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PUBLIC POLICY &
 CONSUMER TESTING
FACE OF FINANCE      OCTOBER 24, 2012          1



            Face of Finance October 24, 2012
PRESENTERS

• Richard Horn                   • Susan Kleimann,
• Senior Counsel,                  Ph.D.
  Consumer Financial             • President, Kleimann
  Protection Bureau,               Communication
  Office of                        Group
  Regulations




              Face of Finance October 24, 2012           2
WHAT WE’LL COVER

• Where we started
 •   Current disclosures
 •   Mandate
 •   Purpose
 •   Beginning policy
• Examples
 • Policy informs design & consumer testing
 • Consumer testing informs design & policy development
• Importance of consumer testing



                      Face of Finance October 24, 2012    3
WHERE WE STARTED

• Current disclosures
 • 2 statutes
 • 2 different disclosures
 • 1 transaction
   • Truth in Lending Act
   • Real Estate Settlement
     Procedures Act




                   Face of Finance October 24, 2012   4
CURRENT TRUTH IN LENDING




      Face of Finance October 24, 2012   5
CURRENT GOOD FAITH ESTIMATE




        Face of Finance October 24, 2012   6
WHERE WE STARTED

• Mandate
 • The Bureau shall
   propose…model
   disclosures that
   combine the
   disclosures required
   under [TILA] and
   [RESPA] into a single,
   integrated disclosure
   for mortgage loan
   transactions covered
   by those laws.
        • Dodd Frank Act §1032(f)



                      Face of Finance October 24, 2012   7
WHERE WE STARTED

• Purpose
 • 2 goals for combined
   forms:
  1. To improve consumer
     understanding of
     mortgage loan
     transactions; and
  2. To facilitate industry
     compliance with TILA
     and RESPA

 Dodd-Frank Act §§1098, 1100A



                        Face of Finance October 24, 2012   8
WHERE WE STARTED

• Purpose
•   “consumers are provided
    with timely and
    understandable information
    to make responsible
    decisions about financial
    transactions.”
      Dodd-Frank Act § 1021(b)
•   “prescribe rules to ensure
    [consumer financial
    products are]…disclosed to
    consumers in a manner that
    permits consumers to
    understand the costs,
    benefits, and risks ….”
      Dodd-Frank Act § 1032(a



                                Face of Finance October 24, 2012   9
SO WHAT?




Face of Finance October 24, 2012   10
WHERE POLICY  DESIGN & TESTING

• A graphic design
 • Use as few words as
   possible
 • Reduce Information
   overload
 • Show relationships
 • Highlight key
   information
 • Use plain language


                Face of Finance October 24, 2012   11
WHERE POLICY  DESIGN & TESTING

• Information, not
  education
 • Mortgage shopping
   sheet
 • Summary & detail
 • System of other
   sources




                Face of Finance October 24, 2012   12
POLICY  DESIGN & TESTING

• Content
  requirements
 • RESPA
 • TILA
 • Dodd-Frank Act




                 Face of Finance October 24, 2012   13
WHERE POLICY  DESIGN & TESTING

• Chose to test with
  consumers
• Ensure disclosures
  work
• Hire specialists -
  Kleimann
  Communication
  Group


                Face of Finance October 24, 2012   14
WHAT WE DID

• User-centered
  design                                                 Context

• Usability/cognitive
  test - think alouds                              Formative

• Performance, not
  preference                                             Usability

• 10 testing rounds
• Posted designs for                               Validation

  public comment

                Face of Finance October 24, 2012                     15
THE RESULT

• Page 1 – summary
  shopping sheet
• 2 types of
  information
→ Loan details
→ Affordability




              Face of Finance October 24, 2012   16
THE RESULT

• Page 2 – details
• 4 types of details
 • Specific loan fees
 • Specific closing fees
 • Calculating cash to
   close
 • Rate & payment
   details



                  Face of Finance October 24, 2012   17
WHERE TESTING  DESIGN & POLICY #1

• What level of detail
  helps consumers?




                Face of Finance October 24, 2012   18
WHERE TESTING  DESIGN & POLICY #2

• Can consumers
  identify changes
  between the Loan
  Estimate and
  Closing Disclosure ?




