It isn’t because the
responsible agency, the Federal Reserve Board, doesn’t understand the problems. I
have been badgering them about it since 1984, and especially since 1998
when I started writing a newspaper column. The
process through which mandatory disclosure rules are developed is
extremely rigid, however, and it is virtually impossible for a bystander
like me to influence it.
The best way to understand
this is to compare the process of developing rules under which lenders are
required to disclose information to consumers, with the process a private
firm goes through that wants to sell information to consumers.
The first thing the private
firm does is to pretest the information for acceptability by consumers.
After adoption, the firm receives continuous feedback from the market on
how well it is doing, on the basis of which the firm tries to improve the
product. And if it never succeeds in finding a product that consumers buy,
it pulls the plug to cut its losses.
Government rule-makers, in
contrast, do not pretest mandatory disclosures with consumers, and receive
no market feedback from them. They do not know whether the rule is
"selling" in the sense that the information is being actively
used by consumers, or not. And they are not forced by cost pressures to
improve the product or scrap it because the major costs of implementing
the mandatory disclosures are borne by lenders, not by the regulator.
The bottom line is that
mandatory disclosures are not required to meet any sort of market test.
The test the regulators must meet is political. Mandatory disclosures
impose costs on the mortgage lending industry, which must implement the
regulations, and the industry has the ear of Congress.
The industry is therefore the
only major external influence on the rule-making process. But the
overriding concern of the industry is minimizing compliance costs. The
industry wants rules that are clear, so that lenders understand exactly
what they must do to comply. Once rules are adopted which meet this test,
which is unrelated to their usefulness to consumers, the industry has no
interest in further changes because rule changes raise costs.
The industry thus has an
unstated pact with the regulators -- "if you agree to make the rules
clear enough for us to comply and thereafter don’t change them, we will
agree not to tell you how utterly useless they are." And that’s why
the flawed APR never gets fixed.
