The Need for Consumer Education and Financial Literacy in Immigrant Communities

Transcription

1 Monica Jackson Office of the Executive Secretary Consumer Financial Protection Bureau 1700 G Street NW Washington, D.C Re: Consumer Financial Civil Penalty Fund Docket No. CFPB RIN 3170-AA38 Dear Ms. Jackson: Appleseed appreciates the opportunity to comment on the Bureau of Consumer Financial Protection s ( CFPB or Bureau ) proposed rule and request for public comment regarding the Consumer Financial Civil Penalty Fund (the Penalty Fund ). Appleseed is a nonprofit network of 17 public interest justice centers in the United States and Mexico dedicated to building a society in which opportunities are genuine, access to the law is universal and equal, and government advances the public interest. Our financial access and asset building program is devoted to promoting fairness, transparency, multiple options, financial education, and safe and secure banking and asset building options for low-income persons, including a particular focus on immigrant communities. Availability of accessible, effective consumer education and financial literacy programs is critical to achieving these goals. As the CFPB develops criteria to allocate Penalty Fund monies for consumer education and financial literacy programs, Appleseed 1 encourages the CFPB to recognize the importance of supporting programs that help immigrants climb the economic ladder, avoid costly debt cycles, and achieve legal status. The Need for Consumer Education and Financial Literacy in Immigrant Communities Immigrants are vital to our country s social and economic growth. As of 2010, there were an estimated 23.1 million foreign-born persons in the civilian labor force, making up 16.4% of the total work force. 2 Approximately 42% of labor growth in the U.S. is fueled by immigrants; additionally, immigrant workers constitute a high share of the workers employed in the fastest-growing 1 These comments are submitted on behalf of The Appleseed Foundation. 2 Andrew Singer, Immigrant Workers in the U.S. Labor Force, The Brookings Institution and the Partnership for a New American Economy (Mar. 15, 2012) th Street, NW, 11th Floor Washington, DC

2 occupations. 3 Although a significant portion of immigrants begin their life in the U.S. at or near poverty, immigrants are hard-working, entrepreneurial, and upwardly mobile. 4 Immigrants will benefit significantly from consumer education and financial literacy programs aimed at helping them make more effective financial choices. For example, low-income immigrants currently rely far too much on expensive products, such as payday or auto title loans, that trap them in cycles of high-interest debt. 5 While such loans are marketed as short-term loans to cover unexpected expenses, most borrowers use these loans to cover ordinary living expenses at an average annualized interest rate of 391%. 6 These loans can pose particular hardship for recent immigrants, who have little credit history and often look to such loans to assist with visa, residency, and citizenship applications, among other needs. Immigrants are also consumers of international remittance services, 7 but they may be unfamiliar with the potential tradeoffs between remittance fees and exchange rates. 8 Without knowledge of the full cost of remittances (coupled with insufficient disclosures by service providers), immigrants may not be able to compare provider prices and may not be able to obtain the best price. Furthermore, immigrants may be inexperienced with using remittances as a tool to build assets. 9 Like many non-immigrants, immigrants may be unfamiliar with the consequences of certain events that affect their finances. For example, immigrants may be unaware that default judgment can result in wage garnishment and frozen assets, and may not know how to respond to a civil 3 Id. 4 See Migration Policy Institute, MPI Data Hub: The United States - Income & Poverty, Tables 1 & 2, available at (in 2010, 18.8% of immigrants were in poverty, and 24.7% were between 100 and 199 percent of the poverty level); David Dyssegaard Kallick, Immigrant Small Business Owners: A Significant and Growing Part of the Economy (A Report from the Fiscal Policy Institute s Immigration Research Initiative) (June 2012), p. 1 ( The immigrant share of small business owners, at 18 percent, is higher than the immigrant share of the overall population (13 percent) and the immigrant share of the labor force (16 percent). ); Ron Haskins, Immigration: Wages, Education, and Mobility, Economic Mobility Project: An Initiative of the Pew Charitable Trusts & The Brookings Institution (2008) (noting that there is considerable movement in wages between first and second generation immigrants, and that education is key to upward mobility). 5 See, e.g., The Pew Charitable Trusts. Payday Lending in America: Who Borrows, Where They Borrow and Why (July 2012) (hereinafter Pew 2012 Report ); The Pew Charitable Trusts. Payday Lending America Report 2: How Borrowers Chose and Repay Payday Loans (February 2013) (hereinafter Pew 2013 Report ). 6 Pew 2012 Report at pp. 6, See, e.g., Dilip Ratha, Sanket Mohapatra, Ani Silwal, Migration and Remittances Factbook 2011, 2d Ed., The International Bank for Reconstruction and Development (2011) ($48.3 billion in remittances were sent from the U.S. in 2009); Sending Money Home - Leveraging the Development Impact of Remittances, Inter-American Development Bank, Multilateral Investment Fund (estimating that Latin American immigrants in U.S. would send $45 billion in remittances in 2006). 8 Ann Baddour, et al, Remittance Transparency: Strengthening Business, Building Community, Appleseed Foundation (2011), at pp. 10 (noting that consumers may lack awareness regarding the costs of remittances paid through the exchange rate) (citing Ann Baddour, Sonja Danburg, et al, Creating a Fair Playing Field for Consumers: The Need for Transparency in the U.S.-Mexico Remittance Market, Appleseed Foundation (2005). 9 See Colin C. Richard, Dodd-Frank, International Remittances, and Mobile Banking: the Federal Reserve s Role in Enabling International Economic Development, 105 NW. U. L. Rev. Colloquy 248, 251 (2011) (though remittances are used for saving and investing, most remittances are used for essentials).

