Debt, Consumer Protection and Middle Class Wealth Building

Those were the topics on tap at yesterday's Senate Banking Subcommittee on Financial Institutions and Consumer Protection hearing. As I mentioned yesterday, our own Ray Boshara (well, he's not all ours anymore) was on a crowded but extremely informative panel alongside Ida Rademacher from CFED. Here's a quick breakdown of the panelists and what each focused on (you can download formal written testimony from each panelist here, and use the same site to watch archived video of the hearing):

Atif Mian, UC Berkeley --Professor Mian focused on his research into the accumulation of household debt in the past 10 years, the relationship of that debt buildup to the economic collapse, and the painstaking process of deleveraging and how that continues to damage the economy. Professor Mian recommended a program of principle reduction as a difficult but necessary step to rapidly deleverage households, restore their economic security and boost aggregate demand.

Key quote: "We estimate that deleveraging of the household sector accounts for 4 million of the 6.2 million jobs lost between March 2007 and March 2009 in our sample. In other words, 65% of total jobs lost in the U.S. are due to deleveraging and the drop in aggregate demand as a result of it."

Katherine Porter, UC Irvine School of Law--Professor Porter focused on the increased role of borrowing and debt and the growing role of consumer credit law as a result of the changed nature of the financial services industry. Massive increases in household debt and subsequent deleveraging have combined to have a devastating effect on the economy and changes need to be made in order to restore manageable levels of household debt. The Consumer Financial Protection Bureau is a good place to start laying clear ground rules for both industry and consumers. 

Key quote: "The challenge is to figure out how to calibrate consumer credit markets to balance the harms of borrowing against its benefits. The CFPB is a critical tool for meeting that challenge. Its vitality will help our economy recover and flourish, and its vigilance in the future will safeguard the well-being of American families as consumer debt markets change."

Robert Lawless, University of Illinois College of Law--Professor Lawless centered his remarks on the conditions in the credit markets, and related consumer debt trends, and the relationship to bankruptcy filings. Professor Lawless expressed initial concern that the CFPB would not go "far enough" and could be subject to regulatory capture. However, he praised the research functions of the CFPB as potentially leading to much greater knowledge about the root causes of overindebtedness and argued that the CFPB is a key corrective to a debt and credit problem grown out of control.

Key quote: "Responsible companies in these industries should welcome the oversight of the CFPB to rid the industries of bad actors. Three years into the financial crisis, it can be easy to forget the conditions that led to the creation of the CFPB. It is important that short political memories not hobble an important tool for American consumers just after it starts."

Ray Boshara, Federal Reserve Bank of St. Louis (Ray's entire testimony is available here.)--Ray's testimony focuses on how and why household balance sheets (debt, savings, etc) contributed to the economic collapse and several proposals to promote savings across the spectrum of American society. He highlighted three shortcomings of policy and behavior leading up to the crisis, 1) that debt levels were allowed to expand enormously; 2) that no emphasis was placed on supporting short-term savings, and; 3) that most families did not diversify their wealth beyond homeownership. He argued that addressing the whole balance sheet for all families would yield stronger families and a stronger society. Ray then offered five policy proposals to promote savings: 1) build assets as early as possible (such as in our ASPIRE Act);  2) build assets at tax time (such as in our Saver's Bonus); 3) build assets in the workplace (AutoIRA and AutoSave are examples); 4) build unrestricted savings, and; 5) support college savings.

Key quote: "We know that household debt is both weighing down millions of families and stifling economic growth. Thankfully, we have compelling evidence, some of it presented here, suggesting that rebuilding balance sheets and net worth will help hard-hit families and the broader economy move forward."

Michael Flores, Bretton Woods, Inc.--Mr. Flores argued that banks are stuck between the legacy costs of their 20th century models while building the digital-based banking platforms for the 21st century. That serving the needs of individuals in terms of small dollar loans cannot be profitable and that the unintended consequences of well-meaning regulations are driving banks to alter fee structures and place more burdens on consumers. He also argued that CFPB, as structured, has limited accountability and raises questions about safety and soundness protections.

Key quote: "I am a true supporter of clear and concise disclosures so the consumer can make an informed decision. However, it is becoming apparent that the law of unintended consequences is alive and well. For example, the reduction in interchange fees to benefit the consumer, which was basically a business to business financial issue between the banks and the merchants, has inadvertently created a significant income redistribution from the consumers to the merchants in the form of higher bank fees to the consumer to lower costs/higher margins for the merchant."

Doug Fecher, Wright-Patt Credit Union--Mr. Fecher emphasized that there was a clear need for affordable financial services and that his institution, and many like it, strived to fill that need through high-quality loans for autos, small businesses, mortgages and student loans. Mr. Fecher also noted that his institution competes against the non-traditional financial sector by offering a small dollar payday loan alternative. Mr. Fecher believed that an increase in banking regulations was burdensome on small institutions and that while he generally was supportive of the CFPB's goals (and very supportive of Richard Cordray as nominee to head the Bureau), he was very concerned that regulation would overburden and ultimately shutter institutions like his.

Key quote: "We are doing what you want us to do--we are taking care of consumers, helping them improve their financial situation, and putting money back in their pockets to use in supporting their families. I believe we need to strengthen America's cooperative credit unions as an essential resource for the current fiscal crisis plaguing this country...we are not doing our job if our members are not in better financial health today than when they first sought our services."

Ida Rademacher, CFED--Ms. Rademacher's testimony outlined the current state  of financial security among middle- and low-income households in the US and the "upside down" nature of current policy supports. She then outlined a framework for helping households achieve financial security and upward economic mobility and a series of policy changes that Congress could adopt to help rebuild the middle class and economy. The policy options included: 1) Confirming a Director for the CFPB; 2) Improving the system of credit reporting and scoring; 3) remove disincentives to save by reforming asset limits in means-tested programs; 4) expanding the Saver's Credit for retirement savings and making it refundable; 5) Enact the AutoIRA; 6) Reauthorize the Assets for Independence Act; 7) enact the ASPIRE Act or a similar foundation for universal children's savings accounts.

Key quote: "Taken together, all of these policy proposals would cost a small fraction of what the Federal government currently spends to subsidize asset building for taxpayers in the highest income brackets, and could easily be funded by capping some of those expensive unfair and ineffective subsidies currently in place. Most importantly, they would begin to address some of the long-term inequities that contribute to the wealth gap, and they would help millions of families build a more secure economic future."

Susan Weinstock, Pew Charitable Trusts--Ms. Weinstock discussed Pew's research though its Safe Checking Project and laid out three policy options that would help mitigate consumers' exposure to high cost, low benefit products. She called for 1) a disclosure box laying out account terms, conditions, and fees; 2) complete disclosure of all overdraft options, and; 3) the prohibition of transaction reordering that maximizes overdraft fees.

Key quote: "Unfortunately, the checking accounts in our study did not meet this standard. We found a median of 111 pages of disclosure documents...The banks often used different names for the same fee or service; put the information in different documents, different media, or different locations in a document...Many of these documents are not user-friendly, with much of the text densely printed, difficult to decipher, and highly technical and legalistic."