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Bogus Statistics: The Banking Industry's Go-To Lobbying Tool

posted by Adam Levitin

Fake statistics have been a central feature of the banking industry's lobbying strategy on every major consumer credit issue since the 2005 bankruptcy amendments. 

In 2005, there was the phantom $400 bankruptcy tax used to push through the BAPCPA.  Then there was the Mortgage Bankers Association's 200 basis point interest rate increase claim about cramdown.  For credit cards, there was no fake statistic, but a pseudo-academic study funded by the American Bankers Association.  (In retrospect, lack of a scare number was a major strategic mistake for the industry.) 

Now we have the latest installment in the parade of phony numbers:  an American Bankers Association-funded study about the likely impact of the Consumer Financial Protection Agency (CFPA) on consumer credit cost and availability and economic growth.  The study is by David Evans of LECG and Joshua Wright of George Mason Law School (Wright may be familiar to some Credit Slips readers from his blog comments in the past). 

There's a lot of tendentious claims in Evans and Wright's study, but the heart of it are some very precise claims as to the impact of the CFPA on the cost of consumer credit (160 basis points), the demand for consumer credit (2.1% decrease), and the net job creation (4.3% slower).

How, you might ask, did anyone possibly arrive at such precise predictions based on legislation that does not create any substantive regulation of the credit industry, but would merely transfer largely existing powers to a new agency? 

The short answer:  just make up the numbers.  I kid you not.  Evans and Wright selectively chose a study on the impact of a different regulation (interstate banking restrictions) on credit cost.  They briefly argue it is analogous to the CFPA Act, which they claim will have double the impact.  (Why double?  Why not?)   Then they take that number and multiply it by an elasticity metric for the demand impact.  And for the coup-de-grace, they take a misleading number on net job creation and conjecture with no basis that it would be reduced by 5%.  These numbers are presented as "plausible, yet conservative" assumptions. 

There's a lot of room for good faith disagreement about methodology, but Evans and Wright's numbers don't come close to passing the straight-faced test.  (Even the Mortgage Bankers Association had some facially plausible basis for their cramdown claim.)  I am still shocked that two serious scholars would attach their names to this study. My short critique of their study is here


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Typo - 4th paragraph: "but the heart of it are some very price claims as to the impact of the CFPA"

Speaking of studies that may not be unskewed by the desire for a particular result: Have you (or any of the CSers) looked at the study by the National Bankruptcy Research Center and Money Management International Financial Education Center that claims there is some benefit to pre-bankruptcy credit counseling? Specifically that prebankruptcy credit counseling results in increased credit scores. To me - and I don't read studies for a living - the data selected for analyis, and the conclusions, seemed very odd.

That is not my experience. We can argue about the real benefits of debtor education programs, but pre-bankruptcy credit counseling has always seemed to me to be a cost imposed for no purpose other than to make it more expensive for debtors to file bankruptcy.

There was a positive article on the study in the September American Bankruptcy Institute Journal - which kind of suprised me.

One example from the ABIJ article - about 15% of people who get pre-bankruptcy credit counseling don't file. The conclusion is: "Put another way, between one and six and one and seven consumers who contacted an approved provider to satisfy the requirements for prebankruptcy counseling found that they did not need to file after all." Implying some connection between an exercise debtors describe as meaningles, and the decision not to file. If it actually was a decision, and not an inability to come up with the filing and attorney fees.

The study also seems to try to equate prebankruptcy credit counseling with entry into a debt management plan - which may have happened, somewhere, sometime, as a result of prebankruptcy counseling, but I've never seen it.

I'd be curious on your thoughts on what looks like a similar industry study, this one from the credit counseling industry.

First consider the sponsers of the credit counseling study. The suggested data of the benefit that prevented consumers from filing bankruptcy may not be accurate if their basis is strictly from pre credit counseling as a condition to file for bankruptcy versus consumers who contact credit counseling agencies, which is better than not, when early intervention to assist in many areas of problems that may not be totally financial related is needed.

So far, it hasn't worked:


House panel approves consumer protection agency

By ANNE FLAHERTY, Associated Press

WASHINGTON – The House Financial Services Committee voted Thursday to create a federal agency devoted to protecting consumers from predatory lending, abusive overdraft fees and unfair rate hikes.

I don't know how anyone can know the actual impact or even get close on their guesses when it comes to credit scores period. To me ole' Issac is the only one who truly knows. What's odd about this discussion is that we are seeing increases in credit scores smack dab in the middle of 13s. I see a ton of people that used to be in Credit Counseling plans and eventually file BK. Their scores going into bk are worse than when they started counseling. I don't know if it is so much the Credit Counseling or Debtor Education courses for that matter. It may just be the debt 2 income ratio part of that "secret" formula doing the trick...??? I have seen 13 debtors recover their scores quickly post-discharge.

ON SUBJECT: It seems certain congress"Persons" need something...anything...even a "Fox Advertisement" to hold on to in order to make the decision they want to.

I have a bridge that I need to sell fairly quickly...;) I'm 90% sure I can sell for 10% off.

Given the brouhaha that your earlier post about Home Depot engendered, this line of argument seems more than a bit hypocritical...

Great job! Thanks.

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