What You Can Do to Squash the Subprime Sequel

• Report this Comment On December 26, 2008, at 3:50 PM, ProfSBornstein wrote:

  The President's Advisory Council on Financial Literacy was a good attempt to address Financial ILLITERACY that is the cause of much of the problems in our economic system. This can be blamed for the high rate of individual and business bankruptcies, the Subprime Crisis, business failures, and there is more to come.

  If you will allow, I present below, my Comment sent to the Council. Please let me know if you believe that it has merit.

  Comment:To suggest a new financial literacy education delivery system.

  Background

  It is widely acknowledged in the field of education that students rarely acquire a deep understanding of the material they are supposed to learn in their courses. Students normally settle for shallow knowledge, such as lists of concepts, a handful of facts about each concept, and simple definitions of key terms. Students lack the deep coherent understanding that fortifies the learner for generating inferences, solving problems, and applying their knowledge to practical situations.

  Given this unfortunate state of affairs, many researchers and teachers in education, psychology, and computer science using Artificial Intelligence have been exploring learning environments and pedagogical strategies that promote deep comprehension.

  A concept, known as Intelligent Tutoring Systems (ITS) or Intelligent Computer-Aided Instruction (ICAI), has been pursued for more than three decades, resulting in prototypes and operational ITS systems providing computer-based instruction to support corporate training, K-12 and college education, and military training. This technology can be applied to financial literacy education.

  Intelligent Tutoring Systems are computer-based instructional tools that rely on Artificial Intelligence techniques to generate individualized and customized interactions tailored to a student's learning needs. The ITS customizes the instruction to match the level of understanding of the learner, and guides the learner to a higher level of comprehension by providing explanations, hints, examples, demonstrations, and practice problems as needed. Research on prototype systems indicates that ITS-taught students generally learn faster and translate the learning into improved performance better than classroom-trained participants.

  Thus, instead of being an information delivery system that bombards the student with a large volume of information, ITS can engage the student in natural language conversation that attempts to get the student to do the talking and that explores what the student knows as students answer questions and solve problems that require deep reasoning. Virtual Tutors, as intelligent and animated pedagogical agents, have been developed that can guide the students to an understanding of the educational content. Continuing research is developing new and innovative improvements that further enhance the learning that can result from Virtual Tutors using ITS.

  Proposed Solution

  The proposed solution suggests using Intelligent Tutoring Systems in a web-based interactive Virtual Tutor as a delivery system for financial literacy education.

  Artificial Intelligence (AI) technology touches our lives on a daily basis. The GPS navigation system is a good example of how technology using natural language can communicate information. Research into the science of learning has enabled the development of an Intelligent Tutoring System called Auto Tutor, which helps students learn by holding a conversation in natural language. It provides one-on-one tutoring which will guide the learner to better understand the educational content.

  AutoTutor was developed by the Institute for Intelligent Systems at the University of Memphis with over $10 million of funding from National Science Foundation, Institute of Education Sciences, and Department of Defense on the topics of computer literacy, physics, tactical planning in the military, and scientific reasoning.

  AutoTutor combines discourse/natural language mechanisms and sophisticated intelligent tutoring mechanisms which are believed to assist the learner in the active construction of knowledge and understanding. AutoTutor, as an Intelligent Tutoring System, has proven to be effective in teaching Computer Literacy and Physics.

  Why is there a need for Intelligent Tutoring Systems to delivery FL education?

  Millions of dollars have been allotted to FL education by the federal and state governments, businesses, banks, credit unions, and others. FL is now included, to at least some extent, in the educational standards of 40 states; 28 states require these standards to be implemented. An increasing number of states require students to take an FL course as a high school graduation requirement.

  The goal of education is to promote learning. Effective learning is accomplished when it promotes cognitive change in learners. Unfortunately, based upon the current assessment of these FL programs, the fact is that they are not fulfilling their mission because learning, which is at the heart of education, is not taking place.

  The 2006 National Jump$tart Coalition Survey: “Financial Literacy: Improving Education”, made an assessment of the current state of financial literacy education:

  We have long noted with dismay that students who take a high school course in personal finance tend to do a little worse on our exam than those who do not. This finding has been a great disappointment to consumer educators and to those who support efforts to make courses in personal finance a requirement for high school graduation. This leads to a conclusion that full-semester classes are not making our young adults more financially literate.

