When is Consumer Understanding Necessary to Make Wise Home Loan Decisions? Testing Enhanced APR Disclosure And General Financial Literacy

Abstract

Two experiments demonstrated that consumers were much better able to use an enhanced APR disclosure proposed by the authors to identify the lower cost of two home loans then when using the currently proposed disclosure form of the CFPB and that consumers failed to focus on APR in the CFPB form where the APR is disclosed in an inconspicuous fashion on page 3 of the Loan Estimate. Participants were also asked a series of questions relating to their "financial literacy" with the vast majority failing to correctly answer questions and identify problematic terms, risks, and lender remedies upon default. Policy implications are discussed.

Keywords: home loan disclosure, eye tracking, APR, financial literacy, cognitive and social psychological phenomena, mortgage counseling