Regulation, not red tape, is urged
Americans don’t have to worry that a $29 toaster could burst into flames, but the same can’t be said for a $290,000 mortgage.
The reason, Harvard law professor Elizabeth Warren contends, is the U.S. has a Consumer Product Safety Commission that demands that all manufactured goods sold in the country meet minimum safety standards. But it doesn’t have an equivalent for financial products.
Warren, an expert in the field, argues that it should.
“No one has to be an engineer to buy a toaster. You shouldn’t have to be a lawyer to take out a loan or get a credit card,” she said. “Markets work best when there are minimum standards for safety.”
Not everyone agrees.
“If she is calling on government to make a determination about whether a product is good for a consumer, we think market forces should be dictating that,” said Michael Ryan, executive director and senior vice president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness. “We would be opposed to another layer of regulation.”
Warren chuckles when asked about the opposition, which she knows is broad. Regulatory agencies as well as industry may oppose the idea, she said. After all, no one wants to give up turf. And right now, there are more than a dozen state, federal and local agencies that monitor issuers of mortgages, credit cards and auto loans.
That’s part of the problem, Warren said. Much of the current regulatory regime watches over the industries that issue financial products, rather than over the products themselves.
Sub-prime mortgages provide a stark example, she said. Thrifts and savings banks accounted for 23% of the sub-prime mortgages issued in 2005, while bank holding companies, regulated under another federal regime, accounted for 25%. But 52% of sub-prime mortgages were written by independent mortgage brokers and finance companies, which are subject to no federal oversight.
“This division not only creates enormous loopholes, it triggers a kind of regulatory arbitrage,” she said. “If regulators push those institutions too hard, they’re likely to reincorporate under another regulatory umbrella -- or under no regulator at all.”
Other products end up being subject to numerous, duplicative rules, creating lengthy and redundant disclosures. Consequently, a credit card agreement that once explained terms in a single page now often spans 30 pages packed with legalese, Warren said.
“People are trying to cook dinner and help the kids with their homework,” she said. “To deal with the complexity of today’s financial products, Americans would have to spend weeks reading disclosures that most lawyers can’t understand.”
Like the Consumer Product Safety Commission, established in 1972, a financial product safety commission would establish guidelines for consumer disclosure, collect data about the uses of different financial products, review new products for safety and require modifications of products considered too dangerous to sell, Warren said.
Many financial-product disclosures are dictated by statutes, so changing them would entail