  The apparent weaknesses in the traditional FL education programs for K-12 are borne out by numerous studies. In a study entitled…Financial Literacy: If It’s So Important, Why Isn’t It Improving? Dr. Mandell concluded: “Measured financial literacy scores among high school seniors is low and has declined since 1997. Tracking students who took such a course over a 5 year period shows no positive impact on financial literacy.” [Mandell, 2006].

  The general adult community will also benefit from the proposed AI web-based Intelligent Tutoring System. Since it is web-based, it will reach millions in the privacy of their homes, and can function as their personal teacher to help guide them to an understanding of the financial literacy concepts they require to manage their finances.

  There is a need for financial literacy education as is evidenced by the Subprime Mortgage Crisis, the growing number of personal bankruptcies, the dangerously high level of credit card debt, the low savings rate, the lack of retirement planning, etc. It can be particularly effective for the Subprime Mortgage borrowers who are currently at risk of mortgage default, foreclosure, and financial distress. This web-based program can supplement the work of the government’s efforts and counseling agencies to reach these borrowers to guide them to avoid default.

  Conclusion

  There is a schism between what we need to know and what we actually understand in our complex financial and credit-based economic environment. This is because, at least in part, we teach remarkably little about money and credit in our schools, and unfortunately, what is taught is often not understood.

  Stated most simply, we live and deal with money daily, but may not understand and communicate effectively about it. The AI based Virtual Tutor using ITS can help guide the understanding of financial literacy concepts and thereby provide both students and adults with the knowledge, aptitude, and skills base necessary to become questioning and informed consumers and manage their finances effectively. The resulting education will also change attitudes and behavior with respect to money choices.

• Report this Comment On December 26, 2008, at 8:40 PM, kickbacker wrote:

  I was a senior loan officer for a regional mortgage bank. For my "penance," I wrote an easy-to-understand book on the deceptive practices we loan officers would use to extract thousands of extra dollars from borrowers - often without their knowledge. (Kickback: Confessions of a Mortgage Salesman).

  A key to the success of any financial literacy program is to keep it SIMPLE. (Remember the K.I.S.S. formula?)

  So I also developed a Mortgage Loan Comparison Worksheet.

  If borrowers would just get truthful answers to these questions when shopping for a mortgage from their loan officers, predatory lending practices and foreclosures could virtually be eliminated. (Additional copies of the worksheet can be downloaded free-of-charge at http://www.januspresentations.com/MortgageLoanComparisonWork...

  Mortgage Loan Comparison Worksheet

  Loan Terms

  How long is the mortgage for? ____ years

  If it is a FIXED RATE mortgage, what would be the monthly payment (for principal and interest)? $________

  If it is an ADJUSTABLE RATE MORTGAGE (ARM), what would be the INITIAL monthly payment? $________

  What could be my MAXIMUM monthly payment? $________

  Could I afford it?

  Are my payments going toward the principal and interest, or just to interest?

  (Payments made to just interest could result in negative equity in your home.)

  Loan Components

  The total amount of the mortgage: $_________

  The amount dedicated to the purchase of the property: $_________

  The difference between the two figures is due to:

  • Broker’s commissions (examples: loan origination fee, points) $_________

  • Pre-paid items (examples: property taxes, homeowner insurance) $_________

  • Other closing costs (examples: survey, flood certification fee) $_________

  • Any “junk” fees (example: document preparation fee) $__________

  Is there a mortgage pre-payment penalty? If so, how much $_________

  Is the broker also earning a yield spread premium by upselling the rate to me (example: he or she obtains the funds at 5.5% and is selling me the rate at 6.0% to earn additional commission)? ___ Yes ____ No

  Is the broker also earning a Service Release Premium (possibly by acquiring the funds, for example, at 9% and selling them to me at 11%)? ____ Yes ____ No

  HUD-1 Statement

  Has this broker been known to inflate the fees or the interest rate just prior to closing? ___ Yes ____ No

  (Request a HUD-1 statement before closing and compare the figures to those on your Good Faith Estimate and Truth-In-Lending Statement.)

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