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Sullivan Advocates Lenders Use Simple Language With Loans
By James Comtois
Impenetrable jargon within loan products was one of the causes for the subprime mortgage crisis, according to consumer advocates. Although legal language on loan applications insures compliance and disclosure, it also insured confusion with borrowers.
As a way to mitigate future mortgage risk, Sullivan, a communications strategy and design firm specializing in financial services companies, is advocating that lenders use plain English to prevent the next subprime meltdown.
"A large part of the recent defaults and foreclosures didn't happen because borrowers intended to defraud the lenders, but because the forms are so difficult to comprehend. It's very difficult to know what exactly you've signed up for," said Barbara Sullivan, founder and managing director of Sullivan.
Currently working with a large mortgage lender, Sullivan offers guidance to originators on how to reduce the risk of bad loans by evaluating and simplifying their consumer loan documents.
"We're a communications company that helps services companies get better business through targeted communications. I've been working with mortgage companies before: they tend to be in a sector in the financial services that's very complicated and intensive," Ms. Sullivan added.
According to Maria Boos, practice lead, functional communications at Sullivan, clear and consistent communication between the borrower and the lender is crucial in preventing future defaults and foreclosures. "The most important starting point for lenders to recognize is that it's a communications issue. It's critical to understand the consumers' need for information and that should be the driving force," she said.
Ms. Boos pointed out that it's important to see where the language is coming from. If it's from a legal process, the language in loan applications will often not be clear, since it will just be written to comply with regulations.
"There was intent to drive consumers to products that are most beneficial to lenders and some tactics in the way that documents are structured can be particularly misleading," said Ms. Boos.
She cited one example where one lender's enrollment form for automatic payments listed the lowest monthly payment as the first option listed. However, this option would cause negative amortization. Although there was some language in the form that disclosed this, it did not disclose what would happen when the borrower reached the point where the principal would no longer be paid.
"It can be argued that it's all disclosed, but it's often in disparate places and there's a lot of jargon," she added.
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