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By Greg Burns

RISMEDIA, August 27, 2008-(MCT)-Almost every American knows by now that adjustable-rate mortgages can backfire, and in Bathsheba Wyatt-Draper’s beginner real estate classes, no one goes home without a stern warning.

“If you see the words, ‘rider’ and ‘addendum,’ be very afraid,” Wyatt-Draper tells the two dozen would-be home buyers learning the ropes at the non-profit Neighborhood Housing Services of Chicago. The same warning applies to “yield spread premium,” she said. And if a relative wants to sell you a house, hire a lawyer anyway, she says with a smile: “Can’t nobody do you like those you love.”

This extensive program of free classroom sessions is popular in today’s hard times. But do classes like this work?

The teacher thinks so. The students think so. Lawmakers seem to think so, too, pouring a fortune into financial literacy education.

The proof, however, is sketchy. Critics say they can find no evidence of a benefit, even from classes such as Draper’s run by knowledgeable teachers for the public good.

“You think, ‘It has to work,'” said Lauren Willis, a professor at Loyola Law School in Los Angeles and author of the new report, “Against Financial Literacy Education.” “They don’t work. There just isn’t any evidence they work. The idea that we are making Americans financially literate to handle their own credit and investment needs, it is a fallacy,” Willis said.

In fact, personal finance education programs may even hurt, she said. Overconfidence can lead program graduates to rush into bad deals, or they blame themselves if they get cheated after their training sessions. More broadly, Willis said, financial literacy classes amount to a costly distraction from the pro-consumer regulation and one-on-one counseling that she recommends.

Doubts about financial literacy education have attracted little attention, though academics have debated its value for years. Willis is among the most outspoken critics, and some prominent researchers disagree with her conclusions, saying the lack of results reflects difficulties in measurement and program flaws that could be corrected with more resources. They also point to positive survey results from those taking the classes.

Still, a surprising number of education advocates admit the evidence of any benefit is scanty, and they worry that unjustified faith in financial literacy training is spawning bad policy.

Lewis Mandell, a University of Buffalo professor emeritus, spent much of his career promoting high school and workplace training programs that, under close review, show “very little effect,” he said. Now he worries that lawmakers responding to the credit crisis will mandate the same, ineffective programs.
“It’s an unthinking and simple solution to very complex problems,” he said.

After decades of deregulation, financial-services companies have shucked many of the rules that protected consumers, such as restrictions on the types of loans they can make and the interest rates they charge. At the same time, they have emphasized disclosure, laying on the fine print in mortgage documents, credit card statements and the like.

Those only work if consumers can understand them, so policymakers have championed financial literacy training.

Under the Bush administration, the U.S. launched a National Strategy for Financial Literacy, headed by a high-ranking Treasury official.

The Defense and Agriculture departments run big programs, as do several large non-profit agencies. Financial-services companies get in the act too, combining marketing with education. The resulting instruction shows up in classrooms and workplaces, informational websites and interactive games.

But in practice, critics say, the financial world has proven too complex and fast-moving for most consumers to keep up. And even decades-long efforts to teach consumers relatively simple credit concepts such as “annual percentage rate” have “failed spectacularly,” as Willis puts it.

In the wake of the mortgage crisis, regulation is making a comeback. Earlier this month, the Fed introduced new rules designed to protect home buyers from certain abusive lending practices. But no one expects a return to the past level of protections, which would drastically reduce consumer choice.

That leaves education in the spotlight, where it belongs, according to literacy advocate Annamaria Lusardi, a Dartmouth College economist.

“We cannot get away from empowering people because they have to make so many decisions,” she said. “Finding that the current programs don’t work does not mean we shouldn’t do it.”

Instead, the programs should be improved to make them relevant, engaging and available at teachable moments. But it’s no simple task: “I don’t know of an example in which we’ve been able to do that,” Lusardi said.

At Neighborhood Housing Services in Chicago, Mike Van Zalingen believes that not all programs are created equal. He has taught more than 200 of the four, two-hour class sessions that his revitalization group requires before it will make a loan to its low- and moderate-income customers. About 1,500 participate each year, and the group is hiring more counselors and adding foreclosure prevention workshops to meet rising demand.

“Some people teach home ownership in an hour,” said Van Zalingen, who supervises the group’s counselors. “There are really crummy teachers out there.”

While his group’s classes are no magic bullet, those who pay attention “will know what questions to ask,” Van Zalingen said.

“We point out all the scams and all the tricks. The class lets them know you can fix a credit score. How deeply that sinks in, I don’t know.”

The feedback is positive, he said, and the program also includes unbiased one-on-one counseling for cleaning up credit and reviewing loan documents, which academic research supports. Yet few citizens go to advisers, and finding a legitimate one is tough.

Moreover, hard times have touched off a rush to take advantage of vulnerable consumers in a cashed-out society. “There are lots of unscrupulous advisers,” Lusardi noted. “In my view, (they’re) more of the problem.”

Wyatt-Draper said her classes “give people control,” and at least some students agree.

“In four weeks, they really can’t give you all the information you need, but you’re better off with the class than without it,” said Marco Escudero, a Chicagoan looking into buying a two- or three-flat in the city.

His friend and classmate Salvador Gomez agreed: “It does help.”

Single mother Rosalie Roa, an administrative assistant at an engineering firm, said the class has inspired her to take another session focused on condos.

“I’m looking for a small place, something to call our own,” she explained. “I’m not asking for much, really.”

Wyatt-Draper helped Roa recognize the value of not rushing in.

“I realize I’m not ready,” Roa said. “I need to keep reading and keep saving.”

© 2008, Chicago Tribune.
Distributed by McClatchy-Tribune Information Services.