Ease Of Use Is Now “A Federal Case” For Mortgage Paperwork

When I was kid, when we thought someone was overreacting, we used to say “don’t make a Federal case out of it!” Maybe people still say this, but I haven’t heard it in a while. I suspect that it went into the Museum of Way-Historical Sayings. Still, I’m sure you get the idea: If the Federal Government is involved, it’s a big deal.

I thought of this expression this morning when I read an article in The Wall Street Journal. There is quite a battle going on over an attempt to make mortgage-disclosure documents easier to understand. On the one side, we find our Federal Government in the persons of Elizabeth Warren and Treasury Secretary Timothy Geithner. On the other side, you find the mortgage industry (or at least a big chunk of it — the article could have offered some more details IMHO).

Now if you’ve ever taken out a mortgage, you know that the documentation you received was close to the polar opposite of “easy to understand.” You may have thought (as I did) that the difficulty stemmed from a failed attempt by lawyers and bankers to communicate effectively. But apparently not! (Or at least that’s not the only reason — I’m pretty sure that most lawyers don’t have John Grisham potential).

But no, says The Journal, there is another reason these forms are so confusing. Apparently, “The mortgage industry has in the past objected to the level of disclosure that regulators wanted, including more information about the fees paid to brokers.” So if I’m reading this correctly (and I would urge you to read the article for yourself), some bankers think that making it hard for customers to understand the terms of a mortgage (especially the fees they pay and whether or not they qualified for a lower rate) is a good thing.

In the short term, that may be right. There’s obviously a benefit to the bank in charging customers higher rates and/or getting more fee income from them. But in the longer term, it’s costing banks hundreds of millions of dollars in lost income from customers who do not buy another product from them, buy products from their competitors, and don’t recommend them (or recommend that others not use them). We wrote a report not long ago that models that loss. Megan Burns is updating both the model and the data in that report for a new report that will be out in a few weeks. Turns out the numbers look similar — we’re still talking about hundreds of millions of dollars of lost revenue as a result of poor customer experience.

So what’s going on? Bank customers are unhappy because these hard-to-use forms damage customer experience in a very clear way. You can see it by considering the classic customer experience pyramid, which says that to meet customer needs, experiences should be useful, usable, and desirable. At Forrester, we attempt to make this model measurable and actionable with our Customer Experience Index, which surveys customers of companies and asks them how well the firm met their needs (was useful), how easy it was to do business with the firm (usable), and whether or not they enjoyed doing business with the firm (desirable). 

The results show that, on average, banks don’t do a very good job at customer experience. But even more interesting is the fact that there is a huge spread between the banks that are best at customer experience and the ones that are worst. At the top of the ratings we see credit unions — and boy, are they happy about that! Compared with customers of local or regional banks, credit union customers tend to own more financial products and are more likely to bank, view statements, and pay bills online. Credit union customers are also the most likely to buy more financial products in the future. All of that boosts the bottom line. In other words, I’m not talking about idealism here (“be user friendly!”); I’m talking about revenue and profitability (“make money!”).

I did find some good news at the end of The Journal article. And it’s good news for both bank customers (who would prefer to be able to understand the loans they take out) and banks (that would like to see their customers buy more of their products and say nice things about them). Apparently one of the big reasons the mortgage industry opposed simplifying disclosure forms went away as a result of the recent financial overhaul (i.e., a practice lenders didn’t want people to know about is now banned).

So maybe, just maybe, more banks will start competing through superior customer service now that some of their old methods of making money aren’t available — or in some cases, stopped working. I certainly hope so: I’ve already seen some of them moving in this direction, and there are certainly some good examples out there to help others learn and then profit.