Financial Literacy
Much emphasis has been placed on the responsibility of lenders and the government to regulate the mortgage industry, but consumer advocate groups, mortgage industry regulators, and the government have not focused on the individual’s responsibility to be financially literate.
And yet, financial literacy trumps regulation any day of the week. (If regulation could effectively control the markets, communism would have prevailed over democracy.) Imagine how different our market would be if companies, municipalities, lenders, and borrowers were more knowledgeable and aware of financial matters before signing on the dotted line. Regardless of whether they were rich or poor, borrowers would have made informed decisions about the loan products they were using, and this would have gone a long way toward minimizing the real estate crisis.
Instead, regulators and borrowers alike seem to think a set of disclosures alone is enough to constitute an informed decision. Case in point: the newly proposed HUD RESPA Reform mandates lengthy generic disclosure scripts to be read by the closing agent during closing. This is not only too little and too late, but it also places responsibility on the wrong party.
Financial literacy is not the simple transfer of knowledge via disclosures. Rather, financial literacy is marked by an individual’s ability to make appropriate decisions when managing finances. Financial literacy is an individual’s commitment to be informed, aware, and responsible of the possible risks of a transaction, as well as a commitment to own the costs of the risk just as a borrower would own the proceeds of the risk.
Though financial literacy is primarily an individual’s responsibility, it can be promulgated by the government. I applaud the steps the federal government has recently taken in this area—educational materials produced by the federal government are readily available for free online, in print, or on a CD. But this alone is not enough to create a community of financially literate borrowers. Let’s start with an aggressive federal campaign in our public schools. Just like JFK started the Official U.S. Physical Fitness Program, so could our government encourage an attitude of financial literacy in today’s students (and tomorrow’s borrowers).
And finally, let’s use this housing crisis as a catalyst for shifting awareness. No one knows a borrower’s financial situation better than the borrower. As such, it is incumbent on the borrower to embrace financial literacy as a necessary component of making an informed decision before accepting a loan.
-Paul Wylie
Please visit http://www.paulwylie.com