Does the industry now support paternalism?

Policy battles over consumer protection often hinge on what’s better for consumers. That’s because consumer advocates often call for reforms that will aid consumers while the industry, which presumably doesn’t want to oppose proposals based simply on the position that they will cut into industry profits, instead attacks the claim that the reforms will actually help consumers. Many consumer protection proposals would limit consumer choice. For example, proposals to cap interest rates would prevent consumers from taking out high interest rate loans. The paternalism argument against such proposals is summed up in the question: who knows what’s best for your family: you or a government bureaucrat who doesn’t even know your family? But when it comes to the CFPB’s credit card late fee regulation–which lowers the safe harbor for the late fee consumers pay to $8–the industry seems now to favor paternalism.

For example, consider this excerpt from Consumer Bankers Association President and CEO Lindsey Johnson’s March 7 testimony before the U.S. House Financial Services Committee Subcommittee on Financial Institutions and Monetary Policy titled Politicized Financial Regulation and its Impact on Consumer Credit and Community Development criticizing the regulation:

* * * As more consumers pay late, there is a higher chance they will become delinquent. Ultimately, consumers experiencing delinquency will have this information reported to credit bureaus, leading to higher credit card balances carried month-to-month and lower credit scores, which can lead to far worse outcomes for consumers such as difficulty obtaining credit, or higher financing costs for housing, cars, and other necessary purchases.

In other words, consumers would be better off being forced to pay higher late fees because low late fees will cause consumers to make bad decisions. To be sure, some late payments are inadvertent but Ms. Johnson seems to think that consumers should be protected from deliberately incurring late fees–and that the way to accomplish that result is to make them pay higher fees.

If it is good policy to protect consumers from making bad choices in this context, why isn’t it also good policy to prevent consumers from making bad choices in other contexts?

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