Tag Archives: financial literacy

Financial Literacy Rehash

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The Consumer Financial Protection Bureau released its second Financial Literacy Annual Report. In blogging about last year’s report, I noted that the CFPB assumed that financial education worked more than research had shown it to work. Unfortunately, this report seems to be mostly a rehash (in many cases an extensive word-for-word rehash) of last year’s (pace Senator Walsh). From what I could tell, the only significant new financial education research that the CFPB has undertaken since last year is its “rules of thumb” project.

“Rules of thumb” are a decision-making and education technique that uses practical, easily-implemented guidelines for making decisions. Existing research has found rules of thumb to be a successful technique for improving decision making in many areas, and more successful than comprehensive education in some instances. Thus, rules of thumb could be a cost-effective method to improve consumer decision making. However, little research exists examining the effectiveness of rules of thumb for financial decision making.

Accordingly, in 2014 the Bureau began a research project to study the effectiveness of rules-of-thumb-based approaches aimed at helping consumers decrease their credit card debt. Rules-of-thumb-based education may be particularly appropriate for improving consumer literacy about credit card use, as credit card decisions are repetitive and frequent. We have finished the first phase of the project to understand how to create rules of thumb, when they are most useful, and how they can be implemented to ensure maximum success. The second phase of the project will test a set of rules of thumb aimed at helping consumers decrease their credit card debt. When we release the final results, which are expected in 2015, we expect that this project will increase knowledge of the efficacy of a rules-of-thumb approach to financial education both within the CFPB and among a range of external stakeholders who serve consumers. (72-73, footnote omitted)

This seems like a great project for the CFPB to undertake. But the rest of its efforts to improve its understanding about the efficacy of financial literacy leaves me under, underwhelmed, particularly because the rule-of-thumb project is limited to just one consumer financial product, credit cards.

Armed, Unarmed or Harmed by Knowledge?

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I posted Armed, Unarmed or Harmed by Knowledge? A Comment on the FHA’s Housing Counseling Pilot Program to SSRN (and to BePress). The abstract reads,

The FHA has requested input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers pilot program. This comment letter argues that housing counseling is not a proven solution to the problem it is meant to solve, excessive defaults by FHA borrowers. HAWK is a traditional housing counseling program but the scholarly literature casts into doubt the efficacy of such programs. It would be better to take time to research which counseling strategies, if any, are proven to be effective. This is true for the FHA but also for other government agencies, such as the Consumer Financial Protection Bureau, that have devoted significant resources to unproven financial counseling programs.

This comment was submitted to the FHA in response to its request for input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers program.

Regular readers of this blog will be familiar with my take on this topic as the comment is adapted from blog posts that have addressed various financial education topics.

Input on Housing Counseling

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HUD has issued a Notice, Federal Housing Administration (FHA): Homeowners Armed With Knowledge (HAWK) for New Homebuyers (Docket No. FR-5786-N-01).

HAWK is a pilot that will

provide FHA insurance pricing incentives to first-time homebuyers who participate in housing counseling and education that covers how to evaluate housing affordability and mortgage alternatives, to better manage their finances, and to understand the rights and responsibilities of homeownership. The goals of the HAWK for New Homebuyers pilot (HAWK Pilot) are to test and evaluate program designs that meet these objectives:

•To improve the loan performance of participants and reduce claims paid by FHA’s Mutual Mortgage Insurance Fund (MMIF).

• To expand the number of families who improve their budgeting skills and housing decisions through access to HUD-approved housing counseling agency services; and

• To increase access to sustainable home mortgages for homebuyers underserved by the current market. (27896)

I have already noted that HAWK is based upon some pretty sketchy research about the efficacy of housing counseling. The Notice presents additional research (in footnotes 5-8) that supports its goals, but I have to say that it seems cherry picked to me. The notice says, for instance, “some studies show” and “Several major studies have recently noted a correlation . . ..” But the Notice does not seem to contextualize these studies at all. A meta-analysis (see here too) of financial education initiatives is decidedly less optimistic.

It seems that the FHA and the CFPB have gone whole hog on counseling even though the evidence is not there to support such strong support. On the bright side, HAWK is a pilot program and the FHA will evaluate it to see whether it meets its goal of “improving loan performance.” (27903) I am just worried a bit worried though, because the FHA’s materials seem to show an unwarranted bias toward counseling that a review of the relevant literature does not seem to bear out.

The HAWK Notice requests comments by July 14, 2014, so you’d better act fast if you have something to say!

Can You Help Someone Become Financially Capable?

