More than half the nation's adult population has problems comparing mortgages and negotiating loan terms and that makes them vulnerable to predatory lending pitches.

While most adults are literate in the common sense of the word, too many suffer low levels of the kinds of literacy necessary to navigate the mortgage maze.

Literacy is not just the ability read (prose literacy), but also the ability to apply arithmetic to numbers in written materials (quantitative literacy) and to locate and use information in charts, manuals and other texts (document literacy).

All literacy considered, the National Adult Literacy Survey, last conducted in 1992, found that 51 percent of the adult population had "very-low" or "low" literacy levels and the percentage was higher for youth, people who were older and minorities.

The finding came even with most people describing themselves as functioning "well" or "very well" when it came to literacy.

"However, these adults would be at a severe disadvantage in resisting a predatory lender's or broker's 'push marketing' and in negotiating loan terms," according to "Financial Education: No Substitute for Predatory Lending Reform," released this week by Durham, NC-based Center For Responsible Lending.

The study was conducted to reveal how education alone won't stop predatory lending.

"This is a good paper. It brings important issues together so that you can see how difficult a solution is," says Earl Peattie, vice president of the Philadelphia, PA-based National Financial News Service. Predatory loans are a malignant outgrowth of the otherwise useful subprime residential mortgage sector. Subprime loans are generally more expensive than prime loans, but they are intended for borrowers who pose a greater risk to lenders, typically because of the lack of credit or previous credit problems. Without the subprime segment, some borrowers would be locked out of the American Dream.

Unfortunately, in numerous documented class action suits, state-filed cases and other complaints, subprime loans became predatory with exorbitantly high costs, penalties and other financially abusive features often directed at specific groups, including minorities, older, low-income borrowers and others who can least afford the added cost.

The same groups, apparently, are least able to sift through the come-ons. Even better educated consumers can stumble over mortgage documents.

"To give you an example of what it takes at closing, a borrower was determined to read all the closing documents and understand them. It took almost three hours to complete the closing. The couple were both highly educated engineers. And closing became the education session -- not something that would work all the time," said Peattie.

The Responsible Lending report concedes many new home buyer training and counseling sessions, credit repair education and loan lessons have demonstrated some success, helping homeowners keep their homes in good times and bad.

However, the study also found that educational programs don't always give consumers the specific information they need when they need it -- long before they are faced with major financial decisions. The study also said existing programs lack quality standards and measures of success that could help fine tune them to better serve financial consumers.

"Most can remember the grand points that I have made in the past, but have difficulty using that information independently to make decisions based on payments, costs, taxes and probable time owning the home and paying the payment," said Roger Harrington, a long-time mortgage advisor who is now also a broker in White Bear Township, MN.

"My clients have been well educated by me many times, but that education is limited to what is important to them at that time or they would never sit still for it," he added.

When the Responsible Lending report examined the source of personal finance information it found that nearly half of all consumers, 47 percent, still learn about personal finance the hard way, through personal experience. The second largest information source was friends and family, 24 percent of the time.

The media (8 percent) did a better job at educating consumers than high schools and colleges (7 percent), employers (3 percent) and special training courses (3 percent).

Given consumers are largely self taught it was no surprise what literacy tasks consumers typically are or are not equipped to handle.

• Most, 99 percent, can total two items on the back of a deposit slip.

• Fewer, 77 percent, could pick the lowest cost for a show based on the ticket price and bus fare.

• Only 48 percent could use a bus schedule to determine travel time between two locations.

• Only 21 percent could compare the price of two items listed as price per pound or price per ounce.

• A dismal 4 percent could determine interest changes on a loan.

Imagine, the 96 percent of consumers who can't determine interest changes on a loan, also suddenly saddled with nearly two dozen documents in the mortgage loan closing session.

Even consumers who know what to do with one loan, may not get it the second time around for reasons beyond their control.

"The industry changes fast. Things people learned a year ago may have changed. New products like those that cut your payments are advertised without stating that in one to three months your payment will probably start catching up big time -- and in a few years you will be very unhappy when you see the results of your short term savings," said Harrington.

"Gimmicks are the way lenders get customers because they work (for the lender). They work for the lender because the general public is too trusting, too lazy and too computer illiterate to make the necessary calculations to choose their best solutions," he added.

The Responsible Lending study concludes that financial education comes with good intentions, but it falls far short of beating back predatory lending.

Education can and should be part of a multifaceted approach. The problems posed by abusive lending practices are pernicious and complex, and they will not be solved with one 'cure all' strategy.

Instead, policy makers must implement an array of tactics to fight abuses, including (1) state and federal laws to restrict unfair practices, (2) consumer education and awareness, (3) improved disclosure of loan terms, and (4) stronger enforcement of current laws, the study concludes.

Wayne, PA-based the Mortgage Professor, Jack Guttentag, generally agrees with the findings.

"Of course lots of folks are illiterate, or practically so, but that is not why we have predatory lending. Illiterate people function well in many markets, they just can't function well in the home loan market, in which many very literate people can't function either. The problem is market failure, not borrower failure, and it is not as complicated a problem to solve as some people believe, if we have the will," Guttentag said.

Published: September 16, 2004

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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.