Bureau of Consumer Financial Protection

October 31, 2012

Mr. Garry Reeder

Chief of Staff

1700 G Street N.W.

Washington, DC 20552

Re: Federal Register Docket No. CFPB-2012-0030

Request for Information on Effective Financial Education

Dear Mr. Reeder:

The undersigned members of the Assets and Opportunity Network would like to commend the Consumer Financial Protection Bureau (CFPB) for its commitment to improving the ability of American consumers to make better financial decisions for themselves and their families. We are grateful for this opportunity to comment on how to make financial education more effective. Financial education has been a crucial component of our members work to help low- and moderate-income families build assets and improve their household balance sheets.

Background

The Assets & Opportunity Network (the Network) is a movement-oriented group of advocates, practitioners, policymakers, and others working nationally to expand the reach and deepen the impact of asset building strategies. The Network is comprised of over 800 members, from 49 states and the District of Columbia, on the frontlines of federal, state and local policy advocacy, coalition-building, and service delivery. The Network is both a learning and advocacy community, which aims to enhance each member’s capacity to advocate and deliver critical community services, and to lead the growth of the asset building movement. The Network is guided by a nationally-representative Network Steering Committee and is convened locally by more than 60 Lead State and Lead Local Organizations. The Corporation for Enterprise Development (CFED) supports the Network’s infrastructure and provides technical assistance and policy consultation.

The recommendations highlighted in this letter were drawn from Network members’ extensive, diverse and practical on-the-ground experiences working for and advocating on behalf of individuals and families seeking to build assets and achieve financial security. In response to your request, the comments below reflect the input and recommendations of this diverse Network or organizations.

Challenges to Effective Financial Education

In your experience, what are consumers' most common financial decision-making challenges?
Is there a common set (or lack) of habits, attitudes, or practices, and if so, what are they?
What are the major challenges in providing financial education that would help adult consumers address the issues identified in questions 1 and 2, and that would lead to good financial outcomes for recipients?

The theoretical underpinning of financial education is that people behave in ways destructive to their financial security because they lack the information to behave differently, and because they have been exposed to defective products. For example, during the subprime mortgage crisis lenders ensnared many borrowers in mortgages they didn’t understand, in some cases leading to“equity stripping,” “flipping,” excessive prepayment penalties and “junk fees,” the terms for which were buried in hundreds of pages of paper. We believe that if people are given proper consumer protections and the right information,behavior should change accordingly.

Behavioral resistance as a challenge to effective financial education

The link between education and behavior is not straightforward. Research suggests that the people who most need the help are not in fact getting it—nor are they necessarily open to receiving it. A recent study by Stephanie Moulton and colleagues found that consumers who under-estimate their non-mortgage debt tend to incur significantly higher mortgage debt when they buy a home, and that consumers who are “overconfident” in their ability to pay-off their debts are less likely to take up an offer of financial counseling.[1]

Unfortunately, attempts to examine these behavior challenges have encountered methodological complications. Researchers acknowledge that “self-selection bias” is perhaps the biggest current failing in the literature evaluating the effectiveness of financial education. In the Kansas City Fed’s evaluation of the workplace financial education program (cited above), researchers qualified their positive findings to note that:

“the people who chose to participate in a financial education program[,] that is, those who self-select into the program, may be more motivated to improve their financial position than those who choose not to participate.”[2]

Similarly, researchers J. Michael Collins and Collin O’Rourke wrote in a survey of homeownership education and counseling programs that “those who attend education and counseling are already more likely to be successful homebuyers and to pay on time than nonparticipants.”[3]

As the Bureau rightly recognizes in this Request for Information, behavioral resistance to financial coaching and education might be among the most significant barriers to delivering universally effective financial education. Financial education cannot truly be deemed “effective” if it only changes the behavior of people who are already motivated to improve their financial capability. It must also reach those who currently believe they don’t need financial education or wouldn’t benefit from it.

Potential sources of behavioral resistance

Feedback from our members revealed several potential sources of behavioral resistance that could limit the delivery of effective financial education:

Stigma: Several of our members blame negative stigma towards talking about financial literacy as one source of people’s resistance to financial education and behavior change. As one Network member put it:

“People don’t want to admit they don’t know enough about their own finances or that they can’t effectively manage their finances. … In order to get people into workshops, seminars, trainings, etc. there has to be an admission (at least internally) that you have a problem and need help. That is very difficult when you think you’ve been doing great just to survive.”

