditworthiness.
12
In January 2009, the cutoff points for this screening question were adjusted to 7.5 percent for first mortgages and
9.5 percent for second mortgages, to reflect the lower HMDA APR-based reporting thresholds over the 2007-08
period.
3
STRUCTURE OF THIS REPORT
This report provides a summary of the work that has been carried out to date, the methodologies
used, and the findings that influenced the development of the proposed model forms and clauses
that will be released for public comment.
Chapters II and III describe the background research ICF Macro conducted with consumers prior
to developing any new forms. Chapter II details ICF Macro’s findings about how consumers
currently shop for mortgages, while Chapter III presents research into the usability of several
types of mortgage disclosures that are either currently provided to consumers or have been
previously proposed.
Chapters IV through VII describe the second phase of the project, during which new disclosure
forms were developed and tested. Chapter IV highlights the general design principles that
ICF Macro form designers used during the course of the form development. Chapter V details
the development and testing of revised TILA statements through six rounds of cognitive
interviews, while Chapter VI describes the development and testing of several other types of
disclosures related to mortgages that are provided at application or after closing. Finally,
Chapter VII provides a brief summary of the project outcomes.
4
CHAPTER II: FINDINGS ABOUT MORTGAGE SHOPPING
One of the goals of ICF Macro’s consumer research has been to obtain a better understanding of
the extent to which consumers shop for mortgages (i.e., compare quotes from more than one
lender or broker) and what kind of information they consider when doing so. Since one of the
purposes of the Board’s disclosures is to make consumers more effective shoppers for
mortgages, it is important that the development of these documents is informed both by how
consumers shop currently and by the obstacles that they encounter in trying to do so.
All rounds of focus groups and interviews conducted by ICF Macro included an introductory
segment during which participants discussed their recent experiences shopping for mortgages.
Participants were asked to describe how they had previously shopped for mortgages, including
how many lenders or brokers they spoke to, how they identified potential lenders or brokers, and
the factors they considered when choosing a mortgage. The following is a summary of
ICF Macro’s key findings about mortgage shopping.
SHOPPING FOR A MORTGAGE
•
Only about half of research participants consulted more than one lender or broker
when looking for a mortgage loan. The two most common reasons that participants did not
shop more actively were a) because they trusted a particular lender or broker due to a
personal relationship or prior business relationship; and b) because they were referred to a
particular lender (e.g., by a real estate agent or home builder) and did not think to consult
others. Other reasons participants cited for not shopping included time constraints, a
reluctance to have multiple lenders perform a credit check because of the impact it would
have on their credit scores, concern about the amount of effort it would take to complete
paperwork for multiple lenders, and in a few cases, a mistaken belief that all lenders would
offer the same rates and terms.
•
When participants were selecting lenders to contact, trust was one of their most
important considerations. Most participants either began the mortgage shopping process by
visiting their current lending institution to look at offers or going to a lender or broker
recommended by friends, family members, or their realtors. Others selected a lender based on
its general reputation as a financial institution. Several participants used the internet to
compare loan products, using web resources that gave them multiple quotes from different
lenders. A few contacted lenders to inquire about offers they saw in newspaper, radio, or
television advertisements.
•
Participants who actively shopped for mortgages used a variety of methods to compare
loans. Some reported using internet tools to compare offers from different lenders. Others
relied on offers that they received from different lenders over the phone. A few met in person
with representatives from different banks. In general, these participants were more certain
about what type of loan they wanted and what terms were most important to them.
5
•
Participants with poor credit were more likely to indicate they had difficulty finding
financing. Some participants indicated that because of poor credit or recent financial
hardships, it was difficult for them to find a lender who would offer them a mortgage. These
participants often indicated that in order to get a loan, they had to accept terms they felt were
less than ideal, such as an adjustable rate mortgage (ARM) or a mortgage with a pre-payment
penalty.
•
Even among participants who shopped for mortgages, the shopping process almost
always ended at the point of loan application. Even participants who actively shopped for
their mortgage and solicited information from several lenders usually only applied for one loan.
In some cases this was because of the cost in time and money required to complete another
application; other participants who had found the shopping process tiring or frustrating seemed
reluctant to revisit the process once they had applied. Whatever the reason, once a loan
application was completed and accepted, very few participants ever revisited the shopping
process and talked to other lenders—even after they learned that the loan they had applied for
had terms they did not like, or when the terms of the offer changed.
IMPORTANT FACTORS TO CONSUMERS WHEN SHOPPING
•
Participants were most likely to shop based on interest rate, monthly payment, and loan
type. Interest rate and monthly payment were by far the two most common terms that focus
group and interview participants compared between lenders or brokers when shopping. Most
participants said they were primarily interested in fixed rate mortgages. While some indicated
that they would consider an ARM if they were sure they could refinance or sell before the rate
adjusted, others said they would never apply for an ARM.13 Other terms some participants
considered when shopping were closing costs, prepayment penalties, discount points, whether
private mortgage insurance was required, and balloon payments.
EDUCATION ABOUT MORTGAGE PROCESS
•
Participants who educated themselves about the mortgage process primarily did so
through an informal networking process with family, friends, and colleagues. New
homebuyers were more likely to have gathered information about the mortgage process before
starting their search; in most cases participants who were getting their second or third mortgage
felt that they were already knowledgeable and did not seek out additional information.
•
Some participants indicated that prior to getting their first mortgage they sought out
information about the process on the Internet. Fewer participants said they obtained
information about the mortgage shopping process by reading magazines or newspapers or by
attending workshops. A few also indicated they educated themselves by reviewing materials
provided by their lending institution. Subprime participants were less likely to use the Internet
and more likely to rely on information from family or friends.
13
It is important to note that much of the consumer research described in this report took place during the “mortgage
crisis” of 2008-09. As a result, participants may have been more risk-averse and suspicious of ARMs and other
alternative mortgage products than they would have been in previous years.
6
FRUSTRATIONS AND SURPRISES
•
Most participants felt overwhelmed by the amount of paperwork involved in obtaining
a loan. When participants were asked what was most difficult about their mortgage
experience, the most frequent answer was the amount of paperwork involved. Many
commented that because they were asked to sign so many papers at closing they did not read
any of them carefully—including their TILA and HUD-1 statements. Some also complained
about the amount of information lenders or brokers requested during the loan application
process. A few participants said they felt uncomfortable providing detailed financial
information to a large number of lenders or brokers because of concerns about privacy.
While none explicitly said so, this may have been an additional reason that some participants
did not shop for mortgages more widely.
•
Time pressure was a particular concern among borrowers who were purchasing a home
and those who felt a need to refinance before their mortgage rates adjusted. Once
participants found a home they wanted to purchase, many felt pressured to find a loan
quickly, which limited their ability to shop. As one participant explained, “I found a house
that I really loved in this neighborhood that I’ve been living in…Then a week later it was my
home…I didn’t even know how to get a mortgage or anything so it all just happened really
quickly.” Some participants said they felt pressure because they had an ARM and needed to
re-finance before the interest rate adjusted. As a result, they did not talk to as many potential
lenders as they might have otherwise.
•
Participants had difficulty acting on information they were provided for the first time
at loan closing. Several participants indicated they were surprised by important changes in
their loan terms at the loan closing. In a few cases, for example, participants said that they
had originally been offered a fixed-rate loan, but were told at closing their rate would be
adjustable. In almost all of these cases, participants still completed the loan transaction
despite their reservations. The most frequent reason mentioned was that they did not feel they
had any options at that point in time—particularly in the case of home purchase loans. In
other cases, participants accepted loans because they believed or were advised by lenders,
that they could easily refinance to better terms in the near future. Finally, several participants
said they felt intimidated and rushed during the closing process and as a result found it
difficult to object or raise questions.
•
Some participants did not believe they were given enough information during the
mortgage process. For example, one participant complained their broker did not show him
all of the loan offers for which he was qualified. Other participants felt their lender or broker
should have explained the terms of their loan more clearly—for example, how and when
rates and payments were going to vary. These complaints were more common among
participants who were purchasing their first home; participants who had previous mortgage
experience were much less likely to complain about a lack of information.
7
•
Although most participants were satisfied with their loans, some had serious concerns
about their mortgages. Most participants were satisfied with the loans they had received
and said they would not have done anything differently when shopping for a loan. However,
some said that, in retrospect, they wished they had spent more time shopping among lenders
to obtain a better loan. Several had more serious concerns. For example, some had mortgages
they were struggling to pay. Others had ended up with mortgages that included terms they
had originally not wanted, such as adjustable rates, prepayment penalties, private mortgage
insurance, and points paid at closing.
8
CHAPTER III: TESTING OF CURRENT AND PREVIOUSLY
PROPOSED DISCLOSURE FORMS
As noted earlier in this report, the first phase of ICF Macro’s consumer testing primarily focused
on gaining knowledge about how consumers used the mortgage disclosures they now receive as
well as testing selected disclosures that were previously proposed by other organizations. In this
early phase of testing, ICF Macro tested three types of disclosures:
•
Transaction-Specific Disclosures: These disclosures provide information about a specific
loan offer from a lender. The transaction-specific disclosure that is currently required is
known as the “TILA statement.” It is currently provided to consumers at two points in the
mortgage process—an initial version is provided within 3 days of application and a final
document is generally provided before loan closing.
•
ARM Loan Program Disclosures: This disclosure is required when a consumer who has
expressed interest in an ARM received an application form. The form provides information
about ARM loan programs offered by the lender but not about specific loan terms based on
the consumer’s creditworthiness.
•
The Consumer Handbook on Adjustable Rate Mortgages (the “CHARM booklet”):
Like the program disclosure, the CHARM booklet is required to be provided to consumers
who have expressed interest in an ARM when they receive an application form. This booklet
provides general information about ARMs and how they work as well as potential risks of
getting an ARM.
The following chapter of the report describes ICF Macro’s consumer research findings related to
these disclosures. It also includes the implications these findings had for subsequent disclosure
design efforts.
TRANSACTION-SPECIFIC DISCLOSURES
In addition to the TILA statement format that is currently in use, two other formats were tested
during the background research phase of the project (Phase I). These included:
•
A form proposed in 1998 by staff from the Department of Housing and Urban Development
(HUD) and the Board (referred to in this report as the “joint form”);14 and
14
Under a 1996 Congressional directive, the Board and HUD studied ways to simplify and improve the disclosures
required by TILA and the Real Estate Settlement Procedures Act (RESPA). In July 1998, the Board and HUD
submitted a Joint Report to the Congress that provided a broad outline intended to be a starting point for
consideration of legislative reform of the mortgage disclosure requirements. The report included a proposed two-page
disclosure that would largely include the information required by both laws. Information elements related to TILA were
included on the first page; the second page included a breakout of settlement costs to fulfill the requirements of
RESPA. The first page of this combined form was used in the background research phase of this project. The 1998
report the agencies submitted to Congress is available at http://www.federalreserve.gov/boarddocs/
rptcongress/tila.pdf.
9
•
A three-page form proposed by Alex Pollock of the American Enterprise Institute in 2007.
This form, titled “The Basic Facts About Your Mortgage Loan,” is referred to in this report
as the “Pollock form.” It contains one page of transaction-specific information and a twopage glossary.
ICF Macro and Board staff opted to study these two specific forms for several reasons. The joint
form shared a number of common elements with the current TILA and thus supplemented
benchmark testing of the TILA statement. In addition, this form reflected joint efforts by HUD
and Board staff to combine informational elements from the Real Estate Settlement Procedures
Act (RESPA) and TILA into a single disclosure. The Pollock form, on the other hand, utilized a
significantly different format than the existing TILA and joint forms. This form also specifically
addressed features of ARMs, which was a primary area of focus for this study.15
Usability information on the current TILA statement was collected through focus groups in
Greenbelt, MD and Los Angeles, CA (Rounds 1 and 4), as well as through cognitive interviews
in Baltimore, MD (Round 7). The Pollock and joint forms were tested through interviews in
Washington, DC and Los Angeles, CA (Rounds 2 and 3). The forms that were shown to
consumers during this background research phase are provided in Appendix D.
Summary of Findings
Initial Reactions to the TILA Statement
•
Only a few participants from the background research testing recognized the current TILA
statement, or knew that they had received this document previously. Those that did recognize
the form usually commented on the four boxes at the top of the page containing the Annual
Percentage Rate, Finance Charge, Amount Financed, and Total of Payments.
•
Participants who did recognize the TILA statement were asked whether they had found the
document useful when they received it previously. Most indicated that they had not, either
because they had not understood it or because they had not paid attention to it at loan closing.
Loan Summary Information
Amount Financed/Loan Amount
•
Most participants who reviewed the current TILA statement incorrectly assumed the “amount
financed” was the same as the loan amount or, as one participant said, “the cost of the
house.”
•
The Pollock and joint forms listed the loan amount, rather than the amount financed. All but
one participant who reviewed these forms were able to correctly identify the loan amount.
15
This project focused primarily on disclosures related to ARMs and other more complex mortgage products. In 2007,
the Federal Trade Commission (FTC) conducted research on consumer understanding of TILA and other disclosures
in the context of fixed-rate mortgages.
10
Total of Payments
•
When reviewing the current TILA, most participants assumed the “total of payments” was
equal to the sum of the finance charge and the amount financed.
Loan Term
•
The current TILA and joint forms did not display the loan term. Most participants who were
asked to identify the loan term added up the number of payments shown in the payment
schedule to calculate their answer. However, a few found it difficult to do so and as a result
could not answer this question.
•
All but one of the participants who were shown the Pollock statement were able to correctly
identify the loan term (30 years).
Settlement Costs
•
When asked whether there was any information that did not appear on the current TILA
statement that they thought should be displayed, several participants commented it would be
helpful to see more detailed information about closing costs and/or settlement charges.
•
All participants correctly identified the amount of the closing costs on both the Pollock and
the joint forms. About half of the participants indicated they would want the closing costs to
be itemized on the statement.
APR and Finance Charge
•
Most participants who reviewed the current TILA and joint forms indicated the “finance
charge” was the cost one would pay for getting the loan. It was unclear whether these
participants understood that this figure was made up of both interest and fees.
•
Almost all participants who were shown the current TILA statement or joint form did not
understand what was meant by the APR.16 Many assumed it was synonymous with the
interest rate while others understood that the two terms were different they were unable to
articulate how they differed.
•
Some participants who saw the joint form (which provided an explanation of the APR)
understood that this rate included both interest and fees. However, most of these participants
only realized this after looking at the form for several minutes and even then did not
understand how the term might be useful to them.
•
Participants had various misinterpretations of the APR, such as that it reflected how the rate
would adjust in the future, or that it was the maximum possible rate. These misinterpretations
occurred even when participants were looking at the joint form, which included an
explanation of the term.
16
The APR did not appear on the Pollock form.
11
Rate and Payment Information
Understanding of Adjustable Rate
•
Over half of the participants who reviewed the current TILA statement understood the
interest rate on the loan would change. However, several arrived at this conclusion because
the payment schedule showed different monthly payments (which would not necessarily
indicate that the loan had an adjustable rate) and not because the form was marked as having
a “variable rate feature.” A few participants indicated they did not know whether the rate
would change or not.
•
Some participants who saw the current TILA commented that although the form used the
term “variable rate,” they were more familiar with the term “adjustable rate.” In fact, a few
did not realize that the fact that the “variable rate” box on the form was checked meant the
rate could change.
•
All participants who reviewed the joint form understood the loan had an adjustable rate.
However, less than half understood the interest rate was fixed for the first 3 years. The
remainder thought that the rate could vary within the first 3 years; several, in fact, thought
that it could begin varying after only 1 month. Several others indicated the form did not
provide any information about when the interest rate could adjust. Moreover, most
participants did not know how often the interest rate could adjust; only a small number
correctly indicated the interest rate could adjust annually after the first 3 years.
•
Almost all participants who saw the joint and Pollock forms were able to identify the initial
interest rate and most were able to also identify the maximum interest rate.
•
All but one participant who reviewed the Pollock form realized the loan had an adjustable
rate. Most understood the rate was fixed for 3 years and would begin to vary after that.
However, only about half of participants were able to indicate the rate would change
annually after the first 3 years. Moreover, a few participants incorrectly indicated that after
3 years, the rate would change to the maximum possible rate.
•
When participants in several rounds of testing were queried as to what would cause their
interest rate to go up or down, they gave a variety of responses, including “the market”; “the
economy”; the “prime rate”; the “Fed rate”; and the Consumer Price Index. All of these
responses seemed to reflect a common belief that rates would change based on external
market forces over which they had no control. However, most participants did not understand
the details of how this rate would be determined (i.e., that it would remain at a fixed margin
above a given index rate).
Monthly Payments
•
Several participants commented they liked the payment schedule shown on the current TILA
and joint forms because it provided specific and detailed information about their future
payments. However, most incorrectly assumed the monthly payments shown in the payment
schedule were their future monthly payments, rather than estimates that could change based
12
on the market. One participant explained, “I like the [the joint] form because it shows…the
payment could change, but it shouldn’t be dramatically different.” This misconception led to
some confusion among participants who questioned how the form could display their future
monthly payments when the interest rate was adjustable.
•
The joint and Pollock forms each disclosed the maximum rate and payment that could ever
be charged on the loan, while the current TILA statement did not. Participants strongly
supported the inclusion of this information on the form, because they felt it would help them
make more informed decisions regarding the affordability and riskiness of adjustable rate
mortgages.
•
Almost all participants who saw the joint form were able to correctly identify the initial
monthly payment and knew this payment could vary over time. However, as with interest
rates, participants were confused as to when the payment could begin adjusting. While some
participants correctly stated the payments could change after 3 years, others thought the
payments could adjust as early as within 1 month.
•
Almost all participants who reviewed the Pollock form correctly identified the initial monthly
payment on the Pollock form. When looking at the Pollock form, most participants
understood the monthly payments would be fixed for the first 3 years of the loan and then
could vary.
•
When asked if the Pollock form indicated what the payment would become after 3 years,
about half of the participants identified the payment associated with the fully-indexed rate.
However, it appeared that some participants correctly identified the fully-indexed rate
because it was the only other payment displayed on the form, rather than because they
understood the term. When asked to explain the meaning of “fully-indexed rate,” most
participants were unable to do so (see the section “Terms Unique to Pollock Form” below).
Taxes and Insurance (Escrow)
•
Most participants who saw the joint form incorrectly assumed that the payments shown in the
payment schedule included escrow, even though there was a footnote stating otherwise.
Some participants later saw the footnote and realized their mistake while others did not.
•
The word “escrow” has different meanings in different parts of the country which led to
confusion on the part of participants who reviewed the joint form. Most participants in
Washington, DC. understood the term referred to additional funds for taxes and insurance
that are added to the monthly payment. In California, however, the word “escrow” is used to
refer to the process of closing on a loan.
•
Some participants suggested the joint form provide an explanation of the word “escrow,”
since they thought not everyone would be familiar with the term. Others suggested either
adding another column in the payment schedule to include escrow or moving the information
about escrow closer to the payment schedule.
13
•
When asked which of the monthly payments shown on the Pollock form would be their
initial monthly payment, most selected the payment that included taxes and insurance, while
a few participants chose the payment with just principal and interest.17 Participants who
assumed that payments would not include escrow tended to be those who were younger and
had less experience with mortgages.
Other Required Disclosure Text
Prepayment Penalty
•
While most participants reviewing the current TILA understood the general meaning of the
phrase “prepayment penalty,” about half thought the penalty would not apply if they sold the
house or refinanced their loan. A few were confused by the language that indicated they
would “not be entitled to a refund of part of their finance charge”; these participants thought
if they paid off the loan they would still be responsible for paying the full finance charge
shown on the top of the page.
•
When looking at the joint form, almost all participants realized there was a prepayment
penalty associated with the loan. However, some incorrectly assumed this penalty would only
apply if the loan was paid off or if the house was sold, not if the loan was refinanced.
A number of participants also commented that they would like the form to provide the
amount of the penalty as well as the specific circumstances in which it would apply.
•
When reviewing the Pollock form, almost all participants understood that a prepayment
penalty would be charged and they were able to correctly identify the amount of that penalty.
•
The version of the Pollock form used for testing in Washington, DC stated the prepayment
penalty would be charged “if you refinance within the first three years.” Several participants
who saw this version of the form did not realize that the penalty would also apply if they sold
the house or otherwise paid off the loan. A version of the Pollock form used in Los Angeles
was revised to read that the fee must be paid “if you pay off or refinance your loan.” This led
to fewer misconceptions among participants, although one participant still questioned
whether he would have to pay a penalty if he sold the house.
Other Loan Terms
•
Very few of the participants who saw the current TILA understood the terms “security
interest” and “demand feature.” About half of the participants who read the description of
loan assumption understood what it meant; others were confused by this text. Several
participants were surprised to learn that mortgages could be transferred in this way.
•
Participants generally indicated that the information on the bottom half of the current TILA
statement and joint form (e.g., information about security interest, late charges, loan
assumption, demand feature, and hazard insurance) was much less important than that on the
17
The Pollock form did not indicate whether or not escrow was required, so none of these responses were correct or
incorrect.
14
top half of the form (e.g., information about interest rates and payment). At least half did not
understand what was meant by “security interest,” “assumption,” or “demand feature.”
•
The two pieces of information on the bottom half of the current TILA statement that
participants did indicate were important to them were whether or not the interest rate could
change, and whether the loan included a pre-payment penalty.
Terms Unique to Pollock Form
The Pollock form had several terms and features not found on the current TILA or joint forms.
The findings specific to Pollock terminology and features are described below.
Type of Loan
•
The Pollock form used in testing listed the “type of loan” as a “3/1 LIBOR ARM.” Almost
all participants were confused by this term and did not understand what was meant by either
“3/1” or “LIBOR.”18 Only one participant understood that “LIBOR” referred to the index
being used to determine the interest rate; another understood this after seeing a reference to
LIBOR in the glossary.
Fully-Indexed Rate
•
Most participants did not understand that the fully-indexed rate was the level to which the
interest rate would eventually adjust assuming there was no market fluctuation (i.e., no
variation in the LIBOR index). Several simply thought this was what the interest rate would
change to in 3 years, rather than an estimate. Other participants had even more serious
misconceptions; for example, one thought the fully-indexed rate represented the fee that the
mortgage broker would receive for his or her services.
Payment-to-Income (PTI) Ratio
•
All participants correctly interpreted the payment-to-income ratio shown on the Pollock form
as the percentage of their income that would be required to make their loan payments.
•
Participants’ reactions to the inclusion of the PTI ratio on the form were mixed. Some
thought this information would be useful to help them budget for their mortgage payments.
Others, however, felt this ratio was not helpful because it did not account for other debts and
bills. One participant commented that the PTI ratio was not a valuable measure because it
might change dramatically in the event of a career change.
•
Participants interpreted the income figure provided on the Pollock form differently; about
half assumed the figures listed would be pre-tax, while the other half thought they would be
post-tax. Because of this confusion, several participants suggested this be clarified on the
form.19
18
“LIBOR” stands for the London Interbank Offered Rate, which is used as an index for determining the rate on some
ARM loans.
19
The Pollock form does not indicate whether the income shown is pre- or post-tax.
15
•
When asked whether they would rather be shown pre- or post-tax income on this form,
participants were again split. Some preferred to see post-tax income, since they felt this
would make the ratio more useful. Others preferred to see pre-tax income, because that is the
figure with which they are more familiar. The majority of participants also indicated it would
be more useful to have monthly income listed on the form, as opposed to annual income.
•
Participants had very different opinions of how high the PTI ratio would have to be before
they would feel uncomfortable taking the loan. When asked what level would make them
uncomfortable, participants gave responses ranging from 20 to 50 percent. Only one
participant looked in the glossary and found the reference to the “industry standard” of
28 percent.
Glossary
•
Very few participants noticed the glossary when first reading the form and even fewer
referred to the glossary when they came across terms they did not understand.
•
When asked by the interviewer to review the glossary, participants were very positive toward
it; they found it to be user-friendly and easy to understand.
•
Participants suggested that more consumers would use the glossary if it appeared before the
form, rather than after it.
Design Implications
•
There were several items that do not appear on the current TILA that participants consistently
indicated they would want to see on a revised form. In some cases, these were terms that
participants already use when shopping for a mortgage, and therefore including this
information on the TILA statement would allow them to confirm that they received what they
had been offered verbally. In other cases participants felt the information would be helpful
for them to make informed decisions between loans. Therefore, all revised TILA forms
developed for this project included following new terms: the loan amount, loan term, interest
rate, settlement charges, and maximum rate and payment.
•
Testing of the current TILA and joint forms showed that few participants understood the
APR; many assumed it was the same as the loan interest rate, while those who knew that it
differed from the interest rate were unsure why. In its subsequent revisions of the TILA
statement, ICF Macro attempted to clarify the meaning of the APR by varying the labels and
explanations used, changing the prominence and placement of the term, and in later rounds,
including a graphic showing how the APR compares to that of similar loan offers to provide
context.
•
Testing clearly showed that the current TILA payment schedule is ineffective at
communicating to consumers what could happen to their payments. One goal of the revised
TILA was to portray more clearly what could happen to payments over time—while making
it clear to consumers that in the case of an ARM, their actual payment could not be
accurately predicted.
16
•
Because participants indicated they were more familiar with the phrase “adjustable rate”
rather than “variable rate” as it related to mortgages, and because a few did not realize that
the fact that a loan had a “variable rate” meant that the interest rate could change, the phrase
“adjustable rate” was used on all revised TILA forms.
•
Because participants who saw the joint and Pollock forms were unsure whether escrow
would be included in their monthly payments, the portion of the payment that went toward
escrow was disclosed prominently in the payment table on the revised TILA forms.
•
Because participants generally indicated that the bottom half of the TILA statement was
significantly less useful to them, ICF Macro reformatted this section of the form
significantly. The presence of an adjustable rate or prepayment penalty, both of which
participants indicated were important, were disclosed prominently on all revised TILA forms.
However, other information that was considered less important (such as the need for hazard
insurance or the amount of a late payment fee), or that was confusing to consumers (such as
information about loan assumption, a demand feature, or security interest) was reworded and
removed from the TILA statement.
ARM LOAN PROGRAM DISCLOSURE
ICF Macro tested an ARM loan program disclosure form through the two rounds of focus groups
held in Greenbelt, MD and Los Angeles, CA (Rounds 1 and 4). This form, which is provided in
Appendix D, was designed to be representative of forms that are currently in use. The following
is a summary of findings related to this initial program disclosure.
Summary of Findings
•
None of the participants, including those who had recently shopped for an ARM,
remembered ever receiving anything similar to the ARM loan program disclosure they were
shown.
•
Participants overwhelmingly indicated they would not find the program disclosure useful and
that if given the form, they probably would not read it.
•
Upon looking at the form, the first reaction of many participants was one of confusion.
Several complained it was very difficult to read due to the terminology that was used. One
commented, “You’ve got to be a financial expert to understand that. That’s ridiculous. That’s
like the fine print on the credit card.” Another said that in order to understand the disclosure
“you’d have to take a semester [course] in this.”
•
Several focus group participants were concerned they could not find any information about
what their actual interest rate would be. They indicated that in the absence of this rate, most
of the other information provided was not important to them.
•
The second page of the disclosure included a chart showing a historical example of how
payments would have varied for a $10,000 loan over the previous 15 years. Several
participants did not realize this was only an historical example and assumed that the numbers
17
related to a loan they were actually being offered. Some participants who did understand the
purpose of the chart commented that because the size of the loan was so low the information
was not helpful. Others assumed that because the chart showed 15 years, it was showing a
loan with a 15-year amortization period (in fact, the chart was for a 30-year loan).
•
Several participants commented that the ARM loan program disclosure should show the best
and worst case scenarios with regard to the interest rate and payment adjustments over the
life of the loan. Other changes suggested by at least one participant included simplifying the
terminology used on the form; enlarging the font size used in the disclosure; replacing the
historical table with a line graph; and bolding or highlighting key terms from the first page
for emphasis.
Design Implications
•
Because participant reactions to the current program disclosure were so negative, this
disclosure was redesigned and tested again with consumers in Providence, RI (Round 11).
The goal of this redesign was to use plainer language to simplify the form and to focus the
disclosure more specifically on potentially risky features of ARMs. Research findings related
to the revised program disclosure are provided in Chapter VI of this report.
•
Based on the results of the focus groups, ICF Macro and Board staff felt that borrowers
would be much more likely to pay attention to and use information that is provided in the
context of an actual offer. Therefore, some specific information about how interest rates
would adjust, such as the index and margin used to determine the rate and caps on rate
change, were included in the revised TILA.
18
CHARM BOOKLET
ICF Macro collected usability information about the CHARM booklet20 through the two rounds
of focus groups held in Greenbelt, MD and Los Angeles, CA (Rounds 1 and 4). This booklet was
also shown to interview participants in Washington, DC and Kansas City, KS (Rounds 2 and 6).
The following is a summary of findings related to this disclosure.
Summary of Findings
Consumer Familiarity with CHARM Booklet
•
Almost none of the participants had seen the CHARM booklet before testing. Even among
participants who had recently obtained an ARM, very few indicated they had been given the
booklet. A few thought they might have seen the booklet when they were shopping for loans,
but did not have a clear memory of its contents or whether they had found the resource
useful. Therefore, the majority of the reactions described in this report are based on
participants’ brief review of the booklet during testing.
Initial Reactions to the CHARM Booklet
•
The majority of participants liked the information contained in the CHARM booklet because
it was informative and educational. Several participants commented the booklet answered
questions that some consumers might be reluctant to ask; as one said, “People don’t like to
ask questions, so this is good.”
•
Several participants noted that despite their risks, ARMs can be a useful tool for some
consumers who need a low introductory rate or who plan to sell or refinance their loan before
the interest rate adjusts. These participants felt the booklet would be particularly beneficial to
this type of consumer because it would help them successfully implement their plan.
•
There were specific aspects of the booklet that participants particularly liked:
One of the most frequently mentioned sections of interest to participants was the
description of payment shock on page 20. A few participants thought the section was so
important that it should have been moved to the front of the booklet. One participant was
concerned that people would not read the section in its current location because it is
“buried in the middle—you get bored after the 5th page, [and] you don’t get that far.”
A few participants also liked the graph that gave an example of payment shock because it
visually showed how much your payment could increase.
The cautionary bullets on the first page were cited as being particularly useful by several
participants. They thought it was a good idea to mention the most important topics early
in the booklet. Some participants also commented it was helpful that the bulleted items
included page numbers so readers could easily find more information on the subject.
20
A PDF version of the CHARM booklet may be found at www.federalreserve.gov/pubs/arms/armsbrochure.pdf.
A web summary is also available at www.federalreserve.gov/pubs/arms/arms_english.htm
19
A large number of participants also identified the sections about prepayment penalties
and negative amortization, the Mortgage Shopping Worksheet, and the glossary as being
particularly important.
Fewer participants found other parts of the booklet important. Those parts cited included
the definitions of “lenders” and “brokers” on page 5, the description of payment caps on
page 13, and the explanation of different types of ARMs beginning on page 15.
Length of the CHARM Booklet
•
Although all participants thought the booklet contained useful information and would be
beneficial to consumers who are considering ARMs, most thought the booklet was too long.
Many participants said they would be more likely to read the booklet if it was shorter.
A smaller number of participants disagreed and indicated that if the booklet were shortened it
would actually be less useful because it would not include as much important information.
There were even a few participants who thought the booklet was too short and should include
more detail—for example, information about other loan products other than ARMs.
•
Several participants suggested that multiple versions of the booklet could be developed—
a shorter version, for people who were unlikely to read a longer document, and a longer
version for those who wanted more detailed information. They felt this might be the best way
to make sure everyone saw at least some information about ARMs.
Reactions to the Mortgage Shopping Worksheet (CHARM Booklet pages 2 and 3)
•
Nearly all participants thought this worksheet would be a useful tool for someone who was
shopping for a mortgage. Several commented that the worksheet would remind them of what
loan terms and conditions might be important and that it could act as a guide to help them ask
the necessary questions. Others focused on the fact that the worksheet would help them
compare terms between loans.
•
There was some disagreement among participants about whether the Mortgage Shopping
Worksheet should be in electronic or paper format. Some participants preferred a paper
format because they would be able to carry the worksheet to different banks and either
complete it themselves or have the lender or broker complete it. However, other participants
liked the electronic format because it would allow them to enter the data and complete
calculations. Several participants felt it would be best to have both formats available.
•
Participants provided only two concrete suggestions for improving the worksheet. The first
was to define the acronym “ARM,” since consumers might use the worksheet independently
of the rest of the booklet. A few participants also thought the worksheet should include a
numerical example to illustrate how to complete the form.
20
Reactions to the Glossary (CHARM Booklet pages 30 through 34)
•
Participants were specifically asked to comment on the usefulness of the glossary. All
participants thought the glossary was a valuable part of the booklet because it included
definitions and explanations of important terms that are sometimes difficult for consumers
to find.
•
Several participants gave suggestions for how the glossary could be made more effective,
including bolding the words in the text that appear in the glossary, adding references to the
glossary earlier in the booklet, including the definitions in the text as footnotes, or embedding
definitions in the text itself.
Participants’ Suggested Revisions to the CHARM Booklet
•
Several participants said that including more explicit warnings about the risks of ARMs
might make consumers read the information more carefully. Some of the suggested phrases
included, “It’s really important for you to read this because your life depends on it,” or
“Foreclosure is inevitable if you don’t understand what’s in this book.”
•
A few participants suggested that including information on how mortgage rates are
determined might help consumers forecast their future rates.
•
Other content participants suggested adding to the booklet included:
•
Differences between fixed-rate versus ARM products;
Additional detail about late charges and prepayment penalties;
More emphasis on the need to refinance before the interest rate adjusts; and
A description of how taxes change as the interest rate changes.
Some participants suggested improving the format of the booklet to make it clearer and easier
to read. Specific ideas included adding a table of contents and bolding or highlighting
specific sections to emphasize their importance.
Dissemination of CHARM Information
•
To improve the likelihood of consumers seeing and understanding the information in the
booklet, participants suggested providing it in alternative formats such as audiotapes or
DVDs. One participant pointed out an added advantage of doing this would be that illiterate
or semi-illiterate consumers would also be able to obtain the information. A large number of
participants commented that the booklet should also be available online (as it currently is).
21
•
One participant suggested that the Board should require lenders and brokers to review this
information with their customers and then have them sign a document saying they received
and understood the information. Another felt the Board should increase the amount of time
consumers have before closing a loan so they will be able to read the booklet and other
information.21
•
A large number of participants said that in addition to creating resources like the CHARM
booklet, the government should also take other steps to educate consumers. Suggestions
included creating a “Real Estate 101” class for new home buyers, teaching high school
students about loan products and home ownership, offering free seminars, and providing loan
counselors who would be required to act in consumers’ best interest.
Design Implications
•
Because most participants indicated that the CHARM booklet was too long and many said
that as a result they were unlikely to read it, the Board will propose in July 2009 that lenders
no longer be required to provide this document to potential borrowers. However, the Board
intends to continue to make this publication available for the purposes of consumer
education, and plans to review it in the future to determine how it could be made more useful
for consumers.
•
Despite the fact that they felt it was too long, participants found a number of aspects of the
CHARM booklet to be valuable and informative, such as explanations of negative
amortization, payment shock and other potentially risky aspects of ARMs, and prepayment
penalties. ICF Macro and Board staff incorporated this information into two new one-page
mandatory disclosures that were developed through this project and will be included in the
Board’s proposed rules, titled “Key Questions to Ask About Your Mortgage” and “Fixed vs.
Adjustable Rate Mortgages.” For more information about the development of these new
disclosures, see Chapter VI.
21
This participant may not have understood that the CHARM booklet should be given to consumers when they first
inquire about an adjustable rate loan, before they even apply.
22
CHAPTER IV: GUIDING PRINCIPLES FOR DISCLOSURE DESIGN
Much of ICF Macro’s design of revised disclosures was based directly on findings from
cognitive testing. This reliance on direct consumer research is an important strategy for ensuring
that disclosure forms are useful and understandable to their intended audiences. At the same
time, there are a number of general principles to which ICF Macro’s designers try to adhere
whenever engaged in this or similar projects. These principals include:
•
Use plain language. Jargon and technical language should be avoided whenever possible,
and replaced with words that are more easily understood by consumers. The use of simple
language is particularly important in the context of disclosures, because consumers that are at
the greatest risk of being taken advantage of are often those with lower literacy levels. While
readability metrics (such as the “grade level” of the writing) can be useful in this respect, the
best way to determine whether language is truly understandable is through direct consumer
testing.
