Imagine that you are in New York, Los Angeles or the Carolinas and hungry. You spot a restaurant with a C grade from the Health Department posted prominently at its entrance. Would you eat there? Or would you choose the restaurant next door with the A grade on its door?
Such disclosures have not only helped diners decide where to eat, but also improve restaurant hygiene and reduce the number of diners hospitalized with food-related illnesses.
So simple disclosures can help consumers. But complex disclosures have worked less well.
When was the last time you read a physician's privacy notice, or the privacy notice that your bank sends you each year? Similarly, the borrowers whose defaults led to the Great Recession received disclosures of their loan terms, but many were still surprised later by the payment obligations they had agreed to -- and could not meet.
Congress responded to that problem in part by creating the Consumer Financial Protection Bureau. The bureau is working on new two-page loan disclosure forms. This is a laudable effort. Yet it may not be enough. Even two pages may be too much for some to digest.
Unfortunately, unlike restaurant safety, loan disclosures cannot simply be boiled down to a single A, B or C. Loan disclosures, to be useful, require some degree of complexity. And that complexity is too much for some consumers.
Requiring disclosures for those who cannot understand them is pointless. We need to focus on understanding in borrowing rather than simply disclosure. Otherwise, we must accept that some borrowers will not understand what they are pledging to do, with the consequent risks of default and another Great Recession.
What does it mean to focus on understanding? It might mean using loan counselors.
When Chicago obliged borrowers in certain ZIP codes to consult mortgage counselors, the counselors found that more than half the borrowers had been offered loans that they would not have been able to repay. Borrowers who received such counseling were less likely to default on the loans they took out than borrowers who had not been counseled.
If more subprime borrowers had seen such counselors, the economy might now be in far better shape. Just as restaurant grades have led to better restaurants, mortgage counselors can lead to better loans.
We should establish a two-tier system. Mortgage applicants should be required to take a test on their mortgage terms. Those who fail should be required to see mortgage counselors (which are not the same as mortgage brokers).
States and localities are increasingly barring restaurants from taking advantage of consumer ignorance of problems in the kitchen. We should -- we must -- extend the same protection to borrowers so they know the risks they assume on the largest obligations of their lives.
Jeff Sovern is a law professor at St. John's University School of Law in Jamaica, N.Y., and co-coordinator of the Consumer Law and Policy Blog at www.clpblog.org (firstname.lastname@example.org). First Published May 12, 2012 12:00 AM