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The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit

David S. Evans

University of Chicago Law School; University College London; Global Economics Group

Joshua D. Wright

Federal Trade Commission; George Mason University School of Law

January 7, 2010

George Mason Law & Economics Research Paper No. 09-50
Loyola Consumer Law Review, Vol. 22, No. 3, 2010, pp. 277-335

The U.S. Department of the Treasury has submitted the Consumer Financial Protection Agency Act of 2009 to Congress for the purpose of overhauling consumer financial regulation. This study has examined the likely effect of the Act on the availability of credit to American consumers. To do so we have examined the legislation in detail to assess how it would alter current consumer protection regulation, reviewed the rationales provided for the new legislation by those who designed its key features, considered why consumers borrow money and benefit from doing so, and reviewed the factors behind the expansion of credit availability over the last thirty years. Based on our analysis we have concluded that the CFPA Act of 2009 would make it harder and more expensive for consumers to borrow. Under plausible yet conservative assumptions the CFPA would:

• increase the interest rates consumers pay by at least 160 basis points;
• reduce consumer borrowing by at least 2.1 percent; and,
• reduce the net new jobs created in the economy by 4.3 percent.

By reducing borrowing the Act would also reduce consumer spending that further drives job creation and economic growth. In addition to restricting the availability of credit over the long term, the CFPA Act of 2009 would also slow the recovery from the deep recession the economy is now in by reducing borrowing, spending, and business formation.

The financial crisis has surfaced a number of serious consumer financial protection problems that were not dealt with adequately by federal regulators. Rather than proposing expeditious and practical reforms that can deal with those problems, the Treasury Department has put forward a proposal that would disrupt current regulatory agency efforts to deal with these issues.

This paper focuses on the CFPA Act that the Administration introduced in July 2009. House Finance Committee Chairman Frank has proposed changes to this Act which the Treasury Secretary Geithner appears to be willing to accept. However, given that these changes could be reversed or other changes could be made as the legislation works its way through Congress, we focus on the Administration’s original bill rather than a moving target. Chairman Frank’s proposed changes do not significantly alter any of our conclusions.

Number of Pages in PDF File: 50

Keywords: adverse selection, asymmetric information, automatic underwriting, color-blind, consumer credit, credit worthy, FICO, financial crisis, liquidity constraint, moral hazard, mortgages, overdraft protection, risk analysis, securitization, subprime, supernanny

JEL Classification: E5, E51, E53, E60, E62, G20, G28

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Date posted: October 7, 2009 ; Last revised: September 20, 2010

Suggested Citation

Evans, David S. and Wright, Joshua D., The Effect of the Consumer Financial Protection Agency Act of 2009 on Consumer Credit (January 7, 2010). George Mason Law & Economics Research Paper No. 09-50; Loyola Consumer Law Review, Vol. 22, No. 3, 2010, pp. 277-335. Available at SSRN: http://ssrn.com/abstract=1483906

Contact Information

David S. Evans (Contact Author)
University of Chicago Law School ( email )
1111 E. 60th St.
Chicago, IL 60637
United States
University College London ( email )
London WC1E OEG
United Kingdom
Global Economics Group ( email )
1400 S. Dearborn, Suite 400
Chicago, IL 60603
United States
Joshua D. Wright
Federal Trade Commission ( email )
601 New Jersey Ave., NW
Washington, DC 20580
United States
George Mason University School of Law ( email )
3301 Fairfax Drive
Arlington, VA 22201
United States
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