Democracy Paradox

Mallory SoRelle on the Politics of Consumer Credit

July 27, 2021 Justin Kempf Season 1 Episode 58
Democracy Paradox
Mallory SoRelle on the Politics of Consumer Credit
Show Notes Transcript

Americans are expected to take on debt, because that's how we're expected to finance everything from basic needs to a college education. And that's a function of economic policy making. That doesn't happen by accident.

Mallory SoRelle

A full transcript is available at www.democracyparadox.com.

Mallory SoRelle is an assistant professor of public policy at Duke University and the author of Democracy Declined: The Failed Politics of Consumer Financial Protection.

Key Highlights Include

  • How the American economy depends on credit
  • A brief history of consumer credit in America
  • Details why consumer debt is a systemic problem
  • Why financial consumers do not politically mobilize 
  • Explains how public policy shapes political behavior


Key Links

Democracy Declined: The Failed Politics of Consumer Financial Protection by Mallory SoRelle

Learn more about Mallory SoRelle

Consumer Financial Protection Bureau


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Today, we’re talking about consumer debt. But I don’t want to give any false impressions. Don’t confuse me for Dave Ramsey or Suzie Orman. I’m not offering any financial advice. We’re going to approach this topic as a question of public policy. You might find this unsettling. We use the phrase personal finance, but it says more about our culture than ourselves. Finances are personal. They do not involve public deliberation. 

Mallory SoRelle disagrees. She believes consumer debt is not just a personal problem. It is a systemic issue. She writes, “The political economy of credit is a self-reinforcing cycle that begins when policymakers embrace broad access to consumer credit to sustain the national economy, thus limiting their motivation to adopt financial protections that might threaten that supply.” 

Mallory SoRelle is an assistant professor of public policy at Duke University. She is the author of Democracy Declined: The Failed Politics of Consumer Financial Protection. She brings research and professional experience together to explain why the public does not demand change despite broad support for reform. 

Mallory and I discuss consumer credit as a public policy issue. We’re not commenting on anyone’s finances or personal choices. So, please keep this in mind as you make comments and I do want to hear your thoughts. Leave a comment at democracyparadox.com where you will find a full transcript or mention me on Twitter @DemParadox. You can also send me an email at [email protected] But for now… This is my conversation with Mallory SoRelle…

jmk

Mallory SoRelle, welcome to the Democracy Paradox.

Mallory

Thanks so much for having me. I'm delighted to be here.

jmk

Well, Mallory, your book is an impressive work of political science.

Mallory

Thank you.

jmk

Yeah, but behind the charts and the models, this is also a topic with real implications for real people. You write, “On the eve of the financial crisis in 2007 debt payments amounted to about 19% of the average debtor's income and one in 10 households devoted more than 40% of their monthly paycheck to debt.” So, let's actually bring these facts and figures to life. Can you paint a picture of how our consumer credit system affects an ordinary American?

Mallory

Sure. And, you know, I use the term ordinary American actually a fair bit in the book and then I always wonder, ‘Like, what exactly does that mean?’ Because when we think about credit and debt, as with many aspects of the American economic system, the answer to how debt affects people varies a lot by what people were talking about. So. in the big picture, in the aggregate, I think most of the people listening to this probably don't get through their day without using credit in some way, whether that's to pick up your morning cup of coffee, whether that's to pay your rent, whatever it is you're spending more often than not these days you're using credit for that transaction. So, credit has become sort of ubiquitous in society, but not everyone has access to the same forms of credit.

So, there are millions of Americans who don't even have access to things that we think of as sort of conventional types of credit so, credit cards, loans, bank accounts. Instead, they're forced to rely on what scholars often talk about as the fringe economy so, payday loans, check cashing, pawn shops, types of financing that are incredibly costly to use and that people often get sort of trapped into these cycles of higher and higher debt as they're trying to use those to navigate just basic every day needs. Then there are the remainder of Americans who do have access to things like a credit card, a sort of traditional banking account and then depending on who you are, you're paying different amounts to use those.

So, if you are lower income, if you are a single woman, if you are a person of color, you are paying considerably more in interest rate charges, you're typically paying higher fees to use the exact same type of bank accounts that your more affluent white or male peer might be using.

jmk

Now, when you see different types of fees, are you including penalties in there? Like let's say you bounce a check or you bounce a number of checks and you get charged for those. Is that included in when you say different types of fees?