                Face of Finance October 24, 2012   19
WHERE TESTING  DESIGN & POLICY #2

• Round 6 (IA) results                  • “Honestly this is so
                                          much writing. I’m
 • Trouble tracking                       skimming over it and
 • See changes at high                    not really reading this
   level                                  thing. I don’t know
 • Relatively passive                     what to look for, to tell
                                          you the truth. I guess I
                                          could look at the very
                                          bottom and see what
                                          that says. I don’t know.
                                          This is a bit much.”
                                                        (IA-002)




                Face of Finance October 24, 2012                   20
WHERE TESTING  DESIGN & POLICY #2




           Face of Finance October 24, 2012   21
WHERE TESTING  DESIGN & POLICY #2

• Rounds 7-10 results                     • “Because they did it on
                                            the [Loan Estimate],
 • Improved tracking                        keep the order the
 • Noticed differences                      same here [Closing
 • Actively asked                           Disclosure], it makes it a
   questions                                lot easier, just the
   • Go back to lender
                                            comparison to try to
                                            match up, so just keep
   • Consider not closing
                                            the order same.”
                                                           (PA-005 NE)




                   Face of Finance October 24, 2012                      22
WHERE TESTING  DESIGN & POLICY #3

• TILA §128(b)(2)(C)(ii)                        • “…are they saying
                                                  definitely cannot
 • You may not be able                            or are you saying
   to refinance your                              you may or may
   loan to lower your                             not?”
   interest rate and                                       (AL-005)

   payments in the
   future with us or with
   another lender.




                 Face of Finance October 24, 2012                     23
WHERE TESTING  DESIGN & POLICY #3

• Refinancing this                             • Yeah, you can try
  loan will depend on                            to refinance the
                                                 loan. That doesn’t
  your future financial                          mean you're going
  situation, the                                 to get it, but you
  property value, and                            can try.”
  market conditions.
                                                            (PA-006-NE)



  You may not be
  able to refinance
  this loan.


                Face of Finance October 24, 2012                      24
WHY TEST?

• Sort statutory                   • Move from
  requirements vs.                   preference to
  the information                    performance
  consumers need                       • Team
• Sort what we                         • Consumers
  want to say from
  what they need
• Focus on task, not
  information

                Face of Finance October 24, 2012     25
WHY TEST?




Face of Finance October 24, 2012   26
WHY TEST?

Consumers say . . .                       • Everything is there.
• The strong points are laid                They’re not really hiding
  right out in front of you.                anything. So it’s pretty
  You know how much your                    straightforward.
  monthly payments are                                     (TX-003- NE)
  going to be…how much
  you need to bring at                    • I can actually say 5; it’s
  closing…your interest rate                the best form I’ve ever
  right up here.                            seen.
               (TX-006- NE)                                (TX-009-E)




                       Face of Finance October 24, 2012                   27
WHY TEST?

Industry says . . .                        • I’m seeing everything I
• It’s very easy to follow,                  need to know. My
  very easy to read and                      payments, how much I’m
  friendly to the eye                        escrowing, and how
  instead of having to flip                  much I’m bringing to the
  through many different                     table for closing
  contracts and                              purposes…. So yes, as far
  paperwork.                                 as a summary sheet, I
                (TX-Lender-001)              think this is superior to
• It is the best mortgage                    what we’ve got.
  related form I have ever                                 (TX-Settlement Agent-004)

  seen.
                (TX-Lender-006)


                        Face of Finance October 24, 2012                               28
FACE OF FINANCE




  Face of Finance October 24, 2012   29

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Public Policy & Consumer Testing

