Professor Patricia McCoy became concerned in the years leading up to 2008 when she watched our regulatory system become what she calls “a race to the bottom.”
Lenders shopped for the regulator that would be easiest on them. In turn, the regulators would respond by becoming easier and easier to comply with. Borrowers were being sold predatory sub-prime loans without understanding the consequences. They were duped.
During the financial crisis, millions lost their homes after they took out risky loans. McCoy says that many borrowers didn’t have the information they needed about the loans—and behavioral science can give policymakers tools to help consumers make more informed decisions.
Risks need to be front and center on financial forms, for example. Dollar amounts need to be in numbers, not percentages.
McCoy discusses the impacts of such consumer exploitation and manipulation in the PBS Series, Hacking Your Mind, alongside Nobel Prize winners Richard Thaler, Robert Shiller, and George Akerlof.
A lot has changed since 2008 in terms of consumer protection, McCoy says, but we’ve come to learn that when consumers are exploited, the consequences extend far beyond the individual. “When you had a rash of foreclosures, it could pull down the entire neighborhood,” she explains. “It opens the neighborhood up to crime, vacant houses, falling tax revenues.”
In the years following the financial crisis, Congress passed major consumer protection legislation that overhauled the mortgage marketplace. McCoy says the government has evolved to protect consumers from exploitation, but student indebtedness in the country could prove dangerous to our broader economy.
“We have a lot of concern that the high level of student indebtedness is going to be a drag on the current student population,” McCoy says. “So that they will not be able to fully participate in the larger economy: buy homes, have children as early as they will like because they have the heavy albatross of student debt around their necks.”
McCoy serves as the inaugural Liberty Mutual Insurance Professor of Law at Boston College. She is a nationally prominent scholar in financial services regulation and in 2010 and 2011, she joined the US Department of the Treasury, where she helped form the new Consumer Financial Protection Bureau.