By Susan Kleimann, Barbra Kingsley, and Kristin Kleimann
Elizabeth Warren, special advisor to President Barack Obama, outlined her goal for the Consumer Financial Protection Bureau (CFPB): "The new consumer bureau is based on a pretty simple idea: People ought to be able to read their credit card and mortgage contracts and know the deal."
In a 2009 Consumer Financial Literacy Survey, 42% of adults in the United States, or more than 94 million people, reported having a home mortgage and, of those, 28% said that the terms of their mortgage turned out to be different than they expected. Homeowners reported that either the payment or the terms of the loan were different than expected, the interest rate or its duration were different, or they had no knowledge of private mortgage insurance (PMI). In short, many of these 94 million people didn’t know the deal they had agreed to. By August 2008, 9.2% of all U.S. mortgages outstanding were either delinquent or in foreclosure, and by September 2009, this number had risen to 14.4% (Mortgage Bankers Association). At least some of these foreclosures were the result of consumers finding themselves in the midst of bad deals, deals they didn’t understand—even if they tried—and mortgages that they could no longer pay.
The CFPB was chartered to bring about positive change by protecting consumers as they navigate the maze of financial options available to them and by empowering them with information that helps them understand, shop, compare, and negotiate. Disclosures are the documents that convey to consumers information required by a regulation. One of the CFPB’s first mandates was to develop clear and understandable mortgage loan disclosures to help consumers understand "the deal." The passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) on 21 July 2010 transferred the responsibilities for certain mortgage disclosures under the Truth In Lending Act (TILA) and the Real Estate Settlement Procedures Act (RESPA) to the CFPB. It required the CFPB to combine the initial disclosures that TILA and RESPA covered and to combine the TILA and RESPA closing disclosures within one year of the formal transfer of these responsibilities to the CFPB on 21 July 2011.
In this project, our organization, Kleimann Communication Group, Inc., worked collaboratively with the CFPB Mortgage Disclosure Project team. Our goal was to iteratively design and qualitatively test a loan estimate to combine the information in both the truth-in-lending disclosure and the good faith estimate, both currently given after applying for a loan. We first conducted a ten-round qualitative study from January 2011 to July 2012. We then conducted a quantitative study from October 2012 to August 2013. And finally, we conducted a second qualitative study, consisting of seven rounds of testing in both Spanish and English, between October 2012 and July 2013. Final reports on the three studies and complete copies of the Loan Estimate and Closing Disclosure are available at www.consumerfinance.gov/knowbeforeyouowe.
The Final Disclosures
The CFPB issued the final versions of the newly designed integrated disclosures on 20 November 2013. The three-page loan estimate and the five-page closing disclosure have nearly identical first pages and similar subsequent pages, although the closing disclosure has considerably more detail. For the loan estimate, we used a simple structure that placed a summary of the loan terms and costs before the detailed information. We’ll focus on the first page of the loan estimate. (See Figure 1.)
Our Approach to Developing the Loan Estimate
Disclosures, such as the loan estimate, must simultaneously be accessible yet satisfy legal requirements; clear yet convey complex information; and technical yet useful to the average consumer. In short, disclosures must serve varied purposes that can, at first glance, seem incompatible. To create a disclosure that works—and works for each of these purposes—requires a strong and innovative development process.
The goals of the Mortgage Disclosure Project were clear from the start: comprehension, comparison, and choice.
- Comprehension. Consumers can understand the basic terms of a loan and its costs, both immediate and over time.
- Comparison. Consumers can compare one loan estimate to another and identify the differences.
- Choice. Consumers can make informed decisions and choose the best loan for their personal situation.
Our decisions about selecting, organizing, and presenting the information required more than setting goals. During the formative development process, we experimented and explored over 100 different ways of presenting and highlighting the information. The 10 rounds of rigorous usability testing in the initial qualitative study drove a design-test sequence that fine-tuned content and design decisions.
This article discusses three elements that are critical to this, and every, disclosure project: a systems approach to communication, an understanding of consumer complexity, and a consumer-centered design process (see Figure 2).
Using a Systems Approach
The process of choosing appropriate financial products is, in itself, complex. Consider the home-buying process. It is more than just a singular financial transaction, as it includes many other considerations, including emotions and dreams. It is a long process that starts as soon as consumers begin looking for a home. Once they find a home, they negotiate a cost, enter into a contract, and must choose a mortgage loan. The home loan market offers a dizzying array of loan product choices. Aside from the often-confounding variations in loan products, consumers can shop among multiple lenders and negotiate multiple combinations of loan terms. The home-buying process ends (sometimes months later) when the consumers sit at the settlement table.