Mallory

Yeah. And so, I mean, I'll give you a great example. Actually, it's the one you just mentioned. So, this idea of overdraft fees, I remember when I was defending my dissertation, I was talking about overdraft fees and I think we decided that everyone in the room had had at least one, at one point in time. Right? And this was a room of, you know, established. Professors at an Ivy League institution. So, we can imagine what folks who are in more precarious economic circumstances might be facing. But an overdraft fee is what happens when you spend more money than what you have in your checking account. And it's easy to say, ‘Okay, well, you should've just been paying more attention,’ but that's often sort of a simplistic answer for a much more complex problem.

So, overdraft fees originated, they're a relatively modern invention, at a point in time when most financial institutions had sort of plateaued in the types of profits they could make from conventional loans and they were starting to come up with ways to make new profits. And one of the things that they discovered was that there were a variety of ways through new fees, like an overdraft charge, or even through sort of differential interest rates that they could make more money off of people who were less able to sort of pay off their balances every month than they could for people who were paying off their balances every month. So, we started to see financial institutions create fees that are really intended to trigger additional payments and an overdraft charge is a good example of this.

And so when they were first created, most Americans were enrolled into these overdraft programs without their knowledge. It was just automatic. So there were a lot of people who might, for example, go to the ATM and take out some money to go shopping or get groceries and expecting that if they didn't have enough in their accounts, the ATM would just say, you have insufficient funds, not knowing that they had been enrolled in this new program that would give them no indication that they were about to take out more money than they had and having no idea that they were simply going to be charged a fee on top of that.

So, that's sort of the first problem. Then we have the problem of let's say you get your paycheck on a Friday. So, you know, you have the money, you go run a bunch of errands on Saturday and you don't discover until your next billing statement that, in fact, the bank didn't process that payment until Monday. So, there are all of these sorts of mechanisms in place to trigger these types of fees, even for the sort of most responsible borrowers.

jmk

So, somebody who's really struggling that has 40% of their monthly paycheck devoted to debt.  How does a person get to that point? Is this something that they've just made  a number of poor decisions or is this something that's systemic? How does the person end up in that situation to begin with?

Mallory

So, I would argue that for most people, the answer is it's systemic. We have this tendency in the U.S. in particular to assume that people's financial positions are somehow of their own making and to often ignore all of the institutional features that contribute to that. And that's certainly true in the financial sector as well. So, for example, we'd like to say, you know, ‘Oh, if people had better financial education, they could make better decisions. They wouldn't end up in debt.’

But there are plenty of studies by economists and including some of my colleagues here at Sanford that find that, you know, you can have all the financial education in the world, but if at the end of the day, you don't have inherited familial wealth or you don't have a job that pays a living wage or you don't have access to affordable health insurance or childcare, if you don't have the resources, it doesn't matter how much knowledge you have. You're only going to be eligible for certain types of financing and you're going to have to deal with the sort of punitive fees that come with those. Even if you know they're not good, even if you know how to sort of budget carefully, if you don't have the resources to budget, there's really nothing that individuals can do.

And in the U.S., I argue in the book, we've built a system where instead of enacting policies to create higher wages or instead of enacting more robust social welfare supports, we have focused on expanding access to private credit to cover the same types of needs. So, now it's the case that about 40% of Americans say they rely on something like a credit card just to be able to afford basic necessities like groceries, shelter, transportation. And almost half of Americans say that in a financial emergency, their credit card is the first line of defense. So, it's easy under those circumstances when folks have no good alternatives to fall prey to predatory products that you can't really get away from because you just don't have a good alternative.

jmk

So, we describe this type of credit as consumer credit, but I don't think of myself as a consumer when I use a credit card. When I take out a car loan, even when I signed up for student loans back in the day, I don't think of myself as a consumer. How are financial consumers treated differently from other types of consumers?

Mallory

That's a great question. And I think that's a pretty common response. It's easy to say. Well, a credit card is very different from, you know, a car. Those are different types of products. The problem with that logic is that the market expects us to treat them similarly. They are both things that we purchase. Right? You pay to borrow money the same way you pay to buy groceries as the same way you pay to go see a movie. They're not free of charge. So, in that sense, they are consumer goods and services. And not only do we pay to use them, but we're expected to shop around to get a good deal, the same way we are with other financial products and services. And so that's where one major distinction emerges and that is sort of the availability of choice.

