Disclosure is great, but what consumers really need is protection
Is it possible to imagine an economy that does not work on consumer credit?
Credit is the fat that makes it easier to consume – from toilet paper to televisions to tractors. Extending credit and providing access to borrowing is the backbone that sustains the structural house of the US economy. If you take out credit – or provide credit without adequate underwriting constraints, as happened before the 2008 financial crisis – the house collapses.
Credit has grown so deep anchored in the American psyche that even political discussions of the granting of credit revolve around the fundamental concepts of the nation of freedom and individual responsibility.
This tension between consumer protection and the promotion of responsibility is central to “Democracy has declined: the failure of the consumer financial protection policy.” The author, Mallory SoRelle, assistant professor at Duke University’s Sanford School of Public Policy, argues that over the past 60 years policymakers have largely placed the responsibility of protecting consumers from damaging credit products squarely on the market. shoulders of individuals rather than the government – a decision largely at odds with other developed countries.
Lawmakers have long have resisted tougher consumer protection laws because they fear that such laws restrict access to credit, and less access to credit means less consumer spending – which is bad for a consumer-driven economy. The result, she argues, is a legal framework that prioritizes access to credit over consumer protection.
Surprisingly, SoRelle traces the origins of what she calls “the political economy of credit” to the Great Depression and the New Deal of the 1930s. The FDR had considerable political capital at the time, but it did not. was not unlimited. Extending credit, SoRelle argues, was a more politically acceptable way of gaining the purchasing power of the masses than the alternative – namely, establishing a more robust and vigorous welfare state.
Public works administrator Harold Eccles exemplified this approach by orienting policy towards encouraging the “consumption” of personal loans through banks. Wary of involving the government directly in the housing market in 1933, Eccles, then assistant to the Secretary of the Treasury, lobbied for a federal safety net against losses. This approach, he argued, produced a similar effect while spending much less than if the government had provided loans itself.
Prioritizing loans over direct government intervention had its advantages and disadvantages in its day. The New Deal’s loan-driven approach helped the post-war middle class flourish in a variety of ways, from expanded homeownership to previously unattainable educational opportunities. But it also institutionalized horrific prejudices against blacks and other minorities in the form of redline and outright discrimination.
We then move rapidly forward 30 years to the 1968 legislative struggle against the Truth About Loans Act. At the time, lawmakers were primarily concerned with protecting the national economy “and its constituent financial institutions rather than the welfare of individual borrowers,” SoRelle writes.
As a result, TILA mandated the “wise use of credit” which laid the foundation for how the federal government would protect consumers in the future. By focusing almost exclusively on information disclosure, writes SoRelle, policymakers have ensured that “the responsibility rests with borrowers to make smart decisions.”
This precedent of defining consumer protection as an issue of disclosure remains the cornerstone of consumer protection laws to this day. Of the 18 consumer regulations that were passed from 1968 to 2008, almost all adopted financial disclosures as the sole or primary form of consumer protection. More explicit restrictions exist in some cases, but the message is clear: Financial disclosures have become the government’s de facto way to protect consumers.
This approach satisfies lenders and legislators, SoRelle argues, but at the expense of consumers. Limiting the question of whether a loan is “fair” or “unfair” to whether consumers have received accurate information limits the liability of lenders and encourages lenders to make such disclosures as opaque as possible – hence the term ” small print ”.
Ten years after the establishment of the Consumer Financial Protection Bureau in 2010, many of its rules still focus on financial disclosures. It was only recently that CFPB’s own working group suggested that disclosure of financial information does not replace consumer protection Difficulty.
But since the turn of the century, the expansion of credit to low-income borrowers has become a major profit center for the lending industry. “Access to credit” has also become a popular mantra among many lawmakers, fintech companies, and even some consumer advocates, who believe that access to credit will solve more problems than it creates.
Today there is a backlash against relying on disclosure as the centerpiece of consumer protection, and it’s been brewing for some time, writes SoRelle. Back when Elizabeth Warren was a professor and not a senator, she denounced the use of financial disclosures in the struggle to create her original idea of the CFPB: “Financial products have become more dangerous in part because disclosure is become a means of concealing rather than informing. “
SoRelle’s account of the history of consumer protection in America is rich, but has its flaws. It too easily dismisses the influence of banks, lenders and lobbyists in shaping the debate around credit and consumer protection policies in the New Deal era. (A more conventional analysis of New Deal policies and how commercial interests have sought to crush them can be found in the excellent “Invisible Hands: Businessmen’s Crusade Against the New Deal. ”)
SoRelle also expresses her frustration at what she describes as a widespread failure among well-funded nonprofits to mobilize citizens to demand more consumer protection. She seems genuinely puzzled that consumers are more likely to contact their bank or lender to complain about a product or service than they are to call their senator or representative and ask for more stringent regulations.
“The majority of policies obscure the role of government in regulating consumer credit, thereby privatizing the use of credit for most borrowers,” writes SoRelle.
“Democracy Denied” provides much needed context for understanding how consumer protection policies have been shaped by lawmakers’ broader focus on credit and the economy. But the question remains: Whose responsibility is it to protect consumers from excessive credit?
Financial technology lenders and companies – and, frequently at American Banker – talk about the need for equal access to credit as a synonym for equal access to essential goods and services. But credit is inherently biased against people who need it and in favor of those who don’t. Given the much-cited Federal Reserve statistic that 40% of Americans don’t have $ 400 to cover emergency spending, it may make more sense for policymakers to consider whether consumers are in a position to do so. rational financial choices when accepting more credit.
Credit expansion alone, without other protections, will simply lead to more consumers in debt. This is the problem. But we don’t know who will solve it.