Consumer finance refers to the saving, borrowing, and investment choices that households make over time. These financial decisions can be complex and can affect households’ financial well-being both now and in the future. Safe and affordable financial services are an important tool for most American households as they avoid financial hardship, build assets, and work to achieve financial security over the course of their lives. Understanding why and how consumers make financial decisions is important when considering policy issues in consumer financial markets. Households borrow money for the following common reasons: investments—such as a home or education—to build future wealth, consumption smoothing (i.e., paying later to consume things now), and emergency expenses. Consumer financial markets generally share similar market dynamics. In all of these markets, consumers often act in similar ways when making financial decisions, and firms tend to act in comparable ways to attract consumers. Therefore, the government tends to consider similar policy interventions when regulating in these markets, including fair lending, disclosures, and prohibitions on unfair, deceptive, or abusive practices. There are also certain market-specific protections—for example, limits on liability for unauthorized use of credit cards and accuracy protections in credit reporting. Most households rely on credit or other closely associated financial products to finance some of these expenses, because these households often do not have enough money saved to pay for them up front. According to the Federal Reserve Bank of New York, mortgage debt is by far the largest type of debt for households, accounting for approximately 70% of household debt. Auto loans are the second-largest household debt, followed by student loans and credit cards. The major consumer financial markets can be broadly divided into two categories, one defined by financing a larger item using longer-term payments that potentially lead to the purchase of a larger item or investment and the other by facilitating day-to-day purchases and ensuring that consumers have adequate liquidity. While, broadly, many consumer financial products are fungible, the primary stated purposes for these products are different. The first product group includes mortgages, student loans, and automobile loans. The second product group is more varied in its functions and design, including credit cards, payday loans, personal loans, earned wage access (EWA), “buy now, pay later” (BNPL), and checking accounts or their close substitutes. This report discusses each product, including the pricing and origination structure, the market, and consumers’ uses for the product. In addition, two important market structures complement many of these consumer financial products: (1) the consumer credit reporting system and (2) the debt collection market. These aspects of the consumer credit system facilitate the pricing of credit offers and the resolution of delinquent consumer credit products for most consumer credit markets, reducing risks to financial service providers. Other current policy issues cut across these major consumer financial markets. The growth of financial scams and fraud affects consumers’ finances and can erode consumer confidence in the greater financial system. The powers, structure, and budget of the Consumer Financial Protection Bureau (CFPB) and its effectiveness in helping consumers is an area of active debate. The growing role of machine learning and artificial intelligence in financial services—including in credit underwriting, customer service functions, and fraud detection—is a rapidly evolving change in consumer finances.
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