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November 9, 2020
Introduction to Financial Services: Consumer Finance
Consumer finance refers to the borrowing and saving
Figure 1. Household Debt Breakdown in Q2 2020
choices that people (i.e., households) make over time.
These financial decisions can be complex and can affect
financial well-being both now and in the future.
Understanding why and how consumers make financial
decisions is important when considering policy issues in
consumer financial markets. Research on household finance
suggests that all of the components of a household’s
finances—income, consumption, savings, assets, and
Source: Center for Microeconomic Data, Quarterly Report on
debts—are important to understand a household’s financial
Household Debt and Credit, Federal Reserve Bank of New York, 2020,
experience over time.
at https://www.newyorkfed.org/microeconomics/databank.html.
Safe and affordable financial services are an important tool
Consumer Lending Regulation
for most Americans to achieve financial security over the
In economic theory, consumer lending markets that are
course of their lives. People use three types of financial
competitive should lead to efficient outcomes for
products: credit, insurance, and financial investments. This
consumers; yet, sometimes , market inefficiencies may be
CRS product focuses on the first category—credit products
observed. Common issues in consumer financial markets
(loans) for household purposes.
include (1) information asymmetries between financial
Consumer Debt
firms and consumers and (2) behavioral biases that
Households typically borrow money for the following
predictably bias consumers when making financial
reasons:
decisions. In these cases, government policy can potentially
bring the market to a more efficient outcome. Policymakers
Asset Building. Using credit to make investments can
still must monitor the benefits and costs of various
allow a household to build wealth over time (e.g., a
regulatory approaches to determine whether a policy
mortgage or student loan).
intervention will help or harm the market.
Consumption Smoothing. Using credit to buy and
Although each consumer financial market is governed by
consume now and pay later (e.g., a credit card).
various distinct laws and regulations, three types of policy
interventions are common.
Financial Shocks or Emergencies. Using credit to pay
for unexpected expenses, such as a car or home repair, a
Standardizing Consumer Disclosures. Financial
medical expense, or a pay cut (e.g., a payday loan).
products can be complex and difficult for consumers to
fully understand. Mandated consumer disclosures are
Most households rely on credit to finance some expenses,
generally intended to give consumers more information
either to avoid having to postpone consumption until
about the costs and terms before they take out a new
sufficient funds have been saved or to avoid having to
financial product, thus reducing information gaps in
liquidate wealth that is being accumulated for other
understanding. Standardized disclosures also can help
purposes, such as retirement.
consumers shop for the best terms, because all financial
product terms are required to be disclosed in the same
According to the Federal Reserve Bank of New York,
way.
mortgage debt is by far the largest type of debt for
households, accounting for approximately 69% of
Preventing Unfair, Deceptive, or Abusive Practices
household debt. Student debt (10.8%) is the second-largest
or Acts. Consumers seeking loans or financial services
household debt, followed by auto loans (9.4%) and credit
could be vulnerable, because some consumers may lack
cards (5.7%). As of the second quarter of 2020, household
financial knowledge or be susceptible to behavioral
debt totaled $14.27 trillion. (See Figure 1 for more
biases. For this reason, certain consumer protection laws
information on household debt as of the second quarter of
prohibit unfair, deceptive, or abusive acts or practices.
2020.)
These acts and practices can include both individual
firm conduct and product features.
Ensuring Fair Lending. Fair lending laws prohibit
discrimination in credit transactions based upon certain
borrower characteristics, such as sex, race, religion, and
https://crsreports.congress.gov
Introduction to Financial Services: Consumer Finance
age. These laws historically have been interpreted to
rulemakings have regulated the payday lending and small-
prohibit discrimination, whether intentional or due to
dollar credit market, the mortgage market, and the debt
disparate impact, in which a facially neutral business
collection market. In addition, the CFPB’s structure and
decision has a discriminatory effect on a protected class.
budget continue to be debated by Congress.