•
Prioritize information, and structure disclosures so that the most important
information for consumers is easiest for them to find. Consumers frequently do not read
disclosures carefully; those who look at them often only skim them quickly to look for a few
key pieces of information. If consumers cannot quickly find the information they are looking
for, they are likely to become frustrated and give up. Therefore, before any design work can
begin there must be some discussion to identify the most important pieces of information on
the form. Those should be located most prominently on the disclosure, to increase the
likelihood that even consumers who skim the form quickly can find and understand that
information.
•
Provide information in a format that makes it easy to compare terms between
disclosures. One purpose of mortgage disclosures is to serve as a tool to help consumers
compare products from different lenders. Narrative text is often difficult to compare in this
way, because consumers cannot always identify the equivalent information between forms.
Providing information in more structured formats, such as tables with consistent labels and
headings, facilitates this kind of shopping comparison.
•
Keep language and design elements consistent between forms so that information can
be tracked over time. In a disclosure regime like that currently in place for mortgages,
consumers get information about the product for which they are applying at multiple points
in time. One goal of these disclosures is to help consumers track the terms of their loan at
each stage in the process to make sure nothing changes without their knowledge. To facilitate
this, the structure and formatting of disclosure elements, as well as the language that is used
to describe various aspects of the product, should be made consistent between disclosures
whenever possible. For example, several aspects of the revised TILA statements were
integrated into the initial program disclosures as well, to make it easy for consumers to
confirm that the loan they were considering accepting matched what they had originally
discussed with their lender.
23
•
Use headings and titles to make documents more navigable, and to help consumers find
the information they are looking for. When large amounts of text are included, plain
language headings should be used to distinguish sections on different topics. In tables, rows
and columns should have short, easy-to-read titles that accurately describe the information
that is provided. This allows consumers to find information that they are looking for quickly
and efficiently, and decreases the likelihood that they will become distracted by unrelated
text.
•
Group related concepts and figures. Mortgage disclosures, particularly TILA statements,
contain a great deal of disparate information about a loan. Consumers are likely to find it
easier to absorb and make sense of the information if it is grouped in a logical way so they do
not have to constantly shift their mindset as they read. For example, the revised TILA
statement groups all information about potentially risky features of the loan into a single
section of the form.
•
When possible, provide information in multiple formats to accommodate different
learning styles. Current disclosures provide information in a mostly narrative format,
accompanied by tables of figures. While this structure may be very appropriate for some
consumers, others might benefit from an alternative presentation using graphics or other
heuristics. While this strategy must be balanced with the desire to make efficient use of
space, it can often have significant benefits for consumer comprehension. This approach was
implemented in the APR section of the revised TILA statement, which uses a graphic scale to
provide context for the loan’s APR.
•
Build off of prior research whenever possible. While each type of disclosure is different,
findings from cognitive testing can often translate between different documents. The
applicability of a disclosure format in a new context should always be confirmed through
cognitive testing, but it often provides a useful starting point. For example, some of the
revisions to the way the APR is described on the TILA statement were inspired by findings
from ICF Macro’s earlier testing of credit card disclosures for the Board. ICF Macro’s design
work was also informed by findings from its testing of disclosures related to broker
compensation.22
22
Research on disclosures related to broker compensation was conducted during Rounds 2, 3, 5, and 6 of the
background research phase of this project. ICF Macro submitted findings on this topic to the Board under separate
cover; this report is available at http://www.federalreserve.gov/newsevents/press/bcreg/20080714regzconstest.pdf.
ICF Macro’s final reports related to its design and testing of credit card reports are available at
http://www.federalreserve.gov/newsevents/press/bcreg/20081218a.htm.
24
CHAPTER V: DEVELOPMENT AND TESTING
OF REVISED TILA STATEMENTS
INTRODUCTION
After completing the background testing phase of the project, ICF Macro project staff met with
Board staff to discuss key findings from consumer testing. Following this meeting, ICF Macro’s
design team developed several revised disclosures which were intended to address the
weaknesses of the current forms. These forms were then tested through six rounds of cognitive
interviews from November 2008 through May 2009. The specific forms that were tested changed
in each round, but in each case the findings from one round informed revisions that were made to
the forms for the next round. A more detailed description of each round of testing, as well as the
topics that were covered, can be found in Appendix A.
The remainder of this report is focused on describing these iterative rounds of testing and form
design. This chapter (Chapter V) focuses exclusively on the development and testing of revised
TILA statements, which was the primary focus of these interviews. Chapter VI describes work
that ICF Macro conducted on other types of mortgage disclosures provided at application or after
closing.
For each round of testing that is presented in this chapter, the report begins by describing the
objectives and methodology used in that set of interviews, including the different forms tested
and the structure of the interview protocol. This is followed by an overview of key interview
findings and a description of significant design decisions made following that round.
ROUND 8: ATLANTA, GEORGIA (NOVEMBER 2008)
Objectives and Methodology
In November 2008, ICF Macro conducted nine cognitive interviews in Atlanta, GA. These
interviews focused primarily on testing two proposed formats for a revised TILA statement and
gathering data on how consumers might shop between loans using these forms. The interview
protocol included the following sections:
•
Participants in the interviews were first asked to review a TILA statement in one of two
formats (version A or B) that described a 3/1 ARM product. They were then asked a series of
questions designed to test their comprehension of the content on the form.
•
Next, participants were given a second form in the same format describing a different 3/1
ARM. They were asked to compare the two loans and decide which loan they would choose.
The purpose of this exercise was to gather information on which terms participants
considered when comparing two loans.
25
•
After this shopping simulation, participants were shown the alternative version of the TILA
statement and asked to compare several aspects of the two forms in terms of their clarity and
usefulness.
•
Finally, participants were shown a table and graph that explained in more detail what could
happen to their monthly payments, and were then asked questions to test their comprehension
of the information. This table and graph showed what would happen to monthly payments
under two scenarios: if market rates stayed the same (Scenario A) and if rates increased to the
maximum allowed each year (Scenario B).
This first round of developmental testing focused on key terms that would likely be most
prominent on a revised TILA. Additional content was added to the TILA in subsequent rounds.
Six forms were used during the interviews; all are provided in Appendix D:
•
TILA statements A1 and A2 (both have the same format, but different loan terms);
•
TILA statements B1 and B2 (same loan terms as their respective A forms, but with an
alternative format); and
•
A payment scenario graph and table showing how payments could change over the life of
the loan.
Key Interview Findings
Initial Reactions to the Form
•
Each interview participant was asked to “think aloud” when reading through the TILA
statement. In general, participants immediately noticed the interest rate, maximum interest
rate, and the prepayment penalty. Most also noticed the finance charges, although they did
not express as much interest in this information. Two participants commented they liked to
know in advance what their payments would be.
Loan Obligation
•
Most participants did not notice the text in the “Your Rights as a Borrower” section that
indicated they were not obligated to accept the loan shown. However, even those who did not
notice this text still understood they were under no obligation to accept the loan.
General Loan Information
•
All participants correctly identified the term of the loan (30 years) and understood that it was
an adjustable rate mortgage.
•
Participants were confused about the difference between the “loan amount” and the “amount
financed.” When asked to identify the amount of money they were borrowing, five
participants indicated it was $200,000 (the “loan amount”) while four stated it was $195,250
(the “amount financed”). Two participants indicated the difference between the two was due
26
to the amount of “prepaid finance charges” listed on the form, but it was unclear whether
either understood what this meant.
Settlement Charges
•
Participants were asked about their understanding of settlement charges as illustrated on the
sample form. Four participants indicated they did not know what “total estimated settlement
charges” were. Others indicated that settlement charges included a variety of costs associated
with the loan, such as the appraisal fee, legal fees, prepaid items, loan fees, taxes, documents,
escrow, loan origination fee, processing fee, and title charges.
•
Three participants were asked to describe the difference between settlement charges and
“closing costs”; all said that the two terms were interchangeable.
•
Participants all understood that “cash to closing” was related to the amount of money they
would be expected to bring to the closing. However, two participants thought they would also
have to pay the settlement costs shown at closing—that is, they believed the two figures were
distinct and did not overlap.
•
Interview participants were asked why the “cash to closing” amount might be less than the
total estimated settlement charges (as it was in the model form used in this round of testing).
Three participants indicated that some settlement charges could have been rolled into the cost
of the loan, while one said that the seller might be paying some of the settlement charges.
The remaining participants did not understand why the “cash to closing” figure might be
lower.
•
Version B displayed the settlement charges and cash to closing at the top of the form, while
version A showed these terms in a separate section at the bottom. All but one participant
indicated that they preferred to have this information near the top of the page.
APR and Finance Charge
•
When asked to explain what “finance charges” are, participants were generally unsure. Most
thought the finance charges were equal to the amount of interest that the borrower would pay
over time; only a few understood the finance charges shown on the form included fees as
well as interest. At least one participant was unsure whether principal was also included in
the figure for finance charges shown.
•
When asked to explain what the “APR” was, most participants indicated they did not know.
Several indicated that the APR was the same as their interest rate. Others knew the APR was
different from the interest rate but were unable to articulate how. A few participants
commented that they primarily thought of this term as relating to credit cards.
•
Most participants did not read the definitions of finance charge and APR during their first
review of the form. After being directed to read these definitions, some participants realized
that the finance charge included fees. Even after reading the definition of the APR, however,
participants were unable to explain in their own words what it was.
27
•
Because the APR and finance charge are more useful shopping tools when they are
calculated over the specific length of time the borrower expects to hold the loan, the forms
used in this round showed these terms over three different time horizons: 3 years, 5 years,
and 30 years. Most of the participants, however, expressed confusion as to why the APR
would vary over time. A few said the APR would increase over time because the interest rate
would increase at the end of the introductory period, but most had no explanation.
Participants’ confusion in this respect was generally due to the fact that they did not
understand what the APR signified.
•
When asked how they would use the finance charges or APR in their decision-making, most
participants indicated that they would not. Almost all participants indicated they would be
much more likely to compare loans based on the interest rate than on the APR. One
commented that he thought the APR would be useful if they expected to be in a home for
15 to 30 years, but not in the shorter term. Two specifically stated that the APR was too
confusing for it to be useful to them.
Rate and Payment Information
•
All interview participants were able to correctly identify the initial interest rate (5.625%) and
the period for which the rate would apply (3 years, or until 2011). However, participants
were unsure what would happen after that point. A few participants said that the interest rate
would definitely go up after 3 years, but this was usually based on a general assumption that
interest rates for ARMs tend to increase. The remaining participants thought the rate could go
up or down depending on the market. None of the participants understood that the loan
described in the form offered a discounted introductory rate.
•
When the interview participants were asked what would cause their interest rate to go up or
down, they gave a variety of responses, including “the market”; “the economy”; the prime
rate; the “Fed rate,” and the Consumer Price Index. All of these responses seemed to reflect a
common belief that rates would change based on external market forces over which they had
no control.
•
All interview participants were able to correctly identify the maximum highest payment
($2,165.97), the maximum interest rate (11.625%), and the year in which it could reach this
amount (2013). Participants generally understood that the highest possible payment and rate
were only maximums, and would not definitely be reached.
•
Most participants understood the interest rates and respective payments shown on the form as
initial and “maximum ever” terms. They were much less clear as to the meaning of the
middle interest rate and payment, which represented the maximum at the first adjustment.
•
Most participants indicated that the amount shown on the forms for “estimated taxes and
insurance” included property taxes, county taxes, and local taxes. Most participants thought
the term “insurance” related to homeowner’s insurance, while a few thought it might also
include private mortgage insurance (PMI). All participants recognized that while this was
shown as a fixed amount on the form, both taxes and insurance could also vary over time—
although some commented that they would not expect this amount to vary much.
28
•
Versions A and B of the TILA statement both included a table of interest rates and monthly
payments, but these tables were formatted very differently. This difference did not have a
noticeable effect on participants’ comprehension of the information. However, most
interview participants indicated that they preferred the payment table shown in version B
because a) it allowed them add the different pieces of their monthly payment from top to
bottom, rather than left to right; and b) it presented changes over time from left to right,
rather than from top to bottom. Two participants also noted that version B used the term
“introductory rate,” which they found more descriptive than “initial rate,” the term used in
version A.
Risk Factors/Key Questions
Versions A and B both included a section labeled Risk Factors, but the sections were formatted
very differently. Version A listed two potentially risky features of the loan—the fact that the
interest rate was adjustable and the fact that the loan included a prepayment penalty. Version B,
on the other hand, listed six “key questions” related to potential risks, such as “Can my interest
rate increase?” “Could I owe a balloon payment?” and “Will I owe a balloon payment?” Each
question was answered “Yes” or “No,” with additional explanation provided with “Yes”
answers.
•
Regardless of which version they were shown, all but one interview participant understood
that the loan they were shown included a prepayment penalty.
•
The four interview participants who reviewed version B were asked about their
understanding of the six key questions listed on the form.
•
All of the participants understood the questions related to changing interest rates,
changing monthly payments, and prepayment penalties.
While most participants understood what was meant by a “balloon payment” when they
read the questions and answers, one thought it pertained to paying down principal on the
loan.
Most participants were confused by the questions “Will my monthly payments cover only
interest and no principal?” and “Can my loan balance increase?” While these questions
refer to interest-only payments and negative amortization, respectively, very few
participants understood what they meant. For example, one participant thought that
his/her loan balance would increase if the interest rate increased, while another thought
the question referred to whether or not the borrower would be able to refinance in the
future for more money.
Participants were asked to directly compare versions A and B and indicate which format they
preferred. All participants indicated that they preferred the “key questions” format of version
B because they found it easier to read and more informative. Several also liked the fact that
version B showed which risk factors did not apply to the loan, as well as those that did.
29
Mortgage Shopping Simulation
In one portion of the interview, participants were asked to review two TILA statements that
showed loans with different terms and indicate which they would choose and why. Loan 1 had
lower settlement costs and slightly higher interest rates and monthly payments, while Loan 2 had
higher settlement costs and lower interest rates and payments.
•
Participants focused almost exclusively on the interest rate, monthly payment, and settlement
charges, and cash due at closing when making their decisions. Very few compared the
finance charges or APRs of the two loans.
•
Participants were split as to which of the loans they would choose. Three participants stated
they would choose Loan 1, while four said they would choose Loan 2. The remainder did not
express a clear opinion or indicated they would choose the loan based on the period they
planned to retain the loan. Most indicated they would have difficulty deciding between the
two loans, because the differences between them were so small.
•
Some participants indicated their choice between the two loans would depend on their
situation—for example, whether they could afford to pay higher settlement charges, or
whether they specifically needed lower monthly payments.
•
When asked whether it would make a difference if they knew that they were going to hold
the loan for either 3 years or 30 years, most participants said that it would not. A few
participants, however, revised their selection based on the concept that trading higher
settlement charges for lower payments makes more sense in the long term, while accepting
higher payments in return for lower settlement charges would make more sense in the short
term.
•
Participants were generally confused to find that the APR and finance charges for one of the
loans were lower than the other for a 3-year term but higher for a 30-year term. Most
participants did not understand why this would be the case.
Payment Change Scenario Table and Graph
After they completed their first review of the TILA, participants were shown a graph and
corresponding table showing more detail about how their monthly mortgage payment would
change over time under two different scenarios. The terms shown in the graph and table matched
those in the first TILA statement that participants were shown.
•
All participants understood the distinction between the two scenarios shown in the table and
graph (“market rates stay the same” vs. “maximum possible rate and payment”).
•
All participants understood the “Year of Loan,” “Period Beginning,” and “# of Payments”
columns in the table, although one commented that the number of payments was redundant
and unnecessary.
30
•
Almost all participants understood from both the table and graph that even if market rates
stayed the same, their payment would increase after three years. Several indicated that this
surprised them, because this was not apparent from the first page of the TILA. However, the
table did not improve understanding of why rates would increase if market rates stayed the
same; even after seeing both the table and graph none of the participants understood that the
loan in question had a discounted introductory rate.
•
When looking at the graph and table, all participants understood that their rate and payment
would never be higher than the maximum shown. Some, however, incorrectly thought that
the rate and payment could never go below than the amounts shown for Scenario A (the
scenario under which market rates stayed constant). This misconception was particularly
prevalent when participants were looking at the graph; several incorrectly assumed that their
payment would always fall between the two lines shown.
•
Most participants indicated that they found the table easier to understand than the graph; one
said that he23 would not look at information presented in graphical format because he would
assume it was difficult to understand.
Subsequent Design Decisions
Loan Summary Section
•
Because all but one participant in this round preferred to have information about settlement
charges provided near the top of the form, all forms developed for subsequent rounds of
testing included these charges in the Loan Summary section at the top of the page.
•
Several participants did not understand the relationship between “cash to close” and
settlement charges. To address this confusion, forms developed for the next round showed
the arithmetic relationship between total settlement charges, cash to close, pre-paid fees, and
fees that were rolled into the loan amount.
APR and Finance Charge
•
Participants in Atlanta had a great deal of difficulty interpreting the table showing APRs and
finance charges for multiple time horizons; most, in fact, had no understanding of why APRs
over different time periods would vary. Therefore, the decision was made to highlight only a
single APR and finance charge.
•
Some participants connected the term “APR” with its meaning in a credit card context, and as
a result assumed that the APR was the same as their interest rate. To address this potential
confusion, forms used in the next round used two different labels for the Annual Percentage
Rate: “This Loan’s Price Tag” and “Total Cost.”
23
To protect participants’ confidentiality, this report will refer to individual participants as “he” regardless of the actual
gender of the participant.
31
•
Most participants in Atlanta found the lengthy description of the APR that was provided to
be confusing. The forms tested in the next round used a simpler, shorter phrase to describe
this term (“the interest rate when some closing costs are factored in”). Variations of this
shorter description were used in forms for all subsequent rounds.
•
Despite the explanation provided on the forms, some participants in Atlanta did not
understand that the APR represented a combination of both interest and fees. Therefore, one
of the forms tested in the following round tried to display this relationship more explicitly as
an “equation” (interest rate + fees = APR).
Rate and Payment Information
•
Participants found the rate and payment table used in version B (which showed payment
components vertically and time periods and payment changes horizontally) significantly
easier to understand. Therefore, all forms for subsequent rounds included a table with this
format.
•
Because several participants indicated they preferred the label “introductory rate” to “initial
rate,” all subsequent forms used this phrasing.
•
Several participants in this round had difficulty understanding how their rate could change
over time, therefore, explanatory text was added under the heading “Rate Change.” This text
disclosed the length of the introductory period, the index and margin that would be used to
determine the rate after the introductory period ended, and the periodic and lifetime rate
change caps. The new text also stated that the loan had a discounted introductory rate, since
none of the participants in this round realized that this was the case. This “Rate Change”
information was added below the Payment Summary table.
•
Because several participants indicated they would not use the payment change scenario
graph, and because it would take up a great deal of space on the form, this graph was not
included in any subsequent forms.
•
While several participants had difficulty understanding the payment change scenario table
that was tested this round, there was some evidence that others did benefit from more specific
information about how their rates and payments would change over time. Therefore, this
table was included in one of the versions tested in the following round (version D).
Risk Factors/Key Questions
•
Participants in this round responded positively to the question and answer format used in the
Risk Factors section of version B. Therefore, this format was used in all subsequent forms.
•
Participants also liked the fact that version B indicated which risk factors were not associated
with the loan being described, as well as those that were. Therefore, the forms developed for
the next round included all Key Questions, even those to which the answer was “No.”
This issue was revisited in the Dallas round of testing (Round 10).
32
•
Most participants who were shown version B had difficulty understanding the Key Questions
related to interest-only payments and negative amortization. As a result, the wording of these
questions was revised for the forms tested in the following round.
ROUND 9: BETHESDA, MARYLAND (JANUARY 2009)
Objectives and Methodology
In January 2009, ICF Macro conducted nine cognitive interviews in Bethesda, MD. As with the
previous round of interviews, the Bethesda round focused primarily on testing two proposed
formats for a revised TILA statement and gathering data on how consumers might shop between
loans using these forms. The interview protocol included the following sections:
•
Participants in the interviews were first asked to review a TILA statement in one of these two
formats (versions C or D) that described a 3/1 or 5/1 ARM product. They were then asked a
series of questions designed to test their comprehension of the content on the form.
•
Next, participants were given a set of two TILA forms in the same format that described two
fixed-rate loans. They were asked to compare the two loans and decide which they would
choose. As in the previous round, the purpose of this exercise was to gather information
about which terms participants consider when selecting between loans. The decision was
made in this round to use fixed-rate loans rather than ARMs to simplify the comparison for
participants.
•
After this shopping simulation, participants were shown the alternative TILA statement and
asked to compare several aspects of the two forms in terms of clarity and usefulness.
•
After reviewing the TILA statements, participants were asked to review some text for
additional required disclosures about possible lender actions, loan assumption, property
insurance, demand features, and refund of finance charges. The goal of this section of the
interview was to assess the extent to which participants understood this language.
Version D included some information that was not on version C, including a table providing
more detail about future changes in rates and payments (the payment change scenario table tested
in the previous round) and a table showing APRs and finance charges for three different time
horizons. As a result, version D was printed on two letter-sized pages. Version C was printed on
one legal-sized page, as were the forms used in the previous round.
All TILA statements for this round (Round 9) included a section labeled “Optional Features,”
which contained information on credit life insurance, reduced documentation loans, and owner’s
title insurance.
Seven forms were used in these sections of the interview; all are provided in Appendix D:
•
TILA statements C1, C2, and C3 (all forms had the same format, but C1 was a 3/1 ARM
while C2 and C3 were fixed-rate loans);
33
•
TILA statements D1, D2, and D3 (same terms as C1, C1, and C3, but with an alternative
format); and
•
A separate page of additional required disclosures.24
Key Interview Findings
Initial Reactions to the Form
•
When asked what information was most important to them on the TILA statement,
participants most frequently mentioned the interest rate (3 participants), monthly payment
(2), Key Questions About Your Loan (2), the loan type (2), and the loan amount (2). Other
items mentioned as most important included the timing of the interest rate adjustments, the
fact that taxes and insurance were included in the monthly payments, and the boldface
language at the bottom of the form indicating not to sign the form if you do not understand
the terms.
•
When asked whether there was any information that was not on the form that they would
want to know, some participants commented that they would want a more detailed
breakdown of their settlement charges.
Loan Obligation
•
Most participants did not notice the text at the top of the form that indicated they were not
obligated to accept the loan shown. However, most interview participants who did not notice
this text still understood they were under no obligation to accept the loan.
Loan Summary Section
•
Eight of nine participants correctly identified the term of the loan (30 years). All participants
understood that the loan being described was an adjustable rate mortgage.
•
When asked to identify the amount of money they were borrowing, five of nine participants
correctly identified the loan amount shown on the form. Two participants incorrectly
subtracted from the loan amount the down payment shown on the form, while one thought he
was borrowing the “amount financed.” The remaining participant thought he was borrowing
the amount financed plus the finance charge.
•
When asked if they could identify the price of the home they were purchasing, most
participants added the loan amount and down payment together to obtain the price of the
home. None answered this question correctly, which would have required subtracting the
closing costs that were included in the loan amount.
24
For the second day of testing, these disclosures were integrated into the TILA statements rather than being shown
on a separate page.
34
•
Generally, interview participants did not understand the concept of the “amount financed.”
The two participants who came closest to correctly explaining this term said that it was the
loan amount less the closing costs—although both noticed that based on the numbers shown
on the form, this was not true. Others gave a variety of incorrect explanations for the amount
financed, including that it was “how much escrow they would have,” the amount they would
have to pay back, or the amount that they borrowed.
•
Both versions of the TILA tested in this round broke closing costs into three categories: “paid
before closing,” “included in loan amount,” and “due at closing.” In general, most
participants did not understand the significance of these categories. For example, only four of
the nine participants understood that the “due at closing” figure was what they would have to
pay at settlement, and only three understood that they were effectively borrowing the costs
“included in loan amount.”
•
At least four participants confused the phrase “closing costs” with the amount that they
would have to pay at closing when in fact some would be paid before closing. This
misunderstanding persisted despite the fact that the costs “due at closing” were listed on the
form.
•
When asked whether they preferred the use of the term “settlement charges” or “closing
costs,” most participants thought the two phrases had identical meanings. One thought
settlement charges were a subset of closing costs, while another suggested “loan fees” as an
alternative term.
APR and Finance Charge
•
Only one of the nine participants understood that the APR included both interest and fees.
About half thought that the terms APR and interest rate were identical in meaning, while
others knew the APR was different but could not articulate how.
•
When participants were asked how they would use the APR, all but two indicated they would
not use the term. Of the two that indicated they would use it for shopping and comparing
loans, one misinterpreted the APR as the “average interest rate” over time.
•
Comprehension of the finance charge was higher than that of the APR; all but one participant
was able to correctly describe what the finance charges signified. However, only one of the
nine participants indicated that he would find this information useful.
•
Versions C and D displayed the APR and finance charge in two very different formats. On
version C, the APR and finance charge were provided in a box labeled “This Loan’s Price
Tag.” Version D included a horizontal box across the page labeled “Total Cost” that
presented the initial interest rate, settlement charges, APR and finance charge in the form of
an equation.25 Participants were split when asked which format they preferred; four preferred
this aspect of version D while three preferred version C. However, regardless of which form
participants were shown comprehension of the APR was minimal.
25
The equation was stated as follows: interest rate + estimated closing costs = APR & finance charge.
35
•
As in the previous round, participants were generally confused by the table on the second
page of version D that showed the APR and finance charge over 3, 5, and 30 years. Few
could explain why the APR would vary based on the time horizon used. Almost all
participants ignored this table, except when specifically asked questions about it.
Rate and Payment Information
Understanding of Adjustable Rate
•
All but one participant were able to correctly identify both the initial interest rate and when
the first rate adjustment could take place. Six of the nine were able to indicate how often the
interest rate would change.
•
All participants understood that the loan described by the versions C1 and D1 had an
adjustable rate. However, only two understood that their initial rate was discounted, so a rate
increase after the introductory period was very likely.
•
Most participants believed that it was much more likely that their rate would increase than
that it would decrease. However, this was based on a general distrust of adjustable rate
products, rather than anything they saw on the form.
•
When participants were asked why their interest rate would fluctuate, most correctly stated it
was the “market” or “market rate.” As in previous rounds of testing, participants had a
variety of explanations for what this “market rate” was based on, including the housing
market, the “average going rate” for mortgages, and “the economy.” One participant
correctly stated that the “market rate” was based on the rate the banks paid to borrow their
money.
•
All interview participants were able to correctly identify the maximum interest rate, and eight
of nine were able to identify the year in which it could first reach this amount. However,
most participants did not recognize the relationship between the year the maximum could be
hit and the periodic caps described on the form.
Payment Summary Table
•
The Payment Summary tables used in versions C and D both showed the introductory and
“maximum ever” rate and payment for the loan. Version C also included a third column that
showed the maximum rate and payment at first adjustment. Two participants were confused
by the difference between the “maximum at first adjustment” and “maximum ever” columns
in the table. However, several other participants commented that the information about what
could happen at the first adjustment was very important to them.
•
Most participants indicated that when evaluating a loan, the maximum payment would be
more important to them than the initial payment because they would want to make sure they
could afford the highest possible payment. Two, however, said that the initial payment was
more important because they would expect to refinance out of the loan before it hit the
maximum.
36
•
When specifically asked to read the information under the heading “Rate Change,”
participants generally understood the text about rate caps. Most also seemed to understand
the concept of an index and margin, although none understood the term “LIBOR.”26
Taxes and Insurance (Escrow)
•
All participants understood that they would be required to pay taxes and insurance as part of
their monthly payment. All but two recognized that the cost of taxes and insurance could
change over time and that the amount on the form was only an estimate.
•
When asked what was included in the amount shown for taxes and insurance, most indicated
that it included property taxes and homeowner’s insurance. Two participants thought it might
include costs shown elsewhere in the form, such as title insurance or credit life insurance.
Another thought it included private mortgage insurance (PMI).
•
The term “escrow” was shown on the form next to the itemization of taxes and insurance. All
but two participants understood what this term meant. In almost all cases, however, this
understanding was based on prior knowledge rather than the description provided on the
form.
Payment Change Scenario Table (Version D1)
•
The payment change scenario table on version D1 did not significantly improve participants’
understanding of what would happen to their rate and payment. Even after reviewing this
table most participants did not understand that their introductory rate was discounted and
would likely increase at the end of the introductory period.
•
When reviewing the payment change scenario table, most participants understood that over
time their rate and payment could be between the figures shown for Scenarios A and B, and
also that they could not be above the amount shown for Scenario B. As in the previous round,
however, some incorrectly thought that the rate and payment could not go below the amount
shown for Scenario A (the scenario under which market rates stayed constant).
•
When asked to assess the importance of the payment change scenario table, most participants
indicated that it was not important because it largely repeated information provided
elsewhere on the form. A few, however, commented that this table provided useful detail and
showed more clearly that the interest rate could increase even if the market rates stayed the
same.
26
In Version C, the “Rate Change” text was immediately following the Payment Summary table. In Version D, this text
was on the second page, above the Payment Change Scenario table.
37
Key Questions Section
•
All participants understood they would be charged a pre-payment penalty if they paid off the
loan, refinanced, or sold the property within 3 years. All also understood the questions
related to rate and payment change and late payment fees.
•
Participants’ understanding of the term “balloon payment” was inconsistent. Five were able
to accurately define a balloon payment, while four gave a variety of incorrect definitions of
the term, such as a higher payment due to a rate increase or a final loan payment that is lower
than previous payments. One person confused a balloon payment with a jumbo loan.
•
All participants understood the meaning of the question related to interest-only mortgages.
However, several who were unfamiliar with this type of loan were confused as to why
payments would ever be interest-only.
•
Only two of the nine participants understood the question “Can my balance increase even
after I’ve made payments?” Others had a variety of misinterpretations; some, for example,
thought that the question referred to whether the lender could add a late fee to the loan
principal or whether the borrower could borrow more money in the future, such as with a line
of credit. Others thought this question was redundant with the question related to interestonly payments.
•
When asked about the relative importance of the questions shown, several participants
commented that the information about late payment fees would be less valuable to them
because they would already expect to be charged a fee for making a late payment.
Credit Life Insurance and Other Optional Features
•
About half of participants did not understand that this section showed features that were
already included in their hypothetical loan. Instead, they thought these features were being
offered to them at this point.
•
When specifically asked what they could do to lower the cost of the loan, most participants
did not understand that the credit insurance product was optional and could be declined in
order to lower the cost of the loan.
•
None of the participants understood what was meant by a “No Doc or Low Doc” loan. About
half understood the meaning of “credit life insurance” and “owner’s title insurance,”
although several thought that title insurance was a required, not optional, feature.
38
Mortgage Shopping Simulation
In one portion of the interview, participants were asked to review two TILA statements that
showed loans with different terms and indicate which they would choose and why. Loan 3 had a
higher interest rate (6.5% vs. 6.25%), and a slightly higher monthly payment. Loan 2, however,
included a large amount of closing costs that were included in the loan amount. As a result, Loan
2 had a higher APR than Loan 3. Both were fixed-rate loans and did not require the borrower to
pay anything at closing.
•
Seven of the nine participants selected Loan 3, while two selected Loan 2.
•
The two participants selecting Loan 2 stated they chose this loan because of the lower
monthly payment and lower interest rate. Neither noticed the $15,470 in closing costs that
were rolled into the loan amount.
•
Most of the participants who selected Loan 3 based their decision at least in part on the
the APR for that loan was lower. However, as they discussed their decision it was clear
most of these participants did not understand what the APR represented. For example,
pointed to the APR and indicated that the “interest rate” was lower for Loan 3, when in
this was not the case.
•
When it was pointed out to participants that Loan 2 had a higher APR but a lower interest
rate, almost none of the participants were able to explain how this could be.
•
When asked if the length of time they planned to hold the loan would make a difference in
their selection of the loan, almost all indicated that it would not. Only one participant who
was comparing version D forms looked at the table on the second page that showed APRs
and finance charges for different time horizons.
fact
that
two
fact
Other Required Disclosure Text
In addition to testing revised TILA statements, another goal of this round was to assess
participants’ understanding of text related to other required disclosures. On the first day of
interviews, participants were shown these statements on a separate sheet of paper. On the second
day, the statements were integrated into the TILA statements used in the shopping simulation.
•
Seven of the nine participants understood language indicating that the lender could demand
the borrower pay off the loan at any time. All of those who understood the statement
indicated it was an important piece of information.
•
Seven of the nine participants understood a statement that early payoff of the loan could
result in a refund of interest or fees. Participants who understood this text indicated that it
was important information to them, although most indicated it would likely not have an
impact on whether or not they accepted the loan.
39
•
Seven of the nine participants understood a sentence indicating that the borrower “can obtain
insurance from anyone that is also acceptable to the lender.” One of the two who
misunderstood this sentence thought it meant that he was being charged PMI. Among those
who understood the meaning of this text, most indicated it was not important because they
already knew this information.
•
Only four of nine participants understood language indicating that the loan could be assumed.
One thought the text referred to the lender “selling” the mortgage to another lender, while
another thought assumption could only take place if the original borrower defaulted. Two
thought that the fact that a buyer could assume the loan would be a negative feature for the
original borrower.
Subsequent Design Decisions
Loan Summary Section
•
Some participants were confused by the fact that the down payment was shown on the TILA
statement, and incorrectly thought that the amount they would be borrowing would be the
“loan amount” shown on the page less their down payment. Therefore, the down payment
was removed to simplify the form and improve comprehension.
•
The description of “Loan Type” on the forms used in Bethesda included information about
rate changes, including the length of the introductory period and the frequency with which
the rate would adjust. This information was redundant with other sections of the form;
therefore, the TILA statements used in the next round of testing did not include these details.
Instead, they simply described the sample loan as a “3/1 Adjustable Rate Mortgage (ARM).”
•
The mathematical relationship that was shown between total settlement charges, cash to
close, pre-paid fees, and fees rolled into the loan amount did not improve consumer
understanding of how these terms were related. Therefore, this section of the statement was
eliminated from forms tested in the next round (Dallas). Instead, the Loan Amount section of
these forms displayed the portion of the loan amount that was applied to settlement charges.
•
Participants in the first two rounds (Rounds 8 and 9) generally did not understand the
meaning of the amount financed. In addition, several participants in the first two rounds
mistakenly thought the amount financed was the amount of money they would be borrowing.
Therefore, for the next round the amount financed was removed from the Loan Summary
section and the prepaid finance charge (the figure that is subtracted from the loan amount to
determine the amount financed on the form) was placed in a footnote on the bottom of the
page.
•
Some participants expressed a desire to see a more detailed breakdown of their settlement
charges. Therefore, all TILA statements used in subsequent rounds included a reference to
“See your Good Faith Estimate for details.”
40
APR and Finance Charge
•
As in the previous round, participants were generally confused by a table that showed APRs and
finance charges for three different time periods. In addition, only one of nine participants
referred to this table when choosing between two loans. As a result, this table was not included
in any forms for subsequent rounds.
•
Neither label used for information about the APR and finance charge (“This Loan’s Price Tag”
or “Total Cost”) led to improved comprehension of these terms by participants. As a result, the
forms used in the next round of testing (Dallas) used different labels for the APR: “True Cost
Factor” and “Overall Rate of Fees and Interest.”
•
Explicitly displaying the relationship between interest rates, settlement charges, APR and finance
charge, as was done on version D, did not have a discernable impact on consumer understanding
of the APR. Because of this, as well as concerns that this format gave too much prominence to
the initial interest rate, this “equation format” was not used in subsequent TILA versions.
•
Participants in this and previous rounds generally disregarded the finance charge when reading
their TILA statements, other than commenting that the number was very large. Several
commented that this information was not useful, since they had no choice but to pay a large
finance charge if they wanted to purchase a home. Therefore, on subsequent versions of the
form the finance charge was deemphasized and moved from the top of the first page to the
“More Information About Your Payments” section under the heading “Total Payments.”
Rate and Payment Information
•
When asked to compare the Payment Summary tables on versions C and D, several participants
commented that the columns providing information about the maximum rate and payment at
first adjustment was important to them. Therefore, all versions for subsequent rounds included
this column in the Payment Summary table.
