Banking Law

Too Dumb To Borrow?

For decades, there's been a split between those who think that consumers should be free to make informed decisions about credit, good or bad, as long as they have available to them the relevant information to make such informed decisions. Others argue that the average consumer will never have enough information to make informed decisions, either because the average consumer has a head full of rocks or because creditors are so vilely devious that they make Angelica Huston's ruthless character in "The Grifters" look like Mother Teresa and they will trick-screw the consumer some way, somehow, no matter how much disclosure is made. For the latter, the only solution is government intervention to ban certain creditor practices that a majority of legislators either (1) believe are "unfair" (based upon a Platonic ideal of "fairness" I assume, the ideal form of which exists somewhere in the realm of metaphysical reality, since everyone knows that most politicians favor the practices of the Greeks), or (2) abhor because "the freakin' creditors" have been contributing jack-squat to the legislators' campaign war chests. A recent article in Housing Wire adds ammunition to the gunbelt of those who laugh at the very concept of "informed" borrowers of consumer credit.

A study conducted by the Center for Economic and Entrepreneurial Literacy, released Thursday, finds that many Americans aren?t exactly the brightest bulbs in the room. Which means if you wonder how we got into this mess, you have to at least consider the average intelligence of the masses that took out a mortgage loan they couldn?t afford ? however politically incorrect it may be to do so.

?The national survey conducted last week shows that an overwhelming number of Americans are unable to answer some of the most basic questions about borrowing, interest rates, terminology, and even basic math,? the Center said in a press statement. ?More troubling is that many Americans admit to making poor decisions with their own personal finances.?

No kidding. Some highlights from the survey are eye-opening ? and others are questionable, as early commenters caught onto (such as FICO being the most important part of originating a loan, for example). But the following two findings stood out to me more than anything else:

• 65% of respondents could not identify what would remain if you subtracted 25% from 8.
• One in three respondents could not identify what 1% of 50,000 was.

As Paul notes, "if you can't do basic math," just about any dumb decision is possible with respect to your financial affairs, including not having a clue about what the financial disclosures contained on a good faith estimate or HUD-1 might mean, much less what the financial implications might be of all that "legal mumbo jumbo" that forms the legal agreement between borrower and lender or that might be contained in a periodic notice mandated by law. I'm not certain that I agree with the managing director of the Center for Economic and Entrepreneurial Literacy, that "[e]conomic illiteracy is at the heart of our current eeconomic crisis." It's certainly a cause, but I'd argue that it will be hard to assert that it was`"at the heart" of the crisis." If I had to pick a "heart" right now, I'd pick "greed" over ignorance. We'll likely understand the most critical factors looking back. However, I do agree with the assertion "that we need to increase personal finance education at all ages so we have better informed employees, borrowers, and voters."

Full post as published by Bank Lawyers Blog on December 14, 2008 (boomark / email).