WASHINGTON — Citigroup Inc.'s Vikram Pandit said Friday it may be time for the U.S. to follow other nation's lead and start approaching consumer lending as a corporate finance issue.
Rather than U.S. firms continuing to rely on credit scores, he suggested employing systems similar to ones in Asia that utilize databases and regulations to foster sharing on "both sides of the borrowers' balance sheet."
"Lenders then scrutinize this data to make informed assessments of creditworthiness and the affordability of debt," said Pandit in a speech to a conference hosted by Deloitte & Touche. "This may sound too hard to implement but other countries have already done so to great effect. This obviously is not an inexpensive or simple fix. Yet the potential savings from increased safety should far outweigh the costs. The fact that other countries already have or are moving to adopt such a system should stop and make us think."
He said while implementing on a country-by-country basis is not ideal, it would be "better than nothing."
It was just one suggestion that Pandit made in making the point that regulators should pay greater attention to consumer issues in efforts to keep the financial system safe. Pandit stressed the need to implement stronger product regulation to help consumers make better choices, and called for simplified disclosure requirements and greater transparency of market structures.
On disclosure, Pandit said all institutions should be required to disclose, "in plain language," essential facts about their products, particularly credit offerings.
"The disclosures currently required by law theoretically tell the customer all he needs to know — provided, of course, that he can get through the fine print," said Pandit. "But the information can be complex, confusing, and hard to access."
For example, consumers typically choose credit cards with the lowest annual percentage rate because they think that one is the best choice; but that's not the necessarily always the case.
Citi, he says, offers a Simplicity Card that has a higher rate than many other cards, but does not charge annual fees or late fees and is not assessed penalty rate hikes.
"For a customer used to being charged those fees, the actual cost of using the card is lower," said Pandit.
Because credit card issuers are not required to disclose the total potential cost of credit for their products "in one clear sum," customers are not able to make direct comparisons.
Lastly, Pandit called on stronger product regulation to protect consumers against "behavioral arbitrage."
For example, when consumers shop for a car they tend to pick a financing plan with the lowest upfront cost. But usually, the car with the lower monthly payment is often the most expensive choice, he said.
This is similar to what was seen in the recent financial crisis with the explosion of adjustable rate mortgages and no-down payment loans to draw in first time home buyers. "They looked cheap, but turned out to be very expensive," he said.
"Some of the real-life patterns we see in consumer behavior lead to decisions that harm individuals' balance sheets and threaten systemic safety," said Pandit. "As we learned from the credit crisis and housing bubble, bad individual consumer decisions are not necessarily isolated that hurt only the decision makers.