•
The presence of the more detailed Payment Change Scenario table on the second page of
version D did not noticeably improve most participants’ understanding of what would happen to
their rate and payment over time. Most participants indicated that this table was not important to
them, because it was largely redundant with other parts of the form. For this reason, this table
was not included in any subsequent forms.
Key Questions Section
•
As in previous rounds, participants continued to respond positively to the question and answer
format used in the Key Questions section of the TILA statement. As a result, this format was
retained in the forms for all subsequent rounds of testing.
•
Some participants did not realize that the Key Questions shown on the form were describing
potentially risky loan features. Therefore, on forms for all subsequent rounds the title of this
section was changed from “Key Questions About Your Loan” to “Key Questions About Risks.”
41
•
For Round 9, an additional question about late payment fees had been added to the forms
being tested. However, several participants indicated that this information was less important
to them. Based on these results, all subsequent forms did not include this question.
•
As in Atlanta, some participants in this round had difficulty understanding the difference
between the questions related to interest-only payments and negative amortization. As a
result, the wording of these questions was revised again for the following round.
Credit Life Insurance and Other Optional Features
•
Because participants generally did not understand the Optional Features section of the forms
used in this round, this section of the TILA was significantly restructured for the next round
of testing. References to reduced documentation and owner’s title insurance were dropped,
and the credit life insurance disclosure was revised to clarify that the product is optional and
could be declined.
Other Required Disclosure Text
•
Participants indicated that information about loan demand features was particularly important
to them, so the decision was made to include this information on the TILA statement in the
Key Questions section.
42
ROUND 10: DALLAS, TEXAS (FEBRUARY 2009)
Objectives and Methodology
In February 2009, ICF Macro conducted 10 cognitive interviews in Dallas, TX. As in previous
rounds, this round of interviews focused primarily on testing two proposed formats for a revised
TILA statement and gathering data on how consumers might shop between loans using these
forms.
As part of the interview, participants were shown several alternatives for how the APR could
displayed. All of these alternatives provided context for how the loan’s APR compared to that of
other similar loans. All disclosed the boundary between prime and higher-priced loans; that
boundary is 1.5 percentage points over the “average prime offer rate” (APOR) calculated by the
Board for first lien loans and published each week.27 Some of the APR presentations also
disclosed the APOR itself, which was described as the average rate “on comparable loans
recently offered to borrowers with excellent credit.”
The interview protocol included the following sections:
•
Participants in the interviews were first asked to review a TILA statement in one of two
formats (versions E or F) that described a 3/1 ARM product. They were then asked a series of
questions designed to test their comprehension of the content on the form.
•
Next, participants were given a second form describing a different 3/1 ARM in the same
format, but with different terms. They were asked to compare the two loans and decide which
they would choose. As in previous rounds, the purpose of this section of the interview was to
gather information about which terms participants consider when selecting between two
loans.
•
After this shopping simulation, participants were shown the alternative TILA statement and
asked to compare several aspects of the two forms in terms of their clarity and usefulness.
•
After completing their review of the TILA statements, participants were then shown the
alternative APR presentations and asked a series of questions designed to measure their
comprehension of the information.
•
As in the previous round, after reviewing the TILA statements participants were asked to
review some additional text for required disclosures about possible lender actions, loan
assumption, property insurance, refund of finance charges, and late payment fees.
The TILA statements tested in this round included two new items in the Key Questions section.
These questions related to loan demand features (“Can my lender demand full repayment at
anytime?”) and equity sharing features (“Do I have to share any equity I gain?”).
27
The boundary is 3.5 percentage points for subordinate lien loans.
43
Six forms were used in these sections of the interview; all are provided in Appendix D:
•
TILA statements E1 and E2 (both have the same format, but different terms);
•
TILA statements F1 and F2 (same terms as E1 and E2, but with an alternative format);
•
A variety of alternate approaches to displaying the APR; and
•
Additional text for required disclosures.
All TILA statements used in this round of testing were printed on one legal-sized page.
Key Interview Findings
Initial Reactions to the Form
•
After participants first reviewed the TILA statement, they were asked what pieces of
information on the form were most important. Participants most often mentioned the monthly
payment (5 participants), loan type (4), interest rate (4), key questions (3), loan amount (3),
and term of loan (3).
Loan Obligation
•
Most participants did not notice the text that indicated they were not obligated to accept the
loan shown. However, all but one participant still understood they were under no obligation.
Loan Summary Section
•
All participants correctly identified the term of the loan (30 years) and the amount borrowed.
•
When asked how much of the $200,000 loan they could apply to the price of the home they
were purchasing, only three participants understood that $198,000 would go toward the home
purchase and the remaining $2,000 would be used to pay for closing costs.
•
When asked if the Total Settlement Charges listed on the form included their down payment,
half of the participants incorrectly stated that it did, while three more indicated they did not
know.
APR
•
Two different labels were used for the APR in this round of testing; on version E the term
was labeled “True Cost Factor,” while version F used the phrase “Overall Rate of Fees +
Interest.” When asked to explain in their own words the definition of this term, only two
participants provided an explanation related to its actual meaning. All other participants were
confused by the term; for example, several thought the APR represented an “average” or
“overall” interest rate. None of the participants were able to successfully explain how the
“True Cost Factor” or “Overall Rate of Fees plus Interest” differed from the interest rate.
44
•
Version E displayed the APR (called the “True Cost Factor”) without a percentage sign. This
variation was an attempt to decrease the extent to which participants confused this term with
their interest rate. However, this had no noticeable impact on participant understanding; in
fact, even participants who saw version E discussed the True Cost Factor as if it was a
percentage and confused it with their interest rate.
•
When asked to indicate whether they preferred the treatment of the APR on version E or F,
about half of participants selected each form. As in the previous round, however, participant
comprehension of the APR was extremely low regardless of which version participants were
shown.
Rate and Payment Information
Understanding of Adjustable Rate
•
All interview participants were able to correctly identify the initial interest rate. All
participants also understood that the loan had an adjustable rate and that the rate and payment
would be fixed for the first three years. Participants also were able to correctly identify the
size of their payment during that time.
•
Most participants understood that the rate could change annually after the third year, but two
did not know how often the rate could change.
•
Almost all participants were able to correctly identify the maximum interest rate of the loan.
One participant was confused by the text below the table that indicated the rate could
increase by 2% each year, and mistakenly thought this meant there was no maximum rate.
Payment Summary Table
•
Several participants mistakenly thought the different columns in the payment table
represented what would happen to their rate and payment, rather than what could happen. For
example, at least two thought that in 2012 and 2014 their rate and payment would increase to
the amount shown in those columns of the table, and did not understand that their rates and
payments might actually be lower than those shown.
•
When asked whether the initial or maximum payment would be more important to them
when considering an adjustable-rate loan, eight of the ten participants indicated that the
maximum payment would be more important.
•
Underneath the Payment Summary table, both versions of the TILA statement used in this
round included some explanatory text. Version E included an additional sentence that did not
appear on version F: “If the market rate does not change, at the end of this period your
interest rate will increase by 2.00%, adding approximately $250.00 to your monthly
payment.” The inclusion of this statement did not have any noticeable effect on participant
understanding.
45
•
Almost all participants understood that the interest rate would change based on the “market
rate” (the term used in the statement). When asked to explain what is meant by the “market
rate,” participants gave a variety of answers, including the stock market, the price of homes
in a community, and “how the economy is doing.” One participant understood the term
“LIBOR.”
•
Most participants had difficulty connecting the rates shown in the payment table with the
information about periodic and lifetime caps below the table. In fact, for a few participants
the presence of this explanatory text seemed to decrease comprehension of the table; these
participants initially understood what was shown in the table, but then became confused
when reading the text.
•
Almost all participants understood the information provided under the heading “Total
Payments,” including the number of payments, total of payments, and finance charge. When
asked how they would use this information, most participants indicated that they would not.
•
No participants commented on the footnote providing the prepaid finance charge during their
first reading of the form. When the interviewer pointed out this footnote and asked
participants to explain what the “prepaid finance charges” signified, none were able to do so.
Taxes and Insurance (Escrow)
•
All but one participant indicated they had heard the term “escrow” previously. Most seemed
to have a thorough understanding of the term before reading the form.
•
All participants understood the amount they would pay for taxes and insurance could change
over time. However, three participants did not realize that the amount shown in the table was
estimated, and would not necessarily be accurate when they closed on the mortgage.
•
All but two participants assumed that the “insurance” referred to in the payment table was
homeowner’s insurance. One thought this figure might include private mortgage insurance
(PMI), while another thought it could include other types of insurance but did not specify
which kinds.
Key Questions Section
•
Eight of ten participants understood from the Key Questions section that the lender could
demand repayment of the loan at any time. However, two of the eight mistakenly thought
that the lender could only do so if they became delinquent.
•
Half of the participants misunderstood the question related to equity-sharing. Several were
confused by the last sentence of this section (“In exchange, we are giving you a lower
interest rate”) and mistakenly thought the form was indicating they would receive a lower
interest rate at the point when they sold their home. Regardless of whether they fully
understood the information provided, all participants stated that an equity-sharing feature
would be a negative feature for the borrower.
46
•
Version F showed eight key questions in this section, each with an answer of “Yes” or “No.”
Version E only showed those questions whose answers reflected risky features of the loan,
and then provided a concise statement listing other features not present in the loan terms. All
but two participants indicated they preferred to be shown all eight key questions, even when
the answer showed that a given feature did not apply to the loan. Two participants preferred
to be shown only those questions whose answers implied risk.
•
Version E included “interest-only payments” in a list of features that did not apply to the
loan, while version F listed the question “Will my monthly payments reduce my loan
balance?” and indicated that the answer was “Yes.” In both forms, the intent was to indicate
that this loan did not include interest-only payments. However, participants’ comprehension
of this fact was slightly higher when viewing version F.
•
A few participants commented they did not like the fact that the answers to the Key
Questions related to rate and payment change were simply “Yes.” They indicated that more
explanation should be provided to help borrowers understand their loan more completely.
Credit Life Insurance
•
Almost all participants were somewhat familiar with credit life insurance before seeing the
form; only one indicated that he had never heard of this feature before.
•
Almost all interview participants understood from their reading of this section of the form
that credit life insurance is not required. All understood that this insurance would have a
monthly cost associated with it and that this cost was not included in the monthly payments
shown elsewhere on the form.
•
After reading this section of the form, several participants commented that credit life
insurance sounded like an important loan feature and indicated that they would want to
enroll.
Mortgage Shopping Simulation
Participants were asked to review two TILA statements that described different 3/1 ARMs.
Loan 1 had a higher interest rate and monthly payment, while Loan 2 had higher settlement
charges and a slightly higher APR. Participants were asked to select one of the loans and provide
reasons for why they chose it.
•
Eight of the ten participants selected Loan 2 (i.e., TILA version E2 or F2). These participants
generally realized the loan had higher settlement charges, but felt that the lower interest rate
and monthly payments outweighed the higher up-front costs.
•
Two participants selected Loan 1 (version E1 or F1). They did so primarily because of its
lower settlement charges, although one also considered the APR (see below).
47
•
Only one person considered the APR when choosing between the two loans. This participant
chose F1, because it had a lower “Overall Rate of Fees + Interest” (APR) and lower
settlement charges. When other participants were asked why they had not used the APR,
most indicated they did not understand what the term meant.
•
When asked if the length of time they planned to hold the loan (3 vs. 30 years) would make a
difference in which loan they selected, just over half indicated that it would not. Four
participants, however, indicated that the first loan would be the better choice over 3 years
while the second loan would be preferable over 30 years. Their reasoning was that over a
longer period of time it made sense to pay a larger up-front charge in exchange for a lower
interest rate, which was what the second loan offered.
Alternative APR Presentations
•
As part of the interview, each individual was shown two alternative presentations of the APR
that provided context for how the loan compared to others in the market. One version
included a graphic that placed the APR on a scale, along with a line distinguishing “prime”
and “subprime” loans. The second version did not include a graphic, but included text that
listed both the cut-off between “prime” and “subprime” loans and the average APR received
by people with “excellent credit.”
•
When looking at either the graphic or text-based versions, participants generally understood
that a lower APR was better for them and that people with better credit would be offered
loans with a lower APR. However, it was not clear to what extent this understanding was
based on the material presented to them or on prior knowledge.
•
Both versions used the word “subprime” in their descriptions. While almost all thought the
word had a negative connotation and indicated they would not want a “subprime loan,”
several did not understanding the meaning of this term.
•
In general, participants found the text-based presentation of the APR easier to understand.
The primary reason for this was that the text-based presentation listed the average APR
received by people with excellent credit, while the graphic presentation did not.
•
A few participants suggested the graphic and text be used in combination to explain the
information more fully.
Other Required Disclosure Text
•
All or almost all participants understood the disclosure text related to possible lender actions,
property insurance, refunds of interest and fees, and late payment fees.
•
As in previous rounds, several participants had difficulty understanding the text about loan
assumption. In some cases this confusion was due to the fact that the phrase “take over your
mortgage” was seen as threatening or a negative feature of the loan.
48
Subsequent Design Decisions
Loan Summary Section
•
Some participants in this round of testing were confused as to whether the amount shown for
“settlement charges” included their down payment, so a statement was added to the TILA
statement indicating that the down payment was not included in the settlement charges.
•
Most participants did not understand after reading the forms that a portion of the loan amount
would go toward settlement charges. Therefore, the forms developed for the next round more
explicitly broke the loan amount into two portions: the amount applied toward fees and the
amount available for the borrower’s own use.
APR
•
Neither of the labels used for the APR (“True Cost Factor” and “Overall Rate of Fees and
Interest”) led to improved comprehension of the term. As a result, forms used in subsequent
testing used the original label “Annual Percentage Rate” for this term. Rather than varying
the label used, the form designers focused on improving the presentation this term.
•
Displaying the APR without a percentage sign had no discernable effect on consumer
understanding, so the percentage sign was used in subsequent versions of the TILA
statement.
•
Participants in Dallas generally reacted positively to the new alternative presentations of the
APR they were shown. Therefore, the forms used in the following round of testing included
both text-based and graphic context for how the APR compared to that of other loans.
Rate and Payment Information
•
Some participants in this and previous rounds had difficulty relating the rate caps to the
maximum rates shown in the payment table. Therefore, one of the versions designed for the
next round (version G1) included text that explicitly connected the lifetime cap to the
maximum interest rate.
Key Questions Section
•
Most participants in this round preferred to have all Key Questions shown, even those to
which the answer was “No.” However, ICF Macro and Board staff were concerned that
listing all eight Key Questions might not be an efficient use of space, since affirmative
answers to some of the questions (such as that related to a demand feature) would be rare.
Therefore, the decision was made to require that Key Questions related to rate and payment
changes, pre-payment penalties, interest-only payments and balloon payments would be
required on the form, whether the answer to the question was affirmative or negative. Key
Questions related to negative amortization, equity-sharing, and a demand feature would only
be required if the answer was affirmative. This policy was implemented in all forms designed
for subsequent rounds of testing.
49
•
Due to continued lack of participant understanding of the Key Question related to interestonly payments, the wording of this question was revised slightly on forms for the following
round.
•
Because some participants commented they did not like the fact that the responses for the
first two Key Questions stated simply “Yes” with no explanation, in subsequent forms a short
explanation accompanied all affirmative answers.
Credit Life Insurance
•
Based on the findings from this round, the Board staff was concerned that the presence of
information about credit life insurance on the first page of the TILA statement increased
awareness of the product, but did not make consumers aware that they might not qualify for
the product’s benefits. Therefore, the decision was made to remove this information from the
TILA statement and to add language to alert consumers that they might not be eligible for
benefits from the insurance.
Other Required Disclosure Text
•
Because participants had difficulty understanding the disclosure text describing loan
assumption, this text was revised and tested again in the next round of interviews.
50
ROUND 11: PROVIDENCE, RHODE ISLAND (MARCH/APRIL 2009)
Objectives and Methodology
On March 30 and April 1, 2009, ICF Macro conducted 10 cognitive interviews in Providence,
RI. Unlike previous rounds of interviews, which focused primarily on hybrid ARMs, the TILA
statements tested in this round described more complex mortgage products. Loan G was an
interest-only 5/1 ARM that included PMI. Loan H was a 3-year fixed-rate mortgage with a
balloon payment. Loan H also had an equity-sharing feature, which was disclosed in the Key
Questions section. Loan G had a subprime APR, while Loan H had an APR just under the cutoff
for subprime. Two different versions of the TILA statement were developed and tested for each
of these two loan products.
To avoid having the statements appear cramped or dense, forms for this round were laid out on
two letter-sized pages rather than one legal-sized page. The “Key Questions” section was moved
to the second page, as was some descriptive text about rate and payment changes (under the
heading “More Information About Your Payments”).
The interview protocol included the following sections:
•
Participants in the interviews were first asked to review one of the TILA statements that
described an interest-only ARM product (version G1 or G2). They were then asked a series
of questions designed to test their comprehension of the content on the form.
•
Next, participants were given a TILA statement that described the second loan product
(version H1 or H2). They were asked to review this loan and asked several questions about
its content.
•
After reviewing the TILA statements, participants were asked to review some additional text
for required disclosures about assumption, negative amortization, and reduced documentation
loans.
For the Providence round of testing and all subsequent rounds, the footnote for prepaid finance
charges was deleted. Instead, the amount financed was shown under the heading “Total
Payments,” in the “More Information about Your Payments” section on the second page of the
statement.
Five forms were used in these sections of the interview; all are provided in Appendix D:
•
TILA statements G1 and G2 (both have the same terms, but a different format);
•
TILA statements H1 and H2 (both have the same terms, but a different format); and
•
A separate page with additional text for required disclosures.
51
Key Interview Findings
Loan Obligation (Loan G)
•
All but one participant understood that when they received this form they would not be
obligated to accept it. As in previous rounds, this understanding was based more on prior
knowledge than on the fact it was stated on the form.
•
Three participants incorrectly believed that by signing the TILA statement they would be
committing themselves to the loan. Another participant commented that even thought the
form specifically states that a signature only indicates receipt of the form, the cautionary
language above the signature line makes it appear binding.
Loan Summary Section (Loan G)
•
All participants correctly identified the term of the loan (30 years) and the amount borrowed.
•
When asked if they could identify how much of the $200,000 loan they could apply to the
price of the home they were purchasing, about half of participants correctly indicated that
$198,000 would go toward the home purchase. The remaining participants were not able to
answer this question correctly.
•
Only three participants understood that the $2,000 that had been rolled into the loan amount
for Loan G was included in the amount shown for Total Settlement Charges. Others thought
this $2,000 would be an additional charge or were not sure.
•
Almost all participants understood from the form the down payment was not included in
settlement charges.
APR (Loans G and H)
•
Several participants initially confused the APR with their interest rate. When asked to explain
the difference between the interest rate and APR, only two participants were able to explain
that the APR included settlement charges—even though the APR was described on the page
as “Your interest rate with settlement charges included.”
•
Despite the fact that participants did not generally understand what the APR was, most
realized from the graphic that the APR for Loan G fell in the “subprime” category, and that
this meant their loan was more costly than a prime loan. These participants indicated this
made them feel more negatively about the loan.
•
All participants were shown Loan H and asked how they would react to the loan if they had
excellent credit. About half indicated that if they had excellent credit they would expect to
get a lower APR closer to the average prime offer rate (APOR). The other half did not seem
concerned that their APR was different from the APOR, and did not indicate that this fact
would affect their decision whether to accept the loan.
52
•
Five participants were asked to explain the graphic on Version G-1 or H-1—in particular, the
significance of the two dotted lines on the graph. Four of the five participants understood that
one dotted line represented the APOR, while the other represented the lower end of the range
labeled “subprime.” Two of the five, however, thought the graphic divided the range of
possible APRs into three categories—one for people with excellent credit (below the APOR),
one for people with “average” credit (between the APOR and “subprime” cutoff), and one for
people with poor credit (the area labeled “subprime”). This was not the intent of the graphic,
since this interpretation misrepresents the significance of the APOR.
•
Although the word “subprime” had a negative connotation for them, only a few participants
understood that a subprime loan was a higher-priced loan usually given to borrowers with
poor credit. Two participants thought the term “subprime” meant the loan had a rate lower
than the prime rate.
•
The APR graphic in versions G1 and H1 was slightly different than that on versions G2 and
H2. In G1 and H1, the APOR was represented by a dotted line, while the APR for the loan
being described was represented by a diamond. In G2 and H2, the APOR was represented by
a star, and the loan being described was represented by an inverted triangle and labeled “this
loan.” About three quarters of participants indicated they preferred the latter format. Some
commented that a star was an appropriate symbol for the APOR, since it represented a very
good rate.
Rate and Payment Information
Understanding of Adjustable Rate (Loan G)
•
When asked to identify the initial interest rate of the loans, several participants mistakenly
pointed to the APR. This seemed to be largely due to the prominence of this figure on the
form.
•
All participants understood the rate would change, and all but one understood that the first
rate adjustment would occur after 5 years (2014). However, most did not realize their initial
rate was discounted.
•
Only three of the ten participants understood that the rate would change annually after the
first 5 years.
•
When participants were asked what determined how the rate would change over time, three
participants understood the rate was based on an index. Most other participants indicated the
rate change was based on the “market rate” or the “national rate.”
53
Payment Summary Table (Loan G)
•
The maximum interest rate was correctly identified by eight of ten participants. Four of five
participants who saw version G1 understood that the interest rate could increase no more than
2 percentage points each year.28
•
All participants were able to identify the amount of the first monthly payment and all knew the
payment would be same for the first 5 years.
•
When asked what was more important to them in terms of the payments, six participants
indicated the “maximum ever” payment was more important than the initial or first adjustment
payments.
•
As in previous rounds, several participants were unsure what would happen to their payment
after the introductory period ended. Some assumed the payment would definitely increase to the
amount shown in the “maximum at first adjustment” column, while others understood that their
payment could be lower than that shown.
Interest-Only Payments (Loan G)
•
Only two of the ten participants realized during their first review of Loan G that their payments
would be interest-only during the first 5 years. All participants eventually understood this
feature of the loan, but in most cases only after being prompted by the interviewer to re-read
portions of the form.
Taxes and Insurance (Escrow) (Loans G and H)
•
On versions G1 and G2, only one participant thought the amount for taxes and insurance shown
in the payment summary table was the actual amount he would pay; all others understood this
figure was an estimate. Almost all participants also understood that taxes and insurance could
change over time.
•
Almost all participants understood Loan H did not include an escrow account and that as a result
they would have to pay taxes and insurance on their own. In all cases, this understanding was
based on the inclusion of the words “not included” in the escrow row of the Payment Summary
table; fewer participants noticed this information in the More Information About Your Payments
section.
Key Questions Section (Loans G and H)
•
All participants understood that Loan G included a prepayment penalty if they paid off the loan
within the first 2 years.
•
When asked to read the Key Question related to interest-only payments, almost all participants
understood they would not be paying any principal for the first 5 years they made payments. All
28
Form G2 did not include information about the periodic cap on rate change.
54
realized that this could be a risky feature, although one participant commented he might still
accept an interest-only loan if that were the only type he could afford.
•
When looking at Loan H, only three of ten participants noticed the equity-sharing feature in
their first review of the form. Four others eventually saw this information in the Key
Questions section, while three never did.
“More Information About Your Payments” Section (Loan G)
•
All participants had heard of PMI previously. However, only two of the ten participants
noticed the text under the heading Escrow that indicated that they would be paying PMI with
this loan.
•
Version G1 included information about periodic and lifetime rate change caps, while version
G2 did not. Participants who saw G1 showed a greater understanding of how their rate could
change over time. For example, some participants who saw G1 were able to use the periodic
rate change cap information to determine what their maximum rate would be in 2015, while
no participants who saw G2 were able to correctly answer this question. When asked whether
information about rate caps would be important to them and should be included on the form,
most participants responded affirmatively.
•
Almost all participants correctly identified the number of payments and total of payments, as
well as the amount that would go to interest and fees. As in previous rounds, none were able
to explain what was meant by the “amount financed,” although this did not affect their
comprehension of other parts of the form.
Balloon Payment (Loan H)
•
Almost all participants realized in their initial review of Loan H that it included a balloon
payment. All understood that the “balloon payment” was a large payment that they would
have to make after 3 years.
•
Most noticed the information about the balloon payment in the Payment Summary table.
Only one noticed it first in the Key Questions section.
•
Versions H1 and H2 provided information about the balloon payment in two different ways.
H1 showed the balloon payment in a separate column in the Payment Summary table, while
H2 showed the balloon payment in a separate row below the table. The format that was used
did not have a discernable effect on participant understanding; almost all participants noticed
the balloon payment regardless of which form they saw. Participants were evenly split in
terms of which of the two formats they felt was the clearest presentation of the balloon
payment.
55
Other Required Disclosure Text
•
At the end of the interview, participants were asked to review three different disclosures and
describe what they meant in their own words. The first disclosure was revised text related to
loan assumption. The results were more positive than in previous rounds; most participants
understood what was meant by the fact that the lender could “permit the new buyer to take
over the payments” on their mortgage and that this could be a positive feature for a borrower.
•
In addition to the language about loan assumptions, participants were also asked to review
two disclosures in the “Q&A” format used in the “Key Questions About Risk” section of the
TILA. The first described negative amortization by indicating that the loan balance for the
loan could increase over time, even if the borrower made payments. All stated that this was
not a feature that they would want on their loan. While few participants had previously heard
the phrase “negative amortization,” almost all understood that if this disclosure were true
they could potentially end up owing more money than they had originally borrowed.
•
The other “Key Question” disclosure participants were asked to review described no- or lowdocumentation loans. It indicated that the loan had a higher rate or fees because the borrower
did not document his or her employment, income, or other assets. While several were
surprised at the disclosure because they assumed that documentation always had to be
provided, almost all understood its meaning.
Subsequent Design Decisions
Loan Summary Section
•
Although the breakout of the loan amount into two amounts—the amount applied towards
fees and the amount available for the borrower’s own use—was more successful than
previous attempts to communicate information, almost half of the participants were still
confused by this portion of the form. As a result, this reference was removed from the Loan
Amount section. Instead, underneath the settlement charges a reference was added referring
to what portion of the fees were included in the loan amount.
APR
•
Two different versions of the APR graphic were tested in Providence. Generally, participants
reacted more positively to the graphic used in versions G2/H2, which included more explicit
labels for the APOR and the APR of the loan offered. As a result, this basic graphic template
was used in forms for subsequent rounds of testing.
•
Several participants were confused by the word “subprime” as it was used in the APR
section, so this word was not used in forms for the next round. Instead, the “subprime”
portion of the APR range in the graphic was labeled “high cost.”
•
Several participants in Providence and previous rounds of testing expressed a belief that a
small difference in APR would not likely make a significant difference in their monthly
payment. To combat this misconception, a reference was added to forms for the following
56
round (Denver) that indicated the monthly dollar amount a 1 percent decrease in APR could
save a borrower.
Rate and Payment Information
•
Because participants continued to struggle to understand what would happen to their payment
at the end of the introductory period, for the next round of testing information was added to
the first page of the form describing what would happen if market rates did not change. This
text appeared as a “Teaser Rate Notice” under the payment summary table.
•
Most participants did not notice the disclosure in the “More Information about Your
Payments” section that indicated their loan included private mortgage insurance. Therefore,
the forms for the next round of testing included this information in the heading of the escrow
row in the Payment Summary Table on the first page.
•
Because most participants did not initially realize that payments for Loan G would be
interest-only for the first 5 years, in the next round a reference to “interest-only payments”
was added under Loan Type to make this feature more prominent.
•
In the model forms and clauses it releases in July 2009, the Board will propose that in most
cases the balloon payments be displayed in a separate row at the bottom of the payment table
(as in version H2). Since participants had no clear preference between the different formats
tested, the rationale for this decision was that it may be easier to add a row to the payment
table rather than a column since space is more likely to be limited horizontally on a page.
Key Questions Section
•
In an attempt to improve comprehension among participants, the wording of the affirmative
answer to the Key Question related to interest-only payments was revised slightly on forms
for the following round.
•
Several participants did not understand that interest rate adjustments for the sample loan
could occur on an annual basis, so a reference to the frequency of adjustment was added to
the answer to the first Key Question (“Can my interest rate change?”).
57
ROUND 12: DENVER, COLORADO (APRIL 2009)
Objectives and Methodology
In April 2009, ICF Macro conducted 10 cognitive interviews in Denver, CO. The TILA
statements tested in this round described two different mortgage products: an interest-only ARM
and a payment option ARM. The goal of the interviews was to assess how clearly the revised
statement described the terms of these more complex products.
The interview protocol included the following sections:
•
Participants in the interviews were first asked to review one of two TILA statements that
described an interest-only ARM (versions J-IO or K-IO). As in previous rounds, they were then
asked a series of questions designed to test their comprehension of the content on the form.
•
Next, participants were given the alternate interest-only TILA statement, which varied only
in the way in which APR information was presented on the form. Participants were asked to
compare the APR sections on the two forms and indicate which format they felt was clearer
and more informative. In order to minimize learning effects, the order in which participants
were shown the two interest-only TILA statements was rotated between participants.
•
Participants were then shown a TILA statement that described a payment option ARM
product (versions J-PO or K-PO). Again, participants were then asked a series of questions
designed to test their comprehension of the content on the form. They were subsequently
shown the alternate payment option TILA statement and asked which aspects of each form
they found clearer. As with the interest-only loans, the order in which the participants were
shown the two payment option TILA statements was rotated.
•
After reviewing the TILA statements, participants were shown some additional text related to
credit life insurance and were asked questions to test their understanding of the content.
Five forms were used in these sections of the interview; all are provided in Appendix D:
•
TILA statements J-IO and K-IO, which described interest-only ARM products (identical
except for the format of the APR section);
•
TILA statements J-PO and K-PO, which described payment option ARM products (identical
except for the format of the APR and Payment Summary sections); and
•
A page with an additional disclosure about credit life insurance.
Versions J-IO and K-IO displayed an APR of 7.59%, which fell into the “high cost”
(i.e., subprime) area shown on the form. Versions J-PO and K-PO displayed an APR of 6.01%,
which was close to, but not in, the high cost range shown on the form.
58
Prior to this round, ICF Macro and Board staff determined that the Payment Summary table
tested in prior rounds would not be appropriate to use for a payment option ARM. Because
payment option ARMs are significantly different products, the table being used for other types of
loans would not have disclosed several important pieces of information, such as the fact that
multiple payment options were available each month. Therefore, versions J-PO and K-PO
include a new Payment Summary section that was customized for this specific type of product.
Because of the complexity of payment option ARMs, ICF Macro did not attempt to describe all
details of the loan product. For example, the TILA statement that was developed did not display
all payment options available for this type of loan; it only provided information about the full
and minimum payments. The primary goals of the statement were to communicate to consumers
that: a) making the minimum payment each month would cause their loan balance to increase;
and b) their minimum required payment could increase dramatically in the future.
Key Interview Findings
Loan Summary Section29
•
All participants correctly identified the term of the loan (30 years). All but two correctly
identified the amount that was being borrowed; the remaining two incorrectly thought they
were borrowing the “amount financed” shown on the second page of the form.
•
Almost all participants understood that the settlement charges shown on the form did not
include any down payment they would owe.
•
TILA statements used in Denver indicated that $2,000 of the settlement charges had been
“rolled into” the loan amount. All five participants who were shown these forms were
confused when this language was pointed out to them; most thought this meant the loan
amount would be different than the amount shown ($200,000). On the second day of testing,
participants were shown an alternative wording for this portion of the disclosure (“$2,000 of
these charges is already included in your loan amount above”). Participants found this
phrasing much clearer; all understood that the $2,000 was part of the $200,000 loan amount
shown on the form.
APR
•
29
As in previous rounds, participants continued to confuse the APR with their interest rate;
several, in fact, referred to the APR as the interest rate during their initial review of the form.
When participants were asked to explain why the APR and interest rate listed on the form
were different, only two correctly indicated that the APR includes settlement charges. All
others were either unable to explain the difference or provided an incorrect explanation; two,
for example, thought the APR was the average of the interest rates they would be charged
over time.
Participants answered questions about the loan term and settlement charges while reviewing the interest-only loan.
59
•
The forms used in this round included a graphic that that showed a range of possible APRs.
The APOR was identified on this range, and labeled the “Avg. Best APR.” The range of
subprime APRs was shaded darker on the scale, and was labeled “high cost.” All participants
were able to correctly explain what the “Avg. Best APR” and shaded regions meant. Most
also understood that participants with poor credit were likely to be offered loans with APRs
that were identified as “high cost.”
•
The APR for the interest-only loan used in this round was 7.59%, which placed it in the
range labeled “high cost.” Most participants realized that the APR fell into the “high cost”
category based on their review of the graphic. However, not all indicated this would be a
factor in whether or not they accepted the loan. For example, some who confused the APR
with the interest rate said that 7.59% seemed like a good interest rate to them, because it was
lower than what they had on their current mortgage. Others commented that they would not
accept the loan, because their current interest rate was lower than 7.59%. These participants
were clearly relating the APR shown on the form to their own personal experience, rather
than the context provided by the form.
•
Six of the ten participants indicated they would be less likely to accept the interest-only loan
based on the information in the APR section, while the remaining four indicated this
information would be unlikely to affect their decision. However, in some cases it was clear
that participants’ attitudes toward the loan were being driven by factors other than the APR,
such as the fact that it had an adjustable rate or that payments were interest-only.
•
The TILA statements describing a payment option loan displayed an APR of 6.01%, which
was just below the boundary of “high cost” loans. Again, most participants understood the
content of the APR section—for example, they knew that the average APR offered to
borrowers with excellent credit was 4.75%. However, when asked what they would do if they
had excellent credit and received this form from their lender, half expressed concern that
their APR was too high. These participants indicated that they would go to another lender to
get another offer, or would ask their lender to give them a lower APR. Others, however, did
not seem to be bothered by the fact that they had not been offered the lower APR and
indicated that the information on the form would not influence their decision whether to
accept the loan.
•
All forms also included a statement informing readers that a 1% APR reduction would result
in a savings of $167 a month for the first 5 years. Most participants did not notice this
information; when asked if the form contained any information about how much money they
would save with a lower APR, only two participants referenced this statement on the form.
•
When participants were asked to compare the APR sections of versions J and K, six
participants indicated that they preferred version K, while only one preferred version J. The
remaining three participants did not express a preference. The aspects that participants liked
about version K included the fact that the APR was displayed in a larger font, the fact that the
explanatory text was below the graphic rather than beside it, and the fact that the definition of
the APR was provided right next to the actual term, rather than in smaller font below.
60
Rate and Payment Information
Interest-Only ARM
•
All interview participants correctly identified the initial and maximum interest rates, as well
as the period of time during which the rate would remain fixed.
•
All but one participant indicated their rate and payment would likely increase at the end of
the first 5 years. However, their responses seemed to be based mostly on a distrust of ARMs
and an assumption that rates on these loans usually increase. Only two participants
referenced the information in the Teaser Rate Notice; they indicated the rate would likely
increase because it was discounted for the introductory period.
•
Only three participants understood how often the interest rate could change after the first
5 years; the remainder did not see that information in the Key Questions or More Information
About Your Payments sections.
•
About half of participants were able to identify the maximum their rate could increase in a
single year (2%); the remainder did not see this information in the More Information About
Your Payments section.
•
All participants correctly identified the initial monthly payment, and all but two understood
that this payment would remain constant for 5 years (except for potential changes in escrow).
•
Almost all participants could identify the maximum their payment would be when it first
adjusted after 5 years. However, some participants mistakenly thought their payment would
definitely increase to the maximum at that time. This misconception appeared to be in part
because of a misreading of the table and in part because of general distrust of ARM products.
•
When the Teaser Rate Notice was pointed out to them, a few participants reacted negatively
to the use of the word “teaser.” Some commented that lenders would be very unlikely to use
this word when communicating with consumers; others felt the use of the word was
demeaning or insulting.
•
Only six of the participants realized during their initial review of the form that the loan
included interest-only payments; the remaining four did not.
•
In some cases, participants were not concerned to find out that payments for the first 5 years
were interest-only. They seemed to think this was a traditional loan in which the amount of
principal paid during the first few years is very small. Because of this misunderstanding,
these participants indicated that the fact that initial payments were interest-only would not
affect how they felt about the loan.
61
Payment Option ARM
•
Two participants had previously heard of a payment option mortgage; one of the two had
held this type of mortgage previously.
•
After their first review of the TILA statement, about half of participants commented they
definitely would not accept this type of loan. Two others indicated they found the terms of
the loan confusing.
•
All participants understood the interest rate could change and all but two understood it could
begin changing after the first month.
•
Half of the participants were able to identify the initial interest rate of the loan (1.5%). Four of
the other five participants incorrectly referenced the APR when asked this question. Participants
who saw version K were more successful in identifying the initial rate because it was displayed
in the Payment Summary table rather than in the explanatory text above the table.
•
All but two participants were able to identify the maximum interest rate for the loan (10.5%).
•
All but one participant understood that their minimum payment would increase over time,
and increase dramatically in June 2011.
•
Most participants understood based on their first review of the form that if they made only
the minimum payment each month, their loan balance would increase because of unpaid
interest.
•
The Payment Summary tables were significantly different on versions J-PO and K-PO.
Participants were shown both forms and asked which version of the table they found clearer
and more informative. Most participants indicated that they preferred the table on version K
to that on version J. The most frequent reasons given by participants were that they liked the
fact the column headings identified specific points in time (rather than “Year 1,” “Year 2,”
etc.); they liked the fact that the table in version K listed the interest rate at different points in
time as well as the payment; they liked the references to “1st adjustment” and “2nd
adjustment” that were provided; and they liked the placement of the description of the full
and minimum payment options.
Taxes and Insurance (Escrow)
Interest-Only ARM
•
All but two participants were able to explain the term “escrow.” Of the other two, one said
that they had heard of the word but did not know what it meant, while the other had never
heard the term.
•
Seven participants understood that the amounts shown for taxes and insurance on the form
were only estimates. Eight understood that these amounts could change over time.
62
•
Half of the participants had previously heard of PMI; the remainder had not.
•
Although the Payment Table listed PMI as part of the estimated taxes and insurance, only six
of the ten participants realized they would be paying PMI on this loan. One reason that
awareness was fairly low may have been that half of the participants had never heard of PMI
before.
Payment Option ARM
•
When reviewing the payment option ARM, half of the participants saw the reference that
taxes and insurance were included in the payments shown in the Payment Summary section.
The remaining participants indicated that taxes and insurance were not included or stated
they did not know.
Key Questions Section
Interest-Only ARM
•
All participants understood that the interest-only loan they were shown had a prepayment
penalty.
•
When directed to read the Key Question about interest-only payments, most participants
understood that payments for the first 5 years would not cover any principal, and that they
would begin paying down the loan principal in year 6.
Payment Option ARM
•
When reviewing the payment option forms, most participants generally understood the
content of the Key Questions related to interest-only payments and negative amortization.
However, a few confused the information that was provided about interest-only payments
and negative amortization, and mistakenly thought that the information in the Key Question
about interest-only payments related to the minimum payment option.
“More Information About Your Payments” Section
Interest-Only ARM
•
When asked to read the text under the Rate Calculation heading, about half of the participants
were able to explain how their rate would be determined after the introductory period. Some
participants were confused by the term “LIBOR,” while others had difficulty understanding
the concept of how an index and margin would be used to calculate their rate.
•
When asked to read the text under the Rate Change Limits and Total Payments headings, all
participants generally understood the information provided. However, several participants
did not notice this information until they were specifically asked to read it (e.g., the periodic
rate cap).
63
Payment Option ARM
•
Most participants did not understand the information under the heading Rate and Payment
Change Limits in the More Information About Your Payments section of the form. Two
participants seemed to generally understand the information about the caps on payments and
the loan balance, although the extent to which they understood exactly how the caps worked
was unclear. Other participants were clearly confused by this text.
Loan Obligation
•
Despite the fact the forms included a statement consumers were not obligated to accept the
loan in addition to a statement “By signing below, I acknowledge receipt of this form,” about
half of the participants mistakenly thought if they signed the statement they would be
indicating acceptance of the loan terms.
Credit Life Insurance
•
All participants understood after reading the text that there was an additional cost for credit
life insurance.
•
When asked whether they would sign up for credit life insurance based on the notice they
were shown, three indicated that they would. Two said that they would consult their own life
insurance policies first to see whether additional coverage was necessary. The remaining
participants were unsure whether they would sign up.
•
Only three participants noticed the language that indicated even if you pay for credit life
insurance, you may not receive any benefit from the policy.
•
All interview participants noticed the reference to the Board website in the credit life
statement. Most indicated that they would be likely to visit this site if they had questions
about this product.
•
Although most participants also saw the reference to a housing counselor, only four indicated
they would be likely to contact a counselor to obtain more information. Others said they
would be more likely to go to the website shown.
Subsequent Design Decisions
Loan Summary Section
•
As in the previous round, some participants were unsure how often their rate and payment
could change after the introductory period ended. Therefore, the forms developed for the
following round of testing included the adjustment frequency in the Loan Type section.
•
Because the alternate language used on the second day describing settlement charges that
were included in the loan amount was clearer to participants, this language was used on
forms for the following round of testing.
64
APR
•
Because some participants continued to confuse the APR with their interest rate, forms for
the next round did not describe the APR as “your interest rate with settlement charges
included.” Instead, the revised forms used the phrase “overall cost of this loan” or “feeinclusive cost of this loan.”
•
Although participants understood that the right side of the APR range represented “high cost”
loans, some participants in this round did not express concern that their APR fell into this
range. Therefore, the graphic used in forms for the subsequent round of testing in Bethesda
attempted to demonstrate the importance of this range by coloring it black and labeling it the
“high cost zone.” Also, an explanatory note about “high cost” loans that had been removed
from forms in this round was added back in, along with a reference that loans falling in this
range are usually provided to consumers with poor credit.
•
Most participants preferred the format of the APR section shown in version K to that of
version J, therefore, this format was used in all subsequent forms.
Rate and Payment Information
•
The Teaser Rate Notice was simplified in forms for the next round of testing, because of
concerns that the number of different rates and payments displayed on the first page could
confuse consumers. Specifically, the amount of the rate increase and the reference to a new
monthly payment amount were removed.
•
A few participants reacted negatively to the use of the word “teaser,” so on subsequent forms
the Teaser Rate Notice was renamed the Introductory Rate Notice.
•
Some participants continued not to notice that their loan included PMI, so a bullet was used
to emphasize this fact in the left-hand column of the Payment Summary table. In addition,
information about private mortgage insurance was given its own heading in the More
Information About Your Payments section on the second page.
Interest-Only Payments
•
Several participants in this round of testing did not realize they would be paying only interest
during the introductory period, while some others did not realize that the fact that payments
were interest-only made this product different than traditional loans. To emphasize that
payments were interest-only, the number “0” in the first column of the Payment Summary
table was replaced with the word “None.”
Payment Option ARM
•
When reviewing forms for the payment option loan, participants strongly preferred all
aspects of the Payment Summary table used in version K to that used in version J. Therefore,
this format was used in the forms designed for the next round of testing.
65
•
Because some participants confused the interest-only payments described in the Key
Questions section with the minimum payment, the description of the minimum payment
option was revised slightly for the next round of testing. The revised text was adapted from
the payment option monthly payment disclosure that was also tested this round (see
Chapter VI).
•
Several participants did not realize escrow payments were included in the sample monthly
payments shown in the Payment Summary table, so this fact was made more prominent in the
forms tested in the following round.
•
Most participants struggled to understand the information in the “More Information about
Your Payments” section under the heading “Rate and Payment Change Limits.” Therefore,
on forms for the following round of testing, this text was broken into two different headings:
“Rate Change Limits” and “Payment Change Limits.”
Key Questions Section
•
Although understanding of the Key Questions related to interest-only payments and negative
amortization was better than in previous rounds, there were still a few participants who were
confused by this text. Therefore, the wording of these questions and answers was revised for
the following round.
Credit Life Insurance
•
While participants understood most of the content in the credit life insurance disclosure
tested this round, most did not realize that purchasing this insurance might not provide them
with any additional benefits. Therefore, this information was made more prominent in the
version of this disclosure tested in the next round.
66
ROUND 13: BETHESDA, MARYLAND (MAY 2009)
Objectives and Methodology
In May 2009, ICF Macro conducted nine cognitive interviews in Bethesda, MD. One goal of this
round was to continue testing how effectively the revised TILA could describe the terms of
complex loan products, such as interest-only and payment option ARMs. Another goal was to
continue testing the extent to which the text and graphic in the APR section provided participants
with useful context for comparing their APR to that being offered to other consumers.
The interview protocol included the following sections:
•
Participants in the interviews were first asked to review one of two TILA statements
describing fixed-rate loans. The primary focus of this portion of the interview was to assess
participants’ reaction to and understanding of the APR section. The decision was made to use
fixed-rate loans for this portion of the interview because in previous rounds of testing
participants’ reactions to forms they were shown were often driven by other loan features,
such as an adjustable rate or a prepayment penalty, rather than by the APR. As a result, it was
often difficult to isolate participants’ reactions to a high APR. By testing the APR in the
context of a simpler loan, ICF Macro and Board staff could assess how a relatively high APR
would affect participants’ evaluation of a loan they might otherwise accept.
•
Next, participants were given a TILA statement that described an interest-only ARM product.
They were then asked a series of questions designed to test their comprehension of
information on the form.
•
Participants were next given a TILA statement describing a payment option ARM product,
and again were asked a series of questions designed to test their comprehension of the
information.
•
After reviewing the TILA statements, participants were asked to review a revised disclosure
related to credit life insurance.
Five forms were used in these sections of the interview; all are provided in Appendix D:
•
TILA statements L1 and L2 (describing fixed-rate loans; they were identical except for the
information in the APR section);
•
TILA statement M (describing an interest-only ARM);
•
TILA statement N (describing a payment-option ARM); and
•
Additional text about credit life insurance.
67
Key Interview Findings
Loan Summary Section (Versions L1 and L2)
•
All participants correctly identified the term of the loan (30 years) and the amount borrowed
($306,000).
•
Six of nine participants understood the settlement charges shown on the form did not include
any down payment they would owe; one participant did not answer this question.
•
Four participants were confused by the statement that $3,000 of their settlement charges were
included in the loan amount shown. Some thought this statement might mean that they were
actually borrowing a different amount than that listed on the form. The remaining
participants understood that the $3,000 of their settlement charges were already included in
the loan.
•
Almost all participants in this round understood that the $3,000 of settlement charges that
were included in the loan amount were already reflected in the “total estimated settlement
charges” listed on the form.
APR (Versions L1 and L2)
•
As in previous rounds, several participants initially confused the APR with the interest rate;
several referred to the APR as the “interest rate” throughout their review of the form. When it
was pointed out to participants that the APR and interest rate were different, only one was
able to explain that the APR was higher because it included settlement charges. Others either
indicated that they did not know why the terms were different or provided incorrect
explanations.
•
Most participants understood the dot on the scale labeled “Avg. Best APR” represented the
average APR offered to applicants with excellent credit. All but one understood that the
“high cost zone” labeled on the scale represented the range of more costly APRs that would
likely be offered to consumers with poor credit.
•
When shown version L1, which showed an APR that was in the “high cost zone,” four of five
participants indicated that this information made them view the loan more negatively and
would make them less likely to accept the loan. Among those who were shown L2, which
had an APR just below the “high cost zone,” three of five participants indicated concern
about the APR.
•
Among all participants, about half said that if they had excellent credit, they would want to
make sure that they got an APR close to the “average best” APR shown on the form. The
remaining participants indicated that the APR graphic did not seem to consider this an
important goal.
68
•
Half of the participants noticed the reference on the form that a 1% APR reduction would
result in a savings of $194 a month. Other participants said they understood that decreasing
their APR would save them money, but did not notice the information on the form about the
specific amount they could save.
•
All but two participants understood there was no limit to how high the APR could be on a
loan. The remaining two thought that the end of the scale (10.75%) represented the maximum
APR that could be offered.
•
The L forms described the APR as the “overall cost of the loan, including interest and
settlement charges.” Participants were asked whether replacing the word “overall” in this
description with the phrase “fee-inclusive” would change their perception of what the APR
signified. Almost all participants indicated this change would not affect their understanding
of the APR. Most indicated that they found the term “overall cost” to be clearer than “feeinclusive cost”; a few said that they found the reference to fees confusing. One participant,
however, did appear to understand the meaning of the APR better when given the “feeinclusive” language.
Rate and Payment Information
Fixed-Rate Mortgage (Versions L1 and L2)
•
All participants understood their interest rate and payment would not change over time
(except if the amount for taxes and insurance changed).
Interest-Only ARM (Version M)
•
Most participants were able to identify the initial interest rate of the loan, although two
incorrectly identified the APR as the interest rate. All participants understood that the interest
rate could change after the 5-year introductory period.
•
All but two participants could identify the maximum interest rate; the remaining two
incorrectly thought the rate could increase above the maximum shown in the Payment
Summary table.
•
All participants correctly identified the maximum their interest rate could be in Year 6. Aside
from the maximum, however, participants seemed unclear as to what could happen to their
rate. Some seemed to think their rate would definitely increase in Year 6 to the amount
shown in the table while others understood their rate could also be lower than the amount
shown.
•
Most participants indicated that they thought their interest rate was likely to increase after the
introductory period ended in March 2014. However, only a few participants referenced the
information in the Introductory Rate Notice, which indicated that the initial rate was
discounted and that the interest rate would increase after the introductory period, even if the
market rate did not change. Most participants did not notice this information or did not
realize how it related to future rate and payment changes.
69
•
All but two participants understood their rate could adjust annually. The remaining two assumed
the rate would adjust every two years after the introductory period ended, because that was the
length of time between the second and third columns in the Payment Summary table.
•
Half of the participants were able to identify the maximum amount their rate could increase
in a single year; others did not notice this information in the More Information About Your
Payments section.
•
Half of the participants realized during their initial reading of the form that payments during
the introductory period would be interest-only. All others noticed this information after
reviewing the form further. Overall, the word “None” in the Payment Summary table seemed
to make the fact that these payments were interest-only more prominent.
Payment Option ARM (Version N)
•
Two participants had heard of a payment option mortgage prior to their interview.
•
After their initial review of the TILA statement, most participants expressed concern with
some aspect of the payment option loan. Some features that participants mentioned included:
the fact that their loan balance could increase; the fact that minimum payments would not
pay off any principal; and the fact that the interest rate was adjustable. When asked if
anything concerned them about this loan, one participant responded “everything.” Another
commented that the loan would make it “too easy” for a borrower to get into trouble if they
made only the minimum payments.
•
All participants understood that their interest rate was adjustable and could begin changing as
soon as the second month.
•
All but one participant correctly identified the initial interest rate; the remaining participant
confused the initial interest rate with the APR. All but one was also able to identify the
maximum interest rate.
•
All but two participants understood their minimum payment would increase over time, and
could increase dramatically in June 2011 when the loan would require a fully amortizing
payment.
•
Most participants understood the minimum payment covered only some interest and no
principal, while the full payment covered both. Two participants understood that the
minimum payment covered no principal, but mistakenly thought that it covered all interest.
•
All but two participants understood that making the minimum payments would cause the
loan balance to increase over time. Not all understood why this occurred, however; a few
indicated that the loan balance would increase because the principal was not being paid off,
rather than because of unpaid interest.
70
•
After being directed to read the statement at the bottom of the page that explained making
minimum payments would lead to an increase of $29,943.00 to the loan amount, all participants
indicated that this information would make them less likely to make minimum payments.
Taxes and Insurance (Escrow)
Interest-Only ARM
•
Although all participants indicated they had previously heard the term “escrow”; when asked
to describe it, however, only six were able to do so accurately.
•
All but two of the participants realized the payments for the interest-only loan included PMI.
Most saw this information in the More Information About Your Payments section on the
second page, rather than in the note about PMI in the Payment Summary table.
Payment Option ARM
•
As in the previous round, most participants did not realize taxes and insurance were included
in the monthly payments shown on the form. Only three participants in this round of testing
understood that this was the case, while other participants either assumed that taxes and
insurance were not included or were not sure.
Key Questions Section
Interest-Only ARM
•
All participants realized, based on their initial review of the form, that the interest-only ARM
had a prepayment penalty feature. Most of the participants noticed this feature on the first
page of the form, rather than from the Key Questions on the second page of the form.
•
When asked to read the Key Question related to interest-only payments, all but one
participant understood the information clearly. One incorrectly thought that making interestonly payments would cause the loan balance to increase.
Payment Option ARM
•
Participants were asked to read the Key Questions related to interest-only payments and
negative amortization and explain what they said. Most participants understood both features
and the impact that they would each have on the loan balance over time. However, as in
previous rounds a few participants confused the two. For example, two participants indicated
that making interest-only payments would cause the loan balance to increase.
71
“More Information About Your Payments” Section
Interest-Only ARM
•
When asked to read the text under the Rate Calculation heading, almost all participants were
able to explain that their rate would be equal to the LIBOR index plus 5%. While some had
never heard of the LIBOR index, most generally understood the concept that their rate would
vary based on a market rate.
•
All but one participant understood the annual and periodic rate change caps described under
the heading Rate Change Limits. However, as noted above about half of the participants did
not see this information until it was pointed out to them.
•
As in previous rounds, almost all participants understood the text under the heading Total
Payments, although none understood what the “amount financed” signified.
Payment Option ARM
•
Almost all participants were able to explain the information under the heading Rate Change
Limits on the payment option ARM statement, including that their rate could increase to a
maximum of 10.5% and that it could start adjusting the first month after consummation. This
was an improvement from the previous round, when participants did not understand this text.
•
As in the previous round of testing, participants were generally confused by the information
under the heading Payment Changes. While some understood that their payments could
increase no more than 7.5% a year at the beginning of the loan, they generally did not
understand the relationship between caps on payments and the loan balance or what would
happen after the loan balance cap was reached.
Credit Life Insurance
•
All participants understood after reading the notice that credit life insurance was not a
required feature.
•
Participants generally understood the first two bulleted statements. Most participants were
surprised by the third statement, which stated that even if they paid for the insurance they
may “not qualify to receive benefits in the future.” A few indicated they did not understand
how they could pay for the coverage and then receive no benefits. Despite their surprise,
participants seemed to understand the statement; all but two correctly indicated that if they
purchased the coverage and then died, the insurance would not necessarily pay off their loan.
Most assumed that the reason a borrower would not be covered would be because of preexisting medical conditions or suicide.
•
When asked whether they would purchase credit life insurance, all but one participant
indicated they would not—in fact, one participant had recently purchased credit life
insurance and was planning to re-read the paperwork after the interview. The remaining
participant, however, indicated he would purchase credit life insurance after reading the
notice.
72
•
When asked how much credit life insurance would cost for a $200,000 loan, five of seven
participants correctly answered $144 per month. The remaining two gave the figure shown
on the form ($72 per month), which was the incremental cost for each $100,000. Two
participants were not asked this question.
•
Most participants indicated they would be likely to visit the website shown on the notice if
they had additional questions about credit life insurance.
Loan Obligation
•
Because the forms used in this round specifically stated that a signature on the part of the
borrower merely indicates receipt of the form, six participants understood that by signing
they would not be committing themselves to the loan terms. However, three participants
incorrectly thought that signing the form would indicate a commitment to the lender.
Subsequent Design Decisions
Loan Summary Section
•
Because participant understanding of the frequency of rate and payment change was higher
than in the previous two rounds, the decision was made to include this information under the
Loan Type heading, as was done in this round.
Rate and Payment Information
•
For interest-only loans, the use of the word “none” in the Payment Summary table indicating
none of the payment would be used to pay principal seemed to make this information clearer
and more noticeable to participants. Therefore, this notation was used in the final TILA
statement models and clauses.
APR
•
Most participants in this round indicated that the term “overall cost” was a clearer descriptor
of the APR than “fee-inclusive cost”; there was no clear difference between the two terms in
how well they explained the meaning of the term. Therefore, the decision was made to use
the phrase “overall cost” in the final model forms and clauses.
•
The revised format of the APR graphic—particularly the use of the term “high cost zone”—
appeared to improve its effectiveness at communicating to participants the costs of having a
high APR. Compared to the previous round of testing in Denver, more participants in this
round indicated that if they had excellent credit they would expect to get an APR near the
“average best APR” shown on the scale. Therefore, this basic format was used in the APR
section of the final model forms and clauses.
73
“More Information About Your Payments” Section
•
Because participants were more likely in this round to realize the interest-only loan they
reviewed included PMI, the decision was made to retain the separate heading “Private
Mortgage Insurance” in this section of the forms and clauses.
•
Although participants who reviewed the payment option ARM still did not understand the
relationship between the caps on payments and the loan balance, their understanding of the
rate change limits was significantly better than in the previous round. Therefore, the decision
was made to retain separate headings for “Rate Change Limits” and “Payment Change
Limits” on the model forms and clauses for payment option ARMs.
74
CHAPTER VI: DEVELOPMENT AND TESTING
OF OTHER TYPES OF MORTGAGE DISCLOSURES
Although the primary focus of most rounds of interviews for this project was on testing current
and revised TILA statements, ICF Macro and Board staff also developed and tested several other
types of disclosures. These included several new early disclosures, a revised initial program
disclosure, a rate adjustment notice for ARMs, and a payment option monthly payment
disclosure explaining the consequences of making less than the full payment each month. In
most cases, these disclosures were developed by ICF Macro and tested in only one round of
interviews, after which small changes in wording were made to address any comprehension
issues that had become apparent through testing.
This chapter of this report describes the development and testing of these other disclosures.
NEW EARLY DISCLOSURES ABOUT MORTGAGE RISKS
“Mortgage Risk Worksheet”
For the round of interviews held in Baltimore, MD (Round 7), ICF Macro developed a new early
disclosure called the “Mortgage Risk Worksheet.” This document listed six mortgage features
that are potentially risky or costly: an adjustable rate, balloon payment, interest-only
payments/negative amortization, prepayment penalty, no-documentation or low-documentation
loans, and direct payment of taxes and insurance. For each of the six features, the form provided
a description of the feature and the potential benefits, risks, and costs. In each case, the
participant was asked to decide whether or not they were comfortable with the risk and to
indicate if their comfort level by checking a box. Since the intent of the Mortgage Risk
Worksheet was to ensure that individuals were affirmatively “opting in” to risky loan features,
the form did not include a box for participants to check if they were not interested in a particular
feature.
Participants in the Baltimore interviews were shown the Mortgage Risk Worksheet and asked to
provide initial reaction and feedback. They were then asked to explain several portions of the
form, to learn the extent to which they understood the content. Finally, they were asked to
describe how, if at all, they would use this worksheet in their own mortgage shopping process.
The form that was shown to participants is provided in Appendix D.
Key Findings
•
The Mortgage Risk Worksheet was received favorably by most participants. However, some
more experienced participants indicated the Worksheet would be of minimal value to them
because they already understood the risks associated with these loan features.
75
•
Most participants indicated they learned something from reading the form. Most often,
participants said they had learned something about balloon payments, negative amortization,
or “no-doc”/”low-doc” loans.
•
Participants generally understood most of the content on the form. However, several were
confused by the difference between an “interest-only loan” and one with negative
amortization. This confusion may have been exacerbated by the fact that these two loan
features were combined into a single row in the worksheet.
•
Some participants were confused by the last row of the worksheet, which related to “direct
payment of property taxes and homeowner’s insurance.” The source of this confusion
seemed to be that while most rows addressed the presence of a risky loan feature, this last
row addressed the absence of an escrow account. As a result, several participants mistakenly
thought that by checking the box in the right-hand column they were indicating they did want
an escrow account—when in fact a checkmark meant that they would consider a loan that
required them to save for taxes and insurance themselves.
•
A few participants had difficulty understanding the row on “no-doc”/”low-doc” loans. In
most cases, participants confused by this row seemed to understand the content but were
surprised that these types of loans existed.
•
Several participants suggested additional features be added to the worksheet, such as fixed
rate loans and PMI. Others suggested the document should provide a full glossary of loan
terminology. Based on these suggestions, it was clear the participants did not understand that
the Mortgage Risk Worksheet was designed specifically to alert consumers about loan
features that might be particularly risky or costly. Instead, they viewed it as a source of
general information about mortgage terms.
•
Participants generally understood how the form was intended to be used—that is, that
potential borrowers were to read and complete the worksheet and then use it as a basis for
discussion with their lender or broker. However, most participants indicated they would be
unlikely to complete the worksheet or bring it to meetings with their lenders or brokers.
Participants seemed to feel that the usefulness of the form lay in the information it provided
and that actually completing it would provide minimum additional value for them.
•
Several participants did not like the fact that the worksheet only offered a checkbox to
indicate they were comfortable with the risk. They felt a second checkbox should be
provided in each row indicating that the potential borrower is not comfortable with the risk
associated with that feature.
•
Several participants commented that a worksheet like this would only be valuable if lenders
and brokers were held accountable for collecting it and keeping consumers’ stated
preferences in mind when presenting loan offers. A few even recommended that the form
include a signature line for the potential borrower and lender, to show that consumers’
preferences had been collected and discussed.
76
Subsequent Design Decisions
•
While participants indicated that much of the content in this disclosure was important and
helpful to them, most said they would not use the form as intended. As a result, the decision
was made at this time not to require lenders to provide this type of worksheet to all potential
borrowers.
•
Because ICF Macro and Board staff believed that the content of the Mortgage Risk
Worksheet was important in helping consumers understand and assess the risk associated
with adjustable-rate and other loan products, a new early disclosure was designed for the
following round of testing. This new document, which was titled “Six Key Questions to Ask
About Your Mortgage,” moved away from the “worksheet” structure of the original form but
provided much of the same information about potentially risky loan terms.
“Key Questions to Ask About Your Mortgage” Disclosure
The disclosure titled “Six Key Questions to Ask About Your Mortgage,” which was developed
following the Baltimore round of testing, listed six questions consumers should ask their lender
about a loan offer, as well as an explanation for why each question is important.
The Key Questions early disclosure was designed to be provided to consumers when they first
inquire with a lender or broker about getting a mortgage. However, the questions shown on the
form mirrored those shown on the revised TILA statement. The intent of this parallel
construction was that during the shopping stage, consumers would ask their lender or broker
these questions about the loan they were being offered. Once they applied for the loan, the TILA
statement would allow them to confirm the answers they had been given.
This early disclosure was tested with participants in the Atlanta round of interviews in November
2008 (Round 8). Based on findings from this round, the disclosure was revised and tested again
with participants in Dallas in February 2009 (Round 10). Content was added to the form for this
round; the version of the Key Questions disclosure tested in Dallas lists nine questions instead of
the original six.
Participants in both rounds (Atlanta and Dallas) were shown the Key Questions disclosure near
the end of the interview and asked to provide initial reactions and feedback. They were then
asked to explain several items on the form, to gather data on the extent to which they understood
the content. Both versions of the Key Questions disclosure are provided in Appendix D.
Key Findings
•
When asked to rate the usefulness of the Key Questions document on a scale of 1 (“not at all
useful”) to 10 (“extremely useful”), almost all participants in both rounds of testing gave the
document a rating of 9 or 10. No participants gave the form a rating lower than 7.
•
Participants liked the “question and answer” format and thought the content would be
particularly helpful for first-time buyers.
77
•
Participants in both rounds of testing generally understood the intended purpose of the
disclosure. While many indicated they would not necessarily ask their lender the exact
questions shown on the page, some said they would use the information on the form to
develop their own list of questions.
•
When asked whether they had learned anything from reading the form, about half of the
participants indicated that they had. In Atlanta, participants most frequently said they had
learned something about negative amortization, interest-only payments, or balloon payments.
In Dallas, participants most frequently indicated they had learned something about equitysharing features, demand features, and “no-doc”/”low-doc” loans—in fact, several said they
had never heard of these three features before reading the Key Questions disclosure.
•
Participants in both rounds generally understood the questions related to variable interest
rates, payment changes, and prepayment penalties; these were all terms and concepts with
which participants were already familiar.
•
In general, the questions that were least understood by participants were those relating to
interest-only payments and negative amortization. Several participants confused these two
features and were unclear as to the difference between them. This was particularly true in
Atlanta, when the question about negative amortization immediately preceded the question
related to interest-only payments. The order of these two questions was flipped in Dallas,
which appeared to alleviate the confusion between them—although some participants
continued to struggle to distinguish the two.
Subsequent Design Decisions
•
Between the Atlanta and Dallas rounds, several small changes were made to the wording of
both the questions and the answers. These revisions, along with the reversal of the order of
questions relating to negative amortization and interest-only payments, seemed to improve
comprehension of the document slightly.
•
Because participants in both the Atlanta and Dallas rounds reacted so positively to the Key
Questions disclosure, and indicated that they would find the information useful, the Board is
proposing that this document be provided to all prospective borrowers. The final model form
includes seven of the nine Key Questions listed on the version used in Dallas.30
30
Two Key Questions relating to loan features that are relatively rare in the market (equity sharing and demand
features) were removed from the form, because of concerns that if the disclosure were too long fewer consumers
would read it.
78
REVISED ARM LOAN PROGRAM DISCLOSURE
As described in Chapter III, ICF Macro tested the current version of the ARM loan program
disclosure through focus groups in Greenbelt, MD and Los Angeles, CA (Rounds 1 and 4).
Participants’ reaction to the disclosure was fairly negative; most indicated they found it difficult
to understand and that, because the content was so general, the form would not help them shop
between products or lenders.
Prior to the round of interviews in Providence, RI (Round 11), ICF Macro developed a revised
program disclosure form. This form included four terms that are important distinguishing
characteristics of an ARM program: the length of the introductory period, the frequency of rate
change, the index used to calculate the rate, and limits on rate changes. It also provided answers
to the Key Questions used on the TILA statement. The intended timing of this disclosure was the
same as the current ARM program disclosure; consumers would be provided with the document
at the point before they have applied for a loan. The revised program disclosure form that was
tested in Providence is provided in Appendix D.
Participants in the Providence interviews were asked to read the revised program disclosure and
provide general comments on the extent to which they would find the form useful. They were
then asked a series of questions designed to test their understanding of the content.
Key Findings
•
Participants understood that the purpose of the ARM loan program disclosure was to provide
general information about a lender’s loan program. They understood that this disclosure
differed from transaction-specific documents like the TILA, because the lender could not
provide specific information about interest rates before application.
•
Six participants understood that the information on the form was being provided by the
lender. Three were not sure who was responsible for the information provided, while one
thought the information on the form was coming from “the government.”
•
Comprehension of the information on the program-specific page was generally high. All but
one participant understood that their rate could begin changing after 3 years, and all knew
that their rate would change annually after that point. Three participants mistakenly thought
that the maximum interest rate on the loan would be 6%; in fact, this was the maximum
increase in the interest rate. When asked if anything was confusing to them, two participants
indicated they found the LIBOR index and margin as well as limits on the rate change and
interest caps difficult to understand.
•
Eight participants understood without prompting that the loan being described had both
demand and equity-sharing features. Once they had read the information about these features,
all participants understood them clearly. All participants indicated that these features would
make them less likely to accept the loan; several were surprised because they had not known
that mortgages could have these features.
79
Subsequent Design Decisions
•
Because participants’ understanding and perceived usefulness of the revised program
disclosure form were dramatically higher than the current version, the Board will propose to
include the revised form in its proposed regulations.
•
Because a few participants mistakenly thought that the reference to a “6% lifetime cap”
referred to a limit on the interest rate itself rather than the change in the rate, the wording of
this reference was revised following the Providence round of testing to state that the interest
rate can increase “no more than 6% total for the life of the loan.”
NEW EARLY DISCLOSURE:
“FIXED VS. ADJUSTABLE RATE MORTGAGES”
For the round of interviews held in Providence, RI (Round 7), ICF Macro developed a new early
disclosure. This one-page document provided information about the relative advantages and
disadvantages of an ARM compared to a fixed-rate loan, most of which currently appears in the
CHARM booklet. The intent was that this publication would be provided to consumers at the
point when they first expressed interest in a mortgage. The document that was tested is provided
in Appendix D.
Participants in the Providence interviewers were given this new early disclosure together with
the revised program disclosure described above. They were asked to comment on the extent to
which they would find this information useful, and were then asked questions designed to test
their understanding of the form.
Key Findings
•
Participants understood that the purpose of this disclosure was to provide them with
information about ARMs, and about the relative advantages and disadvantages of this type of
loan product compared to a fixed-rate mortgage.
•
Participants generally had a favorable reaction to the page comparing fixed rate to adjustable
rate mortgages. Participants commented that the information was clear and easy-tounderstand, and they did not identify anything that they found unclear or confusing. Several
participants particularly liked the box that directly compared the two products and provided
suggestions for when to consider each of them.
•
Half of the participants understood the information on this page was coming from the Board,
as opposed to a lender or broker. Other participants understood this was the case only after
the Board logo and heading (“Federal Reserve Board Consumer Protection Resources”) were
pointed out to them.
80
Subsequent Design Decisions
•
Because participants generally understood the information on this disclosure and indicated
that the information would be useful to them, lenders would be required to provide these
forms to potential borrowers.
ARM ADJUSTMENT NOTICE
Currently, Regulation Z requires lenders to notify ARM borrowers of a change to the interest
rate; if the borrower’s payment will change, the lender must send the notice in advance of the
change. Regulation Z does not contain a model form for this disclosure.
Prior to the round of interviews in Providence, RI (Round 11), ICF Macro developed a model
notice to inform borrowers that their interest rate had been changed and would change their
monthly payment. The specific terms shown on the notice also indicated that the borrower would
begin paying interest, whereas previous payments had been interest-only. The notice shown to
participants is provided in Appendix D.
Participants in the Providence interviews were asked to review this notice and provide initial
reactions and comments. They were then asked a series of questions designed to test their
understanding of the content.
Key Findings
•
Participants generally understood the form content and recognized all aspects of the loan that
would be changing. All interview participants correctly identified the amount of the new
payment, as well as the date that it would be due. Almost all participants recognized without
prompting that their rate was increasing, the amount they pay for taxes and insurance was
increasing, and their new payments would begin paying off the loan principal.
•
All but one participant saw the information on the form indicating that if they tried to
refinance into another loan, they would be subject to a prepayment penalty.
•
When asked what they would do if they realized they would be unable to make their new
payments, six participants indicated they would call their lender, while four said they would
use one or more of the resources listed at the bottom of the form. Two participants said that
they most likely would not seek out any type of assistance because they did not believe doing
so would be helpful.
81
Subsequent Design Decisions
•
Because comprehension of this notice was generally very high, the model ARM adjustment
notice published by the Board with its proposed rules in July 2009 will be almost identical to
that which was tested with consumers.31
PAYMENT OPTION MONTHLY PAYMENT DISCLOSURE
Prior to the round of interviews in Denver, CO (Round 12), ICF Macro developed a model
disclosure to include with monthly statements for payment option mortgages. This disclosure
describes a borrower’s payment options for that month, along with the impact that each would
have on their loan balance and future payments. The disclosure shown to participants is provided
in Appendix D.
Participants in the Denver interviews were asked to review this disclosure and provide initial
reactions and comments. They were then asked a series of questions designed to test their
understanding of the content.
Key Findings
•
All participants understood that the purpose of this disclosure was to inform them of their
payment options, along with the consequences of selecting a particular payment.
•
Participants felt the information was very clearly presented; they had no questions following
their review of the disclosure. One participant, however, expressed doubt that lenders would
ever be this honest when describing the consequences of making minimum payments.
•
Most interview participants understood if they made the minimum payment they would be
borrowing more money and increasing their loan balance. Most also understood that if they
made minimum payments they would have to make much larger payments in the future.
•
All but two participants understood that if they made an interest-only payment they would be
paying only interest and would not be paying off principal. The remaining two participants
confused the consequences of an interest-only payment with those of the minimum payment,
and indicated that making an interest-only payment would also cause the loan balance to
increase.
Subsequent Design Decisions
•
Because comprehension of the content was generally very high, the model payment option
monthly payment disclosure published by the Board with its proposed rules in July 2009 will
be almost identical to that which was tested with consumers in this round.
31
The model form published by the Board will also show loan balance and other loan features where applicable, such
as interest rate carryover.
82
NEW EARLY DISCLOSURE: MORTGAGE SHOPPING CHECKLIST
For the round of interviews held in Baltimore, MD (Round 7), ICF Macro developed another
early disclosure. Called the “Mortgage Shopping Checklist,” the goal of this one-page document
was to provide consumers with six action steps they should take before applying for a mortgage
loan. These action steps were intended to make consumers more knowledgeable about
mortgages, and to improve their ability to shop effectively between lenders. The disclosure was
designed with the intent that it would be provided to consumers when they first contacted a
lender or broker about obtaining a mortgage.
