Disclosure 2.5: Moving from the Lab to the Field
If financial education classes and lab-tested disclosures are unlikely to help consumers in their real-world financial decisions, what about field-tested targeted education/disclosure? Exciting work by Marianne Bertrand and Adair Morse shows that information given to payday borrowers can reduce their future borrowing, holding payday lender behavior static. Although this last caveat seriously limits the external validity of their results, the potential implications of their work are wonderful enough to be deserving of a full description here.
(a) directly to those who could use the information,
(b) in a manner they would likely notice (the envelope also stated the due date of the loan, so borrowers were likely to keep it as a reminder),
(c) in a simple form that was intuitive to understand (explained below), and
(d) at a time when they could use it to help make near-term future borrowing decisions, such as whether to pay off or renew the loan they had just taken.
Several different disclosures were tested, two of which reduced borrowing. The first was a chart showing not only the price in the format disclosed by payday lenders - the dollar cost of a $300 payday loan paid off after two weeks ($45) - but also the various dollar costs of that $300 loan if it were rolled over for a range of periods, up to 3 months ($270). The chart contrasted these prices with the dollar cost of $300 credit card debt paid off after each of the same time periods, from two weeks ($2.50) to three months ($15).
This first disclosure was intended to address the first problem with traditional disclosure identified in my last post, a failure to fully understand attributes of the product itself. Although $45 might seem a small enough figure not to be worth looking for alternatives, $270 might be a large enough figure to inspire the borrower to seek another form of credit or forgo the loan entirely. (As an aside, Bertrand and Morse noted that this disclosure might not address the second problem with disclosure discussed in my last post, that of changing the borrowers' consideration sets, because many payday loan borrowers do not have the option of using a credit card; instead, the credit card price was meant to dramatize the high price of the payday loan.)
The second disclosure that reduced future borrowing was a frequency graphic showing how many times borrowers are likely to refinance a payday loan before paying it back. This was intended to address the third problem I identified in my last post, a failure to appreciate one's own likely future experience with a product.
Both of these interventions reduced future borrowing - the first reduced the incidence of future borrowing and the second reduced the dollar amount of future borrowing. This experiment provides strong evidence that, at least for some borrowers some of the time, the decision to take a payday loan is in part based on a failure to consider the true likely future price of doing so. Notably, however, the effects of the disclosures were limited to those borrowers who borrowed a relatively small proportion of their income; borrowers who took larger loans as compared to their incomes did not alter their borrowing behavior, perhaps because the relatively larger loans trapped them in a cycle of debt.
By testing disclosures in the field, Bertrand and Morse were able to overcome some of the limitations of the laboratory testing engaged in by the CFPB and other financial regulators discussed in my last post. Bertrand and Morse's experiment was run on actual consumers in their actual decision environments, where these consumers would have been distracted by life, under the emotional pressure of whatever led them to borrow in the first place, and in a hurry to get back to the rest of life. But translating Bertrand and Morse's findings into policymaking requires one more step: an examination of how lenders would respond to the disclosures if this were more than a brief experiment.
Lenders faced with a new mandated disclosure that could reduce their business volume are unlikely to stand idly by. They will dynamically respond with changes in advertising, sales talk, pricing structures, etc. At least three specific lender responses are suggested by Bertrand and Morse's research. The first would be for lenders, in marketing and sales communications, to emphasize to borrowers that credit card companies are unlikely to lend to them, so as to make borrowers feel that they have no choice and should not even contemplate a disclosure that lists credit card borrowing prices. The second is for lenders to put in place a sliding scale of minimum loan sizes that are a relatively high proportion of borrowers' paychecks, making it more difficult for borrowers to pay off the loans they receive before they even see the new disclosures. The third is for lenders to give borrowers a reminder of the due date of the loan on a wallet-sized card that would be more convenient for consumers to keep than the envelope in which loan funds are disbursed, in the hopes that consumers will discard those envelopes before reading the disclosures.
As a law professor rather than a marketing professional I cannot guess all the creative responses lenders might have to a new disclosure, and until lenders try these responses, it is not possible to know how effective they will be in negating the effects of a legally-required disclosure. But my research on policy defaults (which I will discuss in a future post), shows that financial firms are very knowledgeable about consumer psychology and use this knowledge to respond to behaviorally-inspired consumer financial regulation.
Firms are likely to be better than regulators at manipulating consumer psychology, what I have called the frame game. Firms can quickly respond to regulation by changing the environment that frames consumer decisions. The regulatory process is a slow one that does not allow for quick responses to changing environments. Regulation can require particular disclosures, but firms are the last movers when they implement those regulations, and so firms can take action to undo the effectiveness of the disclosures. While regulators might prohibit firms from engaging in particular actions that regulators can foresee might undermine the disclosures, regulators cannot issue blanket prohibitions on psychological manipulation without running afoul of current Supreme Court free speech doctrine.
This is not to say that the disclosures Bertrand and Morse have suggested would not be an improvement on current payday loan disclosure regulation that emphasizes APR, a non-intuitive and poorly understood pricing metric. But it might not be an improvement on substantive limits on payday loan prices or repayment schedules, alternatives I will discuss in a later post. Each move in the cat-and-mouse game between regulators and firms must be considered when comparing potential regulatory responses.