What Happens When Disclosures Contradict What Consumers Believe?

by Jeff Sovern

I recently came across a study by Macro International conducted for the Federal Reserve Board in 2008 titled Consumer Testing of Mortgage Broker Disclosures that sheds some light on that question. Macro had consumers read disclosures stating that mortgage brokers had an incentive to arrange for loans with higher interest rates, because that would increase broker compensation. Macro’s report of its finding stated:

Nearly all participants were surprised to read about the brokers’ conflict. . . . Shortly after reading the disclosure, about half of the participants made statements that directly contradicted what they had read in the agreement about broker incentives. Several, for example, stated late in their interviews that they would expect the broker to show them the loans with the best terms available. However, the disclosure they had just read specifically pointed out that brokers would in fact have incentives not to do so.

So Macro disclosed the conflict more explicitly. The following paragraph describes the result:

As in [the earlier round], most participants understood upon their first reading of the agreement that the broker would have a financial incentive to provide them with higher-interest rate loans. Again, however, participants’ preconceived belief that brokers were working in the best interest of borrowers made this conflict difficult to accept. As a result, many became confused or reverted to their prior assumptions. * * *

And, Macro found, the revised disclosures led to other misconceptions. In short, even under perfect conditions, when no one is attempting to distract consumers from focusing on disclosures, deceive them, or rush them into a particular transaction, disclosures may not be useful to consumers when they create cognitive dissonance.

Comments

[Matt Wallace]

I like that the Federal Reserve's justification for not fully addressing perverse incentives like the Yield Spread Premium in their initial round of post-mortgage-meltdown regulation was that it could lead to "consumer confusion." I hadn't yet had a chance to read this report which shows that the confusion was largely on the grounds that consumers just couldn't believe that the game was so often rigged to give them a bad deal.