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| February 19, 2002 |
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Mortgage consumers, along with a growing number of others who buy financial products and services, are paying dearly for what they don't know. Because of widespread ignorance about financial matters from an APR (annual percentage rate) to zero-down mortgages, consumers are taking it in the wallet, according to law makers and consumer groups who testified earlier this month during a two-day financial illiteracy hearing conducted by the U.S. Senate Committee On Banking, Housing and Urban Affairs. Predatory institutions exacerbate the problem by preying on those who aren't savvy. Low income households who can least afford to lose their homes take on predatory mortgages, consumers who can afford a home often pay more for a mortgage than necessary, and a growing number of young consumers make early credit mistakes that later cost them an opportunity to buy a home. All because they don't have the knowledge they need to cope in an ever more sophisticated and predatory financial environment. "Indeed, there is substantial evidence that Americans do not have an adequate basis for making sound decisions about their personal and household finances, especially given the myriad choices they face. A number of organizations have sought to assess the level of Americans' grasp of financial matters, and their survey evidence consistently shows gaps," testified Senante committee chairman, Sen. Paul S. Sarbanes (D-MD). Sarbanes said what consumers don't know about financial matters can indeed hurt them. The consequences of financial illiteracy include:
It's a vicious fiscal cycle. Problems run deep "Financial illiteracy is another issue which translates into the haves and have nots in terms of economic success and life options. People who have difficulty living within their means and who carry high cost consumer debt often end up trapped as long-term renters," said Eric Tyson a personal finance counselor and author of Personal Finance For Dummies (Hungry Minds/John P. Wiley, $19.99). "It's hard enough for most people to accumulate down payment funds. It's near impossible with large consumer debts and an inability to save money regularly. Those who are able to buy a home with consumer debt or spending problems often consume their home's equity over time through refinancing multiple times to payoff mushrooming consumer debt," Tyson added. Sarbanes said financial illiteracy is exacerbated by weak regulations, limited enforcement of financial protection laws that do exist and the lack of structured financial education. "I do not want to suggest that financial literacy is a magic solution that will solve all the propblesm. I agree with the three-pronged approach outlined to the committee last year by Roger Ferguson, the vice chairman of the Federal Reserve Board, 'Legislation, careful regulation and education are all components of the response to these emerging consumer concerns', " Sarbanes said. Sarbanes specifically mentioned financial ills caused by "hidden fees...predatory lending practices...yield spread premiums" that plague the mortgage and home buying industries, practices that have come under increased scrutiny by both the U.S. Department of Housing and Urban Affairs (which enforces the Real Estate Settlment Procedures Act or RESPA, a federal law designed to protect consumers against undisclosed mortgage costs, illegal fees and kick-backs) and the Federal Reserve (which enforces Regulation Z, The Truth In Lending Act). HUD secretary Mel Martinez recently promised a Senate panel of "sweeping" reforms for the home buying and mortgage application process. He said the RESPA reform proposal should be ready for release within 90 days. Meanwhile, what's a consumer to do? |
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