Professor Oren Bar-Gill spearheaded a January 6 conference, “Regulating Consumer Financial Products,” held at the Federal Reserve Bank of New York and cosponsored by the NYU School of Law. Several NYU Law professors participated in discussions, with panelists addressing failure in consumer credit markets and the need for regulation; who should regulate consumer credit products and what regulatory reforms might be necessary; and the optimal scope of regulatory powers.
In the first panel, “Market Failure and the Need for Regulation,” Vicki Been ’83, Boxer Family Professor of Law and director of the Furman Center for Real Estate and Urban Policy, discussed the Furman Center’s research related to theories of market failures underlying the U.S. mortgage crisis. Been focused on failures in consumers’ understanding of mortgage products, and lack of knowledge when deciding whether to buy or continue to rent.
Consumers often overestimate the potential for housing price appreciation while underestimating the risk of price stagnation or depreciation, she said. Further, they overestimate the potential for refinancing their mortgage, but underestimate the risk of interest rate increases, income shocks, and their ability to secure credit on better terms. Finally, consumers overestimate the benefits and underestimate the costs of homeownership as opposed to other options such as renting. “The costs of those mistakes are extremely high,” Been said, “both for the borrowers and for their neighbors and their local governments, which puts pressure on us to come up with the optimal regulation.”
Clayton Gillette, Max E. Greenberg Professor of Contract Law, argued that new regulation was not necessarily the best or only answer. “If consumers can learn from mandated disclosure,” he said, “then one could imagine that they can also learn from disclosure that emerges from other sources, such as personal experience.” Saying that scholarship regarding credit card use fails to consider consumer learning, he cited a study indicating that paying a late fee in a given month reduces the chances of incurring another late fee by 40 percent. “The possibility that markets can facilitate learning in ways that ameliorate cognitive error reminds us that the relevant question for regulation is always, ‘As compared to what?’” Gillette said. “In the face of omnipresent human irrationality, it’s important to remember that regulators are also human. It’s questionable whether imperfect markets can be corrected by perfect regulators.”
Professor Rachel Barkow discussed the structure of a potential regulatory agency in the second panel, “Who Should Regulate Consumer Credit Products?” Giving her thoughts on the Obama administration’s proposed Consumer Financial Protection Agency as well as other possible regulatory schemes, Barkow, faculty director of the Center on the Administration of Criminal Law, ran through the pros and cons of various options: one agency or numerous agencies, a relatively independent agency or a more partisan one, and a unitary executive model or a commission structure. Other considerations, she said, include the nature of the relationship between a federal agency and the states in enforcing regulations, and the danger of regulatory capture.
Discussing ex-post consumer protection in the third panel, “How Should We Regulate Consumer Credit Products?,” Samuel Issacharoff, Bonnie and Richard Reiss Professor of Constitutional Law, said that one option would entail different regulatory approaches to different economic sectors; a deregulatory approach to the products market, for instance, doesn’t necessarily imply the same strategy should apply to finance. Turning to the matter of regulatory responses to credit-market distortions, Issacharoff called attention to mechanisms that hinder ex-post legal accountability.
“The question of do we need any regulation—we’re past that,” Bar-Gill said. “Consumer financial products are regulated quite a bit, and the trend is not toward less regulation. What we need to ask is how to regulate them in the most effective way.... We can perhaps help those consumers who are falling prey to these very difficult and complex products without encumbering too much the choice available to those of us who can and do want the choice.”
Posted on January 8, 2010
Watch Introduction (23 min):
Panel I: Market Failure and the Need for Regulation
Watch Panel I, Part 1 (40 min):
Watch Panel I, Part 2 ( 43 min):
Panel II: Who Should Regulate Consumer Credit Products?
Watch Panel II, Part 1 (1 hr 3 min):
Watch Panel II, Part 2 (1 hr 6 min):
Watch Panel II, Part 3 (25 min):
Panel III: How Should We Regulate Consumer Credit Products?
Watch Panel III, Part 1:
Watch Panel III, Part 2 and Closing Remarks: