Improving Leverage: Making Credit Better for Consumers

1. Improving Leverage:Making Credit Better for Consumers Asset Funders Network Meeting San Francisco, CA September 26, 2007 Ellen Seidman Director, Financial Services and Education Project New America Foundation

2. Credit Is Essential to Much Asset-Building • Homes • Home repair • Businesses • Higher education • Cars

3. An Example: Homeownership • 68% of homeowners carry a mortgage • 26% of those also carry a second mortgage, a home equity line, or both • 80% of homeowners carry some debt, compared to 65% of renters • Net worth is heavily dependent on home ownership, and homeownership is heavily dependent on debt

4. Use of Credit Has Increased • Prices of many large items have outpaced incomes of most Americans • Increasing demand, especially at lower income levels, for assets that require credit, especially car ownership, home ownership, and higher education • Credit more broadly available • Lifting of usury ceilings • Credit scoring • Risk-based pricing • Asset-backed securities • National competition

5. But Credit Has Also Gotten Harder to Use Well • Complex • More complex products and providers • Unbundling of products • Changing rates and terms • Move from closed end to open end credit • Percentage of families with mortgage debt (44.6%) almost the same as percentage with credit card debt (44.4%) • In just the last year, revolving consumer debt has increased from about $840 billion to over $900 billion • Ubiquitous • Plastic demanded for many standard transactions • Recent report that people are letting mortgages ride to keep credit cards available • Internet and other remote purchase opportunities • Culture and commercials

6. These Changes Are Not All Bad • Bringing depositories with good capital markets access and strong regulatory systems into consumer credit has increased availability and decreased price for many • Broad capital markets access has further reduced prices and almost eliminated regional and interest-rate driven shortages of mortgage money • Pricing has substituted for rationing

7. But Channels Matter • Mortgages • Depositories • In or out of assessment area • Independents • Brokers • Businesses • Depositories • Guaranteed loans • Credit cards • Factors • Auto • Depositories • Standard dealers • Buy here, pay here • Credit cards • Unsecured, general purpose • Secured

8. The Goal: A Good Loan • Transparent: Consumer understands both advantages and risks of product • Simpler products • Clear, balanced, timely disclosure • Quality advice • Fairly-priced: Priced in a manner consistent with underlying risk and cost • Models complete and verified • Incentives aligned • No discrimination, including geographic discrimination • Net benefit: Consistent with long- and short-term interests of consumer, who has a reasonable prospect of repaying • At end, consumer should have greater net worth

9. Market Structure • License and regulate mortgage brokers, change compensation system, responsibilities to consumers • Uniform consumer protection rules for all providers of specific types of consumer credit, effectively enforced • Greater responsibility in securities market for both legal compliance and disclosure of risk • Improve both data and modeling at credit bureaus • Support and enhance information gathering, research and dissemination • Extension, revision of Community Reinvestment Act obligations

10. Questions for Funders • What debt characteristics are most conducive to effective asset building? • How can the corporate social responsibility movement be harnessed to improve the quality of debt? • What research is needed to enhance the interest of creditors and related parties (e.g., credit bureaus) in improving models, debt structures, and responsible marketing to help consumers build assets? • Are there alternative market structures (e.g., CDFIs) that could be effective, and how should they best be supported? • What changes are needed in government policy to enhance the asset-building qualities of debt?

11. Products • Enhance quality and timing of disclosures • Improve availability of “good loans” through regulation of products and practices • Add savings features to debt products • Leverage participation of government-related entities • Implementation of model and default products

12. Questions for Funders • How do consumers perceive, understand and act on product features; how does marketing affect those decisions? • How can disclosure be made more effective? • How can model products and defaults push consumers into wise credit decisions? • What should model products and defaults look like? In what areas are they most important (e.g., auto loans vs. mortgage loans vs. payday loans)? • Can philanthropic support (e.g., loan loss reserves) to new, responsible products, encourage creditors to give them a fair trial?

13. Consumers • Improve quality, quantity, timing and effectiveness of financial education for children and adults • Change the context within which credit is purchased to favor asset-building

14. Questions for Funders • What are the best techniques for improving financial capability, especially among adults, and especially with respect to credit? • What types of delivery systems (including CBOs) work best? How can they be supported over the long term? • What will be the impact of telephone (including mobile) and internet delivery of products, account information, and financial information and training? How can these be harnessed for positive outcomes? • What can behavioral economics teach us about altering the context within which credit is delivered to enhance consumers’ ability to reach asset-building results—through choice or default?

15. Conclusion Credit is essential to building assets in the modern United States economy. However, the credit experience for consumers can and should be improved. There are levers to do so with respect to market structure and knowledge, products and the consumers themselves. Research, advocacy and support for implementation are all needed.