Should You Need a License to Get a Loan?

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borrower's license, financial education, financial literacy, business loans, home loans, personal loans, credit card debt

The following post is by MPFJ staff writer Travis. Travis is a customer blogger for CareOne DebtRelief Services, and also appears weekly at Enemy of Debt. Travis candidly shares his personal journey to pay off $109,000 of credit card debt and the tips he’s learned along the way. As a father and husband, he provides a unique perspective on balancing debt, finances, and family.
I saw the following Facebook status update from an in-law of mine the other day:
Raised my house payment again. 

If you’re a homeowner, and understand fully the process by which your mortgage payment is calculated, you know that your lender can’t just decide to arbitrarily raise your monthly payment.  I gently questioned my in-law to determine the reason for the increase.
Me: How can that be?  A bank can’t just decide to raise their house payment, can they?

Him: Idk, all I know is the value of my house went down, but my payment went up.

Ah, now we’re getting somewhere.  It turns out that even though the value of his home went down, due to actions by his city counsel, his property taxes went up.  This caused an increase in his monthly mortgage payment since his bank rolls an amount for property taxes into his monthly payment.
He had been so enraged at the increase that he was ready to sell his house or refinance with a different bank. 
Only, it wasn’t the bank’s fault.
I’m sure there are many readers that are gasping in awe of his lack of understanding.  But, the thing that pops into my head is something an elementary school teacher once said to me:
“If one person has a question, most likely they aren’t the only one.”
Every day, there may be people that sign not only mortgages, but car loan, personal loan, and even student loan papers without fully understanding what they are getting themselves into.   If I were a lender, that would scare me.  I would want to ensure that anyone I loaned money to fully understood the process, their role in that process, along with all the terms and conditions of the loan.   
I would want them to obtain a borrower’s license.

We require people to become educated, pass an exam, and obtain a license for many everyday privileges, including operating a motor vehicle.  Why not for borrowing money?  Similar to a motor vehicle license, there could be different classes of licenses for different kinds of loans.
Want to get a credit card?  Show me your Class A borrower’s license.
Thinking of buying a house?  Sorry, you need a Class C license to qualify for a mortgage.
While having a borrower’s license certainly wouldn’t guarantee smooth sailing through the entire life of the loan, it would accomplish several very important things:
1.)    The lender is assured that the borrower has an understanding of what they’re getting themselves into.
2.)    The borrower is fully informed, and can make an educated decision as to whether the loan is really the right choice.
3.)    Help avoid disgruntled customers who may take unnecessary actions due to misunderstanding such as what almost happened in my in-law’s case.
I’m all for increased financial education in the classroom, and I certainly support parents teaching their children good financial habits.  But in my opinion, even both of them combined aren’t enough.  Even if a high school senior learns the intricacies of a mortgage in a class, those concepts may become rather fuzzy when he buys his first home ten years later.
By requiring borrowers to learn, be tested, and obtain a license before qualifying for a loan, we can help borrowers make intelligent decisions about their money, and increase the success rate of loans for lenders.
What do you think?  Do you think requiring a “Borrower’s License” would help people make better financial decisions when applying for loans?

    ***Photo courtesy of http://www.freedigitalphotos.net/images/Finance_g198-Person_Siging_On_Loan_Application_p40358.html

    Comments

    1. This is a great topic to discuss, and one that I've thought about before. However, I don't think that as a society, we are quite 'there' yet (although I'd like it if we could be) to have enforced financial literacy.

      The first question would become who would pay for it? I doubt the banks/loan originators would because 1) they wouldn't necessarily profit from it and 2) they sell the loans on the secondary market after originating them.

      Of course, the other option is to have taxes cover the cost, similar to driver's license testing. However, with driver's license testing, it can be argued that physical pain could occur without the education. Since this is just financial pain, it might be harder to convince legislators to pass a bill on this.

      Maybe the thing that would make the most sense is to have the borrowers (individuals) pay for the education (assuming it is fairly cheap), since they are the ones directly benefiting from the increased knowledge.

      I look forward to hearing other people's thoughts on this!
      My recent post Should You Need a License to Get a Loan?

      • travispizel says:

        I agree, I don't think we're quite there yet either – people are always resistant to new fees, and I'd imagine that this would be handled much like a home inspection – something required for closing, but paid for by the purchaser. If they didn't pass, the financing falls through ( but of course they'd still be on the hook for the cost of the license application).
        My recent post I Improved My Marriage by Talking About Money

    2. Justin@thefrugalpath says:

      That would be one way to stop people from borrowing money.

      It would be great if people needed to learn about what they were actually signing before the got a loan. I remember myself in a similar place as your in-law the year after I purchased my house. They had a math error in the house taxes and my escrow account was $1,000 lower than what it needed to be. I had two options, either pay the $1,000 or have my mortgage go up $75 a month to make up the difference.

      I was pretty upset until I set off to educate myself. I'm no expert, but I'm glad to have learned what I have about lending.
      My recent post Goodbye Swiffer Refills Hello Savings

      • travispizel says:

        That's a great illustration of a benefit of having such a license. If a person was educated on how their mortgage payment was calculated, one could also verify that the right amount was being calculated for the taxes.

        Thanks for sharing your thoughts, Justin!
        My recent post I Improved My Marriage by Talking About Money

    3. That would mean a huge decrease to the loaning record, perhaps 50 % most possible.
      My recent post How SME’s can cut their gas usage to avoid being hit by the jump in prices

      • travispizel says:

        I'm not exactly sure what you mean by “loaning record,” falcon….do you mean the overall number of loans originated? Maybe I need that license too. LOL.
        My recent post I Improved My Marriage by Talking About Money

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