3 complaint. 10 Additionally, recent immigrants may face challenges understanding the key terms of the financial products offered to them because they may not speak English or it may be their second language. Consumer education and financial literacy coupled with greater availability of effective disclosures and lower cost products will play an important role in helping immigrants move away from financially debilitating products like payday and auto title loans, and will help immigrants make more economically beneficial choices regarding remittance offerings. 11 For example, persons who are more financially literate are much less likely to engage in high-cost borrowing. 12 Greater financial literacy and familiarity with the formal banking system, among other things, could lead immigrant consumers to find and use less expensive options for remittances. 13 Exposure to the consequences of default judgment may better prepare immigrant consumers to respond to a civil complaint seeking to collect unpaid debts, such as by encouraging consumers to consult an attorney. With this background in mind, Appleseed strongly encourages the CFPB to ensure that a substantial portion of Penalty Fund monies for consumer education and financial are allocated to programs focusing on the following topics: The costs and terms of payday loans, title loans, and bank deposit advance products, including the calculation of interests, the costs of loan renewal, and the total cost of borrowing; The availability of alternative small dollar loans and the application process for such loans; The benefits of using small dollar loans to assist with visa, residency, and citizenship applications; The price structure of remittances and strategies for obtaining the best overall price; and how remittances can be used to build wealth; 10 See, e.g., Marguerite S. Dougherty, et al. Due Process and Consumer Debt: Eliminating Barriers to Justice in Consumer Credit Cases, New York Appleseed & Jones Day (2010) (noting that 41% of legal actions result in default judgments, despite widespread deficiencies in service of complaints and adequacy of proof). 11 See, e.g., Min Zhan, Steven Anderson, Jeff Scott. Banking Knowledge and Attitudes of Immigrants: Effects of a Financial Education Program. International Consortium for Social Development, Social Science Development Issues, vol. 31, no. 3 (Fall 2009) (discussing training program that improved immigrant knowledge about banking and alternative financial services and that improved attitudes toward mainstream financial institutions). 12 See, e.g., Annamaria Lusardi, Carlo De Bassa Scheresberg. Financial Literacy and High-Cost Borrowing in the United States, NBER Working Paper No (Apr. 2013) (financial literacy plays a role in explaining why so many individuals use high-cost borrowing methods); Annamria Lusardi, Peter Tufano. Debt Literacy, Financial Experiences, and Overindebtedness, NBER Working Paper No (March 2009) (individuals with lower levels of debt literacy tend to transact in high-cost manners, incurring higher fees and using highcost borrowing). 13 John Gibson, David McKenzie, and Bilal Zia. The Impact of Financial Literacy Training for Migrants, The World Bank Economic Review (Dec. 23, 2012) (Migrants who have received financial literacy training are likely to seek more information regarding remittance products and are less likely to switch to costlier products).