Consumer Financial Protection Bureau
Credit Reporting. The credit reporting agencies (also
The 2010 Dodd-Frank Wall Street Reform and Consumer
called credit bureaus) collect and subsequently provide
Protection Act (P.L. 111-203) established the Consumer
information to firms about the behavior of consumers when
Financial Protection Bureau (CFPB) to implement and
they participate in various financial transactions. Firms use
enforce federal consumer financial law while ensuring
consumer information to screen for consumer risks. For
markets for consumer financial services and products are
example, lenders rely upon credit reports and scores to
fair, transparent, and competitive.
determine the likelihood that prospective borrowers will
repay their loans. Various policy issues related to credit
The CFPB generally has regulatory authority over providers
reporting include how to address inaccurate or disputed
of an array of consumer financial products and services,
consumer information; how to ensure consumers are aware
including deposit taking, mortgages, credit cards and other
of their rights, such as the right to dispute inaccurate
extensions of credit, loan servicing, consumer reporting
information; and what information is fair to include in
data collection, and debt collection associated with
consumer credit reports, for example, whether medical debt
consumer financial products. The CFPB’s authorities fall
or new types of consumer data should be included.
into three broad categories: rulemaking—writing
regulations to implement laws under the CFPB’s
Financial Technology. Financial technology, or fintech,
jurisdiction; supervision—the power to examine and
refers to financial innovations that apply new technologies
impose reporting requirements on financial institutions; and
to a financial service or product. Related policy questions
enforcement of various consumer protection laws and
include whether the current regulatory framework
regulations. The act also directed the CFPB to develop and
appropriately fosters technological benefits while
implement financial education initiatives, collect consumer
mitigating potential risks to consumer. The CFPB has
complaints, and conduct consumer finance research.
launched several programs designed to reduce regulatory
uncertainty for fintech products, facilitate industry and
Selected Policy Issues
stakeholder coordination, and learn more about fintech
This section highlights selected policy issues of
services and products through research projects.
congressional interest relating to consumer finance.
CRS Resources
The Economic Impacts on Consumers of the COVID-19
CRS Report R45813, An Overview of Consumer Finance
Pandemic. Since March 2020, the economic impacts of the
and Policy Issues
Coronavirus Disease 2019 (COVID-19) pandemic have
caused many Americans to lose income and face financial
CRS In Focus IF10031, Introduction to Financial Services:
hardship. Survey results suggest that since March 2020, half
The Bureau of Consumer Financial Protection (CFPB)
of all U.S. adults live in a household that has lost some
employment income. As a result, many consumers have had
CRS Report R46356, COVID-19: Consumer Loan
trouble paying their loans. Loan forbearance has become a
Forbearance and Other Relief Options
common form of consumer relief during the COVID-19
pandemic. Loan forbearance plans are agreements that
CRS Report R46578, COVID-19: Household Debt During
the Pandemic
allow borrowers to reduce or suspend payments for a short
period of time, providing extended time for consumers to
CRS Insight IN11359, COVID-19: Financial Relief and
become current on their payments. These plans do not
Assistance Resources for Consumers
forgive unpaid loan payments. The CARES Act (P.L. 116-
136) established consumer rights to be granted forbearance
CRS Insight IN11059, CFPB Finalizes New Payday
for many types of mortgages (Section 4022) and for most
Lending Rule, Reversing Prior Regulation
federal student loans (Section 3513). Moreover, financial
regulatory agencies responded to the COVID-19 pandemic
CRS Report R44868, Short-Term, Small-Dollar Lending:
using existing authorities to encourage loan forbearance and
Policy Issues and Implications
other financial relief options for affected consumers.
Although these efforts have prevented many consumers
CRS Report R46477, The Debt Collection Market and
from falling delinquent so far, it is difficult to predict the
Selected Policy Issues
trajectory of future COVID-19 outbreaks and their
subsequent impacts on consumer credit markets.
CRS Report R44125, Consumer Credit Reporting, Credit
Bureaus, Credit Scoring, and Related Policy Issues
CFPB Regulation and Structure. In the decade since the
CRS Report R46332, Fintech: Overview of Innovative
CFPB was created, it has been actively engaged in many
Financial Technology and Selected Policy Issues
rulemakings. Policy debates concern whether the CFPB has
appropriately balanced protecting consumers, credit access,
Cheryl R. Cooper, Analyst in Financial Economics
and costs to industry. Significant and contentious CFPB
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Introduction to Financial Services: Consumer Finance
IF11682
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