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. 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. 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. 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. BEHAVIORAL ECONOMICS
A Brief Explanation of

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. 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. 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. 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. 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. 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. 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. 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. 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. BASIS IDEAS
Elizabeth Warren’s Brainchild

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. 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. 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. BEHAVIORAL ECONOMICS
BEHIND THE CFPB

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. 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. CFPB ORGANIZATION

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