Discrimination, Vulnerable Consumers and Financial Inclusion

Fair Access to Financial Services and the Law

Cătălin-Gabriel Stănescu, Asress Adimi Gikay, Cătălin-Gabriel Stănescu, Asress Adimi Gikay

• Publisher: Routledge
• Year: 2020
• ISBN:
  9781000295191
• Edition: 1
• Topic: Business
• Subtopic: Financial Risk Management
• Index: Business

This book addresses the questions of discrimination, vulnerable consumers, and financial inclusion in the light of the emerging legal, socioeconomic, and technological challenges. New technologies – such as artificial intelligence-driven consumer credit risk assessment and Fintech platforms, the changing nature of vulnerability due to the ongoing COVID-19 pandemic, as well as the sophistication of digital technologies, which help circumvent legal barriers and protections – necessitate the continuous study of the existing legal frameworks and measures that are capable of tackling these challenges.

Organized in two major parts, the first addresses, from multiple national angles, the idea of a human rights approach to consumer law, in order to replace the mantra of economic efficiency that characterizes financial services with those of human dignity and freedom from discrimination and from debt-induced servitude. The second tackles the challenges posed by increased usage of technology in connection with financial services, which tends to solve, but also creates, additional issues for consumers in general, and for vulnerable groups in particular.

Part I

1 Tackling issues in consumer credit

The role of human rights

Chrystin Ondersma^*

As inequality soars around the globe and racism, sexism, heterosexism, and xenophobia persist, questions arise regarding the role of economic policy, including credit policy, and the role of human rights in redressing injustice concerns. The Covid-19 pandemic – in particular in the United States – has laid bare the risks of a society operating in a state of pervasive overindebtedness, without robust health care access, without housing rights, and without employment protections. When households can hardly make ends meet and are already overindebted, and when no safety net is in place to protect against hardship, both the economic consequences and the human rights consequences are dire.

In my previous works, I advocated for a human rights approach to consumer credit by presenting a framework that prioritizes a basic level of human dignity for all rather than wealth maximization.¹

This essay revisits the human rights issues that arise in the consumer credit context and considers how we can best redress these issues. In doing so, I highlight pitfalls that are important to avoid, whether the discussion is centered on human rights bodies, European Union Member States, other governmental bodies, or any individual or organization working to further human rights.

Although credit discrimination based on race and gender is prohibited,² it is nevertheless a pervasive reality in the United States.³ In the United States, white cisgender men often have access to credit on decent terms, absent a problematic credit history. The same is not true for women, transgender individuals, immigrants, and people of color. Even with strong financial credentials and credit scores, individuals in these categories, especially Black and Latinx debtors, are often denied loans or are offered loans with far less favorable terms. Black and Latinx individuals are: (1) routinely required to provide additional financial information before receiving a loan;⁴ (2) less likely to receive assistance with completing the loan application (such as help filling out forms);⁵ and (3) more likely to be denied a loan than white individuals with equivalent financials.⁶ Black and Latinx individuals are more than twice as likely to be denied a home mortgage, taking into consideration their income, loan amount, and neighborhood.⁷ Black and Latinx debtors are charged thousands of dollars more to finance a car and likely to be charged more for the car itself.⁸ Such individuals are also more likely to be pressured to buy add-on products like service contracts.⁹ However, attempts to negotiate for better terms did not change this result.¹⁰ As of 2019, more than 60% of nonwhite applicants received more unfavorable terms on automobile loans than white applicants with equivalent credit histories.¹¹ Women pay more for mortgages than men with similar credit profiles,¹² and Black and Latinx women are offered the worst terms.¹³ In 2013, 39% of women were denied mortgage refinancing.¹⁴ Black and Latinx debtors are also more likely to be “targeted with risky financial products,”¹⁵ such as high-interest predatory loans.¹⁶ This unequal access to fair credit terms violates the individual’s human right to be free from discrimination.¹⁷

Predatory lending also raises human rights concerns beyond discrimination. In some cases, the loan and collection procedure can be considered a taking of the debtor’s property without due process. Examples include situations where an item is procured by fraud and where an individual’s ability to challenge the terms of the loan is thwarted by mandatory arbitration.¹⁸ In some cases, individuals are arrested or threatened with arrest for failure to pay debts even though they cannot afford to pay. Every year, thousands of individuals are arrested and jailed for failure to pay debts, while millions more often go without food or essential medicine in order to pay the debt to avoid arrest.¹⁹ This practice of imprisoning individuals for failure to pay a debt violates both human rights obligations and U.S. constitutional law.²⁰

Human rights issues, such as discrimination, can also arise in the context of debt relief systems and insolvency regimes. For example, in the United States, Black and Latinx debtors are disproportionately pushed into repayment and often never receive debt relief.²¹ Instead, these individuals face extended periods of servitude to creditors with repayment plans that do not permit debtors to meet their basic needs.

