Professors Prepare to Conduct Research on Information Analysis, Recall of Home Loan Terms

CHICAGO, June 7 /PRNewswire-USNewswire/ -- Professor Debra Stark of The John Marshall Law School in Chicago and colleague Dr. Jessica Choplin of the DePaul University Department of Psychology received a $250,000 National Science Foundation (NSF) award to investigate how prospective homeowners read, assess and recall important information before agreeing to the terms of home loans.

"We want to learn whether consumers read the forms, which sections they read, and how they process, evaluate, and remember the disclosed information," Stark explained. "We then want to test strategies to improve consumer home loan decision making."

They received notification June 2010, that their three-year project is being funded by NSF's Law and Social Sciences Advisory Panel. They will be running five experiments at DePaul to test some of their theories, including their theory that unscrupulous mortgage lenders and mortgage brokers can take advantage of consumers' cognitive limitations to reduce the effectiveness of the home loan disclosure forms that Congress has relied upon to protect consumers.

It is expected their findings will be useful to the federal government as it considers whether new protections need to be put in place to help future homeowners understand and evaluate what the loan terms are that they accept.

"Congress presumed that borrowers would carefully read the disclosures, understand the basic terms of the proposed loan, and thereby be empowered to shop around for the best loan and make wise decisions on whether to accept or reject an offered home loan," the professor said. "From what's been happening in the housing market the past decade, we know that predatory lenders and mortgage brokers often misled borrowers causing them not to understand the terms of their home loans."

Stark said federal agencies are trying to make the forms more "consumer friendly" but those changes may not eliminate issues of understanding what the forms should convey nor do the new forms address the problem of how an unscrupulous mortgage lender or mortgage broker can lead a consumer through the forms in a deceptive fashion. She hopes their work will show legislators that a mandatory independent mortgage counseling law is necessary for the forms to work effectively.  

The NSF research and experiments will focus on the following cognitive psychological phenomena:

•  Under confirmation biases, consumers might skim forms looking for information that confirms, rather than disconfirms, their prior beliefs about the loan causing them to miss important provisions.
•  Consumers might also be more likely to miss important provisions if they look over forms investigating whether they were told the truth than if they look them over investigating whether they were lied to.
•  In conversation people assume that their conversational partners are cooperating with them in exchanging information and telling them about the most important things. This mistaken assumption might cause consumers to be misled if intermediaries emphasize unimportant provisions and thereby suggest that important provisions are less important or not worth looking at.
•  Memory difficulties might also reduce the effectiveness of disclosure forms. Spending more time on some items reduces people's ability to remember other items, so discussing unimportant or innocuous features on the disclosure form could reduce people's abilities to remember important and potentially risky features. Sophisticated consumers who know that they ought to look for certain provisions might forget to look for them if they are reminded of some of the features they knew to look for, but not others.

The professors anticipate that they will start running these experiments in September.  The participants will all be 26 years old or older and will represent a diverse sample of people.

SOURCE John Marshall Law School