Thread by @elenabotella

1/ After my TNR essay, I’ve gotten a lot of great questions about how, specifically, we could build a financial sector that still makes credit available when ppl need it, while pushing fewer families into burdensome debt.
newrepublic.com/article/155212…

2/ This is a great, complicated question hard to do justice in a Twitter thread, but here are a few thoughts (this will be wonky, but, it was requested!):

3/ Let me start by articulating a key difference between credit cards and payday loans (a category I’ll use to broadly include any non-revolving subprime unsecured credit at interest rates above 100%, obviously, not all of which are literally payday loans).

4/ If you borrow money on a credit card just to float you until your next paycheck (e.g. less than a month), the dollar amount you pay is not outrageous (IMO). Borrow $500 for 2 weeks at 24% interest, and you’ll pay $5 – not crazy.

5/ The problem is that CCs are designed in ways that encourage consumers to carry their high-interest debt for 2/3/4/5+year, so you’re still paying off your groceries years after you bought them.

6/ Revolving credit w/ high credit limits also encourages ppl to borrow more – for example, you might not walk down the street and apply for a loan to go to your cousin’s wedding, even if you would buy your plane tickets on your credit card without having a plan for repaying it.

7/ As a result, with credit cards, it’s often not just the ‘interest’ consumers regret – it’s also the ‘principal,’ because buying something you can’t afford and paying it back later can be painful even if no interest is charged. The market would be better w/ more friction in it.

8/ By contrast, payday loan borrowers I’ve talked (who also, often, have credit cards) to, have a completely different experience. There is a lot more friction in the borrowing process, they know they’re borrowing money, and it is nearly always to avoid material hardship.

9/ Even so, with payday loans, the prices are so high that they often say that getting their electricity cut off/being evicted/etc. would have been preferable – especially if those things end up happening anyways as the struggle to find the money to pay their loan back

10/ Considering these two examples simultaneously had led me to conclude we need to cap the total cost of credit as a percentage of the principal.

11/ Arguably, charging someone $50 to lend them $1,000 for a month is more defensible (a 60% APR) then charging them $720 to lend them $1,000 for 3 years (a 24% APR). The dollar amount consumers will pay matters a lot to their quality of life.

12/ Not to get to wonky, but this could look something like saying all loans need to either have an APR sub 18% *or* a total cost of credit sub 50%/$10, so there would continue to be access to short-term loans.

13/ Obviously, all usury caps face the same dilemma: should the gov’t cut off access to a product that may help someone through a hard time? (Given that we know banks, in some cases, will lower APRs, and in other cases, stop lending to customers because they'll lose $).

14/ At some point, with sufficiently high prices, the harm of loans does consistently outweigh the good. Tweet 13 is my rough sketch of where I think the line should be drawn, based, primarily, on my conversations with consumers over the last year.

15/ By capping the total cost of credit rather than the APR, you would encourage credit card companies to either lower their interest rates, *or* get consumers to pay down their debt much more quickly, both of which would be in consumers interest.

16/ This is very similar to the approach taken by @TheFCA in Great Britain, which I have been very inspired by, and think is a very useful model.
fca.org.uk/news/press-rel…

@TheFCA 17/ Some other specific practices I think need a statutory/regulatory fix: (a) Don’t let CC companies raise customers credit limits without permission, (b) Don’t let CC companies change customer “grace periods” without going through the CIT process [this is arcane i know]

@TheFCA 18/ (c) Require disclosure of the total amount of late fees/penalty fees paid by the avg. customer (in addition to what’s disclosed today, the per incident fee amount). I'm also very compelled by 'smart disclosure' research

@TheFCA 19/ I am not convinced that DTI caps or our existing ‘Ability to Pay’ rules work very well. The people who I have talked to who were most glad they borrowed money on a CC did so when they were unemployed – e.g. had $0 income.

@TheFCA 20/ I don’t think that’s a great answer (although, I understand loosely why federal policymakers came to that solution, since the CFPB by statute can’t impose a federal usury cap).

@TheFCA 21/ An alternative to DTI caps is to penalize banks with too high a percent of ppl failing to repay loans within a set time period. Again, this is similar to the FCA model (for those who would say ‘this would stop banks from lending to poor ppl’, that's also true for DTI caps).

@TheFCA 22/ I am *double extra convinced* that the Community Reinvestment Act is not working as intended when it comes to credit cards (I can’t speak to the mortgage market). Why should a bank get credit for selling additional 27% APR credit cards?

@TheFCA 23/ I am, like many people, upbeat about credit unions. I wrote about some of the obstacles they face recently for @outline
theoutline.com/post/8021/can-…

@TheFCA @outline 24/ That having been said, some credit unions have terrible management (see this @noamscheiber article about the Marriott Employee Credit Union), so I think regulation continues to be necessary even when you remove the element of greedy shareholders nytimes.com/2018/10/11/bus…

@TheFCA @outline @noamscheiber 25/ For banks/credit unions committed to improving customers lives, I gave some advice to practitioners in @AmerBanker. I don't expect many publicly traded banks to pursue this model, but am happy to give specific advice to interested practitioners. americanbanker.com/opinion/banks-…

@TheFCA @outline @noamscheiber @AmerBanker Basically, I think the ‘experimentation’ culture I describe in TNR could be used to improve the financial stability of American families, if new target variables were chosen for ‘objective functions.’ I know there are skeptics of this approach and some very thoughtful critiques

@TheFCA @outline @noamscheiber @AmerBanker 27/ I have been working on a book-length treatment of these issues; I am not pretending like I adequately defended any of my suggestions above! Just a starting point.

@TheFCA @outline @noamscheiber @AmerBanker 28/ On that note, if there’s anyone I should talk to (yourself or ppl you know with have credit card, payday loan, or personal loan debt, or bankers, academics, non-profits) please @ me. Also, if you are someone who could help bring a book-length treatment of these issues to life

@TheFCA @outline @noamscheiber @AmerBanker 29/ Finally, apologies to everyone who has reached out to me over the last two days I haven’t responded to yet, still digging through texts/DMs/etc. will get back to you!

30/ One last thing — all these suggestions are specifically about banking. Clearly, the systemic solution is to make sure people don’t need to borrow money to have food on the table, access to healthcare, a roof over their head, and a chance to flourish.