So, if we think about other consumer goods, the market functions in a way that assumes we have choice. So, if you were trying to figure out what to eat for breakfast and you're wandering through the grocery store there's a whole aisle devoted to cereal and you could make a choice. Do you want it to be sweetened or unsweetened? Do you want the name brand or the generic store brand? Are you unsatisfied with all of the cereal and what you really want is yogurt or Pop-Tarts?

Most consumer markets are predicated on choice. In the financial market that works differently for most people. If you are a particularly affluent, you may have good choices. You may be able to say, ‘Well, I could get the credit card with the annual fee, but it has the airline miles I really want or I can forego the annual fee, but I'm not going to get as many rewards.’ But most Americans don't have good choices when it comes to credit. First, because we have to use it. It's almost impossible to navigate daily life without access to credit at this point. And second, because the products that are available to us are tied to things like a credit score or other types of risk models that assume something about our ability to repay.

So, unless you're especially affluent, you're getting a very narrow set of options. It's not like we're out there saying, ‘Well, I can get one credit card that's going to charge me 36% interest or one that's going to charge me 10.’ Most people are not given that choice. They're given the same types of products and they have to pick the lesser of evils. The other big difference is that when we're shopping for most goods, we are given some sort of information and the government mandates that. So, if you're thinking about that cereal aisle, again, you could look on the back of a cereal box and you can get information about the nutrition. You can get information about the ingredients in the cereal and you can maybe make some choices based on that.

You know, you don't want high fructose corn syrup or you want something that, you know, has more iron in it or something like that. But also, when we shop for that cereal, we assume that every box on that shelf has already, before it got there, met certain sort of safety standards. That the companies that were producing cereal had to keep their production facilities clean. That they weren't putting additives in the cereal that are going to harm us in some way. We assume that type of sort of safety regulation. When it comes to financial products and services, one thing that's really different, is that on average, there are very few of those safety procedures in place. There are very few regulations that actually tell lenders they can't do something because it's unsafe.

Instead, we have almost entirely the disclosure type of regulation. So, if we just tell consumers something about the credit card, even if that something is bad terms, it's their choice to do something with that information. And so that's another way that consumer financial protection is quite different from other consumer goods. They largely lack the sort of safety measures that we expect for almost every other type of consumer good. Instead, relying just on these information disclosures.

jmk

When you're talking about the lack of choice for people, it reminds me a lot of Matthew Desmond's book Evicted, where he talks about how difficult it is for people to be able to rent apartments when they have a history of eviction. And they're paying oftentimes the same prices as everybody else, just for significantly substandard products. And I think I see a parallel in the way that you're talking about consumer credit as well.

Mallory

Yeah, I think that's exactly right. And historically that has always been the case, particularly for sort of communities that are marginalized in different ways. And that's sort of another parallel with Desmond's work Is for a long time, if you were in an immigrant community or perhaps in the fifties and sixties, if you were in a predominantly black community, the types of credit you had available to you were so substandard to what anyone else had available. It was expensive. They were predatory. They were not intended to help you and more intended to sort of prey on you and that has, always been true in the financial marketplace.

jmk

So, when we're looking at some of these consumer financial products, the companies oftentimes defend them as saying, ‘Well, they make sense for some people. Just maybe this isn't the right product for you.’ We need to make sure that this is allowed, because it's right for some people. Elizabeth Warren argued that some of these products are not safe for anybody. So, I'd like to ask you just point blank are some of the riskiest consumer financial products, do they make sense for any consumers?

Mallory

That's a great question. I think it's one of the biggest challenges for folks who would like to reform the consumer lending system, because there's a difference between asking if they're good for people and if they make sense for people. I think that Senator Warren is correct when she says some of these products are just not good for anybody. But for some folks, they are the only alternative. And so, in that sense, it makes sense for people to use them. So, I'll give you the example of payday loans which are these short-term loans that are made at extremely high interest rates and they are heavily concentrated in communities who do not have access to more traditional types of loans and overwhelmingly those are communities of color.

