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Updated January 13, 2022
Introduction to Financial Services: Consumer Finance
Consumer finance refers to the borrowing, saving, and
Figure 1. Household Debt Breakdown in Q3 2021
investment 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: Federal Reserve Bank of New York, Center for
debts—are important to understand its financial experience
Microeconomic Data, Quarterly Report on Household Debt and Credit,
over time.
2021.
Safe and affordable financial services are an important tool
Consumer Lending Regulation
for most Americans as they work to achieve financial
In economic theory, consumer lending markets that are
security over the course of their lives. People use three
competitive should lead to efficient outcomes for
types of financial products: credit, insurance, and financial
consumers; yet, sometimes, market inefficiencies may be
investments. This CRS product focuses on the first
observed. Common issues in consumer financial markets
category—credit products (loans) for household purposes.
include (1) information asymmetries between financial
Consumer Debt
firms and consumers and (2) behavioral biases that
predictably bias consumers when making financial
Households typically borrow money for the following
decisions. In these cases, government policy can potentially
reasons:
bring the market to a more efficient outcome. Policymakers
must monitor the benefits and costs of various regulatory
Asset building. Using credit to make investments can
approaches to determine whether a policy intervention will
allow a household to build wealth over time (e.g., a
help or harm the market.
mortgage or student loan).
Although each consumer financial market is governed by
Consumption smoothing. Using credit to buy and
various distinct laws and regulations, three types of policy
consume now and pay later (e.g., a credit card).
interventions are common.
Financial shocks or emergencies. Using credit to pay
1. Standardizing consumer disclosures. Financial
for unexpected expenses, such as a car or home repair, a
products can be complex and difficult for consumers
medical expense, or a pay cut (e.g., a payday loan).
to fully understand. Mandated consumer disclosures
are generally intended to give consumers more
Most households rely on credit to finance some of these
information about the costs and terms before they
expenses, either to avoid having to postpone consumption
take out new loans, thus reducing information gaps
until sufficient funds have been saved or to avoid having to
in understanding. Standardized disclosures can also
liquidate wealth that is being accumulated for other
help consumers shop for the best terms, because all
purposes, such as retirement.
financial product terms are required to be disclosed
in the same way.
According to the Federal Reserve Bank of New York,
2. Preventing unfair, deceptive, or abusive practices
mortgage debt is by far the largest type of debt for
or acts. Consumers seeking financial services could
households, accounting for approximately 70% of
be vulnerable, because some consumers may lack
household debt. Student debt (10.4%) is the second-largest
financial knowledge or be susceptible to behavioral
household debt, followed by auto loans (9.5%) and credit
biases. For this reason, certain consumer protection
cards (5.3%). As of the third quarter of 2021, household
laws prohibit unfair, deceptive, or abusive acts or
debt totaled $15.24 trillion. (See Figure 1 for more
practices. These acts and practices can include both
information on household debt as of the third quarter of
individual firm conduct and product features.
2021.)
3. Ensuring fair lending. Fair lending laws prohibit
discrimination in credit transactions based upon
certain borrower characteristics, such as sex, race,
religion, and age. These laws have historically been
interpreted to prohibit discrimination, whether
intentional or due to disparate impact, in which a
https://crsreports.congress.gov
Introduction to Financial Services: Consumer Finance
facially neutral business decision has a
regulations particularly consequential in this market. The
discriminatory effect on a protected class.
CFPB recently finalized two new regulations to implement
Consumer Financial Protection Bureau
the Fair Debt Collection Practices Act (15 U.S.C. §§1692-
1692p), which regulates the third-party debt collection
The 2010 Dodd-Frank Wall Street Reform and Consumer
market. The rules clarify how debt collectors may
Protection Act (P.L. 111-203) established the Consumer
communicate with consumers and the information debt
Financial Protection Bureau (CFPB) to implement and
collectors must disclose to consumers. Policy issues related
enforce federal consumer financial law while promoting
to debt collection include debt collector communication
fair, transparent, and competitive markets for consumer
frequency, how time-barred or obsolete debts should be
financial services and products.
treated, and debt validation.
