Our nation's consumer finance laws, enacted nearly 50 years ago, are outdated. Reams of disclosures go unread and billions are spent by banks to comply with hypertechnical regulations. Perhaps more worrisome, the silent premise underlying many of these laws is that the key to assuring consumer financial health is making consumer debt more widely available and easier to obtain. This flawed premise played a large role in bringing our economy to its knees nine years ago.
In President Trump’s Feb. 3 executive order spelling out principles to guide the administration’s financial regulatory policy, the first “core principle” is: “Empower Americans to make independent financial decisions and informed choices in the marketplace, save for retirement, and build individual wealth." Under the executive order, Treasury Secretary Steven Mnuchin is instructed to identify any laws that inhibit implementation of the core principles.
A prime candidate inhibiting implementation of the first core principle is the patchwork of outmoded consumer laws. They may have been the best that could be put in place at the time, but they are woefully out of step with the needs of consumers today. Identifying these laws as impediments to progress, however, is only a first step. To replace these laws with provisions more useful to 21st-century consumers, Secretary Mnuchin should consider creating a blue-ribbon Consumer Finance Advisory Committee.
Credit used responsibly can bring great benefits to consumers, but we need to do a much better job helping borrowers understand their credit options. When most of our consumer financial protection laws were written in the 1970s, mainframe computers at the Defense Department were less powerful than handheld devices owned by consumers today. We can use this technology and related analytic tools to empower consumers in ways that the authors of current laws could not have imagined in their time. This can go beyond just delivering disclosures electronically (as often happens today), to creating an interactive lending process to engage consumers in deciding what loan is appropriate for them.
The proposed Advisory Committee might want to consider the possibility of authorizing Dynamic Disclosures, interactive electronic disclosures that would let borrowers understand their credit profile — not just their credit scores, but their prospects for default, how their risk profile impacts the availability and pricing of credit, and what would need to change to improve their prospects.
If this were possible, we could move to a world in which borrowers are not just passive applicants for credit, but join lenders in deciding what loan terms make sense. Creative bankers would be encouraged to bring a Steve Jobs-like commitment to make lending tools as user-friendly as possible. And the same principles could also be applied to enhance consumers' understanding of how to build wealth.
And as it surveys the state of consumer finances in America, the Advisory Committee might take note of how federal consumer financial policy focuses on the liability side of the consumer's balance sheet. From student loans, to credit cards, to car loans, to mortgages, to home equity lines, federal policy seems to encourage borrowing at all stages of life. There is almost no guidance or encouragement given to consumers on how to create a path to financial self-sufficiency. Indeed, federal policy seems at times to be leaning in the opposite direction.
Because of interest rate suppression, over the last nine years savers at depository institutions have lost an estimated $2.2 trillion in real-after-inflation earnings compared to what they would have received if their deposits earned at the rates that prevailed between 1960 and 2008. Almost unnoticed by policymakers and the media, the nest eggs of these middle-income voters (often older and unable to take stock market risks with the bulk of their savings) have taken a big hit. And those are the people that saved. A sizable segment of the middle class approaching retirement age has little or nothing put aside. The proposed Advisory Committee should, as part of its mandate, focus on what tools can be created to enhance consumers' ability to understand and balance the use of credit with the need to achieve long-term financial stability.
Now is the time to initiate the thinking needed to update and refocus our consumer finance laws, and this is an endeavor that deserves bipartisan support. Drawing on the best minds in finance and technology, and having representation of consumers and business, a Consumer Finance Advisory Committee could provide the thought leadership needed to bring our consumer finance laws into the 21st century.