Realty Times - Financial Illiteracy Triggers Senate Hearing

Front Page

NEED HELP?

Click for Live Support

Call: 214-353-6980

Financial Illiteracy Triggers Senate Hearing

by Broderick Perkins

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:

Increasing reliance upon the high-cost, fringe-banking sector by men, women and families.

The accumulation of dangerous amounts of expensive credit-card and household debt.

The inability to save and the inability to build a nest egg.

The inability to plan for a financially secure retirement.

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?

Part II: Financial Illiteracy: Education Pays Off

Published: February 19, 2002

Use of this article without permission is a violation of federal copyright laws.

Related Articles:

Broderick Perkins parlayed a career in old-school journalism into a contemporary digital news service that really hits home.

The award-winning consumer journalist, originally from Wilmington, DE, is founder, publisher and executive editor of the bootstrap DeadlineNews Group, a Silicon Valley-based editorial content and consulting service specializing in residential real estate, consumer news and related editorial consulting services.

The DeadlineNews Group includes the website, DeadlineNews.com, offering real estate editorial content and consulting services, and its back shop, the Deadline Newsroom, an open house on news that really hits home.

Perkins obtained his formal journalism education from University of Delaware and a journalism boot camp, the Institute of Journalism Education at the University of California-Berkeley. He went on to 20 years of service as a daily newspaper journalist at the Wilmington, DE News Journal and San Jose, CA Mercury News.

Perkins covered housing on the San Jose Mercury News reporting team which earned a General News Reporting Pulitzer Prize in 1989 for coverage of the Loma Prieta earthquake.

He has also produced real estate, consumer and small business content for the Wall Street Journal, Los Angeles Times, RealtyTimes.com, Nolo.com, Better Homes and Gardens, the National Association of Realtors, Homestore/Move and Intuit/Quicken among more than three dozen publications.

In addition to managing the DeadlineNews Group, Perkins most recently served as chief editorial consultant for Nolo's Essential Guide To Buying Your First Home, Nolo, and writes real estate television scripts for RealtyTimes.com.

Real Estate News Network