MAKING CONSUMER FINANCE WORK

• Published in: Columbia law review Vol. 119; no. 6; pp. 1519 - 1596
• Main Author: Sarin, Natasha
• Format: Journal Article
• Language: English
• Published: New York Columbia Law Review Association, Inc 01.10.2019
• Subjects: Accountability; Bank service charges; Banking; Banking industry; Banks; Banks and banking; Checking accounts; CONSUMER CREDIT; CONSUMER PROTECTION; Consumerism; Consumers; Cost control; Costs; CREDIT CARDS; Customer services; Customers; Economic aspects; Economic crisis; Efficacy; EVIDENCE; Fees & charges; Finance; FINANCIAL SERVICES; Financial services industry; Inequality; Interest rates; LOW INCOME GROUPS; Markets; Monopolistic competition; Overdrafts; Policy making; Poor; Prices; Profitability; Profits; Recessions; Reforms; Regulation; Regulation of financial institutions; Securities markets; Services for; Subprime lending; Wall Street Reform & Consumer Protection Act 2010-US; Warnings; Welfare; UNITED STATES; United States > US
• ISSN: 0010-1958; 1945-2268

The financial crisis exposed major fault lines in banking and financial markets more broadly. Policymakers responded with farreaching regulation that created a new agency—the Consumer Financial Protection Bureau—and changed the structure and function of these markets. Consumer advocates cheered reforms as welfare enhancing, while the financial sector declared that consumers would be harmed by interventions. With a decade of data now available, this Article examines the successes and failures of the consumer finance reform agenda. Specifically, it marshals data from every zip code and bank in the United States to test the efficacy of three of the most significant postcrisis reforms: in the debit, credit, and overdraft markets. The results are surprising. Despite cosmetic similarities, these reforms had very different outcomes. Two (changes in the credit and overdraft markets) increase consumer welfare, while the other (in the debit market) decreases it. These findings run counter to prior work by prominent legal scholars and encourage reevaluation of our (mis)conceptions about the efficacy of regulation. The evidence leads to several insights for regulatory design. First, banks regularly levy hidden fees on consumers, obscuring the true cost of financial products. Regulators should restrict such practices. Second, consumer finance markets are regressive: Low-income customers often pay higher prices than their higher-income counterparts. Regulators should address this inequity. Finally, banks tend to discourage regulation by promising their costs will be passed through to consumers. Regulators should not be overly swayed by their dire warnings.