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1 1 (November 09, 2020)

handle is hein.crs/govdclw0001 and id is 1 raw text is: November 9,2020 Introduction to Financial Services: Consumer Finance Consumerfinancerefers to the borrowing and saving choices thatpeople (i.e.,households) make overtime. These financial decis ions can be complexand 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 consumerfinancialmarkets. Research on household finance suggests that all ofthe components ofa household's finances-income, consumption, savings, assets, and debts-are important to understand a household's financial experience over tune. Safe and affordable financialservices are an importanttool for most Americans to achieve financial s ecurity over the course of their lives. People use three types of financial products: credit, insurance, and financialinvestments. This CRS product focuses on the first category-credit products (loans) for household purposes. Conumr Let 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 andpay 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 expenses, either to avoid having to postpone consumptionuntil sufficient funds have been s aved or to avoid having to liquidate wealth thatis 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 69% of household debt. Student debt (10.8%) is the second-largest household debt, followed by auto loans (9.4%) and credit cards (5.7%). As of the secondquarterof2020, household debt totaled $14.27 trillion. (See Figure 1 for more information on household debt as of the second quarter of 2020.) Figure I. Household Debt Breakdown in Q2 2020 Total Debt: $14.27Trillion -- 2020 Q2 50 82 Home Eqit stdrn Loa Auto oan L e ofCre k Mttgage -s T; . per Source: Center for M icroecon omic Data, Quarterly Report on Household Debt and Credit, Federal Reserve Bank of New York, 2020, at https://www.n ewyorkfed.org/microeconomics/databank.html. C wnumr LQndrng Regdlatkon In economic theory, consumer lending markets that are competitive should lead to efficient outcomes for consumers; yet, sometimes, market inefficiencies may be observed. Common is sues in consumer financial markets include (1) information asymmetries between financial firms and consumers and(2) behavioralbiases that predictably bias consumers when making financial decisions. In these cases, government policy canpotentially bring the market to a more efficient outcome. Policymakers still must monitor the benefits and co sts of various regulatory approaches to determine whether a policy intervention willhelp orharm the market. Although each consumer financial market is governed by various distinct laws andregulations, three types of policy interventions are common. Standardizing Consumer Disclosures. Financial products can be complexand difficult for consumers to fully understand. Mandated consumer dis closures are generally intended to give consumers more information about the costs and terms before they take out a new financial product, thus reducing information gaps in understanding. Standardized dis closures also can help consumers shop for the best terms, because all financial productterms are required to be dis closed in the s ame way. Preventing Unfair, Deceptive, or Abusive Practices or Acts. Consumers seeking loans or financial services could be vulnerable, because some consumers may lack financial knowledge or be susceptible to behavioral biases. For this reason, certain consumer protectionlaws prohibit unfair, deceptive, or abusive acts or practices. These acts and practices can include both individual firm conduct and product features. * Ensuring Fair Lending. Fair lending laws prohibit discrimination in credit transactions basedupon certain borrower characteristics, such as sex, race, religion, and \ Q xa S yg

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