Economic Development and Public Finance Working Paper Series

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Acquiring a mortgage is one of the most complex transactions a family will ever undertake. It may be difficult for borrowers to understand the financial trade-offs associated with interest rates, discount points, yield spread premiums, and upfront settlement costs. Settlement costs and especially the multiplicity of lender fees and the title charges add to the borrower's confusion. Even once the settlement cost has been agreed upon, they are subject to change until the day of closing. To exacerbate this situation, the typical homebuyer may be rushed and easily steered into a bad loan because they are under pressure to make an offer on a home. The average borrower will be at an extreme informational disadvantage compared to the lender because consumers borrow fairly infrequently. This is especially the case for first-time homebuyers who will not be as likely to challenge lenders, whom they may view as unquestionable and benevolent experts. This imperfection can be exploited by lenders and third-party service providers to charge excessive fees. The goal of the final rule is to improve consumer welfare by reducing market imperfections due to information asymmetry in the mortgage loan and settlement process.