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1 1 (January 13, 2022)

handle is hein.crs/govehpj0001 and id is 1 raw text is: Congressional Research Service Informing the legislitive debate since 1914 S Updated January 13, 2022 Introduction to Financial Services: Consumer Finance Consumer finance refers to the borrowing, saving, and 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 debts-are important to understand its financial experience over time. Safe and affordable financial services are an important tool for most Americans as they work to achieve financial security over the course of their lives. People use three types of financial products: credit, insurance, and financial investments. This CRS product focuses on the first category-credit products (loans) for household purposes. Consumer Debt Households typically borrow money for the following reasons: * Asset building. Using credit to make investments can allow a household to build wealth over time (e.g., a mortgage or student loan). * Consumption smoothing. Using credit to buy and consume now and pay later (e.g., a credit card). * Financial shocks or emergencies. Using credit to pay for unexpected expenses, such as a car or home repair, a medical expense, or a pay cut (e.g., a payday loan). Most households rely on credit to finance some of these expenses, either to avoid having to postpone consumption until sufficient funds have been saved or to avoid having to liquidate wealth that is being accumulated for other purposes, such as retirement. According to the Federal Reserve Bank of New York, mortgage debt is by far the largest type of debt for households, accounting for approximately 70% of household debt. Student debt (10.4%) is the second-largest household debt, followed by auto loans (9.5%) and credit cards (5.3%). As of the third quarter of 2021, household debt totaled $15.24 trillion. (See Figure 1 for more information on household debt as of the third quarter of 2021.) Figure 1. Household Debt Breakdown in Q3 2021 Total Debt: $15.24 Trillion Cred-t Card 2021 Q3 ($.0)Home Equity Student Loa Auto Loan ie of Credit ($1.8T) (1.417T) ($.32T) Mortgagei~ ($1 Other ($0.42T) Source: Federal Reserve Bank of New York, Center for Microeconomic Data, Quarterly Report on Household Debt and Credit, 2021. Consumer Lending Regulation In economic theory, consumer lending markets that are competitive should lead to efficient outcomes for consumers; yet, sometimes, market inefficiencies may be observed. Common issues in consumer financial markets include (1) information asymmetries between financial firms and consumers and (2) behavioral biases that predictably bias consumers when making financial decisions. In these cases, government policy can potentially bring the market to a more efficient outcome. Policymakers must monitor the benefits and costs of various regulatory approaches to determine whether a policy intervention will help or harm the market. Although each consumer financial market is governed by various distinct laws and regulations, three types of policy interventions are common. 1. Standardizing consumer disclosures. Financial products can be complex and difficult for consumers to fully understand. Mandated consumer disclosures are generally intended to give consumers more information about the costs and terms before they take out new loans, thus reducing information gaps in understanding. Standardized disclosures can also help consumers shop for the best terms, because all financial product terms are required to be disclosed in the same way. 2. Preventing unfair, deceptive, or abusive practices or acts. Consumers seeking financial services could be vulnerable, because some consumers may lack financial knowledge or be susceptible to behavioral biases. For this reason, certain consumer protection laws prohibit unfair, deceptive, or abusive acts or practices. These acts and practices can include both individual firm conduct and product features. 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

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