Regulation Should Keep Pace with Evolving Marketplace
By Patrick O'Shaughnessy
January 14, 2014
Credit cards, check cashing services, overdraft protection, bank deposit advances, payday loans, Costco mortgages, Walmart prepaid cards, internet loans – Americans have more financial services options than ever. Millions, however, still lack a predictable and reliable process for managing their day-to-day obligations, establishing or rehabilitating their credit history, building savings and growing wealth.
For too many, the American Dream – to own a home, to live a life better than their parents – has faded. According to new research from personal finance company LearnVest, less than half of Americans believe the American Dream can be achieved by anyone. Recent research from the Federal Reserve Bank of New York suggests that, while consumer credit has improved since the 2008 financial crisis, loan demand is still going significantly unmet. Meanwhile, millions of Americans are struggling to cover their expenses, relying on their bank's overdraft protection to cover payments an average of 7.1 times per year, according to Moebs Services.
But these challenges aren't the only barriers standing in the way of smart financial decision-making and upward mobility. Financial institutions and regulations have failed to evolve, making it more difficult for many Americans to navigate the marketplace and to manage their credit needs and expenses. Equally serious, the current regulatory regime is behind the curve.
Consumers have eliminated the barrier between "traditional" financial services and so-called "alternative" nonbanks. They no longer connect their financial decisions and borrowing to a single provider – historically, their bank. Instead, a growing number of consumers – an estimated 24 million American households – are choosing financial services that involve the most favorable terms and lowest fees. They prefer services offered by a variety of credit providers, including payday and installment lenders, pawn shops and online lenders.
But, despite these evolving habits, old regulations remain. Many lenders are not licensed or regulated at all, with operations designed to evade state and federal regulations governing consumer financial services. Many bank and nonbank services that consumers use interchangeably are subject to different regulations and disclosure rules. For instance, banks are not required to disclose the annual percentage rate associated with fees for overdraft credit and there typically is no limit on the number of times consumers can overdraw their account. In contrast, short-term lenders offering a comparable service must disclose their flat fee as an APR and several states restrict access to credit through annual loan limits or outright prohibition.
This regulatory approach favors some services and discriminates against others. As a result, current regulations impede rather than facilitate consumers' ability to comparison shop and make informed financial decisions. This creates a lopsided, less-competitive market, with winners and losers dictated by regulators rather than consumers.
Such narrow policymaking creates additional barriers to credit access, undermining consumer empowerment, economic mobility and competition. To put money back into Americans' pockets and bolster the U.S. economy, the nation must develop more consistent policies that ensure meaningful disclosures and reporting to underpin how consumers actually access and use financial services, especially credit.
The Consumer Financial Protection Bureau is well-positioned to tackle this challenge, as the one agency with the authority to oversee various financial service providers. It's also the first financial regulator that can look across different regulatory frameworks and focus on consumers' varying needs.
I urge the CFPB to establish a working group – of banks, credit reporting agencies, other regulators, Silicon Valley startups, retail consumer lenders and others – to ensure a level regulatory playing field and to conduct a thoughtful examination of American consumer credit – past, present and future.
First, more equitable regulation will create a more competitive and consumer-empowering financial services market. Consistent disclosure requirements are a natural place to start.
Second, and perhaps more important, the CFPB should convene a much-needed dialogue on how consumers access and use credit today and will in the future, amid rapid technological advances, shifting attitudes towards banks and the emergence of new financial service providers. This dialogue should also address what corresponding regulatory changes are necessary to reflect the new financial services world order.
This ongoing conversation would explore ways for providers of all stripes to collaborate with regulators and credit reporting agencies to improve access to credit and other financial services for consumers. This move to revisit – even reinvent – lending practices could also be incorporated into Project Catalyst, the CFPB's current initiative that supports innovation within the consumer finance marketplace.
As Americans seek to regain economic footing, government and commercial leaders must collaborate to provide more consistent, accessible and transparent credit options and a smoother path toward long-term savings and upward mobility. Such improvements would significantly benefit consumers, easing growing concerns about paying their bills and managing their financial obligations.
An equitably regulated, competitive market would bolster the collective consumer financial services industry. Reforming the way we regulate financial services, especially where credit is concerned, promises to restore the American Dream for countless Americans.
J. Patrick O'Shaughnessy is president and chief executive officer of Advance America, a nationwide provider of consumer financial services.