So, I have a colleague at the University of Chicago, Patricia Posey, who studies these payday loans, in particular, and one of the things that she finds doing interviews with folks who use these products is that they understand that these are predatory. They know that these are not good loan products, but the problem is they have no alternatives. So, if the option is no resource or a bad resource, you choose the bad resource. So, when we think about it that way, yes, they make sense for some people, but they make sense because of a lack of alternatives.  And that doesn't mean they're good.

jmk

Now, you just described the problem, the big picture problem, as being systemic. And, in your book, you explain how this goes back far into American history, beginning with the New Deal. In fact, you argue that the new deal policymakers really made a conscious decision to pursue a consumer economy rather than a producer economy during the Great Depression. Let's start there. Can you help explain what the differences is between a consumer and producer economy and what its implications are for today?

Mallory

Sure. And I think actually there are a lot of parallels to what's happening right now that probably makes sense to folks. So, in the depression, policy makers are trying to figure out how to restart the economy. And for much of the early history of the U.S. to the extent that there was much federal economic policy making, it was often intended to help producers. So, like subsidies to different industries, creating infrastructure, like we'll help subsidize railroads. But the focus was doing things to help producers.

But by the time the depression happened, there had been sort of a revolution in consumer goods in the U.S. and policymakers were starting to think of the economy, not in terms of our ability to produce things, but our ability to consume things. That the engine of economic progress would be in the average person's ability to go out and buy products. And so, when the depression hit there were many explanations given for it. One of the explanations that sort of caught on in the Roosevelt Administration was that it was a problem of under consumption and that to get the economy going again, we need people to be able to go out and spend money again.

So, when you want people to be able to consume things, they need to have purchasing power. And there are a number of ways you could achieve that. You could try and make sure wages are high enough that people can go out and spend money through something like a minimum wage law. That's a discussion we're having right now to get us out of this most recent sort of economic recession. You could have more robust social welfare programs. If we have government providing accessible healthcare or accessible childcare, or at the time maybe old age pensions or unemployment insurance that people can use their wages for other things to go out and spend money again. That's a discussion we're having right now.

And so, the Roosevelt Administration did some of those things, but there was a sort of a political limit to how much government spending they could get away with, even in the midst of a depression. And so, what folks in the Roosevelt Administration turned to was this idea that another form of purchasing power would be to get private lenders to extend the credit, because at that point in time there wasn't really like a naturally occurring market for consumer loans. Banks, in fact, didn't actually think it was a very good idea. They were pretty suspicious of most of us as like a good financial risk.

So, the government came along and they said, ‘Look, we think this is a good idea. And in particular, we're really interested in people being able to spend money to help with the construction industry.’ Because that was decimated by the depression. ‘So, what if we, the government, tell you the bank that if you will make small loans to folks to help let's say renovate their homes, create some new construction jobs, we will guarantee you up to a certain amount of losses you might incur? So, that if it turns out the people actually aren't paying back their loans, we will pay you for them. So, you're guaranteed to make some profit here.’ And so, the banks did this and banks quickly discovered that like, actually most people were really good about paying off their loans and this was actually quite profitable.

And over the course of the 20th century, sort of, more programs like this emerged and banks learned that actually making these small types of consumer loans could make them a lot of money. And so, in subsequent periods of crisis, if we think about the sixties and seventies and a lot of the unrest in communities of color in cities, if we think about the financial crisis and we think about what's happening today, the government found it easier to try and incentivize private credit, or politically feasible often than to extend new forms of government provision. So, it became sort of our de-facto model of political economy that we have this consumer driven economy that is fueled by access to credit, instead of other forms of purchasing power.

jmk

Now Europe is known for having a more robust social safety net than the United States, especially the Nordic countries. I would Imagine that they still have home mortgages and some of the types of credit. Is the American credit system substantially different than the credit system that we find over in Europe?

Mallory

Yes, it is though with the caveat that that has changed a little bit over time. So, one of the things that's really interesting, when it comes to credit in a comparative perspective is that because in the U.S. we rely so heavily on it, it becomes, I argue, really challenging for policy makers to enact any type of regulation that might shrink the supply. Because when you have an economy that depends on lots of people having access to lots of credit, you don't want less credit. So, doing something like having an interest rate cap that might make banks lend to fewer people is often a no-go policy-wise.

