I strongly support the principles, goals and general direction of this bill. It represents a good idea which will help mortgage borrowers know what commitments they are making and thereby improve the way mortgage finance works.

The point of the bill, it seems to me, is to help equip borrowers to protect themselves by requiring short, simple and clear disclosures of the key mortgage terms. As I will mention again in a moment, I think the disclosures should also include how these terms relate to household income.

A good mortgage lender wants a borrower who understands how the loan will work, including any possible future interest rate increases and prepayment penalties. Current American mortgage loan documents, with their complex statements in regulatoryese and legalese, certainly do not achieve this. Most of us have had the experience of being overwhelmed and befuddled by the huge stack of documents full of confusing language presented to us for signature at a mortgage closing.

To achieve an informed borrower, a goal the bill would advance, the key information must be simply stated and clear. I like the bill's idea that the disclosures must be in legibly-sized print. In contrast, trying to describe 100% of the details in specific legal terms in small print is likely to result in zero real information transfer to the borrower.

In addition to agreeing with the basic direction of the bill, I do have four suggestions for possible changes:

1. I believe the disclosure form should include the borrower's monthly household income, as a clear confirmation of this essential element of the credit decision from both lender and borrower perspectives. The monthly payments, including--as the bill stipulates--interest, principal, taxes and insurance, should then be expressed as a percent of the household income. This is known as the "housing expense ratio." The borrower needs to know how much this ratio could increase as an adjustable interest rate increases. This is a key element of "underwriting yourself" for the loan.

2. Although the disclosures are especially important for "non-conventional loans," I suggest consideration be given to requiring it for all mortgage loans.

3. The bill requires calculation of the monthly payment "if the interest rate increases to the full allowable amount," which I interpret as the maximum possible interest rate. It seems to me the more relevant calculation is the payment at the "fully indexed rate," which is the adjustable rate formula applied using today's index rate. Underwriting at the fully-indexed rate is a central requirement of the combined federal banking regulators revised subprime mortgage lending guidance, as today's best estimate of how high the interest rate on the loan will go.

4. Finally, I think the borrower, as well as the lender, should sign the form.

In pursuit of the same fundamental goal as the bill, I have previously proposed a one-page disclosure form, "Basic Facts About Your Mortgage Loan." This form, along with accompanying common sense explanations and avuncular advice, is Attachment 1 to this testimony.

One of the deans of mortgage journalists has written about how this one-page proposal is an improvement on past regulations and unsuccessful simplification attempts. His article is Attachment 2.

I believe the kind of direct, to-the-point disclosures addressed by the bill and by my one-page form, or perhaps some combination of the two, would be an important step forward for Washington, D.C.'s and America's mortgage borrowers and housing finance system.

Alex J. Pollock is a resident fellow at AEI.