Should we require a license to borrow?

I just attended the FTC’s Debt Collection Technology 2.0 conference in Washington DC, and came away with some new perspectives on our industry, the role of government and the attitude of consumers.

While the credit industry and the technology vendors that serve it were well represented in the series of panel discussions on such topics as “Dialing, Talking & Texting in an Age of Enhanced Mobility” and “Using Social Media for Debt Collection”, so were the advocates of consumer protection. I thought the FTC staff did a mostly excellent job of facilitating the lively and at times contentious debate among the panel members, but I have to admit to more than a little frustration with the format. Unlike most industry conferences I have attended, the audience participation was limited to submitting written questions. I’m used to a more open dialog with speakers and panelists, so I had to bite my tongue more than a few times.

As the long day wrapped up with a panel entitled “Future Directions: Looming Issues and the Regulatory Landscape”, I finally had to say something. Or in this case, submit a written question. After the Deputy Commissioner for the New York City Department of Consumer Affairs proclaimed that lenders and other creditors were failing to meet their regulatory burden of considering “the least sophisticated consumer” when designing their credit products and the agreements setting forth their terms and conditions, I quickly scribbled out a question card asking “if we require a person to pass a test before we grant them a license to drive a car, should we also require the same before they can borrow money?”

A driver who does not understand the rules of the road is a risk to everyone else driving a car. For everyone’s safety and to reduce the tremendously negative impact of car wrecks to the overall economy, states require drivers demonstrate their knowledge and skills before they can drive without supervision. This sensible approach benefits everyone, keeping our roads flowing smoothly and our drivers able to participate in whatever activities their cars are taking them to – work, play, government conferences etc.

Why are we reluctant to apply the same amount of diligence to consumer credit? After all, loan defaults damage everyone by raising the cost of credit, and when they occur in large numbers as they have in the past four years, threaten the entire economy. Wouldn’t it make sense to require consumers to demonstrate they understand their rights and obligations before we let them sign a loan for hundreds of thousands of dollars?

Of course, just like educating drivers can’t prevent all accidents, improving consumer’s credit IQ won’t prevent a default in cases of job loss or catastrophic illness. The idea is to reduce the number of consumers who opt for credit products that are unsuitable to their means and thus reduce the number of wrecked loans and damaged credit reports.

When I handed my question to the panel moderator, he smiled and at the next break in the discussion posed it to the panel. I was both surprised and pleased when the NYC Deputy Commissioner responded that they also think consumer education is a critical component to an efficient and safe credit market. In fact they offer free courses on budgeting, credit shopping and other topics on their Consumer Campus. That’s not to say she supported the idea of issuing borrower’s licenses, but at least she acknowledged that an informed consumer is a better consumer.

Closing Thoughts

In that spirit, I recommend that the credit industry consider it our responsibility to educate customers on their rights and obligations when they apply for credit, whether it’s for phone service or a mortgage. Plain language terms and conditions are a start. So are welcome calls that remind customers of their due dates and how they can make their payments - a great way to steer customers to good payment habits. All creditors should implement full-file credit reporting, insuring that good payers are rewarded for their on-time payments as opposed to only reporting bad debts. And if an account goes past due, reach out early to the customer and emphasize that two way communication is the best way to maintain their account in good standing.

When we do these things, we increase the safety and efficiency of our credit based economy, reducing the risk of another major wreck like the one we have just lived through. It’s not much different than coming to a full stop and looking both ways at a flashing red light.

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