To Empower, Prohibit, or Delegate?: Regulatory Strategies for the Consumer Credit Market

Much has been written about the state of U.S. consumer credit market. In this Article, we provide an overview of the scholarship in this area and an interim diagnosis of the market failure. We identify the chief problem as various epistemic failures on the consumers’ part, which lead to poor competitive dynamics and are perpetuated in turn as a result of insufficient competition. From an economic perspective, the government has several avenues of enhancing consumer welfare. Based on a cost-effectiveness framework – which asks how decision-making powers should be allocated among the consumer, the government, and other parties – we highlight empowerment, prohibition, and delegation as three regulatory approaches the government has in addressing these failures. We argue that the current regulation, consisting largely of variations of empowerment and prohibition, neglects the dynamic aspect of the consumer credit market. Given the market’s constantly evolving nature, we believe a well-structured delegation is a potentially powerful approach to enhancing consumer welfare. The provisions of the recently enacted Dodd-Frank Act are generally a step in the right direction. While the Act does not go far enough in certain directions, we argue that it does grant wide discretion to the Bureau of Consumer Financial Protection to pursue more creative avenues, including possibly those along the lines of delegation, as we suggest.