Financial Literacy: Your Best Defense Against Predatory Lending


Reserve Chairman Ben Bernanke told the Senate Subcommittee on
Oversight of Government Management, the Federal Workforce, and the District of
Columbia, Committee on Homeland Security and Governmental Affairs that
financial education
must be a life-long pursuit.  “(It)
enables consumers of all ages and economic positions to stay attuned to changes
in their financial needs and circumstances and to take advantage of products
and services that best meet their goals. Well-informed consumers, who can serve
as their own advocates, are one of the best lines of defense against the
proliferation of financial products and services that are unsuitable, unnecessarily
costly, or abusive.”

Tying the financial crisis to the need for
good financial decision making, Bernanke said good choices depend on reliable
and useful information, presented in an understandable way.  He included as essential components of
personal financial management and understanding of how to budget strategically,
use credit, save to build personal wealth, and shop for and choose suitable
financial products.  

Federal Reserve has taken a three-pronged approach to assisting consumers
successfully navigate the financial marketplace.  First, the Chairman said, the Board has
worked diligently to foster financial and economic education.  For years it has provided unbiased, credible research-based
information to consumers in print and on line. 
They have publications in both English and Spanish that provide consumer
tips on topics from avoiding foreclosure scams to managing a checking
account.  Recently the Fed has developed
interactive webpages that offer information on changes in regulations that
affect consumer financial products and services.

Exposing young people to financial information, he said, is especially
important.  Students can be vulnerable to
the lure of taking on excessive debt so the earlier they develop basic
financial skills the better their decision making will be as adults.  With this in mind, the Federal Reserve works
closing with teachers and schools to provide resources such as educational
games, classroom lesson plans, and multimedia tools for financial education

The bank also collaborates with numerous other organizations and agencies
that have financial education as their goal. 
Chief among the organizations is NeighborWorks American which supports
homeowner counseling
but the list also includes Junior Achievement, AARP, the
National Council of LaRaza, America Saves and many others.  Since 2004 the Board has participated in the
Financial Literacy and Education Commission which is composed of
representatives from 22 federal agencies and commission and coordinates
financial education resources offered by the federal government

Second the Federal Reserve conducts research on consumer decision-making
to identify what works in financial education. 
For example, the Board’s Survey of Consumer Finances is one of the most
important sources of information on the assets, debts and wealth of American
households.  Several years ago,
researchers in the Board’s Division of Consumer and Community Affairs joined
with Army Emergency Relief to conduct a longitudinal study of the effect of a
two-day financial education program on soldiers’ financial management.  The Federal Reserve has also developed
substantial expertise in assessing and drawing policy conclusions from a range
of consumer financial data, such as data from credit records or data on
mortgages provided by lenders under the Home Mortgage Disclosure Act. The Fed
has also analyzed alternative approaches to financial education such as an evaluation
of students taught by teachers who had taken a 30 hour Federal Reserve of
Philadelphia course. A 50 question exam administered both before and after the
class showed that the student has a significant increase in their personal
financial achievement compared to other students of the same age. 

Third the Board recognizes that basic
financial knowledge is not sufficient to safeguard consumers from fraud and
deceptive practices so it has developed strong consumer protection rules and
financial product disclosures and vigorously enforces those regulations.
  In recent years the Fed has issued rules for mortgages,
credit cards, student loans, and overdraft protection programs and has
maintained a robust compliance program for banks under the Fed’s purview.

Bernanke said that after its consumer-protection rulemaking authority
and consumer-protection supervisory and enforcement authority transfers to the
Bureau of Consumer Financial Protection the Board will retain some relevant
rule-writing authorities as well as supervisory authorities for smaller
financial institutions it regulates for safety-and-soundness purposes. The
Board is working closely, he said, with the Department of the Treasury and the
new Bureau to facilitate the necessary transfers of authorities and personnel.

“Regardless of how the regulatory and supervisory responsibilities
are distributed,” Bernanke concluded, “a comprehensive approach–one
that includes education, research, and regulation–remains essential to
ensuring that consumers receive adequate protections and that markets for
consumer financial products function well.”

What You Need To Know

Federal Reserve Education Website

Survey of Consumer Finances

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