, over larger customer bases, across geographic areas, and among many merchants. 3 from the consumer's perspective, credit cards provided convenience, facilitated recordkeeping, and offered security from loss ( by theft, for example ). 4 their use gradually expanded among american families, rising to 43 percent in 1983 and to 70 percent by 2007. among lower - income families, usage increased from 11 percent in 1983 to 37 percent in 2007. 5 mortgage markets saw similar product innovations. for example, in the early 1990s, automated underwriting systems helped open new opportunities for underserved consumers to obtain traditional forms of mortgage credit. this innovation was followed by an expansion of lending to borrowers perceived to have high credit risk, which became known as the subprime market. lenders developed new techniques for using credit information to determine underwriting standards, set interest rates, and manage their risks. as i have already mentioned, the ongoing growth and development of the secondary mortgage market reinforced the effect of these innovations, giving mortgage lenders greater access to the capital markets, lowering transaction costs, and spreading risk more broadly. subprime lending rose dramatically from 5 percent of total mortgage originations in 1994 to about 20 percent in 2005 and 2006. 6 innovation thus laid the groundwork for the expansion of credit card and mortgage lending that has taken place over the past 15 years or so, as well as some other forms of credit like auto loans. however, while innovation often brought consumers improved access to credit, it also brought increased complexity and an array of choices that consumers have often found difficult to evaluate properly. take the case of credit cards. in the early days, a card may have allowed the user to make purchases or obtain cash advances, with a single, unchanging annual percentage rate, or apr, applied to each feature. card fees were typically limited to an annual fee, a charge for cash advances, and perhaps fees for making a late payment or exceeding the credit limit. in contrast, today's more - complex products offer balance transfers and treat different classes of purchases and cash advances as different features, each with its own apr. in addition, interest rates adjust much more frequently than they once did, and the array of fees charged for various features, requirements, or services has grown. more - complex plans may benefit some consumers ; for example, pricing that varies according to consumers'credit risk and preferences for certain services may improve access to credit and allow for more - customized products. growing complexity, however,

ben s bernanke : financial innovation and consumer protection speech by mr ben s bernanke, chairman of the board of governors of the us federal reserve system, at the federal reserve system's sixth biennial community affairs research conference, washington dc, 17 april 2009. the original speech, which contains various links to the documents mentioned, can be found on the us federal reserve system ’ s website. * * * the concept of financial innovation, it seems, has fallen on hard times. subprime mortgage loans, credit default swaps, structured investment vehicles, and other more - recently developed financial products have become emblematic of our present financial crisis. indeed, innovation, once held up as the solution, is now more often than not perceived as the problem. i think that perception goes too far, and innovation, at its best, has been and will continue to be a tool for making our financial system more efficient and more inclusive. but, as we have seen only too clearly during the past two years, innovation that is inappropriately implemented can be positively harmful. in short, it would be unwise to try to stop financial innovation, but we must be more alert to its risks and the need to manage those risks properly. my remarks today will focus on the consumer protection issues raised by financial innovation. first, though, i want to say how pleased i am to join you for the sixth biennial federal reserve system community affairs research conference. we all want to see our communities grow and thrive, especially those that have been traditionally underserved. but the people in this room know as well as anyone that, when it comes to consumer protection and community development, good intentions are not enough. hard - won knowledge, as exemplified by the empirical work presented here during the past two days, is required. i applaud your diligent and tough - minded research in analyzing what works and what doesn't. only with such knowledge can efforts to spread prosperity more widely become increasingly effective. sources of financial innovation where does financial innovation come from? in the united states in recent decades, three particularly important sources of innovation have been financial deregulation, public policies toward credit markets, and broader technological change. i'll talk briefly about each of these sources. the process of financial deregulation began in earnest in the 1970s, a period when stringent regulations limited competition and the range of product offerings in the markets for consumer credit. for example, regulation q, which capped interest rates on deposits