Thank you all for joining us today. We have convened this forum to discuss the results of our pilot project on electronic mortgage closings, which are known as “eClosings.” What we found was that consumers who closed their mortgage using an electronic platform were better off on measures of understanding, efficiency, and feeling empowered. At the same time, eClosings hold much promise of greater efficiency and accuracy for the mortgage industry, at potentially lower cost. Many in the industry have been pressing for years to move in this direction; it is important for you to know that we at the Consumer Financial Protection Bureau are strongly supportive of these efforts and see them as a win-win for consumers and industry alike.
At the Consumer Bureau, we are working hard to improve the home-buying and home-owning experience for everyone involved. On the consumer side of the table, we know a mortgage is often the biggest financial commitment that people will ever make. So we have helped consumers so they are not set up with mortgage loans they cannot afford. And we have helped struggling consumers deal with mortgage servicing problems. As we improve the consumer experience, we will improve the marketplace for all responsible providers as well.
Starting this October, the mortgage industry will be providing redesigned disclosures that will help consumers better understand and compare loan offers. The Bureau’s “Know Before You Owe” mortgage disclosure rule creates two streamlined forms that clearly lay out the terms of a mortgage for a homebuyer. The first form is the Loan Estimate, which provides a summary of the key loan terms and estimated loan and closing costs. The second form is a clearer Closing Disclosure, which offers a detailed accounting of the transaction. The idea is that industry can reduce the number of required forms and consumers will be in a better position to understand the final terms of their mortgage before signing on the dotted line.
Today we want to focus on the closing part of the mortgage transaction. A home has been found. An offer was made and accepted. The consumer has applied and been approved for a mortgage. And then it comes down to the closing itself – when a pile of paperwork lies between the consumer and the keys to a new home.
We published a report in April 2014 that laid out the Bureau’s research into consumer pain points with the mortgage closing process. As outlined in that report, people felt like they did not have enough time to review the documents. They felt overwhelmed by the stack of complex paperwork. And they complained about finding errors in the documents even as they were under urgent pressure to close the sale.
Indeed, the sheer volume of the documents can be overwhelming, especially coupled with the short timeframe. Some of these forms are intended to help consumers better understand the costs and risks of their mortgages. Others were devised by lenders as defensive measures to minimize litigation risk. Still others reflect federal, state, and local government requirements, some of which may be outmoded. The undeniable result is information overload: people find that there is just too much to absorb during the closing process, which may cause them to shut down. Those who do try to read all the documents face a different challenge – a lack of guidance in how to understand them. And all of this imposes further costs and burdens on the industry.
The result is that many homebuyers end up signing documents without properly understanding or evaluating the most critical information. This creates new anxiety as they worry about what was buried in the stack of paper that may create some nasty surprises in the years ahead.
So at the Consumer Bureau, we began thinking about a different vision of the mortgage closing process – one with an empowered, knowledgeable borrower who participates in a more efficient, consumer-friendly process. We also see this as a win-win for industry, with a more reliable process that should increase efficiency and accuracy while potentially lowering costs.
We began evaluating options to achieve this vision. Importantly, other stakeholders regulate most closing documents, limiting the opportunities for the Consumer Bureau to take action to reduce the size of the closing package. So we have focused some of our efforts over the past year on studying the benefits that technology can offer to improve the process.
While technology alone will not address all consumer concerns, eClosings do offer the potential to make the process less complex. Current practices may range from faster electronic delivery of documents to fully-integrated electronic documents with embedded links to resources, definitions, or other information and educational tools. In recent years, conversations have increasingly evolved toward embracing “hybrid” approaches to eClosings. This could mean some documents being signed electronically and others remaining on paper or being handled in person, for example, documents that require notarization or that are harder to sign electronically. This would help reduce the intimidating size of the closing stack and improve confidence in the process. An optimal result, in my view, would be for the Closing Disclosure to be the sole paper document presented at the closing table, which would help the consumer focus more closely on this concise executive summary of the proposed transaction. But the key is for companies to start somewhere.
Last year, we initiated the eClosing pilot project to help us better understand the consumer experience. The project took place over a four-month period and involved seven lenders and four technology companies, as well as settlement agents and other real estate professionals. Some consumers used traditional paper documents, some used electronic documents, and some used a combination of the two. Borrowers who completed mortgage transactions during the pilot were invited to complete a follow-up survey. About 1,200 consumers responded.
Scores were calculated based on borrowers rating their responses to various statements from “strongly agree” to “strongly disagree.” We then followed-up with one-on-one interviews. We asked consumers questions about how they felt about the process they experienced. We measured three primary outcomes: understanding, efficiency, and feeling empowered. On all three measures, eClosing borrowers scored higher.
We measured feeling empowered in several ways, including the consumer’s perception of playing an active role or having more or less control over their closing process. This included, for example, having sufficient time to review documents, ask questions, and flag concerns. Our study found a 15 percent positive difference in scores for eClosing borrowers compared to borrowers who closed with paper.
We also measured whether consumers thought the process was more efficient than paper closings in terms of reducing delays, errors in documents, and the amount of time required between important steps in the process. The study found a 17 percent positive difference in scores for eClosing borrowers compared to borrowers who closed with paper.
And we measured how well consumers thought they understood the closing process. The closing stack is full of impenetrable legalese and jargon. The terms and acronyms are foreign to most people, like they are reading another language entirely. So we asked consumers about their perceived understanding of the terms and fees, justifications for any differences between quotes and final costs, and their awareness of their rights and responsibilities. The study found a 7 percent positive difference in scores for eClosing borrowers compared to borrowers who closed with paper.
The study also found – not surprisingly – that the consumers who showed the best results on all three measurements of empowerment, efficiency, and understanding were those who received and reviewed their closing documents in advance of the closing meeting. This was regardless of whether the paperwork was received electronically or in hard copies. Of course this is not unexpected. The more time consumers have with the documents, the better chance they have of being active participants in the process. So they will clearly benefit by the timing requirements of our new “Know Before You Owe” rule.
Though the sample for this pilot was somewhat limited, the correlation between eClosings and the positive outcomes we observed is encouraging and consistent with our expectations.
So much of our lives today can be conducted online and improved with the aid of technology. We can manage our retirement savings online. We can pay our taxes online, and access online help. We can conduct much of our banking over the Internet. Technology offers an important platform for learning and understanding many complex things. It makes sense to leverage technology more heavily in the mortgage closing process as well.
We therefore expect that this pilot project and its findings will spur further industry action and innovation. We will continue to engage in a dialogue on the benefits, opportunities, and risks of eClosings. We strongly believe that improved closing solutions can use technology to create more knowledgeable consumers and a much better process for everyone involved. By increasing efficiency and accuracy, we can cut costs and gain new benefits on all sides. The mortgage and real estate markets involve many players who need to work together to bring about positive change. All of us can embrace the central idea that consumers should feel empowered by modernizing what has become an outmoded closing process.
Finally, this study would not have been possible without our close partnership with the 12 pilot participants, as well as the help of the settlement agents and 1,200 consumers who responded to our survey. We recognize the immense amount of dedication that this pilot project required from each lender and technology vendor. As we move forward, we will continue our commitment to working with stakeholders to use technology in order to improve the mortgage closing experience both for consumers and for industry. Thank you.
The Consumer Financial Protection Bureau (CFPB) is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit www.consumerfinance.gov.