More from the financial education does not work literature

Ironically, you can force people to make “good” financial decisions by allowing them to skip getting financial education if they make the “good” decision instead of the “bad” one!

The Effectiveness of Mandatory Mortgage Counseling: Can One Dissuade Borrowers from Choosing Risky Mortgages?


Sumit Agarwal, Gene Amromin, Itzhak Ben-David, Souphala Chomsisengphet, Douglas Evanoff

We explore the effects of mandatory third-party review of mortgage contracts on consumer choice—including the terms and demand for mortgage credit. Our study is based on a legislative pilot carried out by the State of Illinois in a selected set of zip codes in 2006. Mortgage applicants with low FICO scores were required to attend loan reviews by financial counselors. Applicants with high FICO scores had to attend counseling only if they chose “risky mortgages.” We find that low-FICO applicants for whom counselor review was mandatory did not materially change their contract choice. Conversely, applicants who could avoid counseling by choosing less risky mortgages did so. Ironically, the ultimate goals of the legislation (e.g., better loan terms for borrowers) were only achieved among the population that was not counseled. We also find significant adjustments in lender behavior as a result of the counseling program.

Citation here.

Would being forced to take credit counseling cause you to change what kind of loan you took out?  How onerous would the course have to be for you to change your behavior?

25 Responses to “More from the financial education does not work literature”

  1. plantingourpennies Says:

    It’d probably change the type of loan we took out as we don’t like unnecessary time consuming meetings (though not completely sure we’d apply for a risky loan to begin with). We have paid extra to avoid time consuming activities we aren’t interested in. For our marriage license, we paid ~$50 more because we didn’t want to go to pre-marital counseling classes, most of which are through religious institutions.

    • Leah Says:

      Not that this will likely come in handy for you, but my husband and I did “Prepare/Enrich,” which is not religiously based. We went through a therapist. Our chaplain who did our wedding required some form of counseling. Thankfully, insurance covered almost all of the tab.

  2. Miser Mom Says:

    I am totally wondering whether my students would decide to learn calculus this way. “Take the derivative, or else you’ll have to take my class!”

    But it probably wouldn’t work . . . sigh.

  3. Liz Says:

    As a very risk-averse consumer, I’d have to say “no,” because I’m likely to go with the lowest-risk option in the first place. Does this assume that most borrowers are not researching loan options on their own? In terms of preparation, that is, where would the mortgage counseling fit into the larger set of activities people take part in before entering such a huge monetary contract?

    • chacha1 Says:

      Me too. Super risk-averse. But I *would* assume that most borrowers are not researching much of anything on their own. Anecdotally, it seems to me that most home-buyers look at schools and sex-offenders registries and then think their work is done. :/

      I think counseling ought to be 100% mandatory, because most people (including me) barely understand the mechanics of a mortgage much less the true lifetime financial implications of it.

      • nicoleandmaggie Says:

        But, as bogart notes, the people who did get the mandatory credit counseling did not end up with better outcomes than the control group that did not. Why make it mandatory if it doesn’t work?

      • chacha1 Says:

        Good point. :-) But *why* didn’t it work … worth investigating.

      • Rosa Says:

        but did the low-FICO folks even have substantially better loan options? All the education in the world won’t give someone a low-interest fixed mortgage if the bank won’t go for it because of a low credit score.

      • nicoleandmaggie Says:

        That’s a great point (that is probably addressed in the article…that I didn’t read…)

  4. Laura Vanderkam (@lvanderkam) Says:

    I love this concept as a way to nudge people to make all kinds of good decisions. I’m pondering what some other examples might be. Hmmm.

    • nicoleandmaggie Says:

      It fits into the more general “hurdle” theory, I think.

      Sadly, in this case it didn’t work for the people who most needed the help!

      • bogart Says:

        Right, but it wasn’t the same incentive. The people who didn’t so much need the help (lower risk borrowers, even if contemplating higher risk instruments) had an incentive involving getting to skip counseling. The higher risk borrowers didn’t. If the incentives had been the same, maybe they would have worked for both groups (“the ultimate goals of the legislation … were only achieved among the population that was not counseled.”)

        Given what we know about the value of time to folks who need to work two jobs and so forth, seems entirely possible that would be the case. Further research is needed!

  5. becca Says:

    What makes the authors think the ultimate goal of the legislation is to get better terms for borrowers? Isn’t it obvious that the goal is to provide a hurdle to getting loans for low FICO score individuals? This serves to: 1) blame people least able to negotiate for good terms for taking on bad mortgages 2) remind more economically challenged individuals the state thinks they need education and, overall, and most importantly, 3) provide a fig leaf of coverage to pretend We Have Done Something about mortgage bubbles that drive economic crisis.

    Get better terms for borrowers: this legislation :: exercise religious freedom : Hobby Lobby refusing contraceptive healthcare coverage
    Control or punish poor people : this legislation :: control or punish women : Hobby Lobby refusing contraceptive healthcare coverage

    • nicoleandmaggie Says:

      And yet, Chacha is saying that the counseling should be mandatory. Because there’s a strong belief that credit counseling should work. The authors here are saying that there’s no point in forcing poor people to do it because it’s just an additional hurdle that does not help people. Hence the study.

      Your argument is just that the rich people should have had to go through it too no matter what. And perhaps that should have been in the study design.