The poor are disproportionately affected by predatory lending, oppressive collection tactics, threats of arrest, and debt relief regimes. Of course, access to fair credit and fair insolvency systems are also important for middle-class individuals and families. Everyone should have access to fair credit and fair insolvency systems whether trying to build wealth, start or expand a business on a level playing field, or access fair credit in the event of an emergency, such as a family breakup, job loss, or other crises that resulted in unmanageable debt.

It is important to recognize, though, that while predatory lending, abusive debt collection practices, and lack of access to debt relief are significant problems, they may not be the most fundamental problems within poor communities. The fundamental problems are often poverty and the lack of a sufficient safety net. When income is not sufficient to meet basic needs, and the social safety net does not extend the necessary coverage to enable a person to meet his or her basic needs, the result is often insecurity with respect to housing, food, and health care. When emergencies arise, low-income individuals and families must often turn to credit to keep the lights on, keep the refrigerator working, make rent payments, obtain food, and secure medical care.²²

Senator Bernie Sanders of Vermont, a long-term independent and democratic socialist voice in the federal government, has long called for health care to be recognized as a human right and successfully coalesced a movement to bring this idea into the American mainstream during the 2016 Democratic presidential primaries.²³ While a popular sentiment, there has been significant pushback to the idea that health care is a right to all Americans.

These burdens fall hardest on Black and Latinx individuals who, as a result of persistent and systematic racism that they face, are more than twice as likely as white individuals to be poor.²⁴ Black and Latinx debtors are less likely to have savings available to cover emergency expenses.²⁵ Controlling for income, there are twice as many debt collection lawsuits in Black communities than in white communities.²⁶

Because we have limited time, resources, energy, and political capital, it is the duty of state and federal representatives and regulators to choose where to devote this capital. In doing so, we must decide how to best incentivize these decision makers to act. Under a human rights approach to consumer credit, how do we select which regulatory and policy changes to prioritize? From economists’ perspective, time and political capital should be devoted to the causes that provide the most resources to the general public, even if the added resources are automatically allocated to the communities that already have unfettered access to such resources. Under this analysis, the focus might be on expanding access to credit for the middle class, or on harmonizing credit principles so that the system works more efficiently. From a human rights standpoint, by contrast, the priority is not wealth maximization, but ensuring that everyone’s human rights are protected. This allows us to ask a series of questions, including: (1) Does everyone have a standard of living consistent with human dignity?; (2)Does everyone have access to food, shelter, medical care, and education?; and (3) Is everyone free from discrimination?

One key pitfall to avoid from a human rights standpoint is the mistake of allowing economic efficiency to trump concerns about human dignity; rights to be free from discrimination and debt-induced servitude; and rights to adequate health care, housing, and food consistent with a life of human dignity. It is a mistake to emphasize harmonization and efficiency over human rights. There is already tremendous pressure generated by wealthy corporations and individuals to focus on economic efficiency and wealth maximization and substantial resources deployed to that end. By contrast, the priority from a human rights standpoint should be a fundamental floor of dignity and protection to which all individuals are entitled. This means that even if a given proposal does not maximize economic efficiency, the proposal may still be necessary, from a human rights standpoint, to ensure that more individuals can live lives of dignity that are free from abuse.

That is not to say that human rights principles are inconsistent with wealth maximization and efficiency. In fact, complying with human rights principles is consistent with long-term wealth maximization in that financial products that are safe and non-discriminatory have lower default rates; also, if individuals are trapped in debt spirals they have no resources to contribute to the real economy (such as home purchases and other consumer spending). Nevertheless, human rights require a different focus in terms of political capital since wealth maximization should not be a primary focus for those concerned about protecting human rights.

But those concerned about human rights should not waste energy defending policies designed to protect human rights on efficiency grounds. Of course, if such interference has human rights consequences, then it is properly the domain of human rights, but the focus must be on achieving policies that best protect human rights for the most people. For example, from a human rights standpoint, a policy that allowed everyone to achieve an adequate standard of living would...