A study based on borrowers' cognitive psychology reactions may change what mortgage documents will look like three years from now.
In a classic case where science plays "the devil's advocate" for the mortgage industry, a couple of academics are researching the fluid relationship between borrowers and their mortgages to see where it might be improved. Debra Stark of the John Marshall Law School in Chicago and Jessica Choplin of the DePaul University Department of Psychology are using the $250,000 award they received from the National Science Foundation to investigate how prospective homeowners read, assess and recall important information before agreeing to loan terms.
Whether terms and conditions displayed on a form are comprehensible and clear to the average borrower has been a hot topic. There is a consensus that the industry has made some progress in improving forms and financial education/counseling in large part due to technological innovations and massive modifications. Consumers have acknowledged certain upgrades, but it is not so obvious whether and how the crisis has changed borrower attitudes, or whether the quality of mortgage docs can modify human behavior. The three-year project funded by NSF's Law and Social Sciences Advisory Panel will run five experiments at DePaul that test academics' theories in some of these areas.
One such theory maintains that "unscrupulous" professionals in the industry can take advantage of consumers' cognitive limitations to reduce the effectiveness of disclosure forms "that Congress has relied upon to protect consumers."
Stark says the study will inquire as to whether consumers actually read the forms and if they do, which sections they read, and how they process, evaluate, and remember the disclosed information. The information will be used to create and test strategies designed to improve consumer home loan decision-making. The federal government is expected to use the findings in future considerations regarding mandated consumer protections.
Among the problems so far, according to Stark, is that "Congress presumed that borrowers would carefully read the disclosures, understand the basic terms of the proposed loan, and thereby be empowered" to shop around for the best loan. The presumption also was that consumers would make "wise decisions" on whether to accept or reject an offered loan, Stark says. Judging from what has happened in the housing market the past decade, "we know that predatory lenders and mortgage brokers often misled borrowers, causing them not to understand the terms of their home loans."
Stark says federal agencies are trying to make forms more "consumer friendly" but those changes "may not eliminate issues of understanding." She sees an unsolved problem in the fact that new forms do not address how an unscrupulous lender or broker can lead a consumer through the forms in a deceptive fashion. The study aims to show legislators that a mandatory independent mortgage counseling law is necessary.
The NSF research and experiments will start in September with a diverse sample of people 26-years-old or older. It will focus on several cognitive psychological phenomena.
One example: "Under confirmation biases, consumers might skim forms looking for information that confirms, rather than disconfirms, their prior beliefs about the loan, causing them to miss important provisions." Another example: "Consumers might also be more likely to miss important provisions if they look over forms investigating whether they were told the truth than if they look them over investigating whether they were lied to."
In addition, long disclosure forms require time to review and reduce people's ability to remember other items, researchers say, so "discussing unimportant or innocuous features on the disclosure form could reduce people's abilities to remember important and potentially risky features."