Within a systems approach, mortgage disclosures help consumers make complex, life-changing financial decisions, weigh risks, and understand the terms and conditions. At the outset, they need clear disclosures to help them choose the lender, pick the optimal loan product, and understand associated risks. At settlement, clear disclosures allow consumers to compare the details of their loan against what they were promised. Additionally, when consumers work with multiple documents, they need formats that match across all documents. This matching enables them to find and compare relevant information across documents more easily.
Key Principles of a Systems Approach
- Make loan documents easy to compare
- Put key comparative terms up front
- Demonstrate risks clearly
- Display both long-term and short-term affordability
How We Addressed These Principles
Page 1 of the loan estimate provides a summary of the key loan terms and costs (see Figure 1). The design separates the basic loan terms (e.g., the principal and interest payment and loan costs) from affordability information (e.g., the total monthly payment and cash required to close). The structure does not hide loan terms but, instead, places them upfront in a prominent position. This clear visual structure also allows for easier comparability. Consumers can place two loan estimates next to one another and easily see the differences in the loans, thus helping them decide which has better terms for their situation.
The loan terms are structured around questions such as, "Does the loan have this feature?" and "Can this amount increase after closing?" When these areas are filled out for different loans, they can help a consumer distinguish a simpler loan from a more complicated loan because there are fewer words on the page and the word "No" is dominant. Risks are emphasized by the design. Figure 1 shows a relatively simple loan, but a more a challenging loan, such as an adjustable-rate loan, would show more details, such as when the interest adjusts, how high it could go, and in what year. Thus, more complex loans look more complex because they have more text on the page.
Additionally, short- and long-term costs are demonstrated in the projected payments and in the costs at closing sections. Projected payments shows changes in monthly payments over time. Again, a more complicated loan would have more changes over time than a simpler loan and would look more complicated. Additionally, the projected payments table allows the consumer to visualize "an adjustable rate" loan in the concrete by showing when and by how much payments will go up, factors that affect the long-term affordability of the loan.
Understanding Consumer Complexity
At one level, this project was about designing disclosures—plain and simple. Yet nothing is plain or simple about the consumers who will use these disclosures. In truth, consumers, like all of us, are widely different, frustratingly indifferent to some information, naively trusting at times, frequently unaware of risks, and often willing to ignore anything that seems overly complex. At the same time, consumers are usually well intentioned and want to make good decisions. Disclosures give consumers information, yet consumers must take that information and transform it into actionable knowledge.
We used our knowledge of consumers—as well as consumer testing—to drive our design choices. For example, research shows that consumers go through a series of predictable stages when they encounter information: exposure, awareness, comprehension, retention/retrieval, and decision making (McGuire). Disclosures must support consumers at each of these cognitive processing stages.
They must also serve as active decision-making tools—anticipating and answering the questions consumers have about the financial process they are engaged in. Additionally, they must enable the consumers to complete tasks—for example, choosing an appropriate mortgage loan. We are not directing the consumer to a particular decision. The disclosures need to help consumers identify the information—the facts, risks, and conditions—related to their particular situations so consumers can make trade offs and the best decision for themselves.
Key Principles of Understanding Consumer Complexity
- Support consumer cognitive processing stages
- Design with consumer questions in mind
- Orient information to real-life tasks
How We Addressed These Principles
We created the loan estimate to activate consumers’ interest in the information and help them pay attention by providing loan terms in a large, bold font to capture attention. By leveraging what we know about "how people think," we designed a disclosure that works for them at the different stages of cognitive processing. In our consumer testing, using think-aloud and comprehension questions, we saw that individuals first became aware of information that was new to them, such as the fact that certain adjustable-type loans changed over time. They then would use this information to compare with other types of loans (such as fixed loans with no changes over time) in order to better choose for themselves. They then retained key information and made more complicated trade-offs, such as deciding if they would prefer to put more cash to close down (resulting in higher short-term cost, but lower long-term cost) or accept a higher monthly payment (resulting in higher long-term costs, but lower short-term cost).
We also designed the first page of the loan estimate to answer basic questions consumers have about a mortgage loan such as: "What will my monthly payment be?", "What is the interest rate?", and, "How much cash do I need to bring to closing?" However, we also designed it to address more complex questions that consumers may not even know to ask, such as: "How will this loan affect me over time?", "Will I have to pay more later?", "Does the interest rate change?", and, "If so, how and when?" All of these questions are answered on the first page. There are no "hidden" details that could hurt a consumer later.
Designing for Consumers
A typical, surface-level approach to improving disclosures and supplemental materials is to simplify the language into plain language or to modify existing presentations. In such an approach, simpler words replace legal language to clear out the "gobbledygook." Though an important and necessary step, it does not go far enough. Both our experience and research show that consumers, whether highly literate or not, can better use information that combines visuals with words. Visual design is about arranging text so that it helps to show the relationship of one piece of information to another and guides the reader to critical information.
