If nothing else, the subprime mortgage debacle has given new life to the question of how government can best protect the interests of credit consumers. Credit lenders are naturally concerned, and you can bet their lobbyists are bellying up to the bar en masse, determined to ensure that whatever new regulations do get enacted by Congress, they will be crafted so as not to place undue harm on mortgage lenders and credit card companies.
That's one reason to play close attention to a speech delivered Wednesday by Julie Williams, chief counsel for the Office of the Comptroller of the Currency (OCC) at the Joint Center for Housing Studies at Harvard University. The OCC is the federal government's chief banking regulator. So when Williams tells us her topic will be "what lessons we might learn about different approaches to consumer protection regulation of consumer credit," we should listen.
A second reason would be that Williams is considered by some consumer advocates to be more interested in protecting the interests of lenders than of consumers. So if you're looking for state-of-the-art market-friendly talking points on the subject of consumer protection regulation, she might be a good place to start.
But to understand the nuances of her speech it pays to know your way around the topic. I confess, I read the entire speech, and was puzzled. It seemed balanced and thoughtful. But I felt as if I was missing something.
Williams takes pains to distinguish between two approaches, product-based regulation and provider-based regulation.
Product-focused regulation in the form of substantive prohibitions and restrictions on terms of credit, which some may label the "we know what's good for you approach," has a place, but is a regulatory technique to be used with great care; it can strike at transactions that are abusive and overreaching in some contexts, but if it's not applied with precision, it also can reduce legitimate credit opportunities for borrowers with limited or non-traditional credit profiles ..."
Provider-based regulation, said Williams, offers more of a "'pharmacist approach' to consumer protection" that aims at weeding out the bad actors, rather than restricting the entire industry from specific practices.
"...consider this: If you have flu symptoms that you just can't shake and need an antibiotic, need medication to lower your blood pressure or even to treat a really bad cough, you deal with providers -- pharmacists -- that are specially trained and licensed. But if you propose to take out a mortgage -- to embark on what is likely the most significant financial investment you will make in your life, one that could make or break your financial health, there is no uniform assurance that the loan originator with whom you do business has any particular experience or expertise, or is subject to any particular standards of conduct relative to how you are treated."
The bulk of Williams' speech was a careful, nuanced discussion of the various trade-offs associated with each approach. But it was clear Williams favored the provider-based strategy. Which led me to the obvious question -- if it is true that Williams leans toward protecting the interests of industry, why would industry favor a provider-based strategy?
I e-mailed Bob Lawless and Katherine Porter, two academics who specialize in credit issues and who both contribute to the regularly enlightening Credit Slips group blog, a pioneering effort at integrating cutting-edge academic research with the news of the day. And I got my answer.
"I read Ms. Williams's speech, and I don't see much new in it. Of course, it all sounds quite reasonable -- who could oppose balanced and thoughtful regulation?"
"The effect of her proposals, however, would hardly be neutral. Her comments are opaque, but she seems to want more discretionary authority for federal banking regulators, including the OCC. This discretion would supplant currently highly specified regulations. Discretion is great if one can trust the decision maker. Right now, I don't trust the OCC to implement effective consumer protection."
"I'm sure the banking industry would like her proposals. It is far better for them to be regulated by friendly supervisory authorities in Washington than by skeptical state attorneys general or private attorneys hired by frustrated consumers."
"I would add to Bob Lawless's comments that an additional problem with 'provider-based' regulation (as opposed to product-based regulation) is that the fractured regulatory authority makes it very hard for consumers and even their advocates to know which agency is the appropriate regulator. It's an alphabet soup of agencies for most of these consumer credit things: the OCC, the Fed, the FTC, the FDIC, the OTS, etc. These agencies tend to each suggest on occasion that primary regulatory authority for solving any given consumer problem resides with another agency -- they pass the buck and it tends not to stop as these are all federal agencies with consumer protection responsibilities."
"Product-based regulation, for the consumer, is much easier to understand -- regardless of the charter or type of agency that gave me this loan or card, here is the rule. With consumer law, a major enforcement challenge is making consumers aware of their rights and product-based regulation is superior to provider-based regulation in that regard. With provider-based regulation, the onus is going to be on the consumer to ensure that their provider has been certified or is regulated, and we have to trust the disparate agencies to police the quality of the providers."
As the political process continues to hash out its legislative response to the subprime scandal, it might be useful to bear these distinctions in mind.
UPDATE: Reader hatchshin adds some additional excellent analysis of Williams' speech.