  • 1. PUBLIC POLICY & CONSUMER TESTING FACE OF FINANCE OCTOBER 24, 2012 1 Face of Finance October 24, 2012
  • 2. PRESENTERS • Richard Horn • Susan Kleimann, • Senior Counsel, Ph.D. Consumer Financial • President, Kleimann Protection Bureau, Communication Office of Group Regulations Face of Finance October 24, 2012 2
  • 3. WHAT WE’LL COVER • Where we started • Current disclosures • Mandate • Purpose • Beginning policy • Examples • Policy informs design & consumer testing • Consumer testing informs design & policy development • Importance of consumer testing Face of Finance October 24, 2012 3
  • 4. WHERE WE STARTED • Current disclosures • 2 statutes • 2 different disclosures • 1 transaction • Truth in Lending Act • Real Estate Settlement Procedures Act Face of Finance October 24, 2012 4
  • 5. CURRENT TRUTH IN LENDING Face of Finance October 24, 2012 5
  • 6. CURRENT GOOD FAITH ESTIMATE Face of Finance October 24, 2012 6
  • 7. WHERE WE STARTED • Mandate • The Bureau shall propose…model disclosures that combine the disclosures required under [TILA] and [RESPA] into a single, integrated disclosure for mortgage loan transactions covered by those laws. • Dodd Frank Act §1032(f) Face of Finance October 24, 2012 7
  • 8. WHERE WE STARTED • Purpose • 2 goals for combined forms: 1. To improve consumer understanding of mortgage loan transactions; and 2. To facilitate industry compliance with TILA and RESPA Dodd-Frank Act §§1098, 1100A Face of Finance October 24, 2012 8
  • 9. WHERE WE STARTED • Purpose • “consumers are provided with timely and understandable information to make responsible decisions about financial transactions.” Dodd-Frank Act § 1021(b) • “prescribe rules to ensure [consumer financial products are]…disclosed to consumers in a manner that permits consumers to understand the costs, benefits, and risks ….” Dodd-Frank Act § 1032(a Face of Finance October 24, 2012 9
  • 10. SO WHAT? Face of Finance October 24, 2012 10
  • 11. WHERE POLICY  DESIGN & TESTING • A graphic design • Use as few words as possible • Reduce Information overload • Show relationships • Highlight key information • Use plain language Face of Finance October 24, 2012 11
  • 12. WHERE POLICY  DESIGN & TESTING • Information, not education • Mortgage shopping sheet • Summary & detail • System of other sources Face of Finance October 24, 2012 12
  • 13. POLICY  DESIGN & TESTING • Content requirements • RESPA • TILA • Dodd-Frank Act Face of Finance October 24, 2012 13
  • 14. WHERE POLICY  DESIGN & TESTING • Chose to test with consumers • Ensure disclosures work • Hire specialists - Kleimann Communication Group Face of Finance October 24, 2012 14
  • 15. WHAT WE DID • User-centered design Context • Usability/cognitive test - think alouds Formative • Performance, not preference Usability • 10 testing rounds • Posted designs for Validation public comment Face of Finance October 24, 2012 15
  • 16. THE RESULT • Page 1 – summary shopping sheet • 2 types of information → Loan details → Affordability Face of Finance October 24, 2012 16
  • 17. THE RESULT • Page 2 – details • 4 types of details • Specific loan fees • Specific closing fees • Calculating cash to close • Rate & payment details Face of Finance October 24, 2012 17
  • 18. WHERE TESTING  DESIGN & POLICY #1 • What level of detail helps consumers? Face of Finance October 24, 2012 18
  • 19. WHERE TESTING  DESIGN & POLICY #2 • Can consumers identify changes between the Loan Estimate and Closing Disclosure ? Face of Finance October 24, 2012 19
  • 20. WHERE TESTING  DESIGN & POLICY #2 • Round 6 (IA) results • “Honestly this is so much writing. I’m • Trouble tracking skimming over it and • See changes at high not really reading this level thing. I don’t know • Relatively passive what to look for, to tell you the truth. I guess I could look at the very bottom and see what that says. I don’t know. This is a bit much.” (IA-002) Face of Finance October 24, 2012 20
  • 21. WHERE TESTING  DESIGN & POLICY #2 Face of Finance October 24, 2012 21
  • 22. WHERE TESTING  DESIGN & POLICY #2 • Rounds 7-10 results • “Because they did it on the [Loan Estimate], • Improved tracking keep the order the • Noticed differences same here [Closing • Actively asked Disclosure], it makes it a questions lot easier, just the • Go back to lender comparison to try to match up, so just keep • Consider not closing the order same.” (PA-005 NE) Face of Finance October 24, 2012 22
  • 23. WHERE TESTING  DESIGN & POLICY #3 • TILA §128(b)(2)(C)(ii) • “…are they saying definitely cannot • You may not be able or are you saying to refinance your you may or may loan to lower your not?” interest rate and (AL-005) payments in the future with us or with another lender. Face of Finance October 24, 2012 23
  • 24. WHERE TESTING  DESIGN & POLICY #3 • Refinancing this • Yeah, you can try loan will depend on to refinance the loan. That doesn’t your future financial mean you're going situation, the to get it, but you property value, and can try.” market conditions. (PA-006-NE) You may not be able to refinance this loan. Face of Finance October 24, 2012 24
  • 25. WHY TEST? • Sort statutory • Move from requirements vs. preference to the information performance consumers need • Team • Sort what we • Consumers want to say from what they need • Focus on task, not information Face of Finance October 24, 2012 25
  • 26. WHY TEST? Face of Finance October 24, 2012 26
  • 27. WHY TEST? Consumers say . . . • Everything is there. • The strong points are laid They’re not really hiding right out in front of you. anything. So it’s pretty You know how much your straightforward. monthly payments are (TX-003- NE) going to be…how much you need to bring at • I can actually say 5; it’s closing…your interest rate the best form I’ve ever right up here. seen. (TX-006- NE) (TX-009-E) Face of Finance October 24, 2012 27
  • 28. WHY TEST? Industry says . . . • I’m seeing everything I • It’s very easy to follow, need to know. My very easy to read and payments, how much I’m friendly to the eye escrowing, and how instead of having to flip much I’m bringing to the through many different table for closing contracts and purposes…. So yes, as far paperwork. as a summary sheet, I (TX-Lender-001) think this is superior to • It is the best mortgage what we’ve got. related form I have ever (TX-Settlement Agent-004) seen. (TX-Lender-006) Face of Finance October 24, 2012 28
  • 29. FACE OF FINANCE Face of Finance October 24, 2012 29