Participants in the Baltimore interviews were shown the Mortgage Shopping Checklist and asked
to provide initial reaction and feedback. They were then asked to explain several sections of the
form, to gather data on the extent to which they understood the content. The Checklist shown to
participants is provided in Appendix D.
Key Findings
•
About half of participants indicated they would find this document helpful if they were in the
process of looking for a mortgage. Some said if they had been given this information when
they bought their first home it would have saved them time and money.
•
Participants who indicated that the document would not be useful to them tended to be more
experienced borrowers who had been through the mortgage process multiple times. Several
believed they were already effective shoppers and did not need additional guidance. Some of
these participants, however, thought the Checklist would be a useful resource for first-time
borrowers.
•
One participant commented the document would be more useful if it actually provided
information about mortgages, rather than simply recommending other resources.
•
Several participants expressed surprise that the Federal Reserve Board would produce a
document like this for consumers, because they did not know this was one of the Board’s
roles. Others had not known that the Board offered resources such as consumer-oriented
websites.
•
Approximately half the participants said they would be likely to call the phone number listed
at the bottom of the page and request the “Mortgage Shopping Package.” Others said they
would be unlikely to do so, because they did not believe that this information would be
useful to them.
•
Some participants indicated that in addition to the six items on the checklist, they would like
more information on topics including: the timeline of the mortgage process; how to identify
reputable lenders and/or brokers; an explanation of closing costs; suggestions on how to
improve your credit score; and how to read and understand mortgage disclosures.
•
Several participants suggested that if the Board produced a resource like this, they should be
sure to promote it to increase awareness of its availability.
83
•
A few participants commented that in addition to this form, the Board should also provide inperson workshops and mortgage counseling.
•
One participant indicated that he would be unlikely to get quotes from multiple lenders if
doing so required that he pay multiple application fees.
Subsequent Design Decisions
•
Because half of the participants indicated they did not find the content of this disclosure to be
helpful, the decision was made not to require that a Mortgage Shopping Checklist be
provided to all potential borrowers. However, because other participants—particularly less
experienced borrowers—said that a checklist like this would be useful, the Board plans to
explore options for how to provide this information through consumer education materials.
84
CHAPTER VII: SUMMARY
This report summarizes work conducted by ICF Macro from December 2007 through June 2009
in support of the Board’s efforts to revise Regulation Z rules pertaining to closed-end mortgage
disclosures. The outcomes of this work include the development of:
•
A significantly revised TILA statement that:
Emphasizes potential changes in rates and payments;
Highlights potentially risky or costly loan features;
Helps consumers verify key terms they might have considered before applying for a
particular loan; and
Provides context for how the loan APR compares with what other recent borrowers have
been offered;
•
A new document titled “Key Questions to Ask About Your Loan,” a concise and easy-to read
disclosure for potential borrowers that provides guidance on what questions they should ask
their lenders;
•
A new disclosure titled “Fixed vs. Adjustable Rate Mortgages,” which will be provided to
potential borrowers to explain the relative advantages of fixed and adjustable rate loan
products;
•
A revised ARM loan program disclosure that is simpler and more useful to consumers than
that which is currently in use;
•
A revised ARM adjustment notice that describes future interest rate and payment changes;
and
•
A new payment option monthly payment disclosure for consumers with payment option and
other negative amortization mortgages that describes the consequences of making less than
the full payment each month.
The results of the research described in this report will inform the Board’s proposed revisions to
Regulation Z, which are scheduled for release in July 2009. The disclosure forms developed
through iterative testing will be released with the proposal as model forms and clauses. By
relying heavily on direct consumer testing in the development of these forms, the Board hopes to
ensure that its new regulations will lead to financial disclosures that will be easier for consumers
to read and understand, and as a result will help them make well-informed financial decisions.
85
APPENDIX A:
Research Timeline
Round
#
Date(s)
Type of
Testing
Topics Addressed
1
Greenbelt, MD
February 20, 2008
Focus Groups
(2)
Mortgage shopping behavior
Current disclosures (CHARM booklet, ARM
loan program disclosure, TILA statement1)
2
Washington, DC
March 4 & 6, 2008
Interviews
(7)
Mortgage shopping behavior
Mortgage broker compensation disclosures2
Pollock and joint ( HUD-Fed) forms
3
Los Angeles, CA
March 25-26, 2008
Interviews
(7)
Mortgage shopping behavior
Mortgage broker compensation disclosures
Pollock and joint ( HUD-Fed) forms
4
Los Angeles, CA
March 25-26, 2008
Focus Groups
(2)
5
Washington, DC
April 30 & May 1,
2008
Interviews
(10)
Mortgage shopping behavior
Mortgage broker compensation disclosures
CHARM booklet
6
Kansas City, KS
May 13-14, 2008
Interviews
(11)
Mortgage shopping behavior
Mortgage broker compensation disclosures
CHARM booklet
August 20-21, 2008
Interviews
(10)
Mortgage shopping behavior
New early disclosures (Mortgage Checklist,
Mortgage Risk Worksheet)
Current TILA statement
November 5-6, 2008
Interviews
(9)
Mortgage shopping behavior
New early disclosure (“Key Questions”
disclosure)
Revised TILA statements
Payment scenario table and graph
7
1
Location
Baltimore, MD
Mortgage shopping behavior
Current disclosures (CHARM booklet, ARM
loan program disclosure, TILA statement)
8
Atlanta, GA
9
Bethesda, MD
January 27 & 29, 2009
Interviews
(9)
Revised TILA statements
10
Dallas, TX
February 24-25, 2009
Interviews
(10)
Revised TILA statements
Alternate presentations of APR
“Key Questions” disclosure
11
Providence, RI
March 31 & April 1,
2009
Interviews
(10)
Revised TILA statements (interest-only ARMs
and fixed rate loans with balloon payments)
Revised ARM loan program disclosure
ARM adjustment notice
12
Denver, CO
April 21-22, 2009
Interviews
(10)
Revised TILA statements (interest-only and
payment option ARMs)
Payment option monthly payment disclosure
13
Bethesda, MD
May 6-7, 2009
Interviews
(9)
Revised TILA statements (fixed-rate loans,
interest-only and payment option ARMs)
Unless noted otherwise, testing of current and revised TILA statements focused on statements that described hybrid
ARMs.
2
Findings related to the disclosure of mortgage broker compensation were presented to the Board in a separate report in July
2008, which is available at http://www.federalreserve.gov/newsevents/press/bcreg/20080714regzconstest.pdf.
APPENDIX B:
Sample Recruitment
Screener
Participant Screener for Federal Reserve Board In-Depth Interviews
Providence, RI
March 31-April 1, 2009
Recruiting Script
Hello, I am calling on behalf of the United States Federal Reserve Board. As you may know, recently
many Americans have had problems with their mortgages. In response to the recent mortgage issues,
the Federal Reserve Board is sponsoring a series of consumer interviews in your area so that we can
learn more about how people make decisions regarding their mortgages. We will use what we learn
from these interviews to help improve the information consumers receive when they get a mortgage
loan.
Q1:
Have you obtained a new mortgage or refinanced a mortgage in the past two years?
�
�
Yes � Participant may qualify for Category A; continue to Q2
No � Participant may qualify for Category B; skip to Q9
Great. We will be holding interviews in Providence on Tuesday, March 31st and Wednesday, April 1st.
Participants will receive $75 in exchange for their time and input on this important topic. I was
wondering if you would be interested in attending.
�
�
Yes � Continue to screening questions
No � Record reason (not interested, not available on that date, etc); thank them politely and
end call.
-------------------------------------------------------------------------------------------------------------------------Questions for Category A Candidates
Q2:
Was this mortgage related to a property for your own use, or a property you purchased solely as
an investment?
�
�
Q3:
Were you the person in your household who was responsible for making decisions related to
this mortgage?
�
�
�
Q4:
Own use � Continue
Investment � Thank respondent politely and end call.
Yes � Continue
Yes, in cooperation with my [spouse, partner, etc.] � Continue
No � Thank respondent politely and end call.
Do you work or have you ever worked for a bank or other financial institution, or in the real
estate or mortgage industry?
�
�
Yes � Thank respondent politely and end call.
No � Continue
Q5:
ARTICULATION QUESTION: In a few sentences, could you describe the process through
which you found your current mortgage lender?
�
If respondent indicates that he/she got their mortgage through a family member or close
friend who was a broker or worked at a bank � Thank respondent politely and end call.
In all other cases…
� If respondent gives a thoughtful, articulate answer � Continue to Q6
� If respondent does not give a thoughtful, articulate answer � Thank respondent politely
and end call.
At this point, I am going to ask you a few questions that pertain to financial information that you might
find personal or private. However, I want to assure you that none of this information will be shared
outside the group conducting this research, and all information will be kept anonymous—your name
will never be used in any reports.
Q6:
How many mortgages do you currently have on your primary residence?
�
�
Q7:
One (skip to Q8a)
Two or more
Was the mortgage that you obtained in the past two years the larger or smaller of these
mortgages?
a) Larger (1st mortgage)
b) Smaller (2nd or 3rd mortgage) [NOTE: No more than 2 among interviews]
c) Both [Direct respondent to answer remaining questions based on larger (1st) mortgage]
If answer is
“a” or “c”
Q8a: What is the current interest rate on this
mortgage?
�
�
�
If answer is
“b”
Q8b: What is the current interest rate on
this mortgage?
7.5% or below
Above 7.5% � Qualifies as SP
Don’t know
�
�
�
9.5% or below
Above 9.5% � Qualifies as SP
Don’t know
-------------------------------------------------------------------------------------------------------------------------Questions for Category B Candidates
Q9:
Have you ever owned a home?
� Yes � Thank respondent politely and end call.
� No � Continue
Q10: Have you looked into buying a home in the last year?
� Yes � Continue
� No � Thank respondent politely and end call.
Q11:
In the past year, have you spoken to a mortgage lender or a broker about buying a house?
� Yes � Continue
� No � Thank respondent politely and end call.
Q12: Do you work or have you ever worked for a bank or other financial institution, or in the real
estate or mortgage industry?
�
�
Yes � Thank respondent politely and end call.
No � Continue
Q13: ARTICULATION QUESTION: If you find a house you are interested in buying, how do you
think you will go about finding a mortgage loan?
�
�
If respondent gives a thoughtful, articulate answer � Continue
If respondent does not give a thoughtful, articulate answer � Thank respondent politely
and end call.
Q14: Are you the person in your household who would be responsible for making decisions related
to a mortgage?
�
�
�
Yes � Participant qualifies in Category B; continue to Q15
Yes, in cooperation with my [spouse, partner, etc.] � Participant qualifies in Category B;
continue to Q15
No � Thank respondent politely and end call.
Note: No more than 2 participants can qualify in Category B; all other participants must qualify
in Category A based on a “Yes” answer to Q1.
------------------------------------------------------------------------------------------------------------------------Q15: Have you experienced any of the following financial hardships in the past seven years:
bankruptcy, foreclosure, repossession, or a tax lien?
�
�
Yes � Respondent qualifies as SP
No
Q16: In the past two years, have you been turned down for credit or have you been discouraged from
applying for credit?
�
�
Yes � Respondent qualifies as SP
No
Screening Criteria
Does participant qualify as “SP”?
Interviews
At least 4 recruits must be SP
At least 4 recruits must NOT
be SP
Q17: [Category A only] Was the mortgage that you obtained
used to re-finance an existing mortgage?
a) Yes (skip to Q19)
b) No
Q18: [Category A only] Was this the first home you ever
purchased?
a) Yes
b) No
No more than 4 recruits
should answer “a”
At least 4 recruits should
respond “a”
Q19: Some mortgages have an adjustable interest rate. Does
your new mortgage have a rate that is adjustable or
will become adjustable in the future?
No more than 3 recruits
a) Yes, adjustable
should respond “b” or “c”
b) No, not adjustable � Have you had an adjustable rate
mortgage in the past five years? If Yes, then count as
“a”
c) Don’t know
Q20: What is your age?
a)
b)
c)
d)
18 to 25
26 to 35
36 to 50
51 or above
At least 3 recruits should
respond “a” or “b”
At least 3 recruits should
respond “c” or “d”
Q21: Which of the following categories best reflects your
race or ethnicity? You can choose more than one
category. [Respondents who wish to choose more than At least 3 recruits should
one category should be counted as minorities, even if
respond “a”
one race mentioned is White.]
At least 3 recruits should
respond “b”, “d”, or “e”
a) White
At
least 2 recruits should
b) Black or African-American
respond “c”
c) Hispanic or Latino
d) Asian
e) Native American or Pacific Islander
Q22: What is the highest level that you reached in school?
a)
b)
c)
d)
e)
Some high school
High school graduate
At least some college work
College graduate
At least some graduate school
Q23: Gender
At least 3 recruits should
respond “a” or “b”
At least 3 recruits should be
“c”
At least 3 recruits of each
gender
APPENDIX C:
Participant Demographic
and Background
Information
Round 1
Greenbelt, MD
(Feb. 2008
Focus Groups)
Round 2
Washington, DC
(Mar. 2008
Interviews)
Round 3
Los Angeles, CA
(Mar. 2008
Interviews)
Round 4
Los Angeles, CA
(Mar. 2008
Focus Groups)
Round 5
Washington, DC
(Apr. 2008
Interviews)
Round 6
Kansas City, KS
(May 2008
Interviews)
Round 7
Baltimore, MD
(Aug. 2008
Interviews)
Male
5
2
4
8
3
4
3
Female
11
5
3
8
7
7
7
1
1
3
3
2
1
4
6
36+
13
4
4
14
9
7
4
Caucasian
6
1
3
5
3
9
5
African-American
10
6
1
3
6
2
5
Hispanic
0
0
3
8
1
0
0
Other
0
0
0
0
0
0
0
High school or less
2
1
0
4
1
2
3
Some college or more
14
6
7
12
9
9
7
0
4
0
1
2
7
12
10
10
8
Personal Information
Gender
Age
18-35
Race
Education Level
Financial Hardship (e.g., bankruptcy, foreclosure) in Past 7 Years
Yes
8
0
No
8
7
Denied Credit or Discouraged From Applying in Past 2 Years
2
2
Yes
4
2
1
5
2
2
3
No
12
5
6
11
8
9
7
Subprime
9
2
2
8
3
3
4
Prime
7
5
5
8
7
8
6
Creditworthiness
2
Round 1
Greenbelt, MD
(Feb. 2008
Focus Groups)
Round 2
Washington, DC
(Mar. 2008
Interviews)
Round 3
Los Angeles, CA
(Mar. 2008
Interviews)
Round 4
Los Angeles, CA
(Mar. 2008
Focus Groups)
Round 5
Washington, DC
(Apr. 2008
Interviews)
Round 6
Kansas City, KS
(May 2008
Interviews)
Round 7
Baltimore, MD
(Aug. 2008
Interviews)
Information About Loan History
Reason for Most Recent Loan
Refinance
9
1
3
8
9
7
6
Home purchase
7
6
4
8
1
4
4
No previous loan
0
0
0
0
0
0
0
Yes
6
3
2
6
0
2
3
No
1
3
2
2
1
2
1
First-Time Home Buyer
3
Current Number of Mortgages on Primary Residence
One
14
7
6
8
8
10
7
Two or more
2
0
1
8
2
1
3
Had Adjustable Rate Mortgage in Past 5 Years?
Yes
10
6
5
12
4
7
7
No
6
1
2
4
6
4
3
Method of Obtaining Most Recent Loan
Through broker
3
2
3
10
1
3
4
Directly from lender
8
3
4
5
9
8
6
Don’t know
5
2
0
1
0
0
0
Yes
3
1
0
2
2
2
4
No
13
6
7
14
8
9
4
Don’t know
0
0
0
0
0
0
2
Most Recent Loan: FHA or VA?
Current Interest Rate Above Threshold
2,4
Yes
0
0
1
2
1
2
1
No
16
7
6
14
9
9
9
Round 8
Atlanta, GA
(Nov. 2008
Interviews)
Round 9
Bethesda, MD
(Jan. 2009
Interviews)
Round 10
Dallas, TX
(Feb. 2009
Interviews)
Round 11
Providence, RI
(Mar. 2009
Interviews)
Round 12
Denver, CO
(Apr. 2009
Interviews)
Round 13
Bethesda, MD
(May 2009
Interviews)
Grand
5,6
Total
Male
5
4
4
6
4
3
55 (41%)
Female
4
5
6
4
6
6
79 (59%)
18-35
2
2
2
5
5
3
39 (30%)
36+
7
7
8
5
5
6
93 (70%)
Caucasian
5
5
3
8
6
5
64 (48%)
African-American
4
3
4
1
0
2
47 (35%)
Hispanic
0
1
2
1
3
2
21 (16%)
Other
0
0
1
0
1
0
2 (1%)
High school or less
2
7
0
1
1
1
2
20 (15%)
Some college or more
6
9
9
9
9
7
113 (85%)
4
1
3
1
30 (22%)
6
9
7
8
104 (78%)
Personal Information
Gender
Age
Race
Education Level
Financial Hardship (e.g., bankruptcy, foreclosure) in Past 7 Years
Yes
4
2
No
5
7
Denied Credit or Discouraged From Applying in Past 2 Years
Creditworthiness
2
2
Yes
4
3
7
2
6
3
44 (33%)
No
5
6
3
8
4
6
90 (67%)
Subprime
4
4
7
2
8
3
59 (44%)
Prime
5
5
3
8
2
6
75 (56%)
2
Round 8
Atlanta, GA
(Nov. 2008
Interviews)
Round 9
Bethesda, MD
(Jan. 2009
Interviews)
Round 10
Dallas, TX
(Feb. 2009
Interviews)
Round 11
Providence, RI
(Mar. 2009
Interviews)
Round 12
Denver, CO
(Apr. 2009
Interviews)
Round 13
Bethesda, MD
(May 2009
Interviews)
Grand
5,6
Total
Refinance
3
3
4
58
4
3
65 (49%)
Home purchase
6
6
5
2
5
5
63 (47%)
9
0
0
1
2
1
1
5 (4%)
Yes
3
4
2
2
3
4
40 (63%)
No
3
2
3
0
2
1
23 (37%)
Information About Loan History
Reason for Most Recent Loan
No previous loan
First-Time Home Buyer
3
Current Number of Mortgages on Primary Residence
One
4
7
8
8
6
4
97 (75%)
Two or more
5
2
1
0
3
4
32 (25%)
10
79 (61%)
Had Adjustable Rate Mortgage in Past 5 Years?
Yes
3
5
6
2
7
5
No
6
4
3
6
2
3
50 (39%)
Through broker
3
5
4
11
4
2
48 (38%)
Directly from lender
4
4
5
3
4
5
68 (53%)
Don’t know
2
0
0
0
1
1
12 (9%)
Yes
4
2
0
12
1
1
24 (19%)
No
5
7
9
5
4
6
97 (76%)
0
0
0
0
4
1
7 (5%)
Yes
0
1
3
1
3
1
16 (12%)
No
9
8
6
7
6
7
113 (88%)
Method of Obtaining Most Recent Loan
4
Most Recent Loan: FHA or VA?
Don’t know
Current Interest Rate Above Threshold
2
2,4
1
In this round of testing, two participants did not provide their age.
Participants’ responses to three questions were used to categorize them as likely prime or subprime borrowers. Participants were categorized as “subprime” if they had: a)
suffered a “financial hardship” such as bankruptcy, foreclosure, repossession or a tax lien in the past 7 years; b) been denied credit or discouraged from applying for credit
in the past 2 years; or c) the current interest rate on their loan was higher than established HMDA thresholds (see Footnote 4 below).
3
Only respondents whose most recent mortgage was for a home purchase (as opposed to a refinance) answered this question.
4
The interest rate thresholds that were used to classify respondents as “subprime” were set to be roughly consistent with the Home Mortgage Disclosure Act
(HMDA) APR-based thresholds for reporting higher-priced loans. For Rounds 1 through 8, the 2007-08 HMDA thresholds were used: 8 percent for a first mortgage and 10
percent for a second or third mortgage. For Rounds 9 through 13, these rates were adjusted to the 2008-09 HMDA thresholds: 7.5 percent for a first mortgage and 9.5
percent for a second or third mortgage.
5
Percentages of participants by demographic category may contain a small rounding error, of less than to 1%.
6
Some interviews were conducted with couples who indicated that they made mortgage decisions together. In these cases, the personal information shown in this table was
collected from the member of the couple who responded to the recruitment screening questions.
7
In this round of testing, one participant did not provide their education level.
8
In this round, one participant did not provide the reason for their most recent loan.
9
Participants that had never obtained a mortgage loan were not asked any of the subsequent questions about their loan history.
10
In this round, one participant did not indicate whether he had an ARM in the past 5 years.
11
In this round, one participant did not indicate the method through which they obtained their most recent mortgage.
12
In this round, one participant did not indicate whether his most recent loan was obtained through the FHA or VA.
2
APPENDIX D:
Disclosure Forms Used
in Testing
Round 1:
Greenbelt, MD
February 20, 2008
Current TILA Statement
Current ARM Loan Program Disclosure
Truth in Lending Disclosure Statement
Date
Loan Number
January 2007
23879562
Lender
Universal Mortgage
Borrower(s)
Emily Johnson
Property Address
79 Sussex Court
Wilmington, DE 19808
Final Disclosure
ANNUAL PERCENTAGE RATE
The cost of your credit as a yearly rate.
12.1515 %
FINANCE CHARGE
Amount Financed
Total of Payments
The dollar amount the
credit will cost you.
The amount of credit
provided to you or on
your behalf.
The amount you will have paid
after you have made all
payments as scheduled.
$
$
$
205,908.94
71,617.84
Payment Schedule: Payments will be due monthly
Number of Payments
Amount of Payment
024
$
638.24
780.44
335
001
761.62
277,526.78
Payments Begin
03/01/07
03/01/09
02/01/37
Variable Rate
Your loan � does � does not contain a variable-rate feature. Disclosures about the
variable rate feature have been provided to you earlier.
Security
You are giving a security interest � in the real property, and fixtures and rents if indicated
in the rider mortgage � shares of stock evidencing ownership of the cooperative unit, at the
property address referenced above.
Late Charge
If a payment is more than 15 days late, you will be charged 5% of the payment.
Assumption
Someone buying your house � may, subject to conditions, � cannot be allowed to assume
the remainder of the loan on the original terms.
Prepayment
If you pay off your loan early, you � may, � will not have to pay a penalty.
If you pay off your loan early, you � may, � will not be entitled to a refund of part of the
finance charge.*
Demand Feature
� If checked, your loan includes a demand feature.
Hazard Insurance
Hazard Insurance is required and may be obtained through any company of your choice that
is acceptable to the Lender.
You should refer to your Note, Mortgage and other documents for additional information about non-payment, default, and
required repayment in full before the scheduled date, prepayment rebates, and penalties.
*If you pay off your loan early, you will not receive a refund of part of the finance charge that you have already paid.
I (We) acknowledge receipt of this Disclosure Statement.
___________________________________________
Date: _______________________________
Date:
OCTOBER 19, 2006
Borrower Name:
JOHN DOE
Property Address:
1234 MAIN STREET, SCOTTSDALE, ARIZONA 85254
ADJUSTABLE RATE MORTGAGE LOAN PROGRAM DISCLOSURE
2 YEAR LIBOR ARM
This disclosure describes the features of an Adjustable Rate Mortgage (ARM) program you are considering, which is called
the 2 YEAR LIBOR ARM. The interest rate and payment of this loan may each change during the term of this loan.
Information on other ARM programs available from the lender will be provided upon request.
HOW YOUR INTEREST RATE AND PAYMENT ARE DETERMINED:
Beginning on the first Interest Rate Change Date, your interest rate will be based on an index rate plus a margin. Please
ask us for our current interest rate and margin.
Your initial interest rate will not be equal to an index rate plus a margin. If the initial interest rate is below the then current
index plus margin ("the fully indexed rate"), then the initial interest rate will be a "discounted" interest rate. Please ask us
about the amount of the current discount.
The index rate is the average of interbank offered rates for six-month U.S. dollar-denominated deposits in the London
market ("LIBOR"), as published in The Wall Street Journal. Index rate values are shown below for the first business day
of each month and year shown. The example shows how your payment would have changed based on actual changes in
the index from 1992 to the present. If this index is no longer available at any Interest Rate Change Date, the lender will
choose a new index that is based on comparable information and will give you notice of this change.
When your interest rate changes, your new interest rate will equal the index rate, which is the most recently available
index rate as of the first business day of the month immediately preceding the Interest Rate Change Date, plus the
margin rounded to the nearest one-eighth percent (.125%).
When your payment changes, your new payment will be based on the interest rate, loan balance, and remaining loan
term. The new payment will be an amount sufficient to repay the loan balance at the new interest rate in substantially
equal payments over the remaining loan term. Therefore, NO NEGATIVE AMORTIZATION WILL EVER OCCUR under
this loan program.
HOW YOUR INTEREST RATE CAN CHANGE
Your interest rate can change on your 24th payment date and every 6 months thereafter (the "Interest Rate Change
Date") to a rate equal to the index value plus the margin, rounded to the nearest .125%, subject to the following limits:
Your interest rate cannot increase by more than three percentage points (3.00%) at the first Interest Rate Change
Date and cannot increase or decrease by more than one percentage point (1.00%) at each Interest Rate Change
Date thereafter (the "Periodic Rate Cap").
Your interest rate over the life of the loan cannot increase by more than six percentage points (6.00%) above the
initial interest rate (the "Lifetime Rate Cap").
Your interest rate will never be less than a minimum, or floor, rate equal to the initial interest rate (the "Lifetime Floor
Rate").
HOW YOUR PAYMENT CAN CHANGE
Your payment may change on the first payment date after the first Interest Rate Change Date and every 6 months thereafter.
For example, on a $10,000, 360-month loan with an initial interest rate of 9.000%, (i.e., the index plus the margin shown for
2006 in the Historical Example on page 2, rounded to the nearest .125% and reduced by the initial discount of 3.0%), the
maximum amount that the interest rate could rise under this program is 6.000% above the initial interest rate of 9.000% up to
15.000% and the payment amount could rise from the beginning payment of $80.46 to a maximum of $124.89 (at payment
43). You will be notified in writing 30 days before a payment adjustment may be made. This notice will contain information
about the index and interest rates, payment amount, and loan balance.
1
EXAMPLE OF A 1992 $10,000 LOAN USING HISTORICAL INDEX VALUES:
The example below shows how your payments would have changed under the ARM program based on actual changes in the
index from 1992 to 2006. This does not necessarily indicate how your index will change in the future. For simplicity, the
example is based on these assumptions:
Loan Amount:
$10,000
Interest Adjustment:
Every 6 Months (beginning with the 24th payment date)
Amortization Period:
360 Months
Payment Adjustment:
Every 6 Months (beginning with the 25th payment date)
Interest Rate Margin:
7.250%*
Initial Interest Rate:
8.500%**
YEAR
January 1992
January 1993
January 1994
January 1995
January 1996
January 1997
January 1998
January 1999
January 2000
January 2001
January 2002
January 2003
January 2004
January 2005
January 2006
INDEX VALUE MARGIN
4.19%
3.69%
3.56%
7.00%
5.47%
5.63%
5.56%
.5.07%
6.23%
5.36%
1.99%
1.35%
1.21%
2.96%
4.81%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
INTEREST RATE
8.500% **
8.500%
10.750%
12.750% ***
12.750%
12.875%
12.750%
12.375%
13.500%
12.625%
10.625% ***
8.625%
8.500%
10.250%
12.000%
MONTHLY PAYMENT
12 @ $76.89
12 @ $76.89
12 @ $92.81
12 @ $107.45
12 @ $107.45
12 @ $108.36
12 @ $107.47
12 @ $104.84
12 @ $112.62
12 @ $106.67
12 @ $93.80
12 @ $ 81.95
12 @ $ 81.26
12 @ $ 90.78
12 @ $100.38
LOAN BALANCE
$9,924.42
$9,842.16
$9,783.65
$9,739.12
$9,688.57
$9,632.42
$9,567.18
$9,488.69
$9,413.69
$9,316.64
$9,174.13
$8,974.22
$8,753.44
$8,552.02
$8,363.56
* This is a margin we have used recently. Your margin may be different.
** This interest rate reflects an initial discount of 3.0% and is rounded to the nearest one-eighth percent (.125%). Your initial
interest rate may reflect a different discount from the fully-indexed rate.
*** This interest rate reflects a one (1) percentage point periodic interest rate cap.
To see what your payments (excluding impounds or escrow payments for taxes, insurance and other purposes relating to the
security property) would have been during a period reflected in the chart, divide your mortgage amount by $10,000, then
multiply the loan payment reflected in the chart for that period, by that amount. For example, in 2006 the loan payments for a
mortgage amount of $60,000 taken out in 1992 would be: $60,000/$10,000 = 6 x $100.38 = $602.28.
Borrower
Borrower
Date Consumer Handbook on
Adjustable Rate Mortgages and
disclosure received
2
Date Consumer Handbook on
Adjustable Rate Mortgages and
disclosure received
Round 2:
Washington, DC
March 4 & 6, 2008
Proposed Pollock Form
Proposed Joint (HUD-Fed) Form
�����������������������������������������
Borrower:
Jane and Karl Rover
4 Interview Lane
_____________________________________
Property address: ________________________________
Lending, MD 20815
______________________________________
________________________________
______________________________
XYZ Bank
Lender: ______________________
_________________________________
200,000.00
80
Amount of loan: $ ___________________________,
which is ______
% of the property’s appraised value.
30 __________ years.
Your loan is for _____
LIBOR ARM _________________________________________________________
The type of loan you have: __3/1
______________
5.625
Your beginning interest rate is______________
%. This rate is good for __36
___________ months/years. The rate and
Aug
2010
12
your payment can go higher on ____________ and each ________________________ months after that.
7.75
Today’s estimate of how high the rate will go, called the fully indexed rate, is ____________________
%.
11.625
The maximum possible rate on your loan is ______________ %.
6,250.00
THIS LOAN IS BASED ON YOUR MONTHLY INCOME OF $ ________________________________________
_ .
1,151.31
18.42
= ___________
% of your income.
Your beginning rate = a monthly loan payment of $ _________________________
1,422.15
22.75
-including taxes and insurance this is about $_________________________ = ___________ % of your income.
1,412.83
22.61
= ___________
% of your income.
The fully-indexed rate = a loan payment of $_________________________
1,683.66
26.94
-including taxes and insurance this is about $_________________________ = __________ % of your income.*
*This is called your fully indexed housing expense ratio.
Special factors you must be aware of:
refinance within the first three years .
up to $4,500
-A prepayment fee of ______________________
___________________________________
must be paid if _you
-A “balloon payment” of $ ___________________ to pay off your loan will be due on ___________________ .
-You do/do not have a “payment option” loan. If you do, make sure you really understand what this means.
Start with the definition on page 3.
7,347.00
Total “points” plus estimated other costs and fees due at closing are $ ______________________________________
.
FOR QUESTIONS CONTACT:
Albert Lender
Name: ____________________________________________________________
(301) 496-0000
alender@mortgage.com
Phone:_________________________
e-mail:____________________________
See definitions of underlined terms and guidelines on pages 2–3.
DO NOT SIGN THIS IF YOU DON’T UNDERSTAND IT!
______________________________________________
Borrower
Date
____________________________________________
Authorized Signer of Lender
Date
______________________________________________
Borrower
Date
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
The Basic Facts about Your Mortgage Loan
This form gives you the basic facts, but some mortgage
forms may use terms not listed here. For a good,
borrower-friendly information source, try the Mortgage
Professor online (www.mtgprofessor.com), which
includes detailed explanations of the technical mortgage
terms in its glossary and much other helpful
information.
time. If the index rate stays the same as today, the
rate on your loan will automatically rise to the fullyindexed rate over time. Since the index rate itself can
go up and down, you cannot be sure what the future
adjustable rate will be. In any case, you must make
sure you can afford the fully-indexed rate, not just the
beginning rate, which is often called a “teaser” rate
for good reason.
Definitions and Guidelines Used
in This Form
The maximum possible rate is the highest your
interest rate can go. Most loans with adjustable rates
have a defined maximum rate or “lifetime cap.” You
need to think about what it would take to make your
interest rate go this high. How likely do you think
that is?
The appraised value is what a professional appraisal
estimates the house could be sold for in today’s market.
The type of loan determines whether and by how much
your interest rate can increase. If it can, your monthly
payments will also increase—sometimes by a lot. For
example, in a thirty-year fixed rate loan, the interest
rate is always the same. In a one-year ARM, it will
change every year. Other kinds of loans have various
patterns, but the interest rate may go up a lot. Make
sure you understand what type of loan you’re getting.
Your monthly income means your gross, pre-tax
income per month for your household. This should
be an amount which you can most probably sustain
over many years. Make sure the monthly income
shown on this form is correct!
Your monthly payment including taxes and insurance
is the amount you must pay every month for interest,
repayment of loan principal, house insurance
premiums, and property taxes. Expressed as a
percent of your monthly income, this is called your
housing expense ratio. Over time, in addition to any
possible increases in your interest rate and how fast
you must repay principal, your insurance premiums
and property taxes will tend to increase. Of course,
your monthly income may also increase. How much
do you expect it to?
The beginning interest rate is the interest you are
paying at the beginning of the loan. Especially if it is a
low introductory or “teaser” rate, it is the rate which
you will hear the most about from ads and salespeople.
But how long is it good for and when will rates
increase? In many types of loans, the rate will go up by
a lot. You need to know.
The fully-indexed rate is an essential indicator of what
will happen to your interest rate and your monthly
payments. It is today’s estimate of how high the
interest rate on an adjustable rate mortgage will go. It
is calculated by taking a defined “index rate” and
adding a certain number of percentage points, called the
“margin.” For example, if your formula is the one-year
Treasury rate plus 3 percent, and today the one-year
Treasury rate is 5 percent, your fully-indexed rate is 5%
+ 3% = 8%. At the time the loan is being made, the
fully indexed rate will always be higher than a
beginning “teaser” rate.
Your fully-indexed housing expense ratio is a key
measure of whether you can afford this loan. It is the
percent of your monthly income it will take to pay
interest at the fully-indexed rate, plus repayment of
principal, house insurance, and property taxes. The
time-tested market standard for this ratio is 28
percent; the greater your ratio is, the riskier the loan
is for you.
A prepayment fee is an additional fee imposed by the
lender if you pay your loan off early. Most
The index rates are public, published rates, so you can
study their history to see how much they change over
-2
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
“Points” are a fee the borrower pays the lender at
closing, expressed as a percent of the loan. For
example, two points mean you will pay an upfront
fee equal to 2 percent of the loan. In addition,
mortgages usually involve a number of other costs
and fees which must be paid at closing.
mortgages in America have no prepayment fee. If
yours does, make sure you understand how it would
work before you sign this form.
A “balloon payment” means that a large repayment
of loan principal is due at the end of the loan. For
example, a seven-year balloon means that the whole
remaining loan principal, a very large amount, must
be paid at the end of the seventh year. This almost
always means that you have to get a new loan to
make the balloon payment.
Closing is when the loan is actually made and all the
documents are signed.
The For Questions Contact section gives you the
name, phone number, and e-mail address of someone
specifically assigned by your lender to answer your
questions and explain the complications of mortgage
loans. Don’t be shy: contact this person if you have
any questions.
A “payment option” loan means that in the years
immediately after securing a mortgage loan, you can
pay even less than the interest you are being charged.
The unpaid interest is added to your loan, so the
amount you owe gets bigger. This is called “negative
amortization.” The very low payments in early years
create the risk of very large increases in your monthly
payment later. Payment option loans are typically
advertised using only the very low beginning or
“teaser” required payment, which is less than the
interest rate. You absolutely need to know four
things: (1) How long is the beginning payment good
for? (2) What happens then? (3) How much is added
to my loan if I pay the minimum rate? (4) What is
the fully-indexed rate?
Finally, do not sign this form if you do not
understand it. You are committing yourself to pay
large amounts of money over years to come and
pledging your house as collateral so the lender can
take it if you don’t pay. Ask questions until you are
sure you know what your commitments really are and
how they compare to your income. Until then, do not
sign.
-3
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
Federal Disclosure Statement
for Home-Secured Loans
BORROWERS: Mary and James Focus
CREDITOR: ABC Bank
PROPERTY ADDRESS: 3 Group Lane, Homeloan, MD 20790
DATE: 06/25/07
LOAN AMOUNT
INTEREST RATE
You are borrowing
$ $200,000 .
