By Tim Stern
The consumer financial services industry has undergone a dramatic transformation over the past ten years, facing challenging business environments, landmark financial reform and an evolving credit market. The mortgage market, in particular, has been the focus of enormous regulatory change. This period has corresponded with technological change that has been embraced throughout much of the mortgage process, including online loan applications, paperless loan processing and e-signatures. But these technological developments have not necessarily improved the often antiquated practices the industry uses to connect with consumers. Further, this approach falls short of meeting the strict regulatory requirements to ensure that consumers understand their financial obligations. Instead, during a period of growing emphasis on financial literacy, the mortgage industry largely lacks innovative tools to engage the consumers of the future.
The financial crisis and proceeding reform ushered in consumer awareness and financial literacy initiatives. Since 2008, we have seen the creation of a new consumer watchdog, with the Consumer Financial Protection Bureau (CFPB), and consumer-oriented legislation, namely the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). We also have financial education programs in public schools, enhanced mortgage disclosures and regulatory programs such as the CFPB’s Know Before You Owe, and Your Money, Your Goals, and mymoney.gov.
While these reforms have undoubtedly made strides to advance consumer understanding, they do not address the modern challenges of financial literacy. Younger generations accustomed to ‘check the box’ disclosures, inundated with email spam, and buried by information overload require different tools to navigate the mortgage space. Millennials are now the largest group of homebuyers, dominating one-third of the housing market, according to the National Association of Realtors’ 2015 Home Buyer and Seller Generational Trends . This generation has largely gone numb to emails and e-disclosures, trained to quickly scroll to the bottom of a page to click the “I Agree” button. These behaviors create vulnerabilities for consumers and lenders alike.
Prior CFPB reports have similarly focused on the experience and needs of the consumer throughout the mortgage process. For example, a last year highlighted the “pain points” for consumers taking out a mortgage. In its study, the agency found that consumer frustrations generally related to disclosures. Specifically, consumers cited complex and error-prone documents, inadequate explanations, and insufficient time to review materials. Consumers reported feeling rushed to sign disclosures that they did not thoroughly understand.
CFPB rhetoric and industry studies certainly guide the agency’s investigative, regulatory, supervisory and enforcement agendas, explaining the considerable attention spent on Real Estate Settlement and Procedures Act (RESPA) and Truth in Lending Act (TILA) disclosure reform and subsequent implementation. “The CFPB expects mortgage companies to take affirmative steps to ensure borrowers are educated and informed during the mortgage process. Further, the omission of pertinent information is looked at as seriously as any affirmative misrepresentation,” said Ari Karen, Principal at Offit Kurman, “Relying on disclosures or loan officers to explain things to borrowers did not work in the past. Employing more sophisticated methods that ensure greater consistency of information provides a greater level of protection for owners of mortgage companies, and carries the added benefit of freeing up loan officers to focus on selling more loans.”
Accordingly, the responsibility, and more importantly the liability, to provide consumers with all the necessary information falls on the mortgage industry. Yet it is not evident that simply using e-disclosures is accomplishing this. Instead, the industry needs to rethink financial literacy to engage its consumers in a modern dialogue. Using video communications, such as VidVerify, social media tools like Twitter, and interactive comparison and shopping tools, engage emerging generations in a language they are familiar with, but also in a more meaningful and dynamic way than just employing paperless disclosures.
The CFPB has already demonstrated a track record of disclosure scrutiny, and these efforts are only expected to grow in upcoming years. If the industry wants to avoid enforcement actions that impact their pockets and reputations, then lenders must adopt technology-driven approaches to borrower communications. Employing an automated communication process, using products such as VidVerify, allows lenders to standardize borrower messaging and relate to consumers in an understandable and accessible manner, all while creating an auditable compliance trail.