Interpretation and Experimentation as Advocacy at the CFPB
“Imagine that the interest rate on your savings account was 1% per year and inflation was 2% per year. After 1 year, how much would you be able to buy with the money in this account?”
A. More than today?
B. Exactly the same?
C. Less than today?
D. Do not know.”
A recent study revealed that only 66 percent of respondents were able to answer this question correctly. For those between the ages of 18 and 34, the number shrinks to 50 percent. Though these numbers may seem surprising, they are indicative of the state of financial literacy in the United States.
Indeed, the authors of the study, Annamaria Lusardi and Carlo de Bassa Scheresberg, find that only 40 percent of respondents could correctly answer 3 simple questions about the effect of interest, inflation, and risk on their personal savings. The picture is even bleaker when looking at young people (29 percent) and those who use alternative financial services like payday loans (26 percent). In a related report, researchers found that 1 out of 4 people are certain that they could not readily come up with $2,000 to cover an unforeseen expense. Taken together, these findings make it abundantly clear that the majority of Americans, and especially the most disadvantaged, are underprepared to make everyday decisions about savings and debt.
How can policy makers address this problem?
In response to the financial crisis, Congress established the Consumer Financial Protection Bureau (CFPB) as a “cop on the beat,” protecting consumers from irresponsible and unscrupulous lenders. Most of the initial press coverage detailed the protracted fight over the CFPB’s creation and the failed nomination of its progenitor, Elizabeth Warren, to head the Bureau. And while the CFPB is now up and running with a confirmed director, its greatest potential to affect consumers’ finances has gone largely unnoticed.
That’s because when it was set up, the Bureau was tasked not only with being a regulator, but also with being an interpreter. By distilling complicated mortgage and credit card agreements into simple documents that could be easily understood by people across a wide range of ages and levels of education, it aims to protect consumers from unscrupulous lenders and financial product peddlers. In addition to these simplified financial summaries, the current CFPB website has an interactive tool to help students navigate college loans, allowing visitors to compare the monthly expected payments across different schools and types of financial aid packages.
While the Bureau has been innovative in designing clearer disclosures by consulting experts and running consumer focus groups, there is room for improvement in testing the efficacy of these new tools. The CFPB should evaluate competing designs by varying both the content and presentation style in survey and lab experiments, which have become increasingly common in political science research.
For example, respondents would be randomly assigned to view different versions of the same credit card agreement and then be asked to make financial judgments about the product. Such an approach would allow the Bureau to compare the effects of each potential disclosure on consumer decision-making. Furthermore, the CFPB may be uniquely situated to run larger scale field experiments, where disclosures are varied in real financial products marketed to prospective customers. This would be an ideal scenario, as consumers would be engaging with critical financial information in an everyday setting.
Of course, a consumer translator can only go so far in protecting consumers, and the larger function of the CFPB as a regulator is essential for its success. In the current political landscape, though, where elected officials can score easy points opposing regulation, this alternative framing of the Bureau could help it gain bipartisan public support.
What’s more, the Bureau’s attempts to foster informed financial consumers, however incomplete, can help diminish the informational advantage financial product sellers have enjoyed for far too long. As such, advocates of such an approach can make a market-based argument that’s hard to oppose: more informed consumers would reduce the demand for potentially dangerous and certainly unethical financial products that, in aggregate, threaten not just individuals and households but the entire financial system.