Last month, my colleague, Thomas Hudson, provided his take on the first in a series of roundtable discussions hosted by the Federal Trade Commission (FTC). This month I’d like to offer my take on what happened inside the Wayne State University Law School in Detroit. I felt it was a worthwhile exercise, but there was an interesting theme that emerged that day.
To get everyone caught up, the FTC is on a mission to learn all it can about the auto sales and finance business so it can appropriately exercise its newly minted authority — courtesy of the Dodd-Frank Wall Street and Consumer Protection Act of 2010 — to regulate dealers.
The discussions were spirited and the industry responded well to most of the allegations of abuse levied by consumer advocates. Most of the transgressions they pointed to are already prohibited by state and federal laws. As Tom wrote last month ("Impressions from Detroit," May 2011), “If you eliminated the discussion about things everyone agreed were illegal, the entire program would have taken about 15 minutes.”
The point the industry tried to make was that enforcement of existing law, rather than the creation of more regulations, will do more to help stop alleged abuses. Neither the dealer community nor finance sources have any incentive to prop up or protect the abusers, and I suspect both communities would support the enforcement of the myriad laws already available to stop them.
But while industry reps were focused primarily on market forces and using economics as a means of incentivizing behavior, consumer advocates seemed bent on utilizing social policymaking to do the thinking for consumers. Unfortunately, these are two very different philosophical approaches that cannot be easily reconciled.
The government engages in social policymaking all the time. For example, the Equal Credit Opportunity Act makes it illegal to discriminate against a protected class in a credit transaction. But that doesn’t mean you can’t charge members of a protected class more for credit if there is a legitimate business reason to do so. You just can’t base a decision on class status.
Remember, every American is part of at least two protected classes: race and gender. So, while it would be illegal for me to create underwriting standards that treated men more adversely than women, it would not be illegal for me to charge a man with a 550 FICO score more for credit than a woman with a 750 score. And while it would be illegal to have one price for men with a 550 score and a better price for similarly situated women, it is not illegal per se to charge credit-challenged consumers more for credit. Last I checked, having a poor credit score did not make one part of a protected class.
My view is that people will pay for credit exactly what it is worth to them, just like we do with plane tickets. I recently flew from Washington, D.C., to Texas. The best fare I could get, given my time constraints, was $1,600. Now, the woman sitting next to me paid a little more than $200 for her ticket. She made a determination that the ticket was worth $200 to her; I made a determination that the ticket was worth eight times that to me. Did the airline make a lot more money off of my ticket? You bet. Do I feel discriminated against? Not one iota.
See, no one held a gun to my head and said I had to buy that ticket. Yes, I would have liked to pay less, but that doesn’t mean I want my government fixing the price of plane tickets and dictating to airline shareholders how much the value of their shares are permitted to grow. That’s a recipe for economic ruin.
The same goes for credit. At the end of the day, no one pays more for credit than it is worth to them, and the market determines what that cost is. If asked, I expect most consumers would agree they have a responsibility to understand the legal obligations they submit themselves to. I also think that consumers are perfectly capable of learning, given the proper tools. So, if we want to tinker with social engineering, how about we consider incentivizing consumer education and personal responsibility? I think that is far better for society in the long term than deputizing our government to protect us from ourselves.