4 The short and long term consequences of debt, and the legal ramifications of default judgment; how default judgment can result in wage garnishment and frozen assets; and the availability of attorneys to assist with legal financial matters, including debt collection. In addition to ensuring that civil penalty monies go to programs focusing on immigrant financial integration and consumer education, other topics also merit inclusion in the programs funded by the Civil Penalty Fund. These include: (a) programs aimed at preventing, detecting and redressing financial abuse of the elderly; (b) programs that encourage savings for education, homeownership and retirement, and (c) helping consumers avoid scams and hidden costs generally. Features of Effective Consumer Education and Financial Literacy Programs To make the best use of limited Penalty Fund monies allocated to consumer education and financial literacy programs, the CFPB should ensure that programs receiving such funds are effective and actually lead consumers to save money and reduce or avoid costly debt. As the CFPB likely recognizes, not all financial literacy programs help consumers make better choices. 14 Some programs may amount to little more than marketing programs and may not have a proven track record of helping consumers make better financial decisions. On the other hand, programs aimed at persons with low income appear to improve financial literacy and behavior the most. 15 Appleseed agrees with the Bureau s decision to require that programs receiving monies include specific outcome targets. In selecting programs to receive monies, we also strongly encourage the CFPB to place significant weight in each of additional program factors it has identified for program selection, especially the factors of (a) including an evaluation component to ensure the program s effectiveness, (b) having empirically based reasons to predict successful program outcomes, (c) incorporating sensitivities to specific cultural, linguistic, or demographic characteristics, and (d) having as its primary purpose to improve consumer outcomes. We also encourage the Bureau to (a) be creative, by considering programs that may appear more expensive on the surface but may ultimately provide more bang for the buck, such as programs that provide one-on-one counseling to consumers, and (b) allow allocations to groups that are saving large numbers of consumers from financial traps or making individual financial education programs meaningful by explaining the value of disclosure and how to interpret and use disclosures. 14 See, e.g., Gene Amromin, Itzhak Ben-David, Sumit Agarwal, Souphala Chomsisengphet, Douglas D. Evanoff, Financial Literacy and the Effectiveness of Financial Education and Counseling: A Review of the Literature, Federal Reserve Bank of Chicago (2010) ( Some financial education programs improve financial literacy, but not financial behavior; others lead to improved behavior and outcomes without improving financial literacy; and still others do not appear to be effective at all. ); William G. Gale and Ruth Levine, Financial Literacy: What Works? How Could It Be More Effective? (Oct. 2010) (noting that many traditional approaches to financial literacy have not generated strong evidence of positive and substantial impact, and evaluating alternatives). 15 Amromin et al. ( Though the evidence is mixed, it appears that some financial education programs do improve the behavior and outcomes of their graduates. The effects appear to be strongest for the most financially vulnerable, especially those with low incomes and levels of education. ).

5 Concluding Thoughts Comprehensive immigration reform will mean more immigrants working legally in the United States, making higher wages, sending more money to their home countries, and needing more financial opportunity and protection. Ensuring that immigrants have access to consumer education and financial literacy programs is critical to the success and integration of current and future immigrants. The CFPB can aid these efforts by allocating Penalty Funds to effective programs that focus on the education and literacy needs of immigrants. Thank you again for considering our views on these issues. If you have any questions, please do not hesitate to contact Appleseed at the addresses below. Sincerely, Betsy Cavendish President, Appleseed th Street, N.W., Suite 1100 Washington, DC ; Annette LoVoi Director, Financial Access and Asset Building, Appleseed