Editor's Notes

  1. Each of is speaking for ourselves; none of us is speaking for CFPB.The views we express are our own; they do not represent the views of CFPB.
  2. Generally, TILA covers the loan transaction and REPSA covers the real estate transactionHowever, TILA figures depend on settlement costs and RESPA disclosures currently contain loan informationThese statutes are mandated at two points in the process: (1) at the loan application and (2) at the closing. We’re focused on the application disclosures.
  3. The Truth in Lending Initial Disclosure was revised over the years as Congress continued to add new requirements. This form complies with the newest requirements which became effective Feb 1, 2011.
  4. HUD implemented a new Good Faith Estimate in 2008, which lenders were required to use beginning in 2010. These new forms were designed to encourage shopping and ensure consumers understand when brokers received yield spread premiums as part of their compensation. Implementation has been quite difficult. HUD has issued over 300 Qs and As since the rule was finalized.
  5. This is even before the Plain Writing Act
  6. What we mean by “improve understanding is: “aid understanding by utilizing readily understandable language to simplify the technical nature of the disclosures.”
  7. Foreclosures in US--as of Friday May 18, 2012
  8. Other constraints: No color, 8 ½” x 11”, plain language: some technical terms, but make key features accessible
  9. 5 sites for LE2 sites for CD3 sites for bothBaltimore first and lastNeed to mention that things were also posted on the web site with over 12,000 comments on the first round.
  10. Loan details are the tricks and traps—where factors change
  11. Lots of debate about the choices. The 2010 form (which we’re not showing) used a lump sum based on the research that said consumers were overwhelmed by large quantities of numbers. Industry hated the lump sum and wanted detailed; advocates wanted lump sum.Bias, if any, was to go with the lump sum. Round 2 (CA) –preferred the detail; ask more questions with detailRound 3 (IL) - preferred the detail; ask more questions with detailRound 3 (IL) -preferred the detail; ask more questions with detailRound 4 (MA) same thingRound 5 (NM): Went with detail
  12. Industry wanted Closing Cost Details of the CD to remain like the current HUD-1. Saw the details of HUD-1 as a distribution of funds record; not intended for consumers to use.
  13. First round of testing on the Closing Disclosure.
  14. Round 7 AlabamaRound 8 PennsylvaniaRound 9 TexasRound 10 Maryland
  15. Sometimes it’s the little things that drive you crazyConsumers thought it meant they would never be able to refinance and was part of the loan terms
  16. Consumers thought it meant they would never be able to refinance and was part of the loan terms
  17. Policy & testing EntwinedFragile relationship with consumersResponsible to meet mandates of requirements & performance (make it clear)Responsive to consumersIntelligent saves redo of work AFTER the policy is final.