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THE CONSUMER
FINANCIAL
PROTECTION
BUREAU
How the Bureau is Transforming
the Asymmetrical Financial Market
for the Consumer...
INTRODUCTION
 Bursting of the Housing Bubble
 U.S. economy felt repercussions from 2007-2010
 Easy Borrowing
 Partly f...
REFORM?
 The unregulated financial market led to some widespread,
negative consequences
 “subprime” loans— What’s in a n...
HOW TO REFORM AND REGULATE
Forget about “Perfect Market” Implement Behavioral Economic
 Assumes several conditions
 No e...
BEHAVIORAL ECONOMICS
A Brief Explanation of
BOUNDED RATIONALITY
 Cognitive capacity is limited
 “Brain power”
 Time
 Rationality is “bounded” by this
limited capa...
BOUNDED WILLPOWER
 Willpower
 Economically speaking,
“choosing the optimum”
 Bounded by temporality
 People may think ...
BOUNDED SELF-INTEREST
 Humans are not entirely self-
interested creatures
 Shown through cooperation
 prisoner’s dilemm...
BEHAVIORAL ECONOMICS IN BANKING
 Marianne Bertrand, Eldar Shafir and Sendhil Mullainathan
 Those without banks accounts ...
SIMPLER DISCLOSURES
 Simpler disclosure forms enable better understanding
 Consumer Financial Protection Bureau created ...
B. ECONOMICS IN FINANCIAL
REGULATION
 Barr, Shafir and Mullainathan
in 2008 look at behavior’s
role in making financial
d...
B. ECONOMICS IN FINANCIAL
REGULATION
 Part of determining how to
regulate financial markets is
understanding which
mistak...
B. ECONOMICS IN FINANCIAL
REGULATION-SUGGESTIONS
 “Changing the Rules”
 Enforcement of Federal
Consumer Financial Laws
...
B. ECONOMICS IN FINANCIAL
REGULATION-SUGGESTIONS
 Opt-out options
 Defaults for financial products
can be made to be the...
BASIS IDEAS
Elizabeth Warren’s Brainchild
ELIZABETH WARREN
 Senator from Massachussetts
 Professor from Harvard Law
School
 Published author
 “Two Income Trap”
...
DISCUSSION OF THE FINANCIAL
MARKET
 Financial products and services were vastly unregulated as
compared to physical consu...
THE TWO INCOME TRAP
 One of Warren’s published works
 One of the main reasons behind her advocating for consumer
safety
...
BEHAVIORAL ECONOMICS
BEHIND THE CFPB
SENDHIL MULLAINATHAN
 Economics Professor at Harvard
 Behavioral Economist
 Part-time assistant director of research
 ...
APPEAL TO ETHOS
 CFPB strives to be transparent and easy to work with
 Website appeals to younger audience and also pres...
CFPB ORGANIZATION
CONCLUSION
 Enforcement and Successes
 The Bureau has shown several instances where they enforce consumer
financial law ...
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The Consumer Financial Protection Bureau

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The Consumer Financial Protection Bureau

