BLOG VIEW: I am a staunch proponent of borrower education – especially when it comes to mortgages – because, despite the burden it places on borrowers, I see it as being the best frontline defense against defaults.
In fact, I think the counseling agencies could be playing a larger role in deciding who gets a mortgage and who doesn't. Further, I think all first-time home buyers and lower-income, lower-credit-score borrowers (as defined appropriately) should be required to attend an in-person class – not an online course – where they will learn all about the specifics of their mortgage and be required to pass a test demonstrating their knowledge. In order to be approved for the loan, the borrowers must pass the course. Period. And if there is a problem with having some borrowers take the course and not others, then I say let's do it across the board.
I realize it's a wacky idea – it would be expensive to mandate borrower education across the board and there might be all kinds of challenges to mandating that it take place in a classroom. But here's my line of thought: Lenders are jumping through hoops to comply with the Consumer Financial Protection Bureau's (CFPB) new ‘Know Before You Owe’ or TILA-RESPA Integrated Disclosure (TRID) rules. They've had to hire compliance specialists and attorneys, upgrade their software systems, adjust their processes, retrain their origination staff and make sure their third-party partners are compliant – all at great expense – just to get ready for the new rules, which take effect on Oct. 3.
Yet, despite this Herculean effort, no one – not even the CFPB – really knows for sure how much the new disclosure forms – which are basically ‘cover sheets’ to the the existing disclosures – will improve borrower understanding of the mortgage process. Sure, most lenders say the forms are easier to read, simpler to understand and, perhaps best of all, tailored for each specific loan, but the problem remains: Most borrowers simply do not take the time to carefully read their mortgage documents – whether they are in print or on screen.
Or, when they do read them, they just gloss through, without really comprehending what they are reading.
Here's what I see as ironic and perhaps even antithetical: The bureau wants lenders to educate borrowers about the mortgage process while simultaneously pushing them to adopt technology that automates the process, thus reducing or even eliminating the need for face-to-face human interaction. This automation of the mortgage process, via the Web, means that lenders and, in fact, regulators are relying on ‘cloud-based applications’ to handle the role of educating and informing borrowers about the mortgage process.
It's well established that the ‘Know Before You Owe’ docs and related rules are having the effect of pushing lenders to adopt e-doc, e-sign, e-delivery and e-vaulting solutions and, more importantly, to automate the entire process by way of their websites and loan origination systems. The goal for lenders has always been ease of uptake for consumers. The question is whether lenders can effectively educate borrowers – or better yet, ensure borrower understanding – before those final signatures at the closing.
The problem I see is that it's hard to ensure borrower understanding when most of the education process is taking place in the borrower's home. Sure, using video and other types of multimedia content to educate and inform borrowers about the terms and conditions of their loans is a great idea, but one has to be realistic about the fact that it cannot be verified that they read the documents or watched the videos. This just brings us back to the lender saying, ‘Well, we delivered it – see, here is the Web log showing the delivery of the content to the borrower's IP address on such-and-such a date.’
One of the biggest problems lenders faced in the aftermath of the financial crisis was that the trust they had with borrowers was broken. In my opinion, this was due mainly to the fact that lenders failed to educate borrowers; not only did they fail to see what was coming and give borrowers the heads up, but they failed to cover the worst-case scenarios a borrower might face in the event of a job loss or some other catastrophe.
I don't think the risk a borrower faces in getting a mortgage can be adequately conveyed via a digital medium. I think it requires a human element – it requires face-to-face communication. It requires someone to be in the room with the borrower, saying, ‘look, this is really important, you need to know this.’
For this reason, I think it requires a live classroom setting. Call me old-fashioned, even wacky, but I think lenders should be requiring all high-risk borrowers to attend a real class, instead of allowing them to just confirm that they read some documents online. After all, isn't buying a home ‘one of the most important financial decisions a person will ever make in their lifetime?’ (I forget who said that, by the wayâ�¦)
Look, I know that education is moving online and there's no resisting it. I'm just wondering how ‘click here to sign’ intersects with borrower understanding and intent. I think lenders – and regulators – might see borrowers get more engaged in the process by requiring them to drive somewhere, take a few classes and, finally, demonstrate their knowledge of their loan.
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