This indicates that when financial education is painted as “remedial” and pointing out flaws, versus empowering and building on strengths, people might be far less willing to participate.

Lack of connection to the real world: Another potential source of resistance is the belief that financial education lacks real-world applicability. As one of the Network members puts it, “They don’t believe going to a class will change anything.” Another one of our members argues that the framing and contextualization of information is critical: “[I]f you tell someone that they shouldn’t use check and loan services because they charge interest rates of 300 to 600 percent, that means nothing to many of the people utilizing those services—because [they] see it as situational and don’t calculate the cost in those terms.”

Negative attitudes toward financial institutions: Several respondents also pointed to negative attitudes toward mainstream financial institutions, which were variously described by ourmembers as a “lack of trust for banks and other institutions” or a “cultural beliefs that having a relationship with a financial institution is bad.” Assuming that participants have—or will want to have—relationships with a mainstream financial institution could trigger resistance to financial counseling, especially if educators (1) fail to acknowledge the existence of negative attitudes toward banks or (2) fail to acknowledge the positive experiences individuals might have had with the alternative financial service providers they are “not supposed to be” using.

Recommendations and promising approaches

5. How might CFPB effectively disseminate financial literacy and education resources that will help consumers build the necessary skills to achieve good financial outcomes?

There are many valuable lessons that can be gleaned from the experience of Network members to help the Bureau overcome the behavioral challenges described above. First, we believe that the integration of financial education into human services programs might be among the most effective mechanisms to both ensure that financial education reaches all the individuals who should be served and does so in a manner that would most likely create positive behavior change. Second, we anticipate that the Bureau’s new efforts to standardize financial education and measure financial capability will have far-reaching impacts on the effectiveness of financial education and consumers’ trust in the information they receive.

Integration of financial education into human services programs

The integration of financial education into human services can overcome resistance to financial education and increase its effectiveness in three ways: (1) it allows for the delivery of financial education in a personalized context that is immediately relevant to participants’ lives; (2) it can be coupled with concrete products and incentives, such as individual development accounts (IDA), that are closely aligned with the underlying program’s objectives while also providing immediate “wins” to program participants; and (3) it utilizes pre-existing service delivery pathways so that participants are easier to reach on a consistent basis.

Meaningful context for the delivery of financial information:Perhaps the least effective way to provide financial education is to deliver it in a vacuum as abstract information. Without context, concepts such as “APR” and “compound interest” becomecomplex math problems with no real-world applicability. On the other hand, the integration of financial education into other programs can provide immediately relevant information with a direct connection to better outcomes. As Jonathan Mintz argues, financial instability is often the root cause of why an individual seeks social services—such as homelessness or job loss—in the first place. Thus, financial education that is tailored to help individuals directly address this underlying financial instability can contribute to better program and individual outcomes.

For example, the city of San Antonio requires anyone receiving more than one month of rental assistance to enroll in financial education classes, participate in one-on-one financial coaching and save a portion of his/her current income.[4] For someone at risk of losing his or her home, the benefits of better financial education are immediate and clear, including the better prioritization of spending decisions and help with budgeting; the accumulation of emergency savings in the event of a financial shock; and a better understanding of a borrower’s rights and obligations in the event of a foreclosure.

The City of New York calls these integration opportunities “touchpoints”—optimal moments for integrating financing education when “participants are able to see the added benefit of counseling… and …to complement the experience of the client in engaging with the system.”[5] Moreover, integration allows the personalization of financial education to meet a particular participant’s unique needs. This personalization can do even more to raise the salience of financial education and overcome resistance.

Another example in which financial education is integrated and “contextualized” is the approach taken by Ways to Work, a Milwaukee-based Community Development Financial Institution (CDFI) that offers short-term, low-interest loans (primarily for the purchase of a car) to people with poor credit. The loans offered by the program are coupled with intensive, focused financial education aimed at helping participants rebuild their credit histories and repay their loans successfully. According to a 2011 evaluation, 90 percent of participants reported feeling more financially capable, while overwhelming numbers of participants reported improving their credit scores, employment circumstances and net incomes.[6] Similarly, the New Hampshire-based More than Wheels program offers focused financial education to potential car buyers and helps to negotiate with dealers for the best price and interest rates. A survey of program participants by the organization found that nearly three-fourths reported having a better overall financial outlook.[7]

Access to concrete products and incentives:A second way in which the integration of financial education can make it more effective is when it is coupled with concrete products and incentives—such as a savings account or IDA—that can provide immediate benefits to participants, as well as real-life application of lessons learned. As one Network member states, “It is … critical for people to have quick wins and a sense of accomplishment. The incentives to spend, save and invest wisely have to be equal or greater than the instant gratification of detrimental financial decisions.”