  1. 1. THE CONSUMER FINANCIAL PROTECTION BUREAU How the Bureau is Transforming the Asymmetrical Financial Market for the Consumer’s Benefit Marisa Carreon HONR 499 Spring 2015
  2. 2. INTRODUCTION  Bursting of the Housing Bubble  U.S. economy felt repercussions from 2007-2010  Easy Borrowing  Partly funded by foreign savings  Banks making “subprime loans”  Mortgage-backed securities  Low interest rates + increased borrowing = more homes being bought  Decease of housing prices   decrease in subprime loan values also  “Credit Crunch” to avoid insolvency  Consumers had become “highly leveraged speculators in a fixed asset”  Borrowing financed too much of their spending
  3. 3. REFORM?  The unregulated financial market led to some widespread, negative consequences  “subprime” loans— What’s in a name  Risky borrowing, poorly managed risk by lenders  Lenders being unclear about loan information to borrowers  Predatory lenders seeking profit  Dodd-Frank—means of reform of the financial market  Consumer Financial Protection Bureau (CFPB) one of the means of reform  Protect consumers from predatory lenders and dangerous financial products  Fix market imperfections  Asymmetrical information
  4. 4. HOW TO REFORM AND REGULATE Forget about “Perfect Market” Implement Behavioral Economic  Assumes several conditions  No externalities  No barriers to entry/exit  Inability to set market prices  Profit maximization  PERFECT INFORMATION  Pareto efficiency achieved  No one other equilbrium w/out someone being worse off  This is not reality  Especially with financial market  More true and better account of actual market behavior  Emphasizes Homo Sapien, not Homo Economicus  Perfectly-rational agent does not exist  Combines psychology and economics  Seeks to explain economic decision-making process
  5. 5. BEHAVIORAL ECONOMICS A Brief Explanation of
  6. 6. BOUNDED RATIONALITY  Cognitive capacity is limited  “Brain power”  Time  Rationality is “bounded” by this limited capacity  Humans cannot be expected to always solve optimization problems  Instead, we use heuristics or “rules of thumb” to guess at the optimal solution http://agilevietnam.com/2012/12/28/understand ing-decision-making/
  7. 7. BOUNDED WILLPOWER  Willpower  Economically speaking, “choosing the optimum”  Bounded by temporality  People may think with short- term in mind instead of long- term  Or vice-versa  Depends on self-control and self-awareness http://picoeconomics.org/HTarticles/Selectionist/S eledtionist.html
  8. 8. BOUNDED SELF-INTEREST  Humans are not entirely self- interested creatures  Shown through cooperation  prisoner’s dilemma games  Ultimatum games  Parents making decisions with their children in mind http://www.acting-man.com/?p=34313
  9. 9. BEHAVIORAL ECONOMICS IN BANKING  Marianne Bertrand, Eldar Shafir and Sendhil Mullainathan  Those without banks accounts are almost always poor?  Why?  No bank accounts  higher out-pocket fees  Fees with cashing paychecks  Lack of savings  Pay-day loans from lack of credit  More easily available money is more easily spent  Why don’t they bank?  Associate banks with higher costs=“psychological barrier”  The opposite is true  Suggest restructuring fees and forms to be simpler, easier to understand
  10. 10. SIMPLER DISCLOSURES  Simpler disclosure forms enable better understanding  Consumer Financial Protection Bureau created new disclosure forms  Involved mortgage brokers, lenders, borrowers, and settlement agents in redesign  http://www.consumerfinance.gov/knowbeforeyouowe/#disclosure
  11. 11. B. ECONOMICS IN FINANCIAL REGULATION  Barr, Shafir and Mullainathan in 2008 look at behavior’s role in making financial decisions  Policy should be formed with this role in mind  Bounded rationality and bounded willpower  Limit ability to make best decision  Salient features may inform decision  Low or remarkable prices
  12. 12. B. ECONOMICS IN FINANCIAL REGULATION  Part of determining how to regulate financial markets is understanding which mistakes consumers tend to make and why.  What leads to the  Misunderstanding compound interests  How could predatory firms use this?
  13. 13. B. ECONOMICS IN FINANCIAL REGULATION-SUGGESTIONS  “Changing the Rules”  Enforcement of Federal Consumer Financial Laws  Increasing regulation  Increasing supervision and enforcement of laws  Most effective when used in conjunction with “changing the scoring”  Lack of regulation affects both borrowers and lenders, specifically “high-road” lenders  “Changing the Scoring”  Changing how profits are made in financial sector  Moving profits away from “low- road” competitors  Predatory lenders gaining revenue from subprime loans  Changing penalties for violators
  14. 14. B. ECONOMICS IN FINANCIAL REGULATION-SUGGESTIONS  Opt-out options  Defaults for financial products can be made to be the best, most optimal decision.  Could also be a standardized “one size fits most” product  If they want to follow another option, they can “opt-out” of the default  Can opt-out at anytime, whether default payments are too high or too low  Change behavior of both consumers and lenders  Framing-creates a way of perception  Can be framed poorly (not showing optimal choice for consumer)  Salient features stand out and call to fast thinking mode of consumers  Can be framed well (showing most optimal choice for consumer)  Disclosures-better, more streamlined disclosures frame relevant information to help consumers choose
  15. 15. BASIS IDEAS Elizabeth Warren’s Brainchild
  16. 16. ELIZABETH WARREN  Senator from Massachussetts  Professor from Harvard Law School  Published author  “Two Income Trap”  “A Fighting Chance” (her autobiography)  Popularized idea of the Consumer Financial Protection bureau http://www.bostonherald.com/news_opinion/us_politics/2 013/10/elizabeth_warren_surges_in_new_prez_poll
  17. 17. DISCUSSION OF THE FINANCIAL MARKET  Financial products and services were vastly unregulated as compared to physical consumer goods  Physical products regulated under the Consumer Product Safety Commission (CPSC)  Innovation has incorporated factors of safety  Part of passing regulations and selling product sooner  Why shouldn’t financial products have something similar?  “Innovation”  longer, more incomprehensible contracts that were nonnegotiable  Regulation  better innovation and better products  At the time, lenders were in “a race to the bottom”
  18. 18. THE TWO INCOME TRAP  One of Warren’s published works  One of the main reasons behind her advocating for consumer safety  Even though families with 2 incomes would seem safe from bankruptcy, her research showed they were in ways more vulnerable  The safety net was not much of a safety net because of the extreme payments required by their loans  If one income earner failed, then there was very little to no financial cushions
  19. 19. BEHAVIORAL ECONOMICS BEHIND THE CFPB
  20. 20. SENDHIL MULLAINATHAN  Economics Professor at Harvard  Behavioral Economist  Part-time assistant director of research  “Poverty Impedes Cognitive Function”  Social experiment with farmers before and after harvest  Before Harvest: lower cognitive functions and worse mental processing  After Harvest: better mental processing and cognitive functions  Financial stress impedes cognitive functions
  21. 21. APPEAL TO ETHOS  CFPB strives to be transparent and easy to work with  Website appeals to younger audience and also presents transparency to the public  Consumerfinance.gov
  22. 22. CFPB ORGANIZATION
  23. 23. CONCLUSION  Enforcement and Successes  The Bureau has shown several instances where they enforce consumer financial law on lenders and affected consumers receive money back  Complaint system  Proven to be very popular  Amount of complaints almost doubled from 120,000 to 200,000 from July to September 2013  Doubled again (400,000) by July 2014  New agency showing new, effective methods of regulation

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