In other sort of Western democracies that have stronger social safety nets credit exists, but it's just less important to people's sort of day-to-day wellbeing. And so it's easier in some cases to put more stringent regulations on it because the supply of credit is simply not as important. Because people have other forms of purchasing power or in some cases where it's not regulated as heavily that also is less significant, because again, people don't have to rely on it as much. So, we do see different models in countries where public higher education is free and people have access to childcare and health insurance is paid for by the government. Things like access to credit simply are less important because there are other sort of financial supports for folks and credit can be more of a luxury form of spending.

jmk

So, to really get at the core of your argument here. You are saying that the American economy is substantially based upon the idea of consumer credit to be able to provide growth. And I know that others have made that argument. You're building this on others, but it's a very radical idea for many people to hear in my opinion. You have a quote where you write, “Lawmakers are motivated to maintain wide access to credit in order to support the stability and growth of the U.S. economy, even if it means adopting weak consumer protections that put the financial well-being of individuals at risk.”

Which brings me to the point that when we talk about the type of regulation that we have, where we don't put an emphasis on the safety of the regulations. I find it remarkable how you argue that part of the reason is that the U.S. government is scared to limit the amount of credit that's out there. So, we've made a conscious choice to use information as a form of regulation rather than safety.

Mallory

Yeah, that's a, you know, sort of core piece of the problem I would argue, because the economy relies on access to credit. Policy makers really have very few good choices if they want to maintain that economic system. Now, one option would be to say, we're going to get rid of the whole thing. And instead, actually we're going to adopt universal health insurance and childcare. And our government is just going to look radically different from here on out. That's probably not happening tomorrow.

So, instead they’re in this sort of bind of their own making where they need people to use credit. So, there has to be some financial regulation because you want people to be able to have some confidence in the system. But you can't enact regulations that are going to make banks lend less credit because then all of a sudden, groups won't have purchasing power. And so, what I argue policymakers have done is they've adopted this form of information disclosure, which kind of threads the needle. Technically, a type of consumer financial protection, but it's one that doesn't tell lenders what they can and can't do. Instead, it's a type of regulation that shifts the burden onto individual borrowers by saying, ‘Look, if we just give you all the information now, the balls in your court. You have to make a smart decision.’

And one of the consequences is that there are also political consequences to that because when people's experiences with consumer financial regulations all teach them that, ‘Hey, we're giving you the information. So, if you're not capable of making a good choice, that's actually your fault or maybe it's your bank's fault, because, they didn't make the information clear enough. But in no way, is this a question of government having a role to actually like step in and regulate or protect you.’ Then what that means is Americans on average learn that borrowing is about personal responsibility and it's definitely not about government.

So, we don't think of the issue of consumer financial protection as an inherently political issue with political solutions. We think that these problems of predatory lending are either the fault of individual borrowers or it's about borrower's relationships with their banks. But nowhere in that equation, is there a role for policy makers sort of in the minds of folks to step in and say, ‘No. Actually, this is a government question.’ And that's really unusual. It's both historically unusual because if we went back to the late 1800s, finance was a highly political topic. And it's also unusual in the context of other types of economic policy making.

So, if in fact credit is a stand in for other things like social programs or wages, both of those other things we absolutely think of as political. There are campaigns right now out to get $15 minimum wages. Think about the uproar in 2017 when Republicans wanted to repeal parts of the Affordable Care Act they had come to rely on. And there were sort of people flooding the congressional phone lines in unprecedented numbers, because they understand that's a government policy issue. We've just not seen the same with consumer financial protection, despite the fact that it is a similarly or potentially even more significant economic issue.

jmk

So, the media oftentimes will come out with reports on consumer credit and how much Americans borrow. And the narrative is always that Americans have too much debt. I want to rephrase the question for you, Mallory. Is it really that Americans are expected to take on too much debt then? Is that what you're getting at?

Mallory

Absolutely. Yeah. I mean, Americans are expected to take on debt because that's how we're expected to sort of finance, you know, everything from basic needs to a college education.  And that's a function of economic policy making. That doesn't happen by accident.

jmk

Now I want to talk a little bit about the regulation itself. You already discussed it a little bit about how we focus very much on providing consumer information rather than real regulation. But at the same time, it feels like there's a lot more financial regulation out there. And part of the reason why I feel like that is because there's a lot of government agencies out there that deal with it. Why does it feel like there's so much more regulation even though there really isn't?

