Financially Capable Young’uns

boy-with-math-homework

The Consumer Financial Protection Bureau has issued a new model and recommendations, Building Blocks To Help Youth Achieve Financial Capability (link to report at bottom of page). It opens,

To navigate the financial marketplace effectively, adults need financial knowledge and skills, access to resources, and the capacity to apply their money skills and habits to financial decisions. Where and when during childhood and adolescence do people acquire the foundations of financial capability? The Consumer Financial Protection Bureau (CFPB) researched the childhood origins of financial capability and well-being to identify those roots and to find promising practices and strategies to support their development.

This report, “Building blocks to help youth achieve financial capability: A new model and recommendations,” examines “how,” “when,” and “where” youth typically acquire critical attributes, abilities, and opportunities that support the development of adult financial capability and financial well-being. CFPB’s research led to the creation of a developmentally informed, skills-based model. The many organizations and policy leaders working to help the next generation become capable of achieving financial capability can use this new model to shape priorities and strategies. (3, footnotes omitted)

I have been somewhat skeptical of CFPB’s financial literacy initiatives because there is not a lot of evidence about what approaches actually improve financial literacy outcomes. Unfortunately, this report does not reduce my skepticism. While it claims that it is evidence-based, the evidence cited seems scant, as far as I can tell from reviewing the footnotes and appendices.

The report concludes,

Understanding how consumers navigate their financial lives is essential to helping people grow their financial capability over the life cycle. The financial capability developmental model described in this report provides new evidence-based insights and promising strategies for those who are seeking to create and deliver financial education policies and programs.

This research reaffirms that financial capability is not defined solely by one’s command of financial facts but by a broader set of developmental building blocks acquired and honed over time as youth gain experience and encounter new environments. This developmental model points to the importance of policy initiatives and programs that support executive functioning, healthy financial habits and norms, familiarity and comfort with financial facts and concepts, and strong financial research and decision-making skills.

The recommendations provided are intended to suggest actions for a range of entities, including financial education program developers, schools, parents, and policy and community leaders, toward a set of common strategies so that no one practitioner needs to tackle them all.

The CFPB is deeply committed to a vision of an America where everyone has the opportunity to build financial capability. This starts by recognizing that our programs and policies must provide opportunities that help youth acquire all of the building blocks of financial capability: executive function, financial habits and norms, and financial knowledge and decision-making skills. (52)

What the conclusion does not do is identify interventions that actually help people make better financial decisions. I am afraid that this report puts the cart before the horse — we should have a sense of what works before devoting resources to particular courses of action. To be crystal clear, I think teaching financial literacy is great — so long as we know that it works. Until we do, we should not be devoting a lot of resources to the field.

The State of Predatory Lending

By U.S. Treasury Department (CFPB Conference on the Credit Card Act, 02/22/2011) [Public domain], via Wikimedia Commons

The Center for Responsible Lending has posted the final chapter of The State of Lending in America: The Cumulative Costs of Predatory Practices. This chapter’s findings include,

  • Loans with problematic terms or practices result in higher rates of default and foreclosure/ repossession. For example, dealer-brokered auto loans, which often contain abusive provisions, are twice as likely to result in repossession as bank- or credit union-financed auto loans.
  • The consequences of default, repossession, bankruptcy, and foreclosure are long-term. For example, one in seven job-seekers with blemished credit has been passed over for employment after a credit check, and borrowers who experience default pay much more for subsequent credit.
  • The opportunity costs of abusive loans are significant. For example, during the same period that subprime loans peaked and millions of families unnecessarily lost their homes, families with similar credit characteristics who sustained homeownership experienced on average an $18,000 increase in wealth per family.
  • Abusive loans have an impact on the economy as a whole. The foreclosure crisis depleted overall housing wealth and led to millions of job losses; predatory practices have been shown to diminish public trust and confidence in the financial system; and there is evidence that student debt is preventing economic growth, especially for young families.
  • Across many financial products, low-income borrowers and borrowers of color are disproportionately affected by abusive loan terms and practices. Families with annual incomes below $25,000– $35,000 are much more likely to receive an abusive loan product. And in most cases, borrowers of color are two to three times more likely to receive an abusive loan compared with a white counterpart. The discriminatory effects of abusive lending clearly contribute to the widening wealth gap between families of color and white families.
  • Loans with problematic terms are repeatedly concentrated in neighborhoods of color. Subprime mortgages and payday loans are two examples. Such concentration leads to a net drain of community wealth and value that could have been spent on productive economic activity and meeting vital community needs.
  • Debt plays a profound role in the financial lives of most American households, with about three-quarters of households having at least one form of debt and many having multiple forms of debt. Indeed, most consumers are not simply mortgage holders, credit card users, payday loan borrowers, or car-title borrowers; they are likely to participate in more than one of these markets, often at the same time.
  • Regulation and enforcement is an effective means for ending lending abuses while preserving access to credit. For example, the Credit Card Accountability and Disclosure Act of 2009 (Credit CARD Act) has continued to give people access to credit cards, while eliminating more than $4 billion in abusive fees and overall saving consumers $12.6 billion annually. (6-7)

The Center for Responsible Lending is a very effective advocate for consumer protection in the financial services industry. That being said, I found it interesting that they were very circumspect in their section on Future Areas of Regulation. (33) They referenced the existing Credit CARD Act, Dodd-Frank Act, state payday lending laws and federal payday lending regulations, but they did not identify any aspects of the consumer financial services market that need additional regulation. Hard to imagine it, but it seems that CRL believes that we have reached regulatory Nirvana, at least in theory.