What Happens When Consumer Advocates Mean Well?

Consumer advocates mean well. They are in the business of making things better for consumers. Efforts of consumer advocates have included legislation as diverse as the lending policies reflected in the Community Reinvestment Act and deposit-related protections in the Truth in Savings Act. Efforts are also reflected in case law and government policies, such as the lawsuits under the Fair Housing Act to prevent insurance redlining.

Does this really work? I have found that the real answer is the lawyers' favorite response: maybe yes, maybe no. Sometimes consumer advocacy groups make an enormous difference. Sometimes the solution is at least as bad as the problem.

Is this heresy? Let's look for a minute at what really happens when consumer advocates get what they claim to want. Some laws have made a huge difference. CRA is one of them. The Equal Credit Opportunity Act is another. These two laws have made the world of credit a totally different place than it was 25 years ago. For all of the technical compliance problems of complying with ECOA and Regulation B, the difference made is enormous and the price appears to be worth it - particularly to people who couldn't get credit in their own name before ECOA was passed!

Does CRA work? Drive around some once deteriorated urban neighborhoods and see for yourself. There are clearly places where CRA has made the difference between slums and vital urban communities. Yes, things might have changed without CRA, but clearly the act has played an important role.

But how about Truth in Savings? Do customers really want more information about how the interest is calculated and rounding to the nearest pennies? The most useful information produced by Truth in Savings is the information about fees and penalties - the key terms and conditions of the account. But most of the compliance effort goes into the APY and APYE calculations, a calculation that consumers show no signs of caring about.

To some extent, this is the result of the process. To develop an issue and carry the day, there must be rallying cries. "We want loans, not lunch" took CRA lobbying a long way. Other laws didn't rely on such easy slogans. The concept stood for itself. To argue against the concept of disclosing the cost of a loan or the return on a deposit is just plain political suicide.

Now let's look at what is happening with subprime lending and predatory lending. There is a real problem here - several, in fact. There is a need for subprime loans. This is how persons with less than ideal credit histories - or no credit histories - enter the world of credit. Subprime is the credit activity that opens the door to new entrants. It is also the door that gives a second chance to entrants who have had credit - and blown it. Subprime lending is important. In fact, CRA wouldn't accomplish much without it.

Now, what about predatory lending? There is universal agreement that predatory lending is bad. Predatory lenders are in the category of sharks, bottom feeders, and T. Rexes. They are not good, and no-one wants to belong to their group - no-one nice anyway.

So what is the problem? Subprime lending is important and predatory lending is bad. The problem is that consumer advocates are using the two terms interchangeably in their efforts to call attention to the evils of predatory lending. In the effort to stop predatory lending, consumer advocates are giving subprime lending a bad name.

Consumer advocates need to be careful of how they describe and present issues. They need to look at the long term and the big picture. Because if they only look at the immediate goal - in this case winning on the predatory lending issue - they'll throw out the baby with the bath and kill the golden goose to boot.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 12, 11/00