Does This Year’s Nobel Prize in Economics Suggest Any Lessons Regarding the Regulation of the Consumer Finance Industry?

by Dorsey & Whitney LLP

On Monday October 12, 2015, Professor Angus Deaton won the Nobel Memorial Prize in Economic Science. Professor Deaton’s work focuses in part on consumer behavior, and, more specifically, on techniques used by researchers for gathering relevant and accurate data regarding household consumption choices. How can researchers accurately determine how much money households are spending, what they are spending it on, and why? Depending on what research techniques are used, aggregate economic data may be either reliable or misleading, which in turn can impact economic policy-making. One of Professor Deaton’s contributions to the field of economics is to highlight these granular issues of data collection and to show how they inform big-picture issues of law and policy.

This aspect of Professor Deaton’s work holds relevant lessons with respect to the regulation of the consumer financial services industry. Many recent changes to such regulations are based on studies of consumer behavior. Notably, many of these studies were conducted by the government, not by the scientific community. How reliable are these studies? Is bad data producing bad policy? Are these studies producing useful, objective information, or are they skewed by certain predetermined biases?

For example, the Consumer Financial Protection Bureau (“CFPB”) recently has proposed new regulations that would significantly limit the use of arbitration clauses in consumer finance contracts. This proposal is based on a study designed and conducted by the CFPB, including a national survey of approximately 1,000 consumers. Based on the findings of this study, the CFPB concluded that consumers do not want such arbitration clauses, and that such clauses are harmful to consumers. Thus, the CFPB decided to limit the use of such arbitration clauses in the industry. But how reliable is the CFPB’s underlying study? For example, is it problematic that the study was conducted by the CFPB, rather than a disinterested, non-governmental researcher? Likewise, is it of concern that the non-governmental scientific community has not independently replicated the CFPB’s empirical findings?

Previously, the CFPB overhauled the design and content of the model forms used by residential mortgage lenders to provide certain disclosures to consumers. That policy reform similarly was based on a study, conducted by the CFPB, regarding the extent to which consumers were capable of understanding the then-existing model forms. But how reliable was that study? One distinguished economist, Omri Ben-Shahar of the University of Chicago, has criticized the CFPB’s new model disclosures, and other disclosures mandated by federal and state regulators, as counterproductive on the ground that they unduly overwhelm consumers with information, much of it irrelevant. See Omri Ben-Shahur, More Than You Wanted to Know: The Failure of Mandated Disclosure (Princeton 2014).

To the extent the CFPB and other federal and state governmental agencies are propounding scientific justifications for new regulations affecting the consumer financial services industry, the quality of the data underlying such scientific theories is of fundamental importance. As Professor Deaton’s research has shown, data regarding consumer behavior may be incomplete or inaccurate due to design failures affecting the data-gathering process. When such a study is conducted by a political entity, rather than an independent expert, issues of research methodology arguably should be front and center.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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