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2012 NCHELP Knowledge Symposium

2012 NCHELP Knowledge Symposium. Financial Services Disclosures. Presenter. Disclaimer.

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2012 NCHELP Knowledge Symposium

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  1. 2012 NCHELP Knowledge Symposium Financial Services Disclosures

  2. Presenter Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  3. Disclaimer The information presented in this session represents the views and opinions of the presenters and does not constitute the opinion or endorsement of, or promotion by, Iowa Student Loan. Also, this session is for information purposes only and should not be construed as legal advice. The reader or audience participant is encouraged to consult with legal counsel before making any policy decisions based on the information contained herein. Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  4. So What’s the Brouhaha All About? Events since 2008 have caused a profound transformation in the way we view the consumer’s relationship with the financial services industry Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  5. The Importance of Disclosures Disclosures are viewed as an important area of consumer protection Financial disclosures as a source of consumer protection are gaining prominence in public policy discussions Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  6. Financial Disclosures – A Bumpy History Senator Paul Howard Douglas (D-Illinois) Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  7. Who are the Players? Consumer Lender School Government Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  8. Disclosures – What’s in it for Consumers? Disclosures provide useful information to consumers Create efficient markets (which results in lower prices) Can be a useful comparison tool in the spirit of the Truth in Lending Act The disclosure itself is a financial literacy tool Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  9. Consumers Coincidentally, consumers also pay the costs Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  10. Disclosures – What’s in it for Lenders? If the lender is a good actor, accurate disclosures are useful Shows off a good product Publicizes product pricing and features Transparency is good for the lender’s reputation Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  11. Good for Business Accurate disclosures help legitimate lenders in the marketplace Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  12. Think about it… The magic bullet! Perfect disclosures would satisfy consumers, regulators could back off, and the lenders’ costs would go down – a good thing! Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  13. Disclosures – What’s in it for Schools? Helps students borrow responsibly Being active in helping students may enhance school’s reputation Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  14. Disclosures – What’s in it for Government? Ideological agenda + manipulating consumer behavior = Power Create efficient markets Consumer protections? Government assumes that creditors can provide information at a reasonable cost Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  15. Government: The 800 Pound Gorilla Invites itself to the game The player none of us can ignore Assumption that creditors can provide information cheaply is not always true; however, government doesn’t care Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  16. Preferred Lender Rules The student loan preferred lender rules are a good example of government law-making interfering with the flow of information designed to help consumer Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  17. The Quest for Information Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  18. Economics of Information In theory, free markets ensure optimal outcomes Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  19. Asymmetric Information Unequal information Different terms Different rates Different origination fees Different loan amounts Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  20. Transparency Transparent information is the goal The comprehensive whole of the product so that the consumer can make an informed decision Important issue for consumer protection policy Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  21. Information Economics v. Behavioral Science Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  22. Primary Disclosure Items Annual Percentage Rate Finance Charge But keep in mind there are plenty others… Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  23. Annual Percentage Rate Oddly enough, mathematically not really all that complicated The more variations in the underlying equation the more difficult it becomes Which brings us to the “finance charge” Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  24. Finance Charge – Now it Starts to get Messy… The gift that keeps on giving Reg Z elaborates on what is and what is not a finance charge – very complicated Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  25. It’s All About Cash Flows Money received  Money paid out Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  26. Closed-end Credit Disclosure for the whole of the transaction Fairly straight forward math Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  27. Closed-end Credit (cont’d) Not without its problems Variable rate loans Loans rarely run to maturity Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  28. Open-end Credit Different from closed-end credit Future events Grace periods Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  29. Open-end Credit (cont’d) Unlike closed-end credit (or, at least, what the schedule of events suggest might happen), a lender can’t disclose what will happen in the future Is providing hypotheticals meaningful? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  30. Interest rate v. APR Interest is the most common form of finance charge. It is what the consumer pays for the use of money The APR, on closed-end credit, is a measure of the cost of credit. It includes all costs of credit, including interest Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  31. Interest Rate v APR (Cont’d) Latest trend is to de-emphasize the APR, because… Consumers don’t understand it Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  32. Interest Rate v APR (Cont’d) The APR can be helpful Generally, better than it was prior to 1969 APRs are a consistent standard and can be monitored Consumers know that low APRs are better than high Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  33. Ultimately Political Whether economic or behavioral, the motivation behind disclosures is ultimately political Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  34. The Challenge of the “Least Sophisticated Consumer” Can one argue that it is impossible to simplify the disclosure of complex financial services to the degree that even the most unsophisticated among us can understand them? Should we even try? Should we just assume a certain social casualty rate? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  35. The Limitations of Disclosures The consumer may simply not care or the material is too complex Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  36. Hey Dummy! Are we all the least sophisticated consumer? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  37. How Hard Could It Be? Fixed rate or variable rate? What will the variable rate be three years from now? What does the history of the index tell us? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  38. You've got to ask yourself one question: Do I feel lucky? Well, do ya, punk? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  39. Less is More The only people who truly believe that consumers read financial disclosures are politicians Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  40. Less is More (cont’d) ‘Less is more’ often remains true. Too much information can overwhelm consumers or distract their attention from key content. Federal Reserve Bulletin, August 2011 More disclosure is not necessarily better disclosure U.S. Supreme Court (Millhollin v. FMCC) In financial regulation, as in so many other areas of life, simpler is better Wall Street Journal 9-12-12 Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  41. Less is More (cont’d) Credit cards: Should we provide all of this disclosure gobbledygook or just say: “Hey you! If you pay more than the minimum payment each month you will pay your credit card balance off faster!” Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  42. What Exactly are Congress’ Goals? ‘It is still worthwhile to try to ensure both competition and good information conditions overall, and this is precisely what Congress was attempting to do when it passed the Truth in Lending Act in 1968…’  Durkin/Elliehausen Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  43. As for Ensuring Competition… Yeah, well, we’re there! Look at the wide-range of financial products available today Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  44. Goals to Strive for… Effective financial disclosures will find a way to accommodate both short and long term memory capabilities Don’t overload consumers’ mental processing abilities at the decision point Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  45. What Should be the Role of Government? The passage of Dodd-Frank raised the ante on the debate about the role of government in the regulation of financial services and products Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  46. Public Utility v. Free Market Common ground Providing loans to students and parents fits into a public policy niche in that this country has a social and economic need for a productive work force Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  47. Why are Student Loans Different? If the purchase of an education is critical to public policy goals and worthy of extra protections, then why not car loans? Otherwise, how does one explain public transportation? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  48. Is there Anything that is not critical to the public good? ‘In a society that obsesses about risk, we need to understand that there is a danger in being too risk-adverse.’ ― Gordon Marion Professor of Philosophy at St. Olaf College and trainer of boxers (pugilists, not dogs) Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  49. Not entirely on point, but you get the drift: As the authors [Messrs. Haldane and Madouros] note, ‘Many of the dominant figures in 20th century economics—from Keynes to Hayek, from Simon to Friedman—placed imperfections in information and knowledge centre-stage. Uncertainty was for them the normal state of decision-making affairs.’ Wall Street Journal 9-12-12 Navigating the Sea of Change 2012 NCHER Knowledge Symposium

  50. How to get there? Navigating the Sea of Change 2012 NCHER Knowledge Symposium

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