Thomas A. Durkin

The impact of public policy on consumer credit

Preface. 1. Introduction T.A. Durkin, M.E. Staten. 2. The Evolution of Consumer Credit In the United States L. Calder. 3. The Growth of Consumer Credit and the Household Debt Service Burden D.M. Maki. 4. Personal Bankruptcies C.A. Luckett. 5. Disclosure as a Consumer Protection T.A. Durkin, G. Elliehausen. 6. Financial Literacy in the U.S. and Efforts toward Credit Education L. Mandell. 7 Trends in Equal Access to Credit Products R.W. Bostic.

Theory and Evidence of the Impact of Equal Credit Opportunity: An Agnostic Review of the Literature

As amended in 1976, the Equal Credit Opportunity Act (ECOA) outlawed discrimination in granting credit on the basis of race, color, religion, national origin, sex or marital status, and age. This article examines the difficulties of transforming the goals of the act into effective regulation, looks at what economic theory implies about the possibility of discriminatory behavior in credit markets, and reviews existing statistical evidence concerning discrimination in consumer credit markets. On balance, theory predicts little impact for the act, although a few cases are identified in which the ECOA could have an effect. Available studies have failed to produce much evidence of systematic discrimination. Moreover, there is little evidence that membership in ECOA-protected groups provides information about lack of creditworthiness or that the act has increased credit availability to anyone. Thus, the ECOA would not appear to have a profound effect on the operation of consumer credit markets.

The Cost Structure of the Consumer Finance Industry

This paper estimates the cost function of the consumer finance company industry to explore the questions of existence of scale economies and elasticity of costs by loan size. Using a more appropriate functional form and much newer data than in earlier studies, this study confirms their general conclusion that economies of scale in the industry are limited at the firm level but exist at the office level. Scale economies are found only at smaller offices, however; and they become exhausted as office size increases. Elasticity of operating costs with respect to loan size is shown to be well less than unity.

Disclosure as a Consumer Protection

The common element of the federal government’s consumer-protection measures for financial services in the United States is the requirement that institutions disclose designated information to consumers in specified formats at required times. Disclosures are so central to the purpose of some financial consumer protections that we might properly call them “information protections.” The Truth in Lending Act (1968) is probably the most notable example, but others include the Real Estate Settlement Procedures Act (1975), the Home Mortgage Disclosure Act (1975), the Consumer Leasing Act (1976), the Electronic Fund Transfer Act (1978), and the Truth in Savings Act (1991). The main thrust of each of these laws is mandatory, designated disclosures. Moreover, even those federal financial consumer-protection laws that are not primarily information protections contain significant disclosure provisions. Statutes like the Fair Credit Reporting Act (1971), the Equal Credit Opportunity Act (1974), the Community Reinvestment Act (1977), and the Expedited Funds Availability Act (1987) largely entail direct regulation of the market behavior of institutions, but they also rely on disclosures to advance their objectives.

New Evidence on an Old Unanswered Question: Why Some Borrowers Purchase Credit Insurance and Other Debt Protection and Some Do Not

Credit related insurance and other debt protection are products sold in conjunction with credit that extinguish a consumer’s debt or suspends its periodic payments if events like death, disability, or involuntary unemployment occur. High penetration rates observed in the 1950s and 1960s raised concerns about coercion in the sale of credit insurance. This study presents evidence on credit insurance purchase and debt protection decisions from a new survey. The findings provide little evidence of widespread or systematic coercion in purchases. Instead, findings suggest that risk aversion and health or financial concerns motivate consumers to purchase credit insurance and debt protection, just as these concerns also motivate purchases of other types of insurance.

Rate Ceilings and the Distribution of Small Dollar Loans from Consumer Finance Companies: Results of a New Survey of Small Dollar Cash Lenders

Research conducted many years ago that indicated substantial cost economies of loan size in consumer lending. This finding implies that low interest rate ceilings make small loan sizes unprofitable and will not be available in the marketplace. Furthermore, research indicates that demanders of small cash loans tend to be relatively risky and to face binding limits on the amount they can borrow at relatively low rates. These rationed consumers may benefit from additional credit, even credit at relatively high rates. New data on small installment cash lending are consistent with the hypotheses of this previous research. Nearly all of the loans are extended to risky borrowers, who clearly are subprime on the basis of their credit scores. The annual percentage rates of interest for these loans are high because of their small size and the riskiness of the borrowers. Differences in the availability of smaller loan sizes vary directly with the height of state interest rate ceilings. States with high ceilings for smaller loan sizes have many small loans. States with low ceilings have few such loans. Finally, average APRs on surveyed loans reflect the pattern of rates recommended by the National Commission on Consumer Finance (1972) based on its cost analyses and conclusion that completion would cause rates to reflect costs of production rather than rise to the maximum allowed by law.