In a long story in today's edition, the New York Times is reporting a bubble in often deceptive and abusive subprime auto lending on unaffordable terms, including very high rates of interest. Although not quite the threat to the overall economy that the subprime mortgage bubble created eight or nine years ago, this apparent new bubble in lending for used vehicles has some similar features (targeting vulnerable consumers, lax underwriting, securitization, investors seeking high returns) and is causing significant pain for low income and unsophisticated borrowers. A few regulators are mentioned in the story, but oversight so far seems to have been lax.
Tag: regulation
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Platform, Infrastructure, Utility?
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While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”
There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money–and a challenge for the Credit Slips community.
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Purchasing Insurance as a Game of Chance: What Does Your Homeowners Policy Cover?
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The core product that insurance consumers buy is a standard form contract. Unlike virtually any other market, though, it is virtually impossible for purchasers of personal lines coverage (i.e. homeowners, renters, and auto insurance) to scrutinize this product before they purchase it. Insurers only provide consumers with an actual insurance contract several weeks after they purchase coverage. They generally do not make sample contracts available to consumers on the Internet or through insurance agents. Marketing materials and other secondary literature from regulators and consumer organizations provide virtually no guidance about how different carriers’ policies differ. And most states have essentially zero laws requiring insurers to provide any types of pre-sale disclosure to consumers regarding the scope of their coverage.
How can this possibly be?
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Responsible Lending as an Emerging International Norm
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The International Association of Consumer Law, with participants present from six continents, has been meeting at Brunel University in West London the last few days, hearing presentations from regulators, industry representatives, consumer advocates, and academics. http://qwww.brunel.ac.uk/bls/research/events/ne_41734 Not surprisingly, regulation of consumer credit has been a prime focus, giving some perspective on US struggles to achieve more effective consumer financial protection.
Professor Iain Ramsay of the University of Kent in the UK reported on initiatives for international cooperation to enhance consumer financial protection. The G20, World Bank, Financial Stability Board, and Organization for Economic Co-operation and Development are all on board with this goal, seeing it as an essential part of a program to ensure that the international financial system is safe and sound. The OECD is expected to issue draft principles of consumer financial protection soon, and comments will be invited. Given the primarily prudential role of these organizations, balance from other sectors will be important.
Ramsay raised an underlying and overlooked question: what is the economic and social value of consumer credit?
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Building a Culture of Compliance
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I was scheduled to speak at the AALS Financial Institutions breakfast this morning, but due to flight cancellations I was unfortunately unable to attend. I’m posting below a summary of what I intended to say there, and which I had already planned to share with the readers of Credit Slips anyway. I wanted to talk about what anthropological research among market participants and regulators tells us about how to change the way people behave in the financial markets. After all, the whole point of regulation is just this–to change behavior. Yet how do you do it?
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Market Governance Is About People (And How They Think)
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Hello everyone and thank you so much to Bob and Adam for bringing me into this exciting conversation. This week I want to raise with you a few thoughts about the way forward on financial regulation that have come out of interviewing and observing regulators in their interactions with market participants over ten years. My research has been mainly in Japan but involves some US components as well.
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Overdraft Fee Regulation and the End of Free Checking?
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Ron Lieber has a thoughtful column about the future of free checking. Consumers have become quite used to free checking over the last 15 years or so. The impetus for the column is whether the Fed's new overdraft regulations, scheduled to go into effect in July (new accounts) and August (existing) accounts this year will change the financial equation such that free checking is no longer viable.
I'm skeptical. The potential impact of the Fed's overdraft regulation impact is greatly over-hyped.
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Behaviorally Informed Financial Services Regulation
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A new policy paper issued by the New America Foundation and authored by Michael Barr, Sendhil Mullainathan, and Eldar Shafir argues that we need to move toward “behaviorally informed financial services regulation.” By this the authors mean that financial services regulation should incorporate the insights of behavioral economics and cognitive psychology, regarding things like default rules, framing of information, and hyperbolic discounting.
This paper comes on the heels of Richard Thaler and Cass Sunstein’s book Nudge, the culmination of their work in developing what they call “libertarian paternalism”–a soft-form version of paternalism that instead of mandating outcomes, such as requiring retirements savings, sets default rules and menu choices in a way that encourages them, such as making workers opt-out of retirement savings plans, rather than opt-in.
There’s much to commend about this work (Barr et al., as well as Thaler & Sunstein), and the incorporation of behavioral economics into law has been an important development in the last decade or so of legal scholarship. I do not doubt that behaviorally informed financial services regulation would be an improvement over our current model. But I am dubious about its ultimate efficacy for three reasons.