Tax-time savings initiatives offered by free tax preparation campaigns are a powerful example of how service providers can successfully integrate financial education into a direct service “touchpoint” with built-in product access. Each tax season, nonprofits and local governments across the country seek to maximize low and moderate income families’ takeup of key income supports such as the Earned Income Tax Credit (EITC) and Child Tax Credit (CTC) by offering free tax preparation through the Volunteer Income Tax Assistance (VITA) program. VITA clients often receive their largest annual lump sum of money through their tax returns, which offers an ideal opportunity to save. Indeed, studies demonstrate that approximately one-third of low-income families,[8]including many VITA clients,[9]intend to save a significant portion of their tax returns. Further, many VITA sites (and some private sector tax preparers) now market U.S. Savings Bonds to their clients in order to augment the opportunity this touchpoint provides. Participants in the Tax-Time Savings Bond Campaign have achieved compelling results by integrating educational outreach into the tax prep moment and pairing that with an easily accessible, flexible savings product – a U.S. Savings Bond. One study found that VITA clients who heard from site staff or volunteers about the opportunity to save through bonds were more than twice as likely to buy bonds as those who did not experience outreach.[10] Moreover, this approach is an effective habit-forming experience: about 25 percent of bond buyers reported that they were repeat buyers.[11]

The field’s work on IDAs also suggests that incentives can positively change behavior. IDA program participants receive a match (1:1, 2:1 or sometimes even higher) for deposits made into a dedicated savings account. Participants typically also receive a suite of services, including financial education, aimed at ensuring their readiness to acquire and maintain a major asset, such as a home. Since the 1990s, more than 1,000 organizations now offer IDA programs, resulting in tens of thousands of new homeowners, new business start-ups and new investments in education. According to the Center for Social Development (CSD), the pioneering organization for IDA development, research and implementation, IDA program participation had positive impacts on both total savings and net wealth. One CSD study, for example, found that IDA program participants had accumulated $750 more in real assets at the end of the program than a control group.[12] A study of Massachusetts low-income IDA participants indicated a savings rate of 10%, far exceeding the national average of the general public. Participants reported that they were improving their financial habits with their new skills.[13]

These examples suggest that if financial education is coupled with immediate and tangible incentives that reward both the acquisition and application of new financial knowledge, behavior change—at least in the short term—is more likely to result.

Pathways to the delivery of financial education services:Finally, the integrated delivery of financial education can make it more effective by taking advantage of the built-in infrastructure provided by the core service delivery systems. Not only can participants receive financial counseling at the same sites where program services are delivered, they may even receive it from the same individuals who work with their families through other services. Moreover, using existing pathways can not only help to overcome the time constraints that many program participants may be under due to work schedules, child care and other pressing concerns, it can help deliver financial education over the longer period of time necessary to create and instill long-lasting habits.

One pioneering example of this integrated approach is the “Financial Opportunity Center” (FOC) model, launched by the Local Initiatives Support Corporation (LISC) with support from the Annie E. Casey Foundation. FOCs “bundle” financial education and counseling with public benefits access assistance and employment counseling to help clients improve their financial management skills while also enhancing their careers. Since 2005, LISC’s network of financial opportunity centers includes 65 centers in more than 25 cities. In 2011, LISC FOCs helped more than 3,000 people find employment, 2,800 people obtain public benefits and 6,300 people establish budgets to help them plan for the future. In Chicago specifically, LISC FOCshelped participants realize nearly $12 million in tax refunds, $1.4 million in income supports, and 900new jobs—in a market where new jobs are difficult to find.

The early results from the center-based strategy are promising, but more rigorous evaluation is required to understand precisely what is working and whether initial successes translate into long-term improvements in clients’ financial capability and wellbeing. The Bureau should consider supporting independent evaluation of existing programs or launching a small-scale similar pilot project with built-in data collection and analysis mechanisms.