The Unfair Lending of Fair Lending: Why Borrowers Deserve Transparency
- ricklutz4
- Dec 19, 2024
- 2 min read
Imagine you're a homeowner with a low-interest mortgage, finally ready to sell your home or refinance. You diligently calculate your options and prepare for the transition. Yet, hidden in plain sight is a critical financial detail—fair value—with an opportunity cost equal to hundreds of thousands. Surprisingly, lenders aren’t required to disclose this information to us.
Welcome to the "unfair lending of fair value."
What’s Happening?
Under the Fair Lending Act, borrowers are protected from discriminatory lending practices, ensuring equal access to credit. However, when it comes to transparency, particularly around fair value—the market valuation of our debt—borrowers are in the dark.
Fair value is especially important for low-interest borrowers who want to prepay their loans and move. Financial institutions don’t disclose how much they benefit from prepayments or how the prepayment amount compares to the loan's fair value, leaving borrowers at a significant disadvantage.
The Lock-In Effect: A Real-World Problem
A study by the Federal Housing Finance Agency (FHFA) highlights the lock-in effect: when homeowners with low-interest loans feel financially trapped, unable to sell or refinance due to higher prevailing rates. The theory is simple: borrowers with advantageous rates avoid prepaying because of the higher costs of a new loan.
But what if borrowers knew the true fair value of their debt?
Why Disclosure Matters
Prevent Financial Losses: Borrowers who prepay their loans without understanding fair value may lose out on thousands of dollars.
Avoid Costly Mistakes: Clear information empowers borrowers to make decisions aligned with their financial goals.
Balance the Playing Field: Transparency ensures borrowers and lenders operate on equal footing, promoting fairness in the lending system.
Lenders may argue that fair value is complex and unnecessary for borrowers to understand, which underscores the need for better education and disclosure.
The Case for Change
Current laws and interpretations of the Fair Lending Act don’t require fair value disclosures. It’s time for this to change. Here’s how:
Transparency: Require lenders to disclose fair value to borrowers at key decision points, especially during prepayment discussions.
Educate Borrowers: Provide clear explanations of fair value and its impact on prepayment decisions.
Empowering Borrowers, One Disclosure at a Time
The first step is to keep borrowers informed. By requiring lenders to disclose fair value, we can bridge the gap between fairness and transparency.
Borrowers deserve to know the value of their debt. Let’s advocate for a future where financial transparency isn’t optional—it’s necessary.
Let’s Start the Conversation
What do you think? Should lenders be required to disclose fair value to borrowers? Share your thoughts, tag someone who should know this, and help make lending truly fair.
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