Consumers don’t read sequentially. They skip through a document looking for answers to their questions. As a result, they need to be able to find information in a disclosure easily; they need to find the details of the information and the organizing principle underlying the document. Because disclosures must serve the goal of allowing people to compare, it is important to organize the text to show the whole and its parts consistently (Garrison et al.). For example, in developing this disclosure, we held basic content standard and included a slot for each type of loan term, even if that loan did not have one. So even though not all loans have a prepayment penalty or a balloon payment, these two items remained on page 1 of all disclosures to help consumers more easily compare loans that do and do not have these elements. To some extent, this "whole-to-part" approach lets consumers see and understand all options in a standardized way.
Key Principles of Designing for Consumers
- Balance the visual and verbal
- Create a strong internal structure that orients consumers to the whole and the parts
- Design to enhance navigation and help consumers find relevant information
How We Addressed These Principles
By using a strong internal visual structure, we enabled consumers to better find information they want and need. The loan estimate uses an easy-to-scan tabular grid and visual markers, such as reverse tab headings. Consumers can easily scan to find critical information for their situation. This visual road map is even more important for low-literacy consumers or consumers who are unfamiliar with this type of content. It aids in comparability and comprehension, giving consumers a standard structure that can be compared across loans. They can also identify the whole, such as projected payments, and the parts that make it up—such as principal and interest, mortgage insurance, and estimated escrow. Therefore consumers are able to view the loan at a high level while also drilling down to critical parts that will impact them.
Conclusion
So, do these new disclosures actually work? Did our theoretical approach improve the performance of these disclosures? Did our practical application of plain language and information design techniques improve the performance of these disclosures? Put differently, in comparison to peoples’ understanding and use of mortgage disclosures before the financial crisis, could they now better understand the deal? This project answered these questions through extensive qualitative studies of over 122 consumers and a quantitative study of 858 respondents. Both supported the effectiveness of the final design.
The results of our qualitative studies demonstrated that consumers could:
- comprehend the disclosures
- make tradeoffs between two disclosures
- choose a loan and explain a rationale for their choices, and
- use the disclosures to compare initial and final loan terms and costs.
One inexperienced consumer in the initial qualitative study summarized what many others said: "The strong points are laid right out in front of you. You know how much your monthly payments are going to be . . . how much you need to bring to closing . . . your interest rate is right up here."
In the quantitative study, respondents who saw the integrated disclosures scored significantly better on 35 of 39 questions, regardless of respondent experience, the loan type, or the complexity of the loan. These respondents performed better on tasks such as comparing one loan estimate to another, answering questions about a single loan estimate, comparing a loan estimate to a closing disclosure, or responding to questions about a closing disclosure. They were also better at answering questions about the key concepts related to loan disclosures (e.g., monthly principal).
So what can we conclude? Information design, plain language, and our approach were integrated and integral to the success of these disclosures. In sum, these techniques and approach allowed us to achieve our central goal: consumers could understand "the deal."
For more information about the project, results, and the updated final designs, please visit www.consumerfinance.gov/knowbeforeyouowe.
SUSAN KLEIMANN, PhD founded Kleimann Communication Group in 1997 to develop and rigorously test consumer documents. She has led numerous high-profile projects, such as the Financial Privacy Notice. She also serves as vice chair of the Center for Plain Language and its ClearMark Awards program.
BARBRA KINGSLEY, PhD, a partner with Kleimann Communication Group, has more than 18 years of experience managing high-impact projects that help government agencies improve information and implement results widely. She specializes in organization change and leadership with a goal to transform products, people, and processes.
KRISTIN KLEIMANN, Kleimann Communication Group, is a senior qualitative researcher with more than 18 years of planning and conducting focus groups and one-on-one cognitive interviews.
REFERENCES
Garrison, L., Hastak, M., Hogarth, J., Kleimann, S., and Levy, A. 2012. "Designing evidence-based disclosures: A case study of financial privacy notices," Journal of Consumer Affairs, 6.
McGuire, W. J. 1976. "Some Internal Psychological Factors Influencing Consumer Choice," Journal of Consumer Research 2: 302–19.
Mortgage Bankers Association, Delinquencies Continue to Climb in Latest MBA National Delinquency Survey (2009), www.mbaa.org/NewsandMedia/PressCenter/71112.htm.
The National Foundation for Credit Counseling and Harris Interactive Inc., Public Relations Research, March 2009, The 2009 Consumer Financial Literacy Survey. www.nfcc.org/newsroom/FinancialLiteracy/files/2009FinancialLiteracySurveyFINAL.pdf
"Warren: Time to Get to Work on Consumer Protection." Wall Street Journal. http://blogs.wsj.com/washwire/2010/09/17warren-time-to-get-to-work-on-consumer-protection/