      • chacha1 Says:

        I guess I have a faint residue of romantic belief in the perfectibility of man, hence my attraction to education-related initiatives. :-)
        On the flip side, I have a heavy layer of cynicism with regard to government interventions.

        It just seems to me that saying “it didn’t work so why bother” is not the correct takeaway. I would see it more as “education is not why these people are failing at homeownership, so what is the real problem here.” Except … the answer to that is blindingly obvious in a way that is going to be offensive to just about everyone when you spell it out. It’s akin to “I am fat because I eat too much and don’t exercise.” Nobody wants to admit it. If you state “these people fail mortgage because 1) their expenses habitually outrun their income, and 2) the spectre of foreclosure is not a magic cure for bad financial management” you get resistance and conspiracy theories and defensiveness and nowhere.

        But at my core, I don’t think anybody with a household income of less than $50k/yr and savings of less than $20k should even be considered for any kind of mortgage, and I don’t think most of the mortgages offered can be fairly described as anything but predatory, so I am probably not in my right mind about issues like this.

      • nicoleandmaggie Says:

        Well, perhaps the key take-away is that we haven’t found a teaching intervention that works yet– until we do, we shouldn’t make it mandatory.

      • becca Says:

        With all due respect to Chacha, Because strong belief != data.
        What I didn’t realize about the study is that the pilot ran in 2006. Which makes it much less likely that the intent was to serve as shield to say “we did something!” for politicians. It may also have been a particularly bad year to try to do something about the subprime mortgage market- it was getting really weird that year (i.e. mortgages that would end in foreclosure increased among all FICO groups).

        Also, the authors DO note one upside to the program- it got the most predatory lenders out of the market out of fear of scrutiny (they came right back when the program ended). Clearly, we ought to require low FICO score individuals to go to “counseling”, in which we use the lender-paid fee to buy them cake and ice cream. The predatory lenders still have the incentive to get out, and people who may not have any power to negotiate are not made to suffer through tiresome explanations of how the mortgages they are looking at suck.

      • chacha1 Says:

        was that “let me google that for you” link supposed to point to a specific article? it just generated a page of search results, so I’m not sure what becca wanted me to read.

        in any event, I, personally, do not happen to believe in FICO scores; I think they are a prime example of how the banking and insurance industries manipulate people’s fears to make more profit. I think people need money in the bank before buying a house; based on that personal belief, I think urging broke people to buy a house is mendacious and abusive on its face. Because you can have the full price of a house in your bank account, but FICO doesn’t care (and therefore mortgage lenders don’t either) if you don’t also have a long history of incurring and repaying debt.

        But that’s entirely personal; I’m not an economist and don’t intend to study the question very deeply, in part because I myself have no expectation of ever applying for a conventional house-buying mortgage. :-)

      • becca Says:

        Chacha- the first link presents the data on foreclosures increasing during the subprime mortgage crisis for all FICO score categories, which is what I was initially curious about. This suggests subprime mortgages were problematic for reasons other than simply *who* was taking them.
        But most of the links are actually things like FAQs on FICO scores (e.g. “will foreclosure or shortsale hurt my FICO more?”). So another thing you can learn from Googling is that there is a positive correlation between FICO and foreclosure, but of course the causation is in the other direction than is relevant here (foreclosures lead to bad FICO, not bad FICO leading to foreclosure). I thought it was appropriate in this case (where I think we come to the issue from very different points of view) if I just brought up the topic of understanding the correlation and let you read up from the sources of info that would be most persuasive to you.

        On another note, while there are certainly routes to home ownership that don’t depend on FICO, I think it’s also relevant that there is a large chunk of the population (working class, lower middle class especially), for whom the FICO score is important whether they want it to be or not (like impacting whether credit counseling is mandatory in this pilot program). I certainly wish access to jobs, schools, neighborhoods and wealth accumulation didn’t depend on FICO, but for many, it will to some degree.

  6. omdg Says:

    This sounds a bit like all the well intentioned drs who think that if they just *educate* their patients, then their patients will make good decisions. The problem is there is a huge amount of territory in between “understands and can recite appropriate health behaviors,” and, “appreciates how risks apply to them in real life, and makes necessary modifications to lifestyle.” I suspect similar issues are at play here.

  7. oil_garlic Says:

    I’m sure this will sound a bit paternalistic but I think that most people would benefit from government-mandated financial rules rather than doing it on their own. Example: if you make enrollment in 401k mandatory and you have to decide to opt out, more people would save for retirement by default. The same for loans…I think government should just regulate banks to make it much harder to get loans so people cannot get high-risk loans unless they have a lot of funds/income. Mortgage paperwork should also standardized so it’s easier to compare costs. I’m not opposed to big government anyway..i know bureaucracy can be a headache but people don’t often have time/inclination or smarts to adequately learn about all the various money-related issues. That doesn’t mean they should not or cannot buy a house, it just means that process should be simpler so that working families can focus on raising families, keeping their jobs, and other stuff of life.

  8. og Says:

    Does this make me a liberal, conservative or moderate?

    • nicoleandmaggie Says:

      None of the above! Economists understand that government can lead to negative unintended consequences so should be used only when necessary but is sometimes necessary to fix market failures. I guess the paternalism part is a little bit liberal going by traditional definitions of liberal/conservative (in practice, conservatives are plenty paternalistic).

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