Section 1229 of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 required the Federal Reserve to conduct a study of the consumer credit industry. Specifically, they were ordered to look at the methods creditors use to determine whether a potential borrower will be able to repay his/her debts. Congress wanted to determine if the consumer credit industry solicited and extended credit indiscriminately, without ensuring that consumers could repay the debts, and in a manner that encourages consumers to accumulate additional debt.
Their report (.pdf link) was published last month, and it appears the credit industry is off the hook.
The study concludes that credit card issuers are not choosing or marketing to borrowers "indiscriminately or without assessing their ability to repay debt." As for encouraging consumers to accumulate additional debt, the Fed states "the aggregate growth of consumer debt has not entailed a threat to the household sector of the economy; nonetheless, certain specific industry practices of late have been deemed by regulators to potentially extend borrowers' repayment periods beyond reasonable time frames and have been the subject of extensive supervisory attention and guidance."
Though that might seem like a slap on the hand (a mild one), I'd say it's not even that. The report goes on to assert that the current oversight and enforcement mechanisms work, and suggests no further action (even though sec. 1229 of BAPCPA also empowered the Fed to "issue regulations that would require additional disclosures to consumers" or take "any other actions...to ensure responsible industrywide practices." The report suggests that the Fed has already taken any necessary actions to police the credit lending industry.
Even though a lot of this Fed report is spot on (particularly its defense of risk-based pricing, which allows a greater range of consumers to access credit), it will no doubt disappoint BAPCPA opponents. Sec. 1229 was one of the few parts of the new bankruptcy law that addressed creditor behavior, and the Fed has given them a pass.
I wonder if the framers of the bill chose the Fed for a reason? What might this report have looked like if a different agency had been tasked with issuing it?
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