MyMoney Resources - Researcher

This paper highlights the extent and effects of financial illiteracy on American households, reviews previous efforts to promote financial literacy, and discusses new directions for such initiatives. None of the traditional approaches to financial literacy – employer-based, school-based, credit counseling, or community-based – has generated strong evidence that financial literacy efforts have had positive and substantial impacts. Nevertheless, the apparent success of financial planning efforts and simplification initiatives suggests that there are private actions and public policy strategies that can influence saving behavior. There is a key role for the private sector in enhancing financial literacy and the market is responding rapidly to try to fill the void. There also is an at-least equally important role for the public sector, via a campaign that revolves around a comprehensive website and through better coordination of existing policies toward saving. The authors conclude that improving financial literacy should be a first-order concern for policy-makers, and that gains could accrue not only to the affected individuals, but also to their family members and society at large.

The Federal Reserve Bank of San Francisco, the Take Charge America Institute at the University of Arizona, and the Federal Reserve Bank of Minneapolis invited a small group of researchers and practitioners to discuss how to improve the evaluation and metrics of youth financial education programs. The meeting focused specifically on youth — which we defined as individuals under the age of 25 – in an effort to distinguish this effort from others that have discussed financial education research more broadly. The goal for the meeting was to help create a research agenda that would move the field towards the development of clearly defined outcomes for youth financial education, metrics for capturing ROI, and quality standards for curriculum and delivery that would serve as "best practices" for educators seeking to offer effective financial education interventions.

Abstract: The lack of property tax escrow accounts among subprime mortgages causes borrowers to make large lump-sum tax payments that reduce liquidity. Different property tax collection dates across states and counties create exogenous variation in the time between loan origination and the first property tax due date, affording the opportunity to estimate the causal effect of loan-level exposure to liquidity reductions on mortgage default. We find that a nine-month delay in owing property taxes reduces the probability of first-year default by about 4 percent, or about one-third of the effect of a reduction in equity from 10 percent to negative 20 percent.

This report was prepared to provide background on the “Bank On” model, a new approach for expanding access to safe, affordable financial services for unbanked households. The purpose of this report is to describe the landscape of Bank On programs, their origins, and their context within a broader financial access field. The report provides basic information about Bank On programs that currently exist, including information about program structure, partnerships, and funding as well as an assessment of successes, challenges, special considerations and gaps in the field. Information for this report comes from several sources: a Bank On program survey, research and information gathered for NLC’s publication, Bank On Cities: Connecting Residents to the Financial Mainstream, research and analysis from CFED’s forthcoming publication on the role of financial institutions in Bank On programs, conversations with Bank On program staff and research from experts in the field, including the Center for Financial Services Innovation (CFSI), the New America Foundation, the Brookings Institution, the U.S. Department of the Treasury, and others. The report describes the overall financial access field, the emergence and growth of Bank On initiatives, details about the structure of existing programs, direct and indirect benefits and outcomes, key components of successful programs, challenges facing the Bank On field, and opportunities for expanding the reach and effectiveness of Bank On within the context of comprehensive financial access initiatives.

Using credit report records and data collected from several household surveys, we analyze changes in household debt and saving during the 2007 recession. We find that, while different segments of the population were affected in distinct ways, depending on whether they owned a home, whether they owned stocks, and whether they had secure jobs, the crisis’ impact appears to have been widespread, affecting large shares of households across all age, income, and education groups. In response to their deteriorated financial situations, households reduced their average spending and increased their saving. This increase in saving_at least in 2009_did not materialize through an increase in contributions to retirement and savings accounts. If anything, such contributions actually declined on average during that year. Instead, the higher saving rate appears to reflect a considerable decline in household debt, as households paid down mortgage debt in particular. At the end of 2009, individuals expected to continue increasing their saving and paying down of debt, which is consistent with what we have observed so far in 2010. In contrast, consumers were pessimistic about the availability of credit, expecting it to become harder to obtain during 2010.

Abstract: While a substantial literature has examined the causes of mortgage foreclosure, there has been relatively little work on the consequences of foreclosure for the borrowers themselves. Using a large sample of anonymous credit bureau records, observed quarterly from 1999Q1 through 2010Q1, we examine the credit experiences of almost 350,000 borrowers before and after their mortgage foreclosure. Our analysis documents the substantial declines in credit scores that accompany foreclosure and examines the length of time it takes individuals to return their credit scores to pre-delinquency levels. The results suggest that, particularly for prime borrowers, credit score recovery comes slowly, if at all. This appears to be driven by persistently higher levels of delinquency on Consumer Credit (such as auto and credit card loans) in the years that follow foreclosure. Our results also indicate that the experiences of individuals whose mortgages entered foreclosure from 2007 to 2009 have followed a similar path to borrowers foreclosed earlier in the decade, though post-foreclosure delinquency rates for the recently foreclosed have been higher and, consequently, credit score recovery appears to be taking longer.

Abstract: The widespread use of credit scoring in the underwriting and pricing of mortgage and Consumer Credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.

A substantial fraction of children receiving Supplemental Security Income (SSI-child) benefits for disability apply to move directly onto the SSI-adult program without attempting to enter the labor market. Thus, most SSI-children are aging into what is likely to be a permanent life on the SSI-adult program or, in the event of denial of SSI-adult benefits, turning to other forms of social welfare. Once this transition is complete, very few seek employment while receiving SSI-adult or other benefits. This is costly to both the beneficiaries who live their lives at or near the poverty threshold and to taxpayers who are funding the benefits. The cost of providing such a low level of economic well-being to a growing number of young adults has raised concerns among policymakers and resulted in a large scale attempt by the Social Security Administration to support work among these young adults. There are many reasons why the vast majority of youths and young adults with disabilities are not investing in work. This project focuses on documenting evidence with respect to one of these barriers to work, the financial incentives to work for youth aging onto the SSI–adult program. Specifically, it produces a computation algorithm designed to determine the returns to work, including the value of wages and the eventual value of Social Security Disability Insurance benefits once the quarters of coverage requirement is met, for young adults receiving SSI–adult benefits. Using these algorithms it examines the financial incentives/disincentives of working for young adults on the SSI program.

This paper investigates the effectiveness of both videos and narratives in improving people's understanding of five basic concepts in financial planning: (1) compound interest; (2) inflation; (3) risk diversification; (4) tax treatment of retirement savings vehicles; and (5) employer matches of defined contribution savings plans. To that end the authors have administered a quiz about these concepts in the American Life Panel to establish a baseline of what respondents understand about these concepts. Next, in a number of waves, respondents were shown narratives and videos related to the five concepts and the quizzes were administered again. They find significant improvements in understanding of these concepts in comparison with a control group that was not shown any material. They do not find a difference between videos and narratives in terms of effectiveness.

The authors conducted a field experiment to evaluate the effect of receiving information about the retirement savings decisions of one's peers. Non-participants and low savers in one firm's 401(k) plan received letters enabling them to enroll or increase their plan contribution rate by returning a simple reply form. Some employees were randomly assigned to receive peer information: a statement about the fraction of their coworker peers who were participating in the plan or a statement about the fraction of their coworker peers who were contributing at least 6% of their salary to the plan. Other employees were randomly assigned to receive no such peer information. They find conflicting evidence on the impact of peer information. Among nonunionized non-participants, there is some evidence that peer information leads to a small increase in participation. But among unionized non-participants, savings plan enrollment was reduced by peer information. These results highlight the possibilities and limitations of using peer information interventions to influence behavior.