Mallory

So, that's a great question. And I think you're right. So, first of all, there is a lot of financial regulation. And one of the things that is really interesting about financial regulation in the U.S. is not only are there a lot of regulations, there are a lot of regulators. So, in the U.S. we have a system in which federal regulatory agencies emerged over time as different, essentially different types of banks came into being. And so, we don't have just one central regulator for all types of financial institutions. Some regulatory agencies deal with nationally chartered banks. Some deal with state-chartered banks. Payday lending is mostly dealt with at the state level. It's not even a federal regulatory issue.

So, part of what happens is over time, these agencies come into being essentially as new types of financing emerge. So, by the 1960s, when policy makers are actually starting to think about the first consumer financial protection, because most of these agencies up to that point had been engaged in what we would call prudential regulation, which is essentially the types of regulations that are designed to ensure the stability and profitability of the industries and not the interests of borrowers.

So, by the 1960s when Congress starts to get serious about consumer financial protections and then when they eventually passed the first big consumer financial protection, which is the Truth in Lending Act. They basically look around all of these existing agencies and then they say, ‘We'll just put you in charge of this.’ And one of the things that was fascinating to me when reading the congressional transcripts for this is that members of these agencies so, for example, the Vice Chair of the Federal Reserve Board basically goes to Congress and says, ‘We do not want this. We think this is a great law. We think there should be consumer financial protections. This is not what we do. We have never been an agency designed to protect consumers. In fact, none of our agencies are designed to protect consumers. We have no expertise in this.’

And so, they basically say like our preference would be for you to create an agency to do this. If you're not going to do that, we'll take on responsibility, but we hope it won't be forever.

jmk

So, what you're saying is all of this regulation that exists in terms of the financial industry, at least at that time, was about helping business rather than helping people?

Mallory

Exactly. And part of that is because up until the forties and fifties, the types of consumer financing that we have today weren't very widespread. So, the types of consumer loans that we have today are still a relatively modern invention. And at the time, married white men were about the only people who had access to them. So, as access to credit spreads so too did the need for consumer financial protection. So, it's not necessarily the case that we went decades and decades without consumer financial protection. It's more the case that as consumer financing became more widespread and then the need to regulate it became more prominent, policymakers already had this existing regulatory infrastructure in place and decided not to create a new agency.

Initially, they decided to give it to these existing agencies who didn't really know what they were doing, weren't particularly interested in the task. Of course, after they had responsibility for 50 years, they wanted to keep it. But at the time, they were not interested.

jmk

Yeah. And they saw their constituents, if you will, as the business community.

Mallory

Exactly

jmk

So, they're tasked with protecting the consumers, while at the same time looking after the business interests.

Mallory

Exactly. And I think it's easy now, and particularly after the financial crisis, for us to say, ‘Well, these two are related. Right? If we don't protect consumers at some point that will be bad for financial institutions. But it's shocking how little weight that argument carried until the financial crisis when people just did not see those two things as particularly linked.

jmk

So, even today we have a variety of different agencies that support different aspects of consumer credit. However, they did create one agency to kind of manage consumer credit under Dodd-Frank. Has that made a difference in terms of protecting consumer credit since then?

Mallory

So, yes. The short answer is yes. The long answer is a little more complicated. I would say the most significant policy change that came out of the financial crisis for consumer financial protection, so if we separate out things like investments and securities, which underwent a little bit more regulation, the most significant change that happened on the consumer financial protection side was not actually change in the types of regulations. Because we really didn't do much there, but it was the creation of the Consumer Financial Protection Bureau.

And so, the CFPB was designed to be the first federal agency whose sole mission was consumer financial protection. And what they did was essentially take the now about eighteen different federal financial protections and put them under the authority of the CFPB. Now that doesn't mean that the CFPB doesn't still have to coordinate with some of these other financial regulators, because there is still a lot of fragmentation. But they are now responsible for most of this rulemaking around things like mortgage lending, student loans, credit cards, and other types of financial products and services. And because they are explicitly consumer oriented, what that means is when they have leadership that is supportive of consumer financial protection, they're actually capable of doing quite a lot on behalf of consumers.