Your interest rate is
5.625% .
� fixed
� variable*
LOAN NO.: 123
REQUIRED CLOSING COSTS
(including points)
MONTHLY PAYMENT
Your required closing costs
(including points) are estimated
to total $ 7,347.00 .
Your monthly principal and
interest payment is
$1,151.31.
* If checked, your loan contains a variable rate feature. During the term of your loan, the highest your interest rate could increase is to 11.625 %,
resulting in monthly payments of $ 1,924.97 . See the variable rate disclosures separately provided to you for further information about how your
rate, payment, and loan term may be adjusted.
Finance Charge and Annual Percentage Rate (APR): The dollar cost of borrowing $ 200,000 for 30 years is $ 303,767.47
(the finance charge). The cost of credit as a yearly rate (the APR) is 7.41% . The APR reflects interest (including points) and
other costs required to obtain the loan. Taxes, escrow amounts and hazard insurance premiums are not included. You can use
the APR to compare loan products among different lenders.
Your Scheduled Payments for Principal and Interest Will Be:
Number of Payments
Monthly Payments**
Total of Scheduled Payments
36
$ 1,151.31 beginning Aug. 1, 2007
$
41,447.16
12
$ 1,397.15 beginning Aug. 1, 2010
$
16,765.80
311
$ 1,412.83 beginning Aug. 1, 2011
$ 439,390.13
1
$ 1,414.38 beginning Jul. 1, 2037
$
1,414.38
**This amount does not include taxes or insurance.
Security: Your home is the security for this loan. You may lose your home if you do not make your payments.
Late Charge: If a payment is late, you will be charged $ 50.00 .
Prepayment Penalty: If you pay your loan off early, you
� will
be charged a penalty.
� will not be charged a penalty.
Transfer of Servicing: We may assign, sell, or transfer the servicing of your loan (the right to collect payments from you).
� is
Private Mortgage Insurance (PMI): PMI
required for your loan.
You
� may
cancel when your balance is ____% of the home’s
value, or by paying an additional fee of $ __________.
You � may not cancel PMI.
� is not
Escrow Account: You
� will
required for your loan.
be required to have an escrow account for payment of taxes and hazard insurance.
Your escrow account will add $270.84 to your initial monthly payments listed in the
payment schedule above.
You
You
� may
pay $ __________ to cancel the escrow requirement.
� may not cancel the escrow requirement.
� will not be required to have an escrow account.
Round 3:
Los Angeles, CA
(Interviews)
March 25-26, 2008
Proposed Pollock Form
Proposed Joint (HUD-Fed) Form
�����������������������������������������
Borrower:
4 Interview Lane
Jane and Karl Rover ____________________ Property address: _____________________
_________________
___________
Lending,
MD
20815
______________________________________
________________________________
______________________________
XYZ Bank______________________________________________
Lender: _________
360,000.00
80
Amount of loan: $ ___________________________
, which is ______
% of the property’s appraised value.
30
Your loan is for _______________
years.
3/1 LIBOR ARM
The type of loan you have: _________________________________________________________________________
5.625
36
Your beginning interest rate is______________
%. This rate is good for _____________
months/yyears
ears. The rate and
Aug
2010
12
your payment can go higher on ____________ and each ________________________ months after that.
7.75
Today’s estimate of how high the rate will go, called the fully indexed rate, is ____________________
%.
11.625
The maximum possible rate on your loan is ______________ %.
9,166.67
THIS LOAN IS BASED ON YOUR MONTHLY INCOME OF $ _________________________________________
2,072.36
22.6
% of your income.
= ___________
Your beginning rate = a monthly loan payment of $ _________________________
2,559.86
27.9
-including taxes and insurance this is about $_________________________ = ___________ % of your income.
2,543.10
27.7
% of your income.
The fully-indexed rate = a loan payment of $_________________________
= ___________
3,030.60
33.1
-including taxes and insurance this is about $_________________________ = __________ % of your income.*
*This is called your fully indexed housing expense ratio.
Special factors you must be aware of:
you pay off or refinance your loan within 3 years .
up to $8,100.00
-A prepayment fee of ______________________
must be paid if ____________________________________
-A “balloon payment” of $ ___________________ to pay off your loan will be due on ___________________ .
-You do
do//do not have a “payment option” loan. If you do, make sure you really understand what this means.
Start with the definition on page 3.
11,980.00
Total “points” plus estimated other costs and fees due at closing are $ ______________________________________
.
FOR QUESTIONS CONTACT:
Albert Lender
Name: ____________________________________________________________
(301) 496-0000
alender@mortgage.com
e-mail:____________________________
Phone:_________________________
See definitions of underlined terms and guidelines on pages 2–3.
DO NOT SIGN THIS IF YOU DON’T UNDERSTAND IT!
Authorized Signer of Lender
Date
Borrower
Date
Borrower
Date
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
The Basic Facts about Your Mortgage Loan
This form gives you the basic facts, but some mortgage
forms may use terms not listed here. For a good,
borrower-friendly information source, try the Mortgage
Professor online (www.mtgprofessor.com), which
includes detailed explanations of the technical mortgage
terms in its glossary and much other helpful
information.
time. If the index rate stays the same as today, the
rate on your loan will automatically rise to the fullyindexed rate over time. Since the index rate itself can
go up and down, you cannot be sure what the future
adjustable rate will be. In any case, you must make
sure you can afford the fully-indexed rate, not just the
beginning rate, which is often called a “teaser” rate
for good reason.
Definitions and Guidelines Used
in This Form
The maximum possible rate is the highest your
interest rate can go. Most loans with adjustable rates
have a defined maximum rate or “lifetime cap.” You
need to think about what it would take to make your
interest rate go this high. How likely do you think
that is?
The appraised value is what a professional appraisal
estimates the house could be sold for in today’s market.
The type of loan determines whether and by how much
your interest rate can increase. If it can, your monthly
payments will also increase—sometimes by a lot. For
example, in a thirty-year fixed rate loan, the interest
rate is always the same. In a one-year ARM, it will
change every year. Other kinds of loans have various
patterns, but the interest rate may go up a lot. Make
sure you understand what type of loan you’re getting.
Your monthly income means your gross, pre-tax
income per month for your household. This should
be an amount which you can most probably sustain
over many years. Make sure the monthly income
shown on this form is correct!
Your monthly payment including taxes and insurance
is the amount you must pay every month for interest,
repayment of loan principal, house insurance
premiums, and property taxes. Expressed as a
percent of your monthly income, this is called your
housing expense ratio. Over time, in addition to any
possible increases in your interest rate and how fast
you must repay principal, your insurance premiums
and property taxes will tend to increase. Of course,
your monthly income may also increase. How much
do you expect it to?
The beginning interest rate is the interest you are
paying at the beginning of the loan. Especially if it is a
low introductory or “teaser” rate, it is the rate which
you will hear the most about from ads and salespeople.
But how long is it good for and when will rates
increase? In many types of loans, the rate will go up by
a lot. You need to know.
The fully-indexed rate is an essential indicator of what
will happen to your interest rate and your monthly
payments. It is today’s estimate of how high the
interest rate on an adjustable rate mortgage will go. It
is calculated by taking a defined “index rate” and
adding a certain number of percentage points, called the
“margin.” For example, if your formula is the one-year
Treasury rate plus 3 percent, and today the one-year
Treasury rate is 5 percent, your fully-indexed rate is 5%
+ 3% = 8%. At the time the loan is being made, the
fully indexed rate will always be higher than a
beginning “teaser” rate.
Your fully-indexed housing expense ratio is a key
measure of whether you can afford this loan. It is the
percent of your monthly income it will take to pay
interest at the fully-indexed rate, plus repayment of
principal, house insurance, and property taxes. The
time-tested market standard for this ratio is 28
percent; the greater your ratio is, the riskier the loan
is for you.
A prepayment fee is an additional fee imposed by the
lender if you pay your loan off early. Most
The index rates are public, published rates, so you can
study their history to see how much they change over
-2
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
“Points” are a fee the borrower pays the lender at
closing, expressed as a percent of the loan. For
example, two points mean you will pay an upfront
fee equal to 2 percent of the loan. In addition,
mortgages usually involve a number of other costs
and fees which must be paid at closing.
mortgages in America have no prepayment fee. If
yours does, make sure you understand how it would
work before you sign this form.
A “balloon payment” means that a large repayment
of loan principal is due at the end of the loan. For
example, a seven-year balloon means that the whole
remaining loan principal, a very large amount, must
be paid at the end of the seventh year. This almost
always means that you have to get a new loan to
make the balloon payment.
Closing is when the loan is actually made and all the
documents are signed.
The For Questions Contact section gives you the
name, phone number, and e-mail address of someone
specifically assigned by your lender to answer your
questions and explain the complications of mortgage
loans. Don’t be shy: contact this person if you have
any questions.
A “payment option” loan means that in the years
immediately after securing a mortgage loan, you can
pay even less than the interest you are being charged.
The unpaid interest is added to your loan, so the
amount you owe gets bigger. This is called “negative
amortization.” The very low payments in early years
create the risk of very large increases in your monthly
payment later. Payment option loans are typically
advertised using only the very low beginning or
“teaser” required payment, which is less than the
interest rate. You absolutely need to know four
things: (1) How long is the beginning payment good
for? (2) What happens then? (3) How much is added
to my loan if I pay the minimum rate? (4) What is
the fully-indexed rate?
Finally, do not sign this form if you do not
understand it. You are committing yourself to pay
large amounts of money over years to come and
pledging your house as collateral so the lender can
take it if you don’t pay. Ask questions until you are
sure you know what your commitments really are and
how they compare to your income. Until then, do not
sign.
-3
POLLOCK/AMERICAN ENTERPRISE INSTITUTE/2007
Federal Disclosure Statement
for Home-Secured Loans
BORROWERS: Mary and James Focus
CREDITOR: ABC Bank
PROPERTY ADDRESS: 3 Group Lane, Homeloan, MD 20790
DATE: 06/25/07
LOAN AMOUNT
INTEREST RATE
You are borrowing
$ $360,000 .
Your interest rate is
REQUIRED CLOSING COSTS
(including points)
5.625% .
� fixed
� variable*
Your required closing costs
(including points) are estimated
to total $ 11,980.00 .
LOAN NO.: 123
MONTHLY PAYMENT
Your initial monthly payment
including principal, interest,
taxes and insurance is
$2,559.86.
* If checked, your loan contains a variable rate feature. During the term of your loan, the highest your interest rate could increase is to 11.625 %,
resulting in estimated monthly payments of $ 3,952.44, including principal, interest, taxes and insurance. See the variable rate disclosures
separately provided to you for further information about how your rate, payment, and loan term may be adjusted.
Finance Charge and Annual Percentage Rate (APR): The dollar cost of borrowing $ 360,000 for 30 years is $ 548,176.78
(the finance charge). The cost of credit as a yearly rate (the APR) is 7.45% . The APR reflects interest (including points) and
other costs required to obtain the loan. Taxes, escrow amounts and hazard insurance premiums are not included. You can use
the APR to compare loan products among different lenders.
Your Scheduled Estimated Payments for Principal, Interest, Taxes and Insurance Will Be:
Number of Payments
Monthly Payments**
Total of Scheduled Payments
36
$ 2,559.86 beginning Aug. 1, 2007
$
92,154.96
12
$ 3,002.37 beginning Aug. 1, 2010
$
36,028.44
311
$ 3,030.60 beginning Aug. 1, 2011
$ 942,516.60
1
$ 3,026.78 beginning Jul. 1, 2037
$
3,026.78
**This amount DOES include an estimate of $ 487.50 for escrow of taxes and insurance.
Security: Your home is the security for this loan. You may lose your home if you do not make your payments.
Late Charge: If a payment is late, you will be charged $ 100.00 .
Prepayment Penalty: If you pay off or refinance your loan within 3 years, you
� will be charged a penalty of up to $ 8,100.00
� will not be charged a penalty.
Transfer of Servicing: We may assign, sell, or transfer the servicing of your loan (the right to collect payments from you).
� is
Private Mortgage Insurance (PMI): PMI
required for your loan.
� may
cancel when your balance is ____% of the home’s
value, or by paying an additional fee of $ __________.
You � may not cancel PMI.
You
� is not
Escrow Account: You
� will
required for your loan.
be required to have an escrow account for payment of taxes and hazard insurance.
An amount of $ 487.50 has been included in the payments above to reflect the initial
amount of your escrow. The amount of your escrow payment is likely to rise over time.
You
You
� may
pay $ __________ to cancel the escrow requirement.
� may not cancel the escrow equirement.
� will not be required to hav e an escrow account.
Round 4:
Los Angeles, CA
(Focus Groups)
March 25-26, 2008
Current TILA Statement
Current ARM Program Disclosure
Truth in Lending Disclosure Statement
Date
Loan Number
January 2007
23879562
Lender
Universal Mortgage
Borrower(s)
Emily Johnson
Property Address
79 Sussex Court
Wilmington, DE 19808
Final Disclosure
ANNUAL PERCENTAGE RATE
FINANCE CHARGE
The cost of your credit as a yearly rate.
The dollar amount the
credit will cost you.
12.1515 %
$
205,908.94
Amount Financed
Total of Payments
The amount of credit
provided to you or on
your behalf.
The amount you will have paid
after you have made all
payments as scheduled.
$
$
71,617.84
Payment Schedule: Payments will be due monthly
Number of Payments
Amount of Payment
024
$
638.24
335
780.44
001
761.62
277,526.78
Payments Begin
03/01/07
03/01/09
02/01/37
Variable Rate
Your loan � does � does not contain a variable-rate feature. Disclosures about the
variable rate feature have been provided to you earlier.
Security
You are giving a security interest � in the real property, and fixtures and rents if indicated
in the rider mortgage � shares of stock evidencing ownership of the cooperative unit, at the
property address referenced above.
Late Charge
If a payment is more than 15 days late, you will be charged 5% of the payment.
Assumption
Someone buying your house � may, subject to conditions, � cannot be allowed to assume
the remainder of the loan on the original terms.
Prepayment
If you pay off your loan early, you � may, � will not have to pay a penalty.
If you pay off your loan early, you � may, � will not be entitled to a refund of part of the
finance charge.*
Demand Feature �
If checked, your loan includes a demand feature.
Hazard Insurance
Hazard Insurance is required and may be obtained through any company of your choice that
is acceptable to the Lender.
You should refer to your Note, Mortgage and other documents for additional information about non-payment, default, and
required repayment in full before the scheduled date, prepayment rebates, and penalties.
*If you pay off your loan early, you will not receive a refund of part of the finance charge that you have already paid.
I (We) acknowledge receipt of this Disclosure Statement.
___________________________________________
Date: _______________________________
Date: OCTOBER 19, 2006
Borrower Name: JOHN DOE
Property Address: 1234 MAIN STREET, SCOTTSDALE, ARIZONA 85254
ADJUSTABLE RATE MORTGAGE LOAN PROGRAM DISCLOSURE
2 YEAR LIBOR ARM
This disclosure describes the features of an Adjustable Rate Mortgage (ARM) program you are considering, which is called
the 2 YEAR LIBOR ARM. The interest rate and payment of this loan may each change during the term of this loan.
Information on other ARM programs available from the lender will be provided upon request.
HOW YOUR INTEREST RATE AND PAYMENT ARE DETERMINED:
Beginning on the first Interest Rate Change Date, your interest rate will be based on an index rate plus a margin. Please
ask us for our current interest rate and margin.
Your initial interest rate will not be equal to an index rate plus a margin. If the initial interest rate is below the then current
index plus margin ("the fully indexed rate"), then the initial interest rate will be a "discounted" interest rate. Please ask us
about the amount of the current discount.
The index rate is the average of interbank offered rates for six-month U.S. dollar-denominated deposits in the London
market ("LIBOR"), as published in The Wall Street Journal. Index rate values are shown below for the first business day
of each month and year shown. The example shows how your payment would have changed based on actual changes in
the index from 1992 to the present. If this index is no longer available at any Interest Rate Change Date, the lender will
choose a new index that is based on comparable information and will give you notice of this change.
When your interest rate changes, your new interest rate will equal the index rate, which is the most recently available
index rate as of the first business day of the month immediately preceding the Interest Rate Change Date, plus the
margin rounded to the nearest one-eighth percent (.125%).
When your payment changes, your new payment will be based on the interest rate, loan balance, and remaining loan
term. The new payment will be an amount sufficient to repay the loan balance at the new interest rate in substantially
equal payments over the remaining loan term. Therefore, NO NEGATIVE AMORTIZATION WILL EVER OCCUR under
this loan program.
HOW YOUR INTEREST RATE CAN CHANGE
Your interest rate can change on your 24th payment date and every 6 months thereafter (the "Interest Rate Change
Date") to a rate equal to the index value plus the margin, rounded to the nearest .125%, subject to the following limits:
Your interest rate cannot increase by more than three percentage points (3.00%) at the first Interest Rate Change Date
and cannot increase or decrease by more than one percentage point (1.00%) at each Interest Rate Change Date
thereafter (the "Periodic Rate Cap").
Your interest rate over the life of the loan cannot increase by more than six percentage points (6.00%) above the initial
interest rate (the "Lifetime Rate Cap").
Your interest rate will never be less than a minimum, or floor, rate equal to the initial interest rate (the "Lifetime Floor
Rate").
HOW YOUR PAYMENT CAN CHANGE
Your payment may change on the first payment date after the first Interest Rate Change Date and every 6 months thereafter.
For example, on a $10,000, 360-month loan with an initial interest rate of 9.000%, (i.e., the index plus the margin shown for
2006 in the Historical Example on page 2, rounded to the nearest .125% and reduced by the initial discount of 3.0%), the
maximum amount that the interest rate could rise under this program is 6.000% above the initial interest rate of 9.000% up to
15.000% and the payment amount could rise from the beginning payment of $80.46 to a maximum of $124.89 (at payment
43). You will be notified in writing 30 days before a payment adjustment may be made. This notice will contain information
about the index and interest rates, payment amount, and loan balance.
EXAMPLE OF A 1992 $10,000 LOAN USING HISTORICAL INDEX VALUES:
The example below shows how your payments would have changed under the ARM program based on actual changes in
the index from 1992 to 2006. This does not necessarily indicate how your index will change in the future. For simplicity, the
example is based on these assumptions:
Loan Amount:
$10,000
Interest Adjustment:
Every 6 Months (beginning with the 24th payment date)
Amortization Period:
360 Months
Payment Adjustment:
Every 6 Months (beginning with the 25th payment date)
Interest Rate Margin:
7.250%*
Initial Interest Rate:
8.500%**
YEAR
January 1992
January 1993
January 1994
January 1995
January 1996
January 1997
January 1998
January 1999
January 2000
January 2001
January 2002
January 2003
January 2004
January 2005
January 2006
INDEX VALUE MARGIN
4.19%
3.69%
3.56%
7.00%
5.47%
5.63%
5.56%
.5.07%
6.23%
5.36%
1.99%
1.35%
1.21%
2.96%
4.81%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
7.25%
INTEREST RATE
8.500% **
8.500%
10.750%
12.750% ***
12.750%
12.875%
12.750%
12.375%
13.500%
12.625%
10.625% ***
8.625%
8.500%
10.250%
12.000%
MONTHLY PAYMENT
12 @ $76.89
12 @ $76.89
12 @ $92.81
12 @ $107.45
12 @ $107.45
12 @ $108.36
12 @ $107.47
12 @ $104.84
12 @ $112.62
12 @ $106.67
12 @ $93.80
12 @ $ 81.95
12 @ $ 81.26
12 @ $ 90.78
12 @ $100.38
LOAN BALANCE
$9,924.42
$9,842.16
$9,783.65
$9,739.12
$9,688.57
$9,632.42
$9,567.18
$9,488.69
$9,413.69
$9,316.64
$9,174.13
$8,974.22
$8,753.44
$8,552.02
$8,363.56
* This is a margin we have used recently. Your margin may be different.
** This interest rate reflects an initial discount of 3.0% and is rounded to the nearest one-eighth percent (.125%). Your
initial interest rate may reflect a different discount from the fully-indexed rate.
*** This interest rate reflects a one (1) percentage point periodic interest rate cap.
To see what your payments (excluding impounds or escrow payments for taxes, insurance and other purposes relating to the
security property) would have been during a period reflected in the chart, divide your mortgage amount by $10,000, then
multiply the loan payment reflected in the chart for that period, by that amount. For example, in 2006 the loan payments for a
mortgage amount of $60,000 taken out in 1992 would be: $60,000/$10,000 = 6 x $100.38 = $602.28.
Borrower
Borrower
Data Consumer Handbook on Adjustable Rate Mortgages
and disclosure received
Data Consumer Handbook on Adjustable Rate
Mortgages and disclosure received
Round 7:
Baltimore, MD
August 20-21, 2008
Current TILA Statement
Proposed Early Disclosure: “Mortgage
Shopping Checklist”
Proposed Early Disclosure: “Mortgage Risk
Worksheet”
Truth in Lending Disclosure Statement
Date
Loan Number
June 25, 2007
102030405
Lender
Gravel Bank
Borrower(s)
Joe Smith & Jane Doe
Property Address
1234 Main Street
Anytown, ST 12345
Final Disclosure
ANNUAL PERCENTAGE RATE
FINANCE CHARGE
The cost of your credit as a yearly rate.
The dollar amount the
credit will cost you.
The amount of credit
provided to you or on
your behalf.
The amount you will have paid
after you have made all
payments as scheduled.
$
$
$
7.41 %
303,767.47
Amount Financed
195,250.00
Payment Schedule: Payments will be due monthly
Number of Payments
Amount of Payment
36
$
1,151.31
12
1,397.15
311
1,412.83
1
1,414.38
Total of Payments
499,017.47
Payments Begin
08/01/2007
08/01/2010
08/01/2011
07/01/2037
Variable Rate
Your loan � does � does not contain a variable-rate feature. Disclosures about the
variable rate feature have been provided to you earlier.
Security
You are giving a security interest � in the real property, and fixtures and rents if indicated
in the rider mortgage � shares of stock evidencing ownership of the cooperative unit, at the
property address referenced above.
Late Charge
If a payment is more than 15 days late, you will be charged 5% of the payment.
Assumption
Someone buying your house � may, subject to conditions, � cannot be allowed to assume
the remainder of the loan on the original terms.
Prepayment
If you pay off your loan early, you � may, � will not have to pay a penalty.
If you pay off your loan early, you � may, � will not be entitled to a refund of part of the
finance charge.*
Demand Feature �
If checked, your loan includes a demand feature.
Hazard Insurance
Hazard Insurance is required and may be obtained through any company of your choice that
is acceptable to the Lender.
You should refer to your Note, Mortgage and other documents for additional information about non-payment, default, and
required repayment in full before the scheduled date, prepayment rebates, and penalties.
*If you pay off your loan early, you will not receive a refund of part of the finance charge that you have already paid.
I (We) acknowledge receipt of this Disclosure Statement.
___________________________________________
Date: ____________
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
Mortgage Shopping Checklist
Small differences in mortgage terms can cost you thousands of dollars over the life of your
loan. So take the time to shop wisely. Preparing for the mortgage shopping process
can save you money and stress.
Before applying for a mortgage loan you should:
� Get your free credit report, and check it for errors. If you find errors on your credit
report, request that they be corrected immediately because these mistakes can cause
you to pay more for your loan and can take up to several weeks to fix. To get your free
credit report, go to www.annualcreditreport.com, or call 1-877-322-8228.
� Decide how much of your savings you can afford to put into your home. Putting
more money into a down payment may give you more loan options and get you a
better interest rate. However, be sure to leave yourself with enough savings to cover
unexpected expenses at closing, or in case your home needs repairs.
� Read Shop Wisely: Understanding Your Mortgage Choices. This short booklet
from the Federal Reserve Board provides an overview of what you need to know
before talking to lenders and brokers, including definitions of mortgage terms and
sales tactics to watch out for. The booklet is available online at
www.federalreserveconsumerhelp.gov/shopwisely.
� Complete the Federal Reserve Board’s “Mortgage Risk Worksheet.” Loans have
a wide variety of features, and some features are more risky or costly than others.
Make sure that you understand the risks and costs of different loan features before
talking to lenders and brokers, so that you don’t end up paying more than you have to
for your loan. You can download the Mortgage Risk Worksheet from
www.federalreserveconsumerhelp.gov/loanrisk.
� Compare quotes from at least two brokers or lenders. When you have what you
believe is a reasonable quote, get a second opinion. Remember that a broker or
lender is a salesperson with no obligation to get you the best loan or interest rate.
Also, the more lenders and brokers you talk to the more choices you will have. There
are hundreds of mortgage products on the market, and no one broker or lender offers
all of them.
� Seek help if you need it before you get stuck with a loan you can’t afford. Do not
let anyone talk you into a loan with terms you do not understand or payments you
cannot afford. HUD-approved counseling agencies can help you evaluate loan offers
and tell you about special programs you might qualify for. For a list of HUD-approved
counseling agencies, see www.hud.gov/homebuyers/counseling.
In addition to using the websites above, you can also get print copies of the booklets and
worksheet referenced above by calling 1-888-MY-MONEY and requesting the "Mortgage
Shopping Package."
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
Mortgage Risk Wo rksheet
Some mortgages have features which make them more risky or costly, and these features can be combined in many ways. This
worksheet provides an overview of some common features you should know about. For more information on these terms, see the
booklet Shop Wisely: Understanding Your Mortgage Choices, or visit www.federalreserveconsumerhelp.gov/shopwisely/.
How to use this worksheet:
1.
Fill it in. Read through the explanations of the particular terms, as well as the descriptions of the potential benefits and risks of each
term. If you think you could be comfortable taking that risk, check the box in the right-hand column.
2.
Shop it around. Show a copy of this worksheet to each mortgage broker or loan officer you speak with about a loan. Discuss with
them what types of products you want—and what types you want to avoid.
3.
Check this form against any offer(s) you receive to make sure you are getting what you wanted.
Mortgage Term
Adjustable Rate
Mortgage (ARM)
Explanation
What it is: These loans have payments that can go up or down because the interest rate
changes. Some have rates that can change just a few months after you take out the loan.
Are you comfortable
with the risk?
�
Benefits: You may get a lower interest rate and lower monthly payments at first. If
interest rates go down, your monthly payment may go down.
Yes, I would
consider a mortgage
with an adjustable
interest rate.
Risks or Costs: If interest rates go up, your payment could go up significantly.
Balloon Payment
What it is: These loans allow you to make small payments for a while, with a large
payment due at the end of the loan.
�
Benefits: You may get lower monthly payments initially.
Risks or Costs: At the end of the loan, even after years of making payments, you will
owe a large sum of money.
Interest Only
Loan/Negative
Amortization Loan
What it is: An interest only loan allows you to make smaller monthly payments initially,
because you are paying only the interest owed every month. A negative amortization loan
also allows you to make smaller payments that do not pay down your loan balance, but
unlike an interest only loan, your payment does not cover all the interest you owe.
Benefits: You may get lower monthly payments initially.
Risks or Costs: With both interest only and negative amortization loans, your low initial
payments only cover some or all of the interest on the mortgage—they do not pay off any
of the principal. In the case of negative amortization loans, the amount you owe actually
grows over time. With both loan types, you will eventually have to pay off the loan
principal, and then your payments will go up-often by a lot.
- Page 1 of 2
�
�
Yes, I would
consider a mortgage
with a balloon
payment.
Yes, I would
consider an interest
only loan.
Yes, I would
consider a negative
amortization loan.
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
Mortgage Risk Worksheet
Mortgage Term
Prepayment Penalty
Explanation
What it is: Loans with prepayment penalties require you to pay the lender an extra fee if
you sell the home, refinance the loan, or pay some or all of the principal off earlier than a
specified time.
Are you comfortable
with the risk?
�
Benefits: You may get a lower interest rate.
Yes, I would
consider a mortgage
with a prepayment
penalty.
Risks or Costs: It could cost you several thousand dollars to refinance your loan or sell
your house, if you do so before the prepayment penalty period ends.
“No Doc” (No
Documentation) and
“Low Doc” (Low
Documentation)
Loans
Direct Payment of
Property Taxes and
Homeowner’s
Insurance
What it is: These loans require you to provide less proof of your employment, income,
and/or assets to get a loan.
�
Benefits: The loan process may go more quickly, especially for people who have difficulty
documenting their income or assets.
Yes, I would
consider a “No Doc”
or “Low Doc” loan.
Risks or Costs: A No-Doc or Low-Doc loan usually involves paying a higher interest rate
or higher fees. Note: It is illegal to provide false information on a loan application.
What it is: Many mortgages include property taxes and homeowner’s insurance in the
regular monthly payments. (This mortgage feature is sometimes called an “escrow
account” or an “impound account”). If your mortgage payment does not include taxes and
insurance, you must remember to save and pay these expenses yourself.
Benefits: Loans with no escrow or impound account have lower monthly payments only
because they do not include the insurance and tax payments you will owe. Homeowners
who save up for their property tax and insurance payments may earn interest on their
savings.
�
Yes, I would
consider a mortgage
that required me to
save for property
taxes and
homeowner’s
insurance and pay
them myself.
Risks or Costs: Taxes and insurance can cost hundreds of dollars per month.
Homeowners without escrow/impound accounts who do not save money for taxes and
insurance may not be prepared for these large expenses.
Borrower’s Signature
- Page 2 of 2
Date
Round 8:
Atlanta, GA
November 5-6, 2008
Revised TILA Statement Version A1
Revised TILA Statement Version A2
Revised TILA Statement Version B1
Revised TILA Statement Version B2
Proposed Payment Scenario Graph and
Table
Proposed Early Disclosure: “Six Key
Questions to Ask About Your Mortgage”
STATEMENT OF LOAN TERMS
LENDER:
DATE:
ABC Bank
September 23, 2008
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
BORROWER:
PROPERTY:
YOUR RIGHTS AS A BORROWER
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which
you applied. Use this statement to shop and compare these loan terms to other loan offers. For more information
about what the terms of this loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
• This is a 30 Year loan for $200,000.00.
• The interest rate is adjustable; it will change in 2011 and can adjust either up or down every year after.
• The amount financed (the loan amount less prepaid finance charges) is $195,250.00.
Initial & Maximum
Interest Rate
Monthly
Principal + Interest
Monthly Estimated
Taxes + Insurance
(Escrow)
$ 1,151.31
+
$ 241.00
=
$ 1,392.31
$ 1,397.15
+
$ 241.00
=
$ 1,638.15
$ 1,924.97
+
$ 241.00
=
$ 2,165.97
TOTAL Estimated
Monthly Payment
5.625%
initial rate until first adjustment
(2009 – 2011)
7.625%
max. rate at first adjustment
(Nov. 2011)
11.625%
maximum rate ever
(can be reached as early as 2013)
RISK FACTORS
This loan has an adjustable interest rate, which means that your required monthly payment could go up
after the first three years, and could also increase every year after. See the Payment Schedule on page 2
for more details.
This loan has a prepayment penalty, which means you could be charged a penalty of up to $4,000 if you
pay off your loan, refinance, or sell this property within three years.
THE COST OF THIS ADJUSTABLE RATE LOAN OVER TIME
If market rates did not change, and you kept this loan for:
• 3 years, the finance charge would be $37,833.70 and the APR would be:
6.46%
.
• 5 years, the finance charge would be $66,965.51 and the APR would be:
6.89%
.
• 30 years, the finance charge would be $303,767.47 and the APR would be:
7.41%
.
“The Finance Charge” is the interest plus other fees you’ll pay over the life of the loan.
“APR” is the annual percentage rate, which is interest plus other fees such as points and closing costs as a percentage of the loan
amount, factored over the term of the loan. Since the APR includes much of the cost associated with the loan, it is a good tool to use
to compare loans to each other. A lower APR generally means a less expensive loan.
SETTLEMENT COSTS
Total Estimated Settlement Charges:
Cash to bring to closing:
$5,400.00 (See your Good Faith Estimate for details)
$3,940.00
The Federal Truth in Lending Act requires lenders to mail or deliver this form to borrowers within three days of receiving the application
and at least seven days prior to closing (signing for) the loan.
A1 – 11/3/2008
STATEMENT OF LOAN TERMS
LENDER:
DATE:
ABC Bank
September 23, 2008
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
BORROWER:
PROPERTY:
YOUR RIGHTS AS A BORROWER
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which
you applied. Use this statement to shop and compare these loan terms to other loan offers. For more information
about what the terms of this loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
• This is a 30 Year loan for $200,000.00.
• The interest rate is adjustable; it will change in 2011 and can adjust either up or down every year after.
• The amount financed (the loan amount less prepaid finance charges) is $193,250.00.
Initial & Maximum
Interest Rate
Monthly
Principal + Interest
Monthly Estimated
Taxes + Insurance
(Escrow)
$ 1,119.94
+
$ 256.00
=
$ 1,375.94
$ 1,362.67
+
$ 256.00
=
$ 1,618.67
$ 1,885.28
+
$ 256.00
=
$ 2,141.28
TOTAL Estimated
Monthly Payment
5.375%
initial rate until first adjustment
(2009 – 2011)
7.375%
max. rate at first adjustment
(Nov. 2011)
11.375%
maximum rate ever
(can be reached as early as 2013)
RISK FACTORS
This loan has an adjustable interest rate, which means that your required monthly payment could go up
after the first three years, and could also increase every year after. See the Payment Schedule on page 2
for more details.
This loan has a prepayment penalty, which means you could be charged a penalty of up to $4,000 if you
pay off your loan, refinance, or sell this property within three years.
THE COST OF THIS ADJUSTABLE RATE LOAN OVER TIME
If market rates did not change, and you kept this loan for:
• 3 years, the finance charge would be $38,334.27 and the APR would be:
6.59%
.
• 5 years, the finance charge would be $66,450.27 and the APR would be:
6.89%
.
• 30 years, the finance charge would be $293,408.32 and the APR would be:
7.25%
.
“The Finance Charge” is the interest plus other fees you’ll pay over the life of the loan.
“APR” is the annual percentage rate, which is interest plus other fees such as points and closing costs as a percentage of the loan
amount, factored over the term of the loan. Since the APR includes much of the cost associated with the loan, it is a good tool to use
to compare loans to each other. A lower APR generally means a less expensive loan.
SETTLEMENT COSTS
Total Estimated Settlement Charges:
Cash to bring to closing:
$7,400.00 (See your Good Faith Estimate for details)
$4,090.00
The Federal Truth in Lending Act requires lenders to mail or deliver this form to borrowers within three days of receiving the application
and at least seven days prior to closing (signing for) the loan.
A2 – 11/3/2008
STATEMENT OF LOAN TERMS
LENDER:
DATE:
ABC Bank
September 23, 2008
BORROWER:
PROPERTY:
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you applied.
Use this statement to shop and compare these loan terms to other loan offers. For more information about what the terms of this
loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$200,000.00
Total Estimated Settlement Charges:
$5,400.00
Loan Term:
30 years
Cash to Bring to Closing:
$3,940.00
Adjustable or
Fixed Rate?
Adjustable
(beginning in 2011)
Amount Financed (loan amount
less prepaid finance charges):
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
Interest Rate
MAXIMUM at FIRST
ADJUSTMENT
(Nov. 2011)
5.625%
Principal + Interest
Estimated Taxes + Insurance*
$1,151.31
+ $ 241.00
Total Est. Monthly Payment
$1,392.31
$195,250.00
MAXIMUM EVER
(as early as 2013)
7.625%
$ 1,397.15
+ $
241.00
$ 1,638.15
11.625%
$ 1,924.97
+ $
241.00
$ 2,165.97
* Taxes and Insurance could be significantly higher than the estimates shown here.
RISK FACTORS – key questions to ask about your loan
Can my interest rate increase?
YES. Your interest rate can go up beginning in 2011 and can increase every
year after, up to a maximum of 11.625% as early as 2013.
Can my monthly payment increase?
YES. Your monthly payment can go up beginning in 2011 and can increase
every year after, to an estimated maximum of $2,165.97 as early as 2013.
Will my monthly payments cover only
No.
interest and no principal?
Can my loan balance increase?
No.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell this property within 3 years you
could pay a penalty of up to $4,000.00.
Will I owe a balloon payment?
No.