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Researchers at the World Bank have posted Can You Help Someone Become Financially Capable? A Meta-Analysis of the Literature.The abstract reads,

This paper presents a systematic and comprehensive meta-analysis of the literature on financial education interventions.  The analysis focuses on financial education studies designed to strengthen the financial knowledge and behaviors of consumers. The analysis identifies188 papers and articles that present impact results of interventions designed to increase consumers’ financial knowledge (financial literacy) or skills, attitudes, and behaviors (financial capability). These papers are diverse across a number of dimensions, including objectives of the  program intervention, expected outcomes, intensity and duration of the intervention, delivery channel used, and type of population targeted. However, there are a few key outcome indicators where a subset of papers are comparable, including those that address savings behavior, defaults on loans, and financial skills, such as record keeping. The results from the meta analysis indicate that financial literacy and capability interventions can have a positive impact in some areas (increasing savings and promoting financial skills such a record keeping) but not in others (credit default).

I hope that policy makers at the CFPB have reviewed this paper carefully. The Bureau has a financial education mission that must be built on solid research if it hopes to improve outcomes for consumers. A lot of the scholarly work in this area has questioned the efficacy of financial education, but the Bureau seems to be going full speed ahead with it. The Bureau should bore down into the literature to determine which types of interventions are effective before allocating funds indiscriminately to new initiatives.

I am particularly concerned about the last sentence of the abstract which indicates that interventions have failed to improve consumer behavior when it comes to credit default. That seems to be a big problem for any financial skills initiative. Further research should focus on alternative interventions that might be effective in reducing credit default by consumers. And funds should not be wasted in the interim on unproven initiatives in this area.

Financial Literacy Literacy

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Personally, I was disappointed by the CFPB’s Financial Literacy Annual Report. It seems to me that the Bureau’s Division of Consumer Education and Engagement is thinking too small in setting forth its research agenda. For its financial education evaluation project,

The Bureau is conducting a quantitative evaluation of two existing financial coaching programs. Financial coaching generally involves one-on-one sessions with clients to increase clients’ awareness of their financial decisions and to provide support for clients to reach financial goals mutually set by the coach and client. (46)

Seems to me that there are some fundamental questions about financial literacy that need to be studied before small, resource-intensive projects like financial coaching are. I have blogged about these issues before, but the bottom line is that there is no solid empirical evidence that financial education achieves good results in general. So why study particular initiatives?

I would like to see the Bureau engage in a broad survey of financial literacy first and then develop a research agenda that reflects the big issues, including

  • do improved disclosures improve outcomes for consumers?
  • do consumers have the basic math skills to take advantage of disclosures?
  • what useful metrics exist for measuring the impact of financial literacy initiatives?

These are just a few big questions that I would want to answer before I looked at particular programs.

The Bureau should start from the premise that we have little reason to believe that financial education works.  Let’s build up a body of knowledge from there. If we assume that it works, as the Bureau’s current research agenda implies, then that assumption can lead us on a wild goose chase as we study program, after initiative, after project, looking for that golden-egg laying goose.

The Financial (Mis)Education of Lauren Willis

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Lauren Willis has posted Financial Education:  Lessons Not Learned and Lessons Learned.  This is a sobering, even depressing, overview of what we know about the efficacy of financial education.  This is an extremely important topic because the CFPB has identified financial education as a core part of its mission in its Strategic Plan (see Outcome 2.2).

Willis asks, “Does financial education work as hoped?” (125) She answers her own question:  “Empirical evidence does not support the theory. Some (but not all) studies show a positive correlation between financial education and financial knowledge or between financial knowledge and financial outcomes. But no strong empirical evidence validates the theory that financial education leads to household well-being through the pathway of increasing literacy leading to improved behavior.” (125)

Some of her her other important conclusions (based on a thorough review of the literature) include

  • “the only statistically significant effect of mandatory personal financial training on soldiers was that they adopted worse household budgeting behaviors after the training than before it.” (126)
  • “Youth who took a personal finance course in high school do not report better financial behavior several years later than youth who did not take the course.  Adults who attended public schools where they were required to take personal financial courses were found to have no better financial outcomes than adults who were not required to take such courses.” (126, citations omitted)
  • One “reason financial education is unlikely to produce household financial well-being is that consumers’ knowledge, comprehension, skills, and willpower are far too low in comparison with what our society demands.” (128)

Willis’ conclusions should caution against assuming that financial education is a proven method to reduce the impact of predatory practices in the consumer finance sector.  The CFPB has shown a willingness to test the efficacy of its approaches.  Hopefully it will do so with its financial education initiiatives too.