However, because they're run by a single director, when they have an appointee who is not particularly interested in helping consumers, the director has the potential to really sort of stall a lot of their work. And so, we've seen some back-and-forth in terms of who has been in charge of the CFPB.

jmk

Didn't we just go through a period of that under Trump?

Mallory

We did.

jmk

Yeah. I believe Mick Mulvaney was even in charge of it while being in charge of another agency at the same time.

Mallory

Yes, and Mick Mulvaney is probably one of the most outspoken critics of the CFPB. He called it a sick sad joke. And so you can imagine that his tenure as interim director was not perhaps a robust period of consumer financial protection activity on behalf of ordinary borrowers.

jmk

So, a big part of your book is about how the system that we have for consumer credit holds back and prevents political mobilization, if you will. So, when we look at other types of literature, like civil resistance literature, let's say. Where they're looking at doing something that's a monumental task, like changing an entire regime. Erica Chenowith found that the magic number was, I believe, it's 4% of the population protests and they'll be able to bring about change.

And in the United States, you see that on a much smaller scale in terms of public policy. That if a very small focused interest group wants something, they can make a change because, whether it be because of a financing or whether it be because of just raw votes, that block can be able to make a difference if they're single issued focused. Why is it that we haven't been able to see something like that in the United States? Because things like consumer credit affect everybody. You had mentioned that just about everybody's bounced a check. Just about everybody's faced ATM fees that were exorbitant. Why is it that we can't get, not everybody together, but maybe just a small percentage like three, four, five percent of the population to band together and say, ‘This needs to change. We're sticking to our guns.’

Mallory

That's a great question and I would say it's an even more surprising puzzle because many of the actual proposals for reform are widely popular. So, for example, I have some survey data in the book that I had collected. And one of the things that it does is presents people with some details about reforms to those overdraft charges. Not to get rid of them, but to make them a little bit fair to consumers. And something like 70% of people think it's a good idea and support the reform. And that's true of a lot of consumer financial protections. And remarkably in this day and age, a lot of that support is also bipartisan. So, it seems like it should be the type of issue where you could have agreement and I argue in the book that there are a couple of reasons that doesn't happen.

The first is this institutional sort of explanation that I've already talked about a little bit, which is that policymakers already face a really high bar to change because they've established this economic system and deviating from it would be very high cost. So, they need a lot of pressure to do that. But the larger problem I talk about in the book is that because the focus on information disclosure, really to the exclusion of almost all other types of consumer financial protection, has taught borrowers that these financial issues are that they're about finances. They're about the market. And because these regulations are relayed to borrowers with no indication of government involvement, which is also a little bit different.

Again, returning to the sort of grocery store analogy, if you go to the grocery store and you are shopping for meat. You see a label on the front of that meat that says this was inspected by the USDA and the average American knows what the USDA is or if you go to buy cold medicine, you see a label that says, this is FDA approved or maybe you see something that says the FDA hasn't approved this, use at your own risk. The average American knows what the FDA is. So, they understand that there are government regulators sort of doing something in this area. The same is not true for consumer financial regulations.

So, not only do we put the burden on consumers to think about this as just an issue of making smart decisions. We also don't tell them that all the information they're given comes from the government. And so, the average American does not see government anywhere in this process. And so, what I show in the book is that really affects how they think about who is responsible for these issues of predatory lending and debt. And the answer for most types of credit is they think that either consumers are responsible or they think that banks are responsible. But they don't place a lot of responsibility on political actors. And so, if you don't think that someone is involved in the process, it does not make a lot of sense to turn to that person or that actor to try and get help.

So, what I show in the book is that people, both who have specific individual issues with credit, but also people who have larger systemic problems, even when they're willing to do something and most people are actually willing to do something. What they do is they turn to the market. So they are willing to reach out to their banks, but not an elected official or regulator.

jmk

How effective is it when they reach out to their bank?

Mallory

I would say, not terribly for most people. If you're a particularly affluent client, it might be effective in that particular instance. But for most Americans, you're not going to get much help. You are much more likely to get resolution. If you file a complaint, for example, with the CFPB, they get assistance on something like 97 or 98% of the complaints that come to them. That doesn't always mean you get money back or you get something fixed. But at the very least you get an explanation and actually in about 20% of cases, you actually do get some form of remediation which is much higher than you're likely to get just talking to your individual lender.

jmk

So, how many people actually go to that agency with their complaints?