The CFPB may regulate providers of an array of consumer
Credit Reporting. The credit reporting agencies (also
financial products and services, including deposit taking,
called credit bureaus) collect and subsequently provide
mortgages, credit cards and other extensions of credit, loan
information to firms about the behavior of consumers when
servicing, consumer reporting data collection, and
they participate in various financial transactions. Firms use
consumer debt collection. The CFPB’s authorities fall into
consumer information to screen for consumer risks. For
three broad categories: rulemaking (writing regulations to
implement laws under the CFPB’s jurisdiction
example, lenders rely upon credit reports and scores to
), supervision
determine the likelihood that prospective borrowers will
(the power to examine and impose reporting requirements
repay their loans. Various policy issues related to credit
on financial institutions), and enforcement of various
reporting include how to address inaccurate or disputed
consumer protection laws and regulations. The act also
consumer information; how to ensure consumers are aware
directed the CFPB to develop and implement financial
of their rights, such as the right to dispute inaccurate
education initiatives, collect consumer complaints, and
information; and what information is fair to include in
conduct consumer finance research.
consumer credit reports, for example, whether medical debt
Selected Policy Issues
or new types of consumer data should be included.
This section highlights selected policy issues of
Financial Technology. Financial technology, or fintech,
congressional interest relating to consumer finance.
refers to financial innovations that apply new technologies
to financial services or products. Related policy questions
The Economic Impacts on Consumers of the COVID-19
include whether the current regulatory framework
Pandemic. Since the onset of the COVID-19 pandemic,
appropriately fosters technological benefits while
many Americans have lost income and had difficulty
mitigating potential risks to consumers. The CFPB has
paying their debts. Loan forbearance has become a
launched several programs designed to reduce regulatory
common form of consumer relief during the COVID-19
uncertainty for fintech products, facilitate industry and
pandemic. Loan forbearance plans are agreements that
stakeholder coordination, and learn more about fintech
allow borrowers to reduce or suspend payments for a short
services and products through research projects. The agency
period of time, providing extended time for consumers to
is developing a new rule that would clarify standards
become current on their payments. These plans do not
around consumer-authorized access to financial data.
forgive unpaid loan payments. The CARES Act (P.L. 116-
136) established consumer rights to be granted forbearance
CRS Resources
for many types of mortgages (Section 4022) and for most
CRS Report R45813, An Overview of Consumer Finance
federal student loans (Section 3513). Moreover, financial
and Policy Issues
regulatory agencies responded to the COVID-19 pandemic
using existing authorities to encourage loan forbearance and
CRS Insight IN11550, COVID-19: Consumer Debt Relief
other financial relief options for affected consumers.
During the Pandemic
Although these efforts have prevented many consumers
from falling delinquent so far, as these programs expire, it
CRS In Focus IF10031, Introduction to Financial Services:
is difficult to predict how the ongoing pandemic will impact
The Consumer Financial Protection Bureau (CFPB)
consumer credit markets in the future.
CRS Report R46477, The Debt Collection Market and
CFPB Regulation and Structure. In the decade since the
Selected Policy Issues
CFPB was created, it has been actively engaged in many
rulemakings. Policy debates concern whether the CFPB has
CRS Report R44125, Consumer Credit Reporting, Credit
appropriately balanced protecting consumers, credit access,
Bureaus, Credit Scoring, and Related Policy Issues
and costs to industry. Significant and contentious CFPB
rulemakings have regulated the payday lending and small-
CRS Report R46332, Fintech: Overview of Innovative
dollar credit market, the mortgage market, and the debt
collection market. In addition, the CFPB’s structure and
Financial Technology and Selected Policy Issues
budget continue to be debated by Congress.
CRS Insight IN11745, Open Banking, Data Sharing, and
the CFPB’s 1033 Rulemaking, by Cheryl R. Cooper
Debt Collection. When a consumer defaults on a debt,
lenders often hire third parties to collect those debts.
Consumers have no say over the debt collectors that lenders
Cheryl R. Cooper, Analyst in Financial Economics
choose, arguably making consumer protection laws and
IF11682
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Introduction to Financial Services: Consumer Finance
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