THE COST OF THIS ADJUSTABLE RATE LOAN OVER TIME – compare this APR to the APR of other loan offers
If market rates did not change,
and you kept this loan for:
The Finance Charge would be:
The APR would be:
3 years
$ 37,833.70
6.46%
5 years
$ 66,965.51
6.89%
30 years
$ 303,767.47
7.41%
The Finance Charge is the interest plus other fees you’ll pay over the life of the loan.
The APR is the annual percentage rate, which is interest plus other fees such as points and closing costs as a percentage of the
loan amount, factored over the term of the loan. Since the APR includes much of the cost associated with the loan, it is a good tool
to use to compare loans to each other. A lower APR generally means a less expensive loan.
The Federal Truth in Lending Act requires lenders to mail or deliver this form to borrowers within three days of receiving the
application and at least seven days prior to closing (signing for) the loan.
B1 – 11/3/2008
STATEMENT OF LOAN TERMS
LENDER:
DATE:
ABC Bank
September 23, 2008
BORROWER:
PROPERTY:
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you applied.
Use this statement to shop and compare these loan terms to other loan offers. For more information about what the terms of this
loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$200,000.00
Total Estimated Settlement Charges:
$7,400.00
Loan Term:
30 years
Cash to Bring to Closing:
$4,090.00
Adjustable or
Fixed Rate?
Adjustable
(beginning in 2011)
Amount Financed (loan amount
less prepaid finance charges):
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
Interest Rate
MAXIMUM at FIRST
ADJUSTMENT
(Nov. 2011)
5.375%
Principal + Interest
Estimated Taxes + Insurance*
$1,119.94
+ $ 256.00
Total Est. Monthly Payment
$1,375.94
$193,250.00
MAXIMUM EVER
(as early as 2013)
7.375%
$ 1,362.67
+ $
256.00
$ 1,618.67
11.375%
$ 1,885.28
+ $
256.00
$ 2,141.28
* Taxes and Insurance could be significantly higher than the estimates shown here.
RISK FACTORS – key questions to ask about your loan
Can my interest rate increase?
YES. Your interest rate can go up beginning in 2011 and can increase every
year after, up to a maximum of 11.375% as early as 2013.
Can my monthly payment increase?
YES. Your monthly payment can go up beginning in 2011 and can increase
every year after, to an estimated maximum of $2,141.28 as early as 2013.
Will my monthly payments cover only
No.
interest and no principal?
Can my loan balance increase?
No.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell this property within 3 years you
could pay a penalty of up to $4,000.00.
Will I owe a balloon payment?
No.
THE COST OF THIS ADJUSTABLE RATE LOAN OVER TIME – compare this APR to the APR of other loan offers
If market rates did not change,
and you kept this loan for:
The Finance Charge would be:
The APR would be:
3 years
$ 38,334.27
6.59%
5 years
$ 66,450.27
6.89%
30 years
$ 293,408.32
7.25%
The Finance Charge is the interest plus other fees you’ll pay over the life of the loan.
The APR is the annual percentage rate, which is interest plus other fees such as points and closing costs as a percentage of the
loan amount, factored over the term of the loan. Since the APR includes much of the cost associated with the loan, it is a good tool
to use to compare loans to each other. A lower APR generally means a less expensive loan.
The Federal Truth in Lending Act requires lenders to mail or deliver this form to borrowers within three days of receiving the
application and at least seven days prior to closing (signing for) the loan.
B2 – 11/3/2008
11/1/2008
11/1/2011
11/1/2012
11/1/2013
1 to 3
4
5
6 to 30
36
12
12
300
# of
Payments
$241
$241
$241
$241
Taxes +
Insurance
(Escrow)
5.625%
7.625%
7.750%
7.750%
Interest
Rate
$1,392.31
$1,638.15
$1,653.83
$1,653.83
Monthly Payment*
5.625%
7.625%
9.625%
11.625%
Interest
Rate
$1,392.31
$1,638.15
$1,897.16
$2,165.97
Monthly Payment*
SCENARIO B:
Maximum Possible
Rate Increases
* The Monthly Payment Amounts in this chart include an estimate for taxes and insurance based on today’s costs.
In actuality, the cost of taxes and insurance will likely increase over time.
Period
Beginning
Year of
Loan
SCENARIO A:
If Market Rates
Stayed The Same as Today
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
6 Key Questions to Ask About Your Mortgage
When you are shopping for a loan, ask the lender the six questions below. Some loans have
risky features that could make it difficult for you to repay your mortgage loan. Understand the loan
terms and the risks you could face. If you are not comfortable with certain risks, ask about another
loan product. For more information about risky loan features, read Shop Wisely: Understanding Your
Mortgage Choices available at www.federalreserveconsumerhelp.gov/shopwisely.
1
Can my interest rate increase?
With an adjustable rate mortgage (ARM), your interest rate can go up or down after
a short period. This can result in increased monthly payments.
Can my monthly payment increase?
2
With some loans your monthly payment can increase after a period of time, often by
hundreds of dollars, because you have a lower introductory rate, an adjustable rate,
or a monthly payment that does not cover all that you owe.
Can my loan balance increase?
3
Some loans give you the choice to pay less than the interest owed each month.
The unpaid interest is added to your loan balance and increases the total loan
amount you owe. This could cause you to lose equity in your home.
Will my monthly payments reduce my loan balance?
4
5
Some loans allow you to pay only the interest on your loan each month. You pay
nothing to reduce the amount you borrowed, and so you may not build any equity
in your home.
Can I refinance or pay off my loan early without a fee?
Some loans will charge you a large fee, even thousands of dollars, if you pay off your
loan, refinance it, or sell your home within the first few years of the loan.
Will I owe a balloon payment?
6
Some loans require a very large payment at the end of the loan (e.g., tens of
thousands of dollars). If interest rates rise, if the value of your property drops, or if
lending requirements change you may not be able to refinance before having to
make this large payment.
Round 9:
Bethesda, MD
January 27 & 29, 2009
Revised TILA Statement Version C1
Revised TILA Statement Version C2
Revised TILA Statement Version C3
Revised TILA Statement Version D1
Revised TILA Statement Version D2
Revised TILA Statement Version D3
Proposed Language for Required
Disclosures
STATEMENT OF LOAN TERMS
You have no obligation to accept this loan.
Use this statement to confirm that these are
the loan terms for which you applied, and to
compare this loan to other offers.
For
information about your rights, see:
www.frb.gov/mortgage/tilahelp.htm
January 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
DATE:
LENDER:
BORROWER:
PROPERTY:
LOAN SUMMARY
Loan Amount:
$200,000.00
Down Payment:
$57,000.00
Loan Term:
30 years
Loan Type:
3/1 Adjustable Rate Mortgage (ARM); your interest
rate adjusts in 3 years and once a year after that
Amt. Financed:
7.41 %
APR
The interest rate when some
closing costs are factored in.
$195,250.00 (loan amount minus prepaid closing
costs, such as points)
ESTIMATED CLOSING COSTS
Paid Before Closing:
$ 350.00
Included in Loan Amount:
$2,000.00
Due at Closing:
$ 303,767.47
Finance Charge
Total interest and fees
over the life of the loan.
+ $4,292.00
TOTAL
$6,642.00
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
MAXIMUM at FIRST
ADJUSTMENT
(Jan. 2012)
5.625%
Interest Rate
Principal + Interest
Taxes + Insurance (Escrow)
Total Est. Monthly Payment
$1,151.31
+ $ 241.00
7.625%
11.625%
$ 1,397.15
$ 1,924.97
+ $
$1,392.31
MAXIMUM EVER
(as early as 2014)
241.00
+ $
$ 1,638.15
241.00
$ 2,165.97
Rate Change
You have a discounted interest rate of 5.625% for the first three years. After that, your rate will be based on
the one year LIBOR index (the market rate) + 2.125%. This interest rate can increase no more than 2.00%
yearly, and no more than 6.00% total for the life of the loan.
Escrow
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and
other insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Can my balance sta
made payments?
No.
made payments?
No.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell this property within
3 years you could pay a penalty of up to $4,000.00.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 18% of your monthly payment.
OPTIONAL FEATURES
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
Reduced Documentation (No Doc or Low Doc), which makes you ineligible for our lowest interest rate.
5 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There is no
guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
C1
1/26/2009
STATEMENT OF LOAN TERMS
January 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
DATE:
LENDER:
BORROWER:
PROPERTY:
You have no obligation to accept this loan.
Use this statement to confirm that these are
the loan terms for which you applied, and to
compare this loan to other offers.
For
information about your rights, see:
www.frb.gov/mortgage/tilahelp.htm
LOAN SUMMARY
Loan Amount:
$303,234
Down Payment:
-
Loan Term:
15 years
Loan Type:
Fixed Rate Conventional
Amt. Financed:
$287,764.00 (loan amount minus prepaid closing
costs, such as points)
7.08%
APR
The interest rate when some
closing costs are factored in.
ESTIMATED CLOSING COSTS
Paid Before Closing:
Included in Loan Amount:
$ 180,235.26
$0
Finance Charge
$15,470.00
Due at Closing:
Total interest and fees
over the life of the loan.
$0
TOTAL
$15,470.00
PAYMENT SUMMARY
Estimated Payment
6.250%
Interest Rate
Principal + Interest
$2,600.00
Taxes + Insurance (Escrow)
+ $ 459.00
Total Est. Monthly Payment
$3,059.00
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and other
insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
No.
Can my monthly payment increase?
YES, but only to cover increases in your property taxes or insurance.
made payments?
made payments?
No.
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 18% of your monthly payment.
OPTIONAL FEATURES
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
ded $325 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There is no
guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
C2 1/26/2009
STATEMENT OF LOAN TERMS
You have no obligation to accept this loan.
Use this statement to confirm that these are
the loan terms for which you applied, and to
compare this loan to other offers.
For
information about your rights, see:
www.frb.gov/mortgage/tilahelp.htm
January 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
DATE:
LENDER:
BORROWER:
PROPERTY:
LOAN SUMMARY
Loan Amount:
Down Payment:
$300,000.00
-
Loan Term:
15 years
Loan Type:
Fixed Rate Conventional
Amt. Financed:
$300,000.00 (loan amount minus prepaid closing
costs, such as points)
6.50%
APR
The interest rate when some
closing costs are factored in.
ESTIMATED CLOSING COSTS
Paid Before Closing:
$0
$ 170,398.28
Included in Loan Amount:
$0
Finance Charge
Due at Closing:
Total interest and fees
over the life of the loan.
+ $0
TOTAL
$0
PAYMENT SUMMARY
Estimated Payment
6.500%
Interest Rate
Principal + Interest
$2,613.32
Taxes + Insurance (Escrow)
+ $ 458.00
Total Est. Monthly Payment
$3,071.32
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and other
insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
No.
Can my monthly payment increase?
YES, but only to cover increases in your property taxes or insurance.
made payments?
made payments?
No.
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 15% of your monthly payment.
OPTIONAL FEATURES
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
0 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There is no
guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
C3
1/26/2009
STATEMENT OF LOAN TERMS
ABC Bank
January 23, 2009
LENDER:
DATE:
BORROWER:
PROPERTY:
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you applied.
Use this statement to shop and compare these loan terms to other loan offers. For more information about what the terms of this
loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
Down Payment:
Loan Term:
Loan Type:
TOTAL COST
Amt. Financed:
$210,000.00
$70,000.00
ESTIMATED CLOSING COSTS
30 years
5/1 Adjustable Rate Mortgage (ARM); your interest
rate adjusts in 5 years and once a year after that
Included in Loan Amount:
Paid Before Closing:
Due at Closing:
$ 445.00
$0
+ $9,720.00
TOTAL
$10,165.00
$201,560.00 (loan amount minus prepaid closing
costs, such as points)
Finance Charges of
5.875%
Introductory
Interest Rate
+
$ 291,352.68
$10,165.00
Estimated
Closing Costs
=
Total interest and fees
over the life of the loan.
An APR of
&
7.02%
The interest rate when some
closing costs are factored in.
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 5 years)
Interest Rate
Principal + Interest
Taxes + Insurance (Escrow)
5.875%
11.875%
$1,242.23
$ 2,017.68
+ $ 336.00
Total Est. Monthly Payment
MAXIMUM EVER
(as early as 2017)
$1,578.23
+ $
336.00
$ 2,353.68
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and other
insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Can my balance stay the same even after
I’ve made payments?
No.
Can my balance increase even after I’ve
made payments?
No.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell this property within
3 years you could pay a penalty of up to $4,000.00.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 18% of your monthly payment.
HOW CAN I COMPARE THIS LOAN TO OTHER LOAN OFFERS?
The APR tells you which loan costs you more, depending on how long you keep the loan. Estimate how long you plan to keep this
loan before you pay it off, refinance or sell your property to determine your approximate APR. Use that APR to compare any loan
offers you are considering.
If market rates did not change,
and you kept this loan for:
The Finance Charge would be:
The APR would be:
3 years
$ 44,753.95
7.40%
5 years
$ 68,083.58
6.86%
30 years
$ 291,352.68
7.02%
WHAT DETERMINES HOW MY PAYMENT CAN CHANGE?
Rate Change
You have a discounted interest rate of 5.875% for the first five years. After that, your rate will be based
on the one year LIBOR index (the market rate) + 1.50%. This interest rate can increase no more than
2.00% yearly, and no more than 6.00% total for the life of the loan.
Escrow
The escrow amounts shown are estimates; they can change at any time based on, for example, property
values or insurance premiums.
Payment Change Scenarios
SCENARIO A: If Market Rates
Stayed the Same as Today
SCENARIO B: Maximum Possible
Rate Increases
Year of Loan
# of
Payments
Taxes +
Insurance
Interest
Rate
Monthly
Payment
Interest Rate
Monthly
Payment
1 to 5
60
$336
5.875%
$1,578.23
5.875%
$1,578.23
6
12
$336
7.125%
$1,730.59
7.875%
$1,825.77
7
12
$336
7.125%
$1,730.59
9.875%
$2,085.27
8 to 30
276
$336
7.125%
$1,730.59
11.875%
$2,353.68
TOTAL of Payments at Loan End
$613,873.37
$791,238.63
(including interest, principal and all fees)
ARE THERE ANY FEATURES THAT I COULD ELIMINATE TO SAVE MONEY ON THIS LOAN?
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
Reduced Documentation (No Doc or Low Doc), which makes you ineligible for our lowest interest rate.
Owner’s Title Insurance, which has added $325 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There
is no guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
D1 – 1/26/2009
STATEMENT OF LOAN TERMS
ABC Bank
January 23, 2009
LENDER:
DATE:
BORROWER:
PROPERTY:
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you applied.
Use this statement to shop and compare these loan terms to other loan offers. For more information about what the terms of this
loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
Down Payment:
Loan Term:
Loan Type:
TOTAL COST
Amt. Financed:
$303,234.00
-
ESTIMATED CLOSING COSTS
15 years
Fixed Rate Conventional
Included in Loan Amount:
$287,764 (loan amount minus prepaid closing
costs, such as points)
TOTAL
Paid Before Closing:
Due at Closing:
Interest Rate
+
$15,470.00
Estimated
Closing Costs
=
An APR of
$ 180,235.26
Total interest and fees
over the life of the loan.
$0
$15,470.00
Finance Charges of
6.250%
$0
$15,470.00
&
7.08%
The interest rate when some
closing costs are factored in.
PAYMENT SUMMARY
Estimated Payment
6.250%
Interest Rate
Principal + Interest
$2,600.00
Taxes + Insurance (Escrow)
+ $ 459.00
Total Est. Monthly Payment
$3,059.00
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and other
insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
No.
Can my monthly payment increase?
YES, but only to cover increases in your property taxes or insurance.
Can my balance stay the same even after
I’ve made payments?
No.
Can my balance increase even after I’ve
made payments?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 18% of your monthly payment.
HOW CAN I COMPARE THIS LOAN TO OTHER LOAN OFFERS?
The APR tells you which loan costs you more, depending on how long you keep the loan. Estimate how long you plan to keep this
loan before you pay it off, refinance or sell your property to determine your approximate APR. Use that APR to compare any loan
offers you are considering.
If you kept this loan for:
The Finance Charge would be:
The APR would be:
3 years
$ 68,770.87
8.09%
5 years
$ 99,799.37
7.62%
30 years
$ 180,235.26
7.08%
ARE THERE ANY FEATURES THAT I COULD ELIMINATE TO SAVE MONEY ON THIS LOAN?
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
Owner’s Title Insurance, which has added $325 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There
is no guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
D2 – 1/26/2009
STATEMENT OF LOAN TERMS
ABC Bank
January 23, 2009
LENDER:
DATE:
BORROWER:
PROPERTY:
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you applied.
Use this statement to shop and compare these loan terms to other loan offers. For more information about what the terms of this
loan mean, and your rights as a borrower, visit www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$300,000.00
ESTIMATED CLOSING COSTS
Down Payment:
$ -
Paid Before Closing:
Loan Term:
15 years
Fixed Rate Conventional
Included in Loan Amount:
$300,000.00 (loan amount minus prepaid closing
costs, such as points)
TOTAL
Loan Type:
TOTAL COST
Amt. Financed:
Due at Closing:
Interest Rate
+
$0
Estimated
Closing Costs
=
An APR of
$ 170,398.28
Total interest and fees
over the life of the loan.
$0
+ $0
$0
Finance Charges of
6.500%
$0
&
6.50%
The interest rate when some
closing costs are factored in.
PAYMENT SUMMARY
Estimated Payment
6.500%
Interest Rate
Principal + Interest
$2,613.32
Taxes + Insurance (Escrow)
+ $ 458.00
Total Est. Monthly Payment
$3,071.32
An escrow account is required for this loan, and will be used to pay your property taxes and homeowners and other
insurance. The amounts shown for taxes and insurance are estimates; they can change at any time.
KEY QUESTIONS ABOUT THIS LOAN
Can my interest rate increase?
No.
Can my monthly payment increase?
YES, but only to cover increases in your property taxes or insurance.
Can my balance stay the same even after
I’ve made payments?
No.
Can my balance increase even after I’ve
made payments?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Will I owe a fee if I make a late payment?
YES. If you make a payment more than 15 days late, you may be
charged a penalty of 15% of your monthly payment.
HOW CAN I COMPARE THIS LOAN TO OTHER LOAN OFFERS?
The APR tells you which loan costs you more, depending on how long you keep the loan. Estimate how long you plan to keep this
loan before you pay it off, refinance or sell your property to determine your approximate APR. Use that APR to compare any loan
offers you are considering.
If you kept this loan for:
The Finance Charge would be:
The APR would be:
3 years
$ 54,910.73
6.50%
5 years
$ 86,950.70
6.50%
30 years
$ 170,398.28
6.50%
ARE THERE ANY FEATURES THAT I COULD ELIMINATE TO SAVE MONEY ON THIS LOAN?
The following optional features increase the cost of this loan:
Credit Life Insurance, which is adding $50.00 to your monthly payment for 15 years.
Owner’s Title Insurance, which has added $350 to the closing costs you will pay separately at closing.
If you are unable to make payments on this loan, you could lose your home. There
is no guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
Date
D3 – 1/26/2009
A:
Read your loan contract to learn what happens if you stop making payments, default, pay
or refinance the loan early, or if the lender demands early repayment of the entire loan
balance.
B:
If you sell your home after you take out this loan, your lender has the option to permit the
buyer to take over your mortgage.
C:
You can obtain property insurance from anyone that is also acceptable to your lender.
D:
The lender can require that you pay off the full amount of your loan at any time. All
disclosures are based on the assumed maturity of one year.
E:
If pay, refinance, or sell this property early, you are entitled to a refund of some of the
interest and fees you have paid on your loan.
Round 10:
Dallas, TX
February 24-25 2009
Revised TILA Statement Version E1
Revised TILA Statement Version E2
Revised TILA Statement Version F1
Revised TILA Statement Version F2
Alternate Presentations of APR
Proposed Early Disclosure: “Key Questions
to Ask About Your Mortgage”
Proposed Language for Required
Disclosures
STATEMENT OF LOAN TERMS
DATE:
LENDER:
BORROWER:
PROPERTY:
February 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this
statement to confirm that these are the loan terms for
which you applied. For information see:
www.frb.gov/mortgage/tilahelp.htm
LOAN SUMMARY
Loan Amount:
$200,000.00, of which $2,000.00 goes
toward your total settlement charges.
Loan Term:
30 years
Loan Type:
3/1 Adjustable Rate Mortgage (ARM)
Total Settlement
Charges:
$6,642.001
TRUE COST FACTOR (TCF)
7.41
When comparing loans of the same
type and term, a higher TCF means
a more expensive loan.
(see your Good Faith Estimate for details)
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
MAXIMUM at FIRST
ADJUSTMENT
(Feb. 2012)
5.625%
Interest Rate
Principal + Interest
$1,151.31
Taxes + Insurance (Escrow)
+ $ 241.00
Total Est. Monthly Payment
$1,392.31
MAXIMUM EVER
(as early as 2014)
7.625%
11.625%
$ 1,397.15
$ 1,924.97
+ $
241.00
+ $
$ 1,638.15
241.00
$ 2,165.97
Introductory Rate
You have a discounted introductory rate of 5.625% for the first three years. If the market rate does not
change, at the end of this period your interest rate will increase by 2.00%, adding approximately $250.00
to your monthly payment.
Rate Changes
After the first three years, your rate adjusts annually based on the one-year LIBOR index (the market rate)
+ 2.125%. Your interest rate can increase no more than 2.00% in any one year, and no more than 6.00%
total for the life of the loan.
Escrow
An escrow account is required for your property taxes and homeowners and other insurance. The
amounts shown for taxes and insurance are estimates and can change at any time.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360 payments
totaling $585,778.09, including escrow. Of this amount, $303,767.47 would go to interest and fees.
KEY QUESTIONS ABOUT RISKS
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Can my lender demand full repayment at
anytime?
YES. We can demand that you pay off the full amount of your loan at any time,
for any reason. We are required to give you at least 30 days notice.
Do I have to share any equity I gain?
YES. We are entitled to 50% of any gain you make when you sell or refinance this
property. In exchange, we are giving you a lower interest rate.
The following features are not included in this loan: interest-only payments, negative amortization, a balloon payment, and a
prepayment penalty.
OPTIONS WITH ADDITIONAL COSTS
Credit Life Insurance is available for an additional cost of $50.00 per month for the first 15 years. It is not required for this or any
loan. Initial below to add Credit Life Insurance to your loan.
YES, add Credit Life Insurance to my loan. ___________
(Initial here)
If you are unable to make payments on this loan, you could lose your home. There is no
guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
1
Pursuant to Regulation 226.2(23), which
Date
-paid finance
E1 2/20/2009
STATEMENT OF LOAN TERMS
DATE:
LENDER:
BORROWER:
PROPERTY:
February 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
You have no obligation to accept this loan. Use this
statement to confirm that these are the loan terms for
which you applied. For information see:
www.frb.gov/mortgage/tilahelp.htm
LOAN SUMMARY
Loan Amount:
$201,000.00, of which $3,000.00 goes
toward your total settlement charges.
Loan Term:
30 years
Loan Type:
3/1 Adjustable Rate Mortgage (ARM)
Total Settlement
Charges:
$10,797.001
TRUE COST FACTOR (TCF)
7.50
When comparing loans of the same
type and term, a higher TCF means
a more expensive loan.
(see your Good Faith Estimate for details)
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
MAXIMUM at FIRST
ADJUSTMENT
(Feb. 2012)
5.125%
Interest Rate
Principal + Interest
$1,094.42
Taxes + Insurance (Escrow)
+ $ 233.00
Total Est. Monthly Payment
$1,327.42
MAXIMUM EVER
(as early as 2014)
7.125%
11.125%
$ 1,335.16
+ $
233.00
$ 1,855.02
+ $
$ 1,568.16
233.00
$ 2,088.02
Introductory Rate
You have a discounted introductory rate of 5.125% for the first three years. If the market rate does not
change, at the end of this period your interest rate will increase by 2.00%, adding approximately $250.00
to your monthly payment.
Rate Changes
After the first three years, your rate adjusts annually based on the one-year LIBOR index (the market rate)
+ 2.125%. Your interest rate can increase no more than 2.00% in any one year, and no more than 6.00%
total for the life of the loan.
Escrow
An escrow account is required for your property taxes and homeowners and other insurance. The
amounts shown for taxes and insurance are estimates and can change at any time.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360 payments
totaling $580,104.61, including escrow. Of this amount, $305,019.52 would go to interest and fees.
KEY QUESTIONS ABOUT RISKS
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Can my lender demand full repayment at
anytime?
YES. We can demand that you pay off the full amount of your loan at any time,
for any reason. We are required to give you at least 30 days notice.
Do I have to share any equity I gain?
YES. We are entitled to 50% of any gain you make when you sell or refinance this
property. In exchange, we are giving you a lower interest rate.
The following features are not included in this loan: interest-only payments, negative amortization, a balloon payment, and a
prepayment penalty.
OPTIONS WITH ADDITIONAL COSTS
Credit Life Insurance is available for an additional cost of $50.00 per month for the first 15 years. It is not required for this or any
loan. Initial below to add Credit Life Insurance to your loan.
YES, add Credit Life Insurance to my loan. ___________
(Initial here)
If you are unable to make payments on this loan, you could lose your home. There is no
guarantee that you will be able to refinance to lower your rate and payments.
Do not sign this form if there is any part of it that you do not understand.
Borrower Signature
1
Pursuant to Regulation 226.2(23), which implements the Truth in Lending Act, $9,79
Date
-paid finance
E2
2/20/2009
STATEMENT OF LOAN TERMS
February 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
DATE:
LENDER:
BORROWER:
PROPERTY:
You have no obligation to accept this loan. Use this
statement to confirm that these are the loan terms for
which you applied. For information see:
www.frb.gov/mortgage/tilahelp.htm
LOAN SUMMARY
Loan Amount:
$200,000.00, of which $2,000.00 goes
Overall Rate of Fees + Interest
toward your total settlement charges
Loan Term:
30 years
Loan Type:
3/1 Adjustable Rate Mortgage (ARM)
Total Settlement
Charges:
7.41%
1
$6,642.00
Your interest rate when your closing
costs are included.
(see your Good Faith Estimate for details)
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
MAXIMUM at FIRST
ADJUSTMENT
(Feb. 2012)
5.625%
Interest Rate
Principal + Interest
$1,151.31
Taxes + Insurance (Escrow)
+ $ 241.00
Total Est. Monthly Payment
$1,392.31
MAXIMUM EVER
(as early as 2014)
7.625%
11.625%
$ 1,397.15
$ 1,924.97
+ $
241.00
$ 1,638.15
+ $
241.00
$ 2,165.97
Rate Changes
You have a discounted introductory rate of 5.625% for the first three years. After that, your rate will adjust
annually based on the one-year LIBOR index (the market rate) + 2.125%. Your interest rate can increase no
more than 2.00% in any one year, and no more than 6.00% total for the life of the loan.
Escrow
An escrow account is required for your property taxes and homeowners and other insurance. The amounts
shown for taxes and insurance are estimates and can change at any time.
Total Payments If your interest rate did not change and you made all payments as scheduled, you would make 360 payments
totaling $585,778.09, including escrow. Of this amount, $303,767.47 would go to interest and fees.
KEY QUESTIONS ABOUT RISKS
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Will my monthly payments reduce my loan
balance?
Yes.
Even if I make monthly payments, can my
loan balance increase over time?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Can my lender demand full repayment at
anytime?
YES. We can demand that you pay off the full amount of your loan at any time,
for any reason. We are required to give you at least 30 days notice.
Do I have to share any equity I gain?
YES. We are entitled to 50% of any gain you make when you sell or refinance this
property. In exchange, we are giving you a lower interest rate.
OPTIONS WITH ADDITIONAL COSTS
Credit Life Insurance is available for an additional cost of $50.00 per month for the first 15 years. It is not required for this or any
loan. Initial below to add Credit Life Insurance to your loan.
YES, add Credit Life Insurance to my loan. ___________.
(Initial here)
If you are unable to make payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments. Do not sign this form if there is
any part of it that you do not understand.
Borrower Signature
1
Pursuant to Regulation 226.2(23), which implements the Truth in Lending Act, $4,750.00
Date
-paid finance
F1
2/20/2009
STATEMENT OF LOAN TERMS
February 23, 2009
ABC Bank
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
DATE:
LENDER:
BORROWER:
PROPERTY:
You have no obligation to accept this loan. Use this
statement to confirm that these are the loan terms for
which you applied. For information see:
www.frb.gov/mortgage/tilahelp.htm
LOAN SUMMARY
Loan Amount:
$201,000.00, of which $3,000.00 goes
Overall Rate of Fees + Interest
toward your total settlement charges
Loan Term:
30 years
Loan Type:
3/1 Adjustable Rate Mortgage (ARM)
Total Settlement
Charges:
7.50%
1
$10,797.00
Your interest rate when your closing
costs are included.
(see your Good Faith Estimate for details)
PAYMENT SUMMARY
INTRODUCTORY
Rate & Est. Payment
(for first 3 years)
Interest Rate
Principal + Interest
Taxes + Insurance (Escrow)
5.125%
7.125%
$1,094.42
$ 1,335.156
+ $ 233.00
Total Est. Monthly Payment
MAXIMUM at FIRST
ADJUSTMENT
(Feb. 2012)
$1,327.42
+ $
MAXIMUM EVER
(as early as 2014)
11.125%
233.00
$ 1,568.16
$ 1,855.02
+ $
233.00
$ 2,088.02
Rate Changes
You have a discounted introductory rate of 5.125% for the first three years. After that, your rate will adjust
annually based on the one-year LIBOR index (the market rate) + 2.125%. Your interest rate can increase no
more than 2.00% in any one year, and no more than 6.00% total for the life of the loan.
Escrow
An escrow account is required for your property taxes and homeowners and other insurance. The amounts
shown for taxes and insurance are estimates and can change at any time.
Total Payments If your interest rate did not change and you made all payments as scheduled, you would make 360 payments
totaling $580,104.61, including escrow. Of this amount, $305,019.52 would go to interest and fees.
KEY QUESTIONS ABOUT RISKS
Can my interest rate increase?
YES.
Can my monthly payment increase?
YES.
Will my monthly payments reduce my loan
balance?
Yes.
Even if I make monthly payments, can my
loan balance increase over time?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Can my lender demand full repayment at
anytime?
YES. We can demand that you pay off the full amount of your loan at any time,
for any reason. We are required to give you at least 30 days notice.
Do I have to share any equity I gain?
YES. We are entitled to 50% of any gain you make when you sell or refinance this
property. In exchange, we are giving you a lower interest rate.
OPTIONS WITH ADDITIONAL COSTS
Credit Life Insurance is available for an additional cost of $50.00 per month for the first 15 years. It is not required for this or any
loan. Initial below to add Credit Life Insurance to your loan.
YES, add Credit Life Insurance to my loan. ___________.
(Initial here)
If you are unable to make payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments. Do not sign this form if there is
any part of it that you do not understand.
Borrower Signature
1
Pursuant to Regulation 226.2(23), which implements the Truth in Lending Act, $9,795.00
Date
-paid finance
F2
2/20/2009
A1, no percentage sign
A1, with percentage sign
A2, no percentage sign
A2, with percentage sign
B1, no percentage sign
B1, with percentage sign
B2, no percentage sign
B2, with percentage sign
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
Key Questions to Ask About Your Mortgage
When you are shopping for a loan, ask each lender the questions below. Some loans have risky
features that could make it difficult for you to make payments in the future. Make sure you
understand the terms of your loan. If you are not comfortable with the risks, ask your lender about
other loan products. The only way to make sure you get the best possible loan terms is to get
offers from several lenders.
Shop. Compare. Negotiate.
For more information about risky loan features, read Shop Wisely: Understanding Your Mortgage
Choices, available at: www.federalreserveconsumerhelp.gov/shopwisely.
1
Can my interest rate increase?
If you have an adjustable rate mortgage (ARM), your interest rate can go up or down after a short period.
This means that your monthly payments could increase.
Can my monthly payment increase?
2
With some loans, your monthly payment could increase after a period of time, often by hundreds of
dollars. This increase could be because you have a lower introductory interest rate, your property
taxes or insurance premiums increase, or because in the beginning your monthly payment only
covers the interest on the loan, and not the principal owed.
Will my monthly payments reduce my loan balance?
3
Some loans let you pay only the interest on your loan each month. These payments do not pay down
the amount you borrowed. As a result, if you have this type of loan, you may not build any equity in
your home.
Even if I make my monthly payments, can my loan balance increase?
4
5
Some loans let you choose to pay even less than the interest owed each month. The unpaid interest
is added to your loan balance and increases the total amount that you owe. This could cause you to
lose equity in your home over time.
Could I owe a prepayment penalty?
Some loans charge you a large fee if you pay off your loan, refinance it, or sell your home within the
first few years of the loan. This penalty fee could be thousands of dollars.
Will I owe a balloon payment?
6
Some loans require a very large payment at the end of the loan—sometimes tens of thousands of
dollars. If interest rates go up or if the value of your property drops, you may not be able to refinance
your loan before you have to make this large payment.
7
Could I be required to repay this loan before the end of the term?
With some loans, lenders can demand that you pay off the full amount of the loan at any time.
Will I have to document my employment, income, and assets to get this loan?
8
Sometimes a lender will make a loan without requiring you to show that you are employed and have
the income or assets to repay the loan. These no-documentation (“no-doc”) or low-documentation
(“low-doc”) loans usually have higher interest rates or higher fees than other loans.
Will I have to share part of the equity in my home with the lender?
9
Some lenders will offer you a low interest rate in exchange for a percentage of your home's increased
value at a later date, such as when you refinance or sell your home. This percentage can represent a
large amount of money if your home’s value increases significantly.
1. Read your loan contract to find out what happens if you stop making
payments, default, pay off or refinance your loan early.
2. If you sell your home after you take out this loan, we have the option to
permit the buyer to take over your mortgage.
3. You may get property insurance from any insurer that is acceptable to us.
4. If you pay off or refinance your loan, or sell this property early, you will
receive a refund of some of the interest and fees you have paid on your
loan.
5. If you make a payment more than 15 days late, you may be charged a
penalty equal to 15% of your monthly payment.
Round 11:
Providence, RI
March 31–April 1, 2009
Revised TILA Statement Version G1
Revised TILA Statement Version G2
Revised TILA Statement Version H1
Revised TILA Statement Version H2
Revised ARM Loan Program Disclosure
Proposed Early Disclosure: “Fixed vs.
Adjustable Rate Mortgages”
Proposed ARM Adjustment Notice
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
January 28, 2009
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you
applied. For more information see: www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$200,000.00
of which:
$198,000.00 goes toward the home purchase
$2,000.00 goes toward settlement charges
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM)
Total Estimated
Settlement Charges:
$8,625.00
This does not include your down payment. See your Good Faith Estimate or HUD-1 for details.
Prepayment Penalty:
Up to $4,000.00 if you pay off your loan, refinance, or sell this property within 2 years.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges
included:
7.59%
How does this loan compare? The average APR on comparable loans recently offered to borrowers with excellent credit
was 5.49%. In today’s market, an APR of 6.99% or above is considered subprime (high cost).
PAYMENT SUMMARY
INTRODUCTORY
Rate & Monthly Payment
(for first 5 years)
MAXIMUM at FIRST
ADJUSTMENT
(Mar. 2014)
MAXIMUM
EVER
(as early as 2016)
6.875%
8.875%
12.875%
Principal
$0
$182.14
$116.64
Interest
$1,145.83
$1,479.17
$2,101.91
$332.00
$332.00
$297.00
Interest Rate
Est. Taxes + Insurance (Escrow)
Total Est. Monthly Payment
$1,477.83
Page 1 of 2
$1,993.31
$2,515.55
G-1 – 3/27/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase beginning in March 2014. For more
information, see the Payment Summary table on page 1.
Can my monthly payment increase?
YES. Your payment can increase beginning in March 2014. For more
information, see the Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. Your monthly payments for the first 5 years of the loan (until March 2014)
only cover interest and do not include any principal. Making these monthly
payments will not reduce your loan balance during this period.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell your home within 2 years you
could pay a penalty of up to $4,000.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Change
As shown in the Payment Summary table above, you have a discounted introductory rate that is
fixed at 6.875% for the first five years. After this five year period, and each year after that, your
rate will be based on the one-year LIBOR index (the market rate) plus 5.00%.
Rate Change Limits
After the first five years, your interest rate can increase no more than 2.00% from one year to the
next, and no more than 6.00% total for the life of the loan, which would result in the maximum
ever rate of 12.875%.
Escrow
An escrow account is required for property taxes, and for homeowner’s, private mortgage, and
other insurance. Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $589,385.69, including estimated escrow. Of this amount, $307,935.69 would
go to interest and settlement charges. This amount and your amount financed of $193,250.00 are
used to calculate your APR.
Ask questions if you do not understand any part of this form.
If you are unable to make payments on this loan, you could lose your home.
There is no guarantee that you will be able to refinance to lower your rate and payments.
I acknowledge receipt of this form
Date
Page 2 of 2
G-1 – 3/27/09
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
January 28, 2009
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you
applied. For more information see: www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$200,000.00 of which:
$198,000.00 goes toward the home purchase, and $2,000.00 goes toward settlement charges.
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM)
Total Estimated
Settlement Charges:
$8,625.00
This does not include your down payment. See your Good Faith Estimate or HUD-1 for details.
Prepayment Penalty:
Up to $4,000.00 if you pay off your loan, refinance, or sell this property within 2 years.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges
included:
7.59%
How does this loan compare? The average APR on comparable loans recently offered to borrowers with excellent
credit was 5.49%. In today’s market, an APR of 6.99% or above is considered subprime (high cost).
PAYMENT SUMMARY
INTRODUCTORY
Rate & Monthly Payment
(for first 5 years)
MAXIMUM at FIRST
ADJUSTMENT
(Mar. 2014)
MAXIMUM
EVER
(as early as 2016)
6.875%
8.875%
12.875%
Principal
$0
$182.14
$116.64
Interest
$1,145.83
$1,479.17
$2,101.91
$332.00
$332.00
$297.00
Interest Rate
Est. Taxes + Insurance (Escrow)
Total Est. Monthly Payment
$1,477.83
Page 1 of 2
$1,993.31
$2,515.55
G-2 – 3/27/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase beginning in March 2014. For more
information, see the Payment Summary table on page 1.
Can my monthly payment increase?
YES. Your payment can increase beginning in March 2014. For more
information, see the Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. Your monthly payments for the first 5 years of the loan (until March 2014)
only cover interest and do not include any principal. Making these monthly
payments will not reduce your loan balance during this period.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell your home within 2 years you
could pay a penalty of up to $4,000.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Introductory Rate
As shown in the Payment Summary table above, you have a discounted introductory rate that is
fixed at 6.875% for the first five years. After this five year period, and each year after that, your
rate can increase.
Escrow
An escrow account is required for property taxes, and for homeowner’s, private mortgage, and
other insurance. Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $589,385.69, including estimated escrow. Of this amount, $307,935.69 would go
to interest and settlement charges. This amount and your amount financed of $193,250.00 are used
to calculate your APR.
Ask questions if you do not understand any part of this form.
If you are unable to make payments on this loan, you could lose your home.
There is no guarantee that you will be able to refinance to lower your rate and payments.
I acknowledge receipt of this form
Date
Page 2 of 2
G-2 – 3/27/09
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
January 28, 2009
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you
applied. For more information see: www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$210,000.00
of which:
$207,000.00 goes toward the home purchase
$3,000.00 goes toward settlement charges
Loan Term:
3 years
Loan Type:
Fixed Rate
Total Estimated
Settlement Charges:
$7,472.00
This does not include your down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges
included:
6.50%
How does this loan compare? The average APR on comparable loans recently offered to borrowers with excellent
credit was 5.66%. In today’s market, an APR of 7.16% or above is considered subprime (high cost).
PAYMENT SUMMARY
Rate and
Monthly Payment
5.50%
Interest Rate
Principal + Interest
$ 1,192.36
Est. Taxes + Insurance (Escrow)
not included
Total Est. Monthly Payment
Final Balloon Payment
(due Mar. 2012)
$ 1,192.36
Page 1 of 2
$202,217.84
H1 – 3/27/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
No.
Can my monthly payment increase?
No.
Will any of my monthly payments be
interest-only?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
YES. You will owe a balloon payment of $202,217.84, due in March 2012.
Do I have to share any equity I gain?
YES. In exchange for giving you a lower interest rate on this loan, we are
entitled to 50% of any gain you make when you sell or refinance this property.
MORE INFORMATION ABOUT YOUR PAYMENTS
Escrow
An escrow account is not required on this loan. You must pay your property taxes, homeowner’s,
and other insurance on your own.
Total Payments
If you made all payments as scheduled, you would make 36 payments totaling $243,950.33. Of this
amount, $39,530.44 would go to interest and settlement charges. This amount and your amount
financed of $204,420.00 are used to calculate your APR.
Ask questions if you do not understand any part of this form.
If you are unable to make payments on this loan, you could lose your home.
There is no guarantee that you will be able to refinance to lower your rate and payments.
I acknowledge receipt of this form
Date
Page 2 of 2
H1 – 3/27/09
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
January 28, 2009
You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms for which you
applied. For more information see: www.frb.gov/mortgage/tilahelp.htm.
LOAN SUMMARY
Loan Amount:
$210,000.00, of which:
$207,000.00 goes toward your home purchase, and $3,000.00 goes toward settlement charges.
Loan Term:
3 years
Loan Type:
Fixed Rate
Total Estimated
Settlement Charges:
$7,472.00
This does not include your down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges
included:
6.50%
How does this loan compare? The average APR on comparable loans recently offered to borrowers with excellent
credit was 5.66%. In today’s market, an APR of 7.16% or above is considered subprime (high cost).
PAYMENT SUMMARY
Rate and
Monthly Payment
5.50%
Interest Rate
Principal + Interest
$ 1,192.36
Est. Taxes + Insurance (Escrow)
not included
Total Est. Monthly Payment
$ 1,192.36
Final Balloon Payment due March 2012: $202,217.84
Page 1 of 2
H2 – 3/27/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
No.
Can my monthly payment increase?
No.
Will any of my monthly payments be
interest-only?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
YES. You will owe a balloon payment of $202,217.84, due in March 2012.
Do I have to share any equity I gain?
YES. In exchange for giving you a lower interest rate on this loan, we are
entitled to 50% of any gain you make when you sell or refinance this property.
MORE INFORMATION ABOUT YOUR PAYMENTS
Escrow
An escrow account is not required on this loan. You must pay your property taxes, homeowner’s,
and other insurance on your own.
Total Payments
If you made all payments as scheduled, you would make 36 payments totaling $243,950.33. Of this
amount, $39,530.44 would go to interest and settlement charges. This amount and your amount
financed of $204,420.00 are used to calculate your APR.
Ask questions if you do not understand any part of this form.
If you are unable to make payments on this loan, you could lose your home.
There is no guarantee that you will be able to refinance to lower your rate and payments.
I acknowledge receipt of this form
Date
Page 2 of 2
H2 – 3/27/09
ABC Bank
3/1 Adjustable Rate Mortgage (ARM) Product Description
Interest Rate
Introductory Period
3 Years
The interest rate is discounted and will stay the same for a 3-year
introductory period. After this initial period, the interest rate could
increase.
Frequency of Rate Change
Annually
The interest rate will adjust once each year after the introductory period.
Index
LIBOR Index
After the initial 3-year period, your interest rate will be based on the 1
year LIBOR Index plus a margin that is determined at application. The
LIBOR is published daily in the Wall Street Journal.
Limits on Rate Changes
2% Annual Cap; 6% Lifetime Cap
Your interest rate can increase no more than 2% in any one year, and
no more than 6% over the life of the loan.
Risk Factors
Can my interest rate increase?
YES. Your interest rate could increase at the end of the 3-year
introductory period, and annually after that.
Can my monthly payment increase?
YES. If your interest rate increases, your monthly payment will increase.
Will any of my monthly payments be
interest-only?
No.
Can my lender demand full repayment
at anytime?
YES. We can demand that you pay off the full amount of your loan at
any time, for any reason. We are required to give you at least 30 days
notice.
Could I owe a prepayment penalty?
No.
Do I have to share any equity I gain?
YES. We will give you a lower interest rate on this loan, but in exchange
we are entitled to 50% of any gain you make when you sell or refinance
this property.
For more information about ARMs, or for a list of licensed housing counselors in your area that can help you
understand the risks and benefits of this loan, visit www.frb.gov.
ARM-PD-1 03/27/09
FEDERAL RESERVE BOARD CONSUMER PROTECTION RESOURCES
Fixed vs. Adjustable Rate Mortgages
What Type of Mortgage is Right for You?
A traditional fixed rate mortgage is a safe choice for many borrowers, but in some
circumstances an adjustable rate mortgage (ARM) might make sense for you. If
you are considering an ARM, be sure you understand the tradeoffs.
Fixed Rate Mortgages
With a fixed rate mortgage, the
interest rate and monthly payment
stay the same for the entire loan
term.
Consider a Fixed Rate Mortgage if:
You would prefer predictable
payments or have difficulty
managing monthly payments that
increase; or
You plan to stay in your home for
a long period of time.
ARMs
With an ARM, the interest rate and
monthly payment often start out
lower than with a fixed rate
mortgage. However, both the rate
and payment can increase very
quickly.
Consider an ARM if:
You are confident that you could
afford increases in your monthly
payment, even at the maximum
amount (sometimes as much as
double your initial payment
amount); or
You plan to sell your home within a
short period of time.
If you are considering an ARM, don’t count on being able to refinance
before your interest rate and monthly payments increase. You might not
qualify for refinancing if the market value of your home goes down, or your
financial situation changes due to job loss, illness, or other large debts.
Where to Find Help
For more information about how to choose the right loan for you, or for a list of
licensed housing counselors in your area that could help you make this
decision, visit www.frb.gov.
ARM-gen-1 03/27/09
Important Changes to Your Loan Terms
The following is a summary of changes that are being made to your loan terms, effective
4/10/09. For more detailed information, please refer to your loan agreement(s).
These changes will impact your loan terms as follows:
Current Rate and
Monthly Payment
New Rate and
Monthly Payment
5.75%
7.75%
Principal
$0
$195.56
Interest
$1,166.55
$1,471.35
$345.00
$400.00
Interest Rate
Taxes + Insurance (Escrow)
Total Monthly Payment
$ 1,511.55
$2,066.91
(due on May 1, 2009)
Interest Rate: Your interest rate will change from 5.75% to 7.75%, due to an increase in the 1
year LIBOR index.
Rate Change: Your rate can change each year, by no more than 2.00%. Your rate can never
go higher than 11.00% over the life of the loan.
New Payment: Your new payment includes some of your loan’s principal, and will therefore
reduce your loan balance.
Prepayment Penalty: If you pay off your loan, refinance or sell your home before 5/10/13 you
may be subject to a pre-payment penalty of up to $4,000.
If you are unable to pay your mortgage, contact us at (555) 555-5555 or
www.creditor.com/assistance as soon as possible.
If you would like to talk with a licensed housing counselor, you can find a list of counselors in
your area:
● On the Neighborworks website, at http://www.nw.org/network/home.asp.
● On the U.S. Department of Housing and Urban Development's (HUD) website, at
http://www.hud.gov/offices/hsg/sfh/hcc/hccprof14.cfm.
● By calling (800) 569-4287.
Round 12:
Denver, CO
April 21-22, 2009
Revised TILA Statement Version J-IO
Revised TILA Statement Version J-PO
Revised TILA Statement Version K-IO
Revised TILA Statement Version K-PO
Proposed Payment Option Monthly
Payment Disclosure
Proposed Credit Life Insurance Disclosure
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
February 26, 2009
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM), Interest-Only Payments
Total Estimated
Settlement Charges:
$8,625.00
$2,000.00 of these charges are rolled into your loan amount above.
This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
Prepayment Penalty: Up to $4,000.00 if you pay off your loan, refinance, or sell this property within 2 years.
ANNUAL PERCENTAGE RATE (APR)
How does this loan compare? During the week of
February 23, 2009, the average APR on similar loans
offered to borrowers with excellent credit was 4.00%.
What does this mean in dollars? For this loan, a
1% reduction in APR could reduce your monthly
payment by $167/month for the first 5 years.
The APR is your interest rate with settlement charges included.
PAYMENT SUMMARY
INTRODUCTORY
Rate & Monthly Payment
(for first 5 years)
MAXIMUM at FIRST
ADJUSTMENT
(April 2014)
MAXIMUM
EVER
(as early as 2016)
6.875%
8.875%
12.875%
Principal
$0
$182.14
$116.64
Interest
$1,145.83
$1,479.17
$2,101.91
$332.00
$332.00
$297.00
Interest Rate
Est. Taxes + Insurance (Escrow)
including private mortgage insurance
Total Est. Monthly Payment
$1,477.83
$1,993.31
$2,515.55
Teaser Rate Notice
As shown in the table above, you have a discounted introductory rate that is 6.875%
which ends after five years. In the sixth year, even if market rates do not change, this
rate will increase by .125% to 7.00%, bringing your monthly payment up to $1,745.56.
Page 1 of 2
J-IO – 4/17/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase annually beginning in April 2014.
For more information, see the Payment Summary table on page 1.
Can my monthly payment increase?
YES. Your payment can increase beginning in April 2014. For more
information, see the Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. Your monthly payments for the first 5 years of the loan (until April 2014),
shown in the Payment Summary table on page 1, only cover interest and do
not include any principal. Making these monthly payments will not reduce your
loan balance during this period.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell your home within 2 years you
could pay a penalty of up to $4,000.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 5-year introductory period ends, your rate will be determined annually based on the
one-year LIBOR index (the market rate) plus 5.00%.
Rate Change Limits
When the 5-year introductory period ends, your interest rate can increase no more than 2.00%
from one year to the next, and no more than 6.00% total for the life of the loan, which would
result in the maximum ever rate of 12.875%.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s and
private mortgage insurance). Your escrow payment is an estimate and can change at any time.
See your Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $589,385.69, including estimated escrow. Of this amount, $307,935.69 would
go to interest and settlement charges. This amount, and your amount financed of $193,250.00,
are used to calculate your APR.
� You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms
for which you applied.
� Ask questions if you do not understand any part of this form. If you are unable to make payments on
this loan, you could lose your home. There is also no guarantee that you will be able to refinance to lower
your rate and payments.
� For more information, go to www.frb.gov/mortgage/tilahelp.htm.
By signing below, I acknowledge receipt of this form.
Borrower’s Signature
Date
Page 2 of 2
J-IO – 4/17/069
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
February 4, 2009
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM), Payment Options
Total Estimated
Settlement Charges:
$7,426.00
$1,000.00 of these charges are rolled into your loan amount above.
This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
How does this loan compare? During the week of
February 2, 2009, the average APR on similar loans offered
to borrowers with excellent credit was 4.75%.
What does this mean in dollars? For this loan, a
1% reduction in APR could reduce your full monthly
payment by $125/month.
The APR is your interest rate with settlement charges included.
PAYMENT SUMMARY
You have an introductory rate of 1.5% for the first month only. After the first month the rate can increase up to 10.5%.
This loan offers you several monthly payment options. The table below shows you what your payments would be under
two of these options if the interest rate reached its maximum of 10.5% in the second month of this loan. All payments
shown include $280 for estimated taxes and insurance.
Full Payment Option (recommended)
Full Monthly Payment
Minimum Payment Option
Minimum Monthly Payment
Monthly payments cover all principal and interest.
Year 1
Year 2
Year 3 - 30
$2016.18
$2,016.18
$2,016.18
Initial payments do not cover principal and interest and increase the amount you are borrowing.
Year 1
Year 2
(Intro Min. Payment)
(Cap on Payment)
Year 3 – 30
(No Cap on Payment)
$970.24
$1022.00
$2402.54
You will borrow an additional $29,943.00 by year 3
if you make only minimum payments on this loan.
Page 1 of 2
J-PO-– 4/17/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase monthly beginning in April 2009.
Can my monthly payment increase?
YES. Your full payment can increase beginning in April 2009. Your minimum
payment can increase beginning in March 2010. For more information, see the
Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. This loan gives you the choice to make monthly payments that only cover
interest and do not include any principal. Making these monthly payments will
not reduce your loan balance.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Even if I make my monthly payments,
could my loan balance increase?
YES. Your minimum payment does not cover all the interest that you owe each
month. The unpaid interest will be added to your loan balance, which over time
will increase the total amount you owe and cause you to lose equity in your
home.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 1-month introductory period ends, your rate will be determined monthly based on the
one-year LIBOR index (the market rate) plus 3.75%.
Rate and Payment
Change Limits
When the 1-month introductory period ends, your interest rate can increase up to a maximum
of 10.5% for the life of the loan. Your minimum payments due cannot increase more than 7.5%
each year until the total loan balance has increased by 15%. When this happens, you must
make full monthly payments that cover all principal and interest owed on the loan.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s and
private mortgage insurance). Your escrow payment is an estimate and can change at any time.
See your Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $545,943.65, including estimated escrow. Of this amount, $251,893.65 would
go to interest and settlement charges. This amount, and your amount financed of $193,250.00,
are used to calculate your APR.
� You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms
for which you applied.
� Ask questions if you do not understand any part of this form. If you are unable to make payments on
this loan, you could lose your home. There is also no guarantee that you will be able to refinance to lower
your rate and payments.
� For more information, go to www.frb.gov/mortgage/tilahelp.htm.
By signing below, I acknowledge receipt of this form.
Borrower’s Signature
Date
Page 2 of 2
J-PO – 4/17/069
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
February 26, 2009
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM), Interest-Only Payments
Total Estimated
Settlement Charges:
$8,625.00
$2,000.00 of these charges are rolled into your loan amount above.
This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
Prepayment Penalty: Up to $4,000.00 if you pay off your loan, refinance, or sell this property within 2 years.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges included:
7.59%
APR
How does this loan compare? During the week of February 23, 2009, the average APR on similar loans offered
to borrowers with excellent credit was 4.00%.
What does this mean in dollars? For this loan, a 1% reduction in APR could reduce your monthly payment
by $167/month for the first 5 years.
PAYMENT SUMMARY
INTRODUCTORY
Rate & Monthly Payment
(for first 5 years)
MAXIMUM at FIRST
ADJUSTMENT
(April 2014)
MAXIMUM
EVER
(as early as 2016)
6.875%
8.875%
12.875%
Principal
$0
$182.14
$116.64
Interest
$1,145.83
$1,479.17
$2,101.91
$332.00
$332.00
$297.00
Interest Rate
Est. Taxes + Insurance (Escrow)
including private mortgage insurance
Total Est. Monthly Payment
$1,477.83
$1,993.31
$2,515.55
Teaser Rate Notice
As shown in the table above, you have a discounted introductory rate that is 6.875%
which ends after five years. In the sixth year, even if market rates do not change, this
rate will increase by .125% to 7.00%, bringing your monthly payment up to $1,745.56.
Page 1 of 2
K-IO – 4/17/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase annually beginning in April 2014.
For more information, see the Payment Summary table on page 1.
Can my monthly payment increase?
YES. Your payment can increase beginning in April 2014. For more
information, see the Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. Your monthly payments for the first 5 years of the loan (until April 2014),
shown in the Payment Summary table on page 1, only cover interest and do
not include any principal. Making these monthly payments will not reduce your
loan balance during this period.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell your home within 2 years you
could pay a penalty of up to $4,000.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 5-year introductory period ends, your rate will be determined annually based on the
one-year LIBOR index (the market rate) plus 5.00%.
Rate Change Limits
When the 5-year introductory period ends, your interest rate can increase no more than 2.00%
from one year to the next, and no more than 6.00% total for the life of the loan, which would
result in the maximum ever rate of 12.875%.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s and
private mortgage insurance). Your escrow payment is an estimate and can change at any time.
See your Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $589,385.69, including estimated escrow. Of this amount, $307,935.69 would
go to interest and settlement charges. This amount, and your amount financed of $193,250.00,
are used to calculate your APR.
� You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms
for which you applied.
� Ask questions if you do not understand any part of this form. If you are unable to make payments on
this loan, you could lose your home. There is also no guarantee that you will be able to refinance to lower
your rate and payments.
� For more information, go to www.frb.gov/mortgage/tilahelp.htm.
By signing below, I acknowledge receipt of this form.
Borrower’s Signature
Date
Page 2 of 2
K –IO – 4/17/09
STATEMENT OF LOAN TERMS
Joe Smith & Jane Doe
1234 Main Street, Anytown, ST 12345
ABC Bank
February 4, 2009
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM), Payment Options
Total Estimated
Settlement Charges:
$7,426.00
$1,000.00 of these charges are rolled into your loan amount above.
This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Your interest rate with
settlement charges included:
6.01%
APR
How does this loan compare? During the week of February 2, 2009, the average APR on similar loans offered to
borrowers with excellent credit was 4.75%.
What does this mean in dollars? For this loan, a 1% reduction in APR could reduce your full monthly payment
by $125/month.
PAYMENT SUMMARY
This loan offers you several monthly payment options. The table below shows you what your payments would be under
two of these options if the interest rate reached its maximum of 10.5% in the second month of this loan. All payments
shown include $280 for estimated taxes and insurance.
Maximum Interest Rate
Full Payment Option
Monthly payments cover all principal and interest.
March 2009
(1 month teaser)
April 2009
(1st adjustment)
March 2010
June 2011
(2nd adjustment) + every month after
1.5% (intro rate)
10.5%
10.5%
10.5% (max. ever)
$970.24
$2,016.18
$2,016.18
$2,016.18
$970.24
$970.24
$1022.00
$2402.54
Minimum Payment Option
Initial payments do not cover principal and interest
and increase the amount you are borrowing.
You will borrow an additional $29,943.00 by June 2011
if you make only minimum payments on this loan.
Page 1 of 2
K-PO – 4/17/09
STATEMENT OF LOAN TERMS
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase monthly beginning in April 2009.
Can my monthly payment increase?
YES. Your full payment can increase beginning in April 2009. Your minimum
payment can increase beginning in March 2010. For more information, see the
Payment Summary table on page 1.
Will any of my monthly payments be
interest-only?
YES. This loan gives you the choice to make monthly payments that only cover
interest and do not include any principal. Making these monthly payments will
not reduce your loan balance.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Even if I make my monthly payments,
could my loan balance increase?
YES. Your minimum payment does not cover all the interest that you owe each
month. The unpaid interest will be added to your loan balance, which over time
will increase the total amount you owe and cause you to lose equity in your
home.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 1-month introductory period ends, your rate will be determined monthly based on the
one-year LIBOR index (the market rate) plus 3.75%.
Rate and Payment
Change Limits
When the 1-month introductory period ends, your interest rate can increase up to a maximum
of 10.5% for the life of the loan. Your minimum payments due cannot increase more than 7.5%
each year until the total loan balance has increased by 15%. When this happens, you must
make full monthly payments that cover all principal and interest owed on the loan.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s and
private mortgage insurance). Your escrow payment is an estimate and can change at any time.
See your Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would make 360
payments totaling $545,943.65, including estimated escrow. Of this amount, $251,893.65 would
go to interest and settlement charges. This amount, and your amount financed of $193,250.00,
are used to calculate your APR.
� You have no obligation to accept this loan. Use this statement to confirm that these are the loan terms
for which you applied.
� Ask questions if you do not understand any part of this form. If you are unable to make payments on
this loan, you could lose your home. There is also no guarantee that you will be able to refinance to lower
your rate and payments.
� For more information, go to www.frb.gov/mortgage/tilahelp.htm.
By signing below, I acknowledge receipt of this form.
Borrower’s Signature
Date
Page 2 of 2
K-PO – 4/17/09
Your Payment Options This Month
This Payment
Covers
If you make this
payment this month
If you make this payment
every month
All the interest that
you owe this month,
plus some principal.
Your balance will
decrease. You will be
closer to having it paid off.
Your balance will steadily
decrease and you will pay off
your loan on schedule.
� $250.00
Interest-Only
Payment
All the interest that
you owe this month,
but none of the
principal.
Your balance will stay the
same. You will be no
closer to having it paid off.
As early as June 2011, you will
have to make monthly
payments much larger than
today’s “Full Payment” amount.
� $100.00
Minimum Payment
Just part of the
interest that you owe
this month.
$150.00 in unpaid
interest will be added to
your loan balance. You
are borrowing more
money, and you will be
losing equity in your
home.
As early as June 2011, you will
have to make payments more
than double today’s “Full
Payment” amount to pay off
your loan.
Payment Option
�
$500.00
Full Payment
(recommended)
PO-insert-A-04/16/09
OPTIONAL COSTS
STOP. You do not have to buy this insurance to get this loan. If you have insurance already, this policy
may not provide you with any additional benefits. To learn more about credit life insurance, or to find a
licensed housing counselor who can help you evaluate your options, go to www.frb.gov.
Yes, I want to purchase optional credit life insurance at an additional cost of $72 per month for a loan
of $100,000 for a term of 10 years.
______________________________________________________________
Signature of Borrower(s)
______
Date
Round 13
Bethesda, MD
May 6-7, 2009
Revised TILA Statement Version L1
Revised TILA Statement Version L2
Revised TILA Statement Version M
Revised TILA Statement Version N
Proposed Credit Life Insurance Disclosure
TRUTH IN LENDING STATEMENT
March 26, 2009
ABC Bank
Loan Officer No. 12345 1234
Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345
LOAN SUMMARY
Loan Amount:
$306,000.00
Loan Term:
30 years
Loan Type:
Fixed Rate
Total Estimated
Settlement Charges:
$10,893.00
• $3,000.00 of these charges are already included in your loan amount above.
• This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Overall cost of this loan,
including interest and
settlement charges:
6.55%
APR
How does this loan compare? For the week of March 23, 2009, the average APR on similar conforming loans
offered to applicants with excellent credit was 4.75%. Today, an APR of 6.25% or above is considered high cost
and is usually offered to applicants with poor credit.
How much could I save by lowering my APR? For this loan, a 1% reduction in the APR could save you
$194 each month.
PAYMENT SUMMARY
Rate & Monthly Payment
Interest Rate
6.250%
Principal + Interest Payment
$1,884.09
Est. Taxes + Insurance (Escrow)
$410.00
Total Est. Monthly Payment
$2,294.09
Page 1 of 2
L1 – FR – 5/4/09
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
No.
Can my monthly payment increase?
YES. If your property taxes or insurance premiums increase, your monthly
payment will increase to cover them.
Will any of my monthly payments be
interest-only?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s
insurance). Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Total Payments
You will make 360 payments totaling $825,877.51, including estimated escrow. Of this
amount, $381,595.51 will go to interest and settlement charges. This amount, and your
amount financed of $296,682.00, are used to calculate your APR.
� You have no obligation to accept this loan. Your signature below only confirms that you have received
this form.
� If you are unable to make the payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments.
� If you do not understand any part of this form, ask questions. For more information, go to
www.frb.gov/mortgage/tilahelp.htm.
Applicant’s Signature
Date
Page 2 of 2
L1 – FR – 5/1/09
TRUTH IN LENDING STATEMENT
March 26, 2009
ABC Bank
Loan Officer No. 12345 1234
Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345
LOAN SUMMARY
Loan Amount:
$306,000.00
Loan Term:
30 years
Loan Type:
Fixed Rate
Total Estimated
Settlement Charges:
$10,893.00
• $3,000.00 of these charges are already included in your loan amount above.
• This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Overall cost of this loan,
including interest and
settlement charges:
6.55%
APR
How does this loan compare? For the week of March 23, 2009, the average APR on similar conforming loans
offered to applicants with excellent credit was 5.25%. Today, an APR of 6.75% or above is considered high cost
and is usually offered to applicants with poor credit.
How much could I save by lowering my APR? For this loan, a 1% reduction in the APR could save you
$194 each month.
PAYMENT SUMMARY
Rate & Monthly Payment
Interest Rate
6.250%
Principal + Interest Payment
$1,884.09
Est. Taxes + Insurance (Escrow)
$410.00
Total Est. Monthly Payment
$2,294.09
Page 1 of 2
L2 – FR – 5/4/09
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
No.
Can my monthly payment increase?
YES. If your property taxes or insurance premiums increase, your monthly
payment will increase to cover them.
Will any of my monthly payments be
interest-only?
No.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s
insurance). Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Total Payments
You will make 360 payments totaling $825,877.51, including estimated escrow. Of this
amount, $381,595.51 will go to interest and settlement charges. This amount, and your
amount financed of $296,682.00, are used to calculate your APR.
� You have no obligation to accept this loan. Your signature below only confirms that you have received
this form.
� If you are unable to make the payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments.
� If you do not understand any part of this form, ask questions. For more information, go to
www.frb.gov/mortgage/tilahelp.htm.
Applicant’s Signature
Date
Page 2 of 2
L2 – FR – 5/4/09
TRUTH IN LENDING STATEMENT
February 26, 2009
ABC Bank
Loan Officer No. 12345-1234
Joe Smith & Jane Doe
1234 Main Street
Anytown, ST 12345
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM): rate is fixed for first 5 years, then adjusts every year
• Includes interest-only payments
Total Estimated
Settlement Charges:
$8,625.00
• $2,000.00 of these charges are already included in your loan amount above.
• This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
Prepayment Penalty:
Up to $4,000.00 if you pay off your loan, refinance, or sell this property within 2 years.
ANNUAL PERCENTAGE RATE (APR)
Overall cost of this loan,
including interest and
settlement charges:
7.59%
APR
How does this loan compare? For the week of February 23, 2009, the average APR on similar conforming loans
offered to applicants with excellent credit was 4.00%. Today, an APR of 5.50% or above is considered high cost
and is usually offered to applicants with poor credit.
How much could I save by lowering my APR? For this loan, a 1% reduction in the APR could save you
$167 each month for the first 5 years.
PAYMENT SUMMARY
INTRODUCTORY
Rate & Monthly Payment
(for first 5 years)
MAXIMUM at FIRST
ADJUSTMENT
(April 2014)
MAXIMUM
EVER
(as early as 2016)
Interest Rate
6.875%
8.875%
12.875%
Principal Payment
- none
$182.14
$116.64
Interest Payment
$1,145.83
$1,479.17
$2,101.91
$332.00
$332.00
$297.00
Est. Taxes + Insurance (Escrow)
• Includes Private Mortgage Insurance
Total Est. Monthly Payment
$1,477.83
$1,993.31
$2,515.55
Introductory Rate Notice
You have a discounted introductory rate of 6.875% that ends after five years.
In the sixth year, even if market rates do not change, this rate will increase to 7.00%.
Page 1 of 2
M-IO – 5/4/09
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase annually beginning in April 2014.
Can my monthly payment increase?
YES. Your payment can increase beginning in April 2014.
Will any of my monthly payments be
interest-only?
YES. Your monthly payments for the first 5 years of the loan cover the interest
you owe each month, but none of the principal. Making these monthly
payments means your loan amount will stay the same and you will be no
closer to having it paid off.
Could I owe a prepayment penalty?
YES. If you pay off your loan, refinance, or sell your home within 2 years you
could pay a penalty of up to $4,000.
Will I owe a balloon payment?
No.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 5-year introductory period ends, your rate will be determined annually based
on the one-year LIBOR index (the market rate) plus 5.00%.
Rate Change Limits
When the 5-year introductory period ends, your interest rate can increase no more than
2.00% from one year to the next, and no more than 6.00% total for the life of the loan,
which would result in a maximum ever rate of 12.875%.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s
insurance). Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Private Mortgage Insurance
Private Mortgage Insurance (PMI) is required for this loan. It is included in your escrow.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would
make 360 payments totaling $589,385.69, including estimated escrow. Of this amount,
$307,935.69 would go to interest and settlement charges. This amount, and your amount
financed of $193,250.00, are used to calculate your APR.
� You have no obligation to accept this loan. Your signature below only confirms that you have received
this form.
� If you are unable to make the payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments.
� If you do not understand any part of this form, ask questions. For more information, go to
www.frb.gov/mortgage/tilahelp.htm.
Applicant’s Signature
Date
Page 2 of 2
M –IO – 5/4/09
TRUTH IN LENDING STATEMENT
Joe Smith & Jane Doe
1234 Main Street,
Anytown, ST 12345
February 4, 2009
ABC Bank
Loan Officer No. 12345 1234
LOAN SUMMARY
Loan Amount:
$200,000.00
Loan Term:
30 years
Loan Type:
Adjustable Rate Mortgage (ARM): rate adjusts monthly
• Includes Payment Options
Total Estimated
Settlement Charges:
$7,426.00
• $1,000.00 of these charges are already included in your loan amount above.
• This total does not include a down payment. See your Good Faith Estimate or HUD-1 for details.
ANNUAL PERCENTAGE RATE (APR)
Overall cost of this loan,
including interest and
settlement charges:
6.01%
APR
How does this loan compare? For the week of February 2, 2009, the average APR on similar conforming loans
offered to applicants with excellent credit was 4.75%. Today, an APR of 6.25% or above is considered high cost
and is usually offered to applicants with poor credit.
How much could I save by lowering my APR? For this loan, a 1% reduction in the APR could save you
$125 each month on the full payment option.
PAYMENT SUMMARY
This loan offers you several monthly payment options. The table below shows you what your payments would be under
two of these options if the interest rate reached its maximum of 10.5% in the second month of this loan.
All payments shown in the table include $280 for estimated taxes and insurance (escrow).
Maximum Interest Rate
Full Payment Option
Monthly payments cover all principal and interest.
March 2009
(1 month intro)
April 2009
(1st adjustment)
March 2010
June 2011
(2nd adjustment) + every month after
1.5% (intro rate)
10.5%
10.5%
10.5% (max. ever)
$970.24
$2,016.18
$2,016.18
$2,016.18
$970.24
$970.24
$1,022.00
$2,402.54
Minimum Payment Option
Initial monthly payments cover no principal and only
some interest and increase your loan amount.
You will borrow an additional $29,943.00 by June 2011
if you make only minimum payments on this loan.
Page 1 of 2
N – PO – 5/4/09
KEY QUESTIONS ABOUT RISK
Can my interest rate increase?
YES. Your interest rate can increase monthly beginning in April 2009.
Can my monthly payment increase?
YES. Your full payment can increase beginning in April 2009. Your minimum
payment can increase beginning in March 2010.
Will any of my monthly payments be
interest-only?
YES. This loan gives you the choice to make monthly payments that cover the
interest you owe each month, but none of the principal. Making these
monthly payments means your loan amount will stay the same and you
will be no closer to having it paid off.
Could I owe a prepayment penalty?
No.
Will I owe a balloon payment?
No.
Even if I make my monthly payments,
could my loan balance increase?
YES. Your minimum payment covers only part of the interest you owe each
month and none of the principal. The unpaid interest will be added to
your loan amount, which over time will increase the total amount you are
borrowing and cause you to lose equity in your home.
MORE INFORMATION ABOUT YOUR PAYMENTS
Rate Calculation
When the 1-month introductory period ends, your rate will be determined monthly based
on the one-year LIBOR index (the market rate) plus 3.75%.
Rate Change Limits
When the 1-month introductory period ends, your interest rate can increase up to a
maximum of 10.5% for the life of the loan.
Payment Change Limits
Your minimum payments due cannot increase more than 7.5% each year until the total
loan amount has increased by 15%. When this happens, you must make full monthly
payments that cover all principal and interest owed on the loan.
Escrow
An escrow account is required for property taxes and insurance (such as homeowner’s
insurance). Your escrow payment is an estimate and can change at any time. See your
Good Faith Estimate or HUD-1 form for more details.
Total Payments
If the market rate did not change and you made all payments as scheduled, you would
make 360 payments totaling $545,943.65, including estimated escrow. Of this amount,
$251,893.65 would go to interest and settlement charges. This amount, and your amount
financed of $193,250.00, are used to calculate your APR.
� You have no obligation to accept this loan. Your signature below only confirms that you have received
this form.
� If you are unable to make the payments on this loan, you could lose your home. There is no guarantee
that you will be able to refinance to lower your rate and payments.
� If you do not understand any part of this form, ask questions. For more information, go to
www.frb.gov/mortgage/tilahelp.htm.
Applicant’s Signature
Date
Page 2 of 2
N – PO – 5/4/09
OPTIONAL COSTS
Credit Life Insurance
STOP. You do not have to buy this insurance to get this loan.
If you have insurance already, this policy may not provide you with any additional
benefits.
Other types of insurance can give you similar benefits and are often less
expensive.
Even if you pay for this insurance, you may not qualify to receive any benefits in
the future.
To learn more about credit life insurance go to www.frb.gov.
Yes, I want to purchase optional credit life insurance at an additional cost of $72 per
month for a loan of $100,000 for a term of 10 years.
___________________________________________________
Signature of Applicant(s)
_______
Date