Mallory

So, more now as more people are learning about it. But in the grand scheme of things, not very many. So, in the first five years of its existence, the CFPB handled about a million consumer complaints. Which is great. But when we consider the fact that financial issues make up several of the top 10 complaint categories that are captured by various private and public data sources for these things so, debt collection, credit related identity fraud problems with banks, credit cards. The big one during the pandemic has been credit reporting agencies who have sort of erroneously dinged people for failure to pay things that there were moratoria on.  So, consumers have millions more complaints than are actually being filed with the relevant federal agencies.

jmk

So, are consumer reporting agencies, are those part of the larger systemic problem? Because I always find it odd that their customers are typically businesses, people trying to sell you stuff. And yet they have so much information on us as consumers.

Mallory

They do have so much information. They are incredibly opaque to the average American borrower and I think one of the larger problems, and this is true not just of sort of consumer reporting agencies, but of many of the sort of theoretically neutral mechanisms that are used to judge credit worthiness, is they are inherently racialized and discriminatory in other ways. Because of a history of things like red lining or because of some of the assumptions that are made about demographic characteristics and ability to repay. These types of mechanisms unduly burden low-income folks across the board, but particularly people of color.

jmk

So, the big picture idea that you have in your book, Mallory. Kind of gets my head spinning around and around and around, because my takeaway from your book was that public policy decisions that we make can actually determine the political behaviors and attitudes that we have later on. And that gets me thinking about what those implications are for democracy if the public policy decisions we make predetermine our future political behaviors and attitudes about those policies that we put in place in the past. It makes me feel that it's almost a deterministic sense of democracy. What are the implications for democracy as a force for change when we think of public policy as having that kind of influence on individuals?

Mallory

That's a great question. I think, especially for the sort of current moment we're in, it's easy to think about policies that directly relate to democracy so, the debate we're having right now about access to voting and elections as mattering for democracy. But any type of policy can have effects on people's politics. There's a long literature on the way that different social welfare policies can make people more or less likely to engage in politics down the line. The classic example is Social Security. Older Americans were not a particularly powerful voting bloc until the Social Security Act gave them resources and gave them a reason to become engaged in politics. And now they are the most reliable voting bloc of any demographic and the most difficult policy to change is Social Security.

And I argue that same thing is happening with consumer financial protection and credit more broadly. These policies teach us lessons that become deeply ingrained in the way we think about ourselves and others and what they deserve and what they don't and whose fault it is when things go wrong and what the possibilities for change are. And those cycles can be very hard to break out of, but not impossible. So, we typically think of change occurring when something external happens that can sort of cause us to rethink or reconfigure the way we do things. And the pandemic is a great example of that right now.

So, for example, we've had mounting student loan debt over the last several decades. It's become a bigger and bigger economic issue and yet very little has been done to shape that. And now all of a sudden in light of the recession that came on the heels of the pandemic, policymakers are considering seriously for the first time, efforts to sort of relieve those student debt burdens. You brought up Matt Desmond's book on evictions earlier. That's another great example where all of a sudden, we're starting to seriously consider the way we treat evictions in this country. Like is there a better policy solution?

And so, you know, we could imagine that the same thing will start to happen with consumer financial protection, for other issues as well, that we will finally have enough support to say, ‘You know what? We really are going to take these payday loans seriously. And it's not just that we're going to try and get rid of them, but we're going to try to provide a real alternative.’ You know, there are enough people talking about, for example, postal banking as a solution now that that might be viable. So, it takes these moments where some sort of crisis and media coverage and opportunities for change can come together to sort of reset that trajectory. But absent that, yeah, policy shapes politics in ways that are really hard to undo.

jmk

Well, Mallory, this is obviously a very serious topic and you take it very seriously. But my favorite line from the book actually comes from your acknowledgements where you write, “Debt takes many forms, not all of which are predatory or burdensome.” So, thank you for taking the time here. I'm definitely indebted to you.

Mallory

Thank you so much. And thanks so much for inviting me. This is great.