Consumer Financial Services Law and Policy: 1968-20?? in the Thick of the Battlefield for America's Economic Soul

• Publication year: 2010

Georgia State University Law Review

Volume 26 j g

Issue 4 Summer 2010

3-21-2012

Consumer Financial Services Law and Policy: 1968-20?? In the Thick of the Battlefield for Americas Economic Soul

Kathleen E. Keest

Follow this and additional works at: http://digitalarchive.gsu.edu/gsulr Part of the Law Commons

Recommended Citation

Keest, Kathleen E. (2009) "Consumer Financial Services Law and Policy: 1968-20?? In the Thick of the Battlefield for America's Economic Soul," Georgia State University Law Review: Vol. 26: Iss. 4, Article 8. Available at: http://digitalarchive.gsu.edu/gsulr/vol26/iss4/8

This Article is brought to you for free and open access by the College of Law Publications at Digital Archive @ GSU. It has been accepted for inclusion in Georgia State University Law Review by an authorized administrator of Digital Archive @ GSU. For more information, please contact digitalarchive@gsu.edu.

FOREWORD

CONSUMER FINANCIAL SERVICES LAW AND

POLICY: 1968-20?? IN THE THICK OF THE BATTLEFIELD FOR AMERICA'S ECONOMIC

SOUL

Kathleen E. Keest*

An adversarial model of the law is in essence a contest of competing narratives. Each side musters its evidence and arguments to tell a story, and tries to undermine the opponent's story. They lay the matter before a judge or jury, and we, as a society, trust that truth and justice emerge from that process, at least often enough for the system to sustain the faith of the citizenry in its integrity and capacity to deliver on that promise.

The legislative and common law norms that courts are to enforce emerge from competing narratives, as well. Public policies emerge from all the large and small choices that our public and private institutions make—through action or inaction—from among the predictive and prescriptive stories proffered by proponents on all sides.

History is no less a battle of competing narratives. This issue of the Georgia State University Law Review, with its focus on consumer financial services law and policy, comes at a time when once again we are at a crossroads in our political economy. The financial crisis that started in 2007 convinced most people that something went profoundly wrong. But what? And what to do about it? History, of

* Senior Policy Counsel, Center for Responsible Lending (CRL). The views expressed herein are those of the author, and may not reflect those of CRL.

The CRL is a non-partisan, non-profit research and policy organization, affiliated with the Center for Self-Help, a non-profit community development institution based in Durham, North Carolina, which has provided over $5 billion of financing to low-wealth families, small businesses, and non-profit organizations in North Carolina and around the country. Prior to her work at CRL, she was an Assistant Attorney General and Deputy Credit Code Administrator in the Iowa Attorney General's office, and an attorney specializing in credit regulation at the National Consumer Law Center. She began her career as a Legal Services attorney in Iowa.

1087

1088 GEORGIA STATE UNIVERSITY LAW REVIEW |Vol. 26:4

course, is always the ultimate arbiter of such questions, but it takes a while for its verdict to come into clear focus. In the meantime, we write the stories that we hope will influence history's judgment.

* * *

Over the past thirty to forty-odd years, consumer financial services policy has been one of the fields on which the competition for the dominant economic policy narrative in the larger society has been played. What economic principles should provide the framework for our policies regarding the interaction between financial businesses and their customers? To what extent should government set the rules of the game? Who (or what) should serve as the referee on the playing fields for the games between business and consumers?

Where you stand on those questions is probably correlated with where you stand on the next questions. Does the market automatically self-correct, or can it perversely create incentives for conduct that imposes serious external costs on society? Do consumer protection laws and regulations increase costs to consumers, reduce the availability of credit, and stifle innovation, as the "light-touch" and hands-off narrative goes? Or is public regulation necessary to avoid market cheating, or exploitation of the less sophisticated party in transactions between the professionals in the business and any given consumer? Might it even be necessary to avoid a race to the bottom where irresponsible, unfair and deceptive practices are rewarded (at least in the near term) to the ultimate detriment of consumers and fair competition, and even the economy as a whole, as another story goes?

At the beginning of this period, 1968, the prevailing narrative was that of a competitive market, but one that operated within the bounds of substantive legal ground rules. The ground rules included, for example, usury ceilings and other outside limits on terms and practices. This approach to consumer financial services had been the

2010) FOREWORD 1089

norm throughout most of the Twentieth century.¹ Regulation was decided at the state level, as consumer protection historically was considered a matter of state concern. During the decade between 1968 and 1978, it began to be a federal concern, as well. Congress added most of the chapters in the federal consumer protection act during that decade.²

But the country experienced serious inflation in the late-1970s to early-1980s, and the Federal Reserve Board's monetary policy to combat it sent interest rates to historic highs. Those interest rates butted up against mortgage rate ceilings, and the housing and mortgage industry sought legislative relief. Most states responded by lifting mortgage rate caps entirely, or by enacting floating rate ceilings. (Floating ceilings put a cap at a specified margin above a specified market-based index, to assure that the cap will not be below market rates.) Congress followed, deregulating mortgage lending by preempting state laws limiting interest rates, points, and non-standard terms such as adjustable rates, balloon payments, and negative amortization.³

1. For an excellent overview of the early Twentieth century reform efforts on small loan lending, see generally Combating the Shark, Symposium, 8 LAW & contemp. prob. 1-205 (Winter 1941). (It is especially interesting in light of the current debate over payday lending. This business model is strikingly similar to one used at the turn of the Twentieth century that was the object of that early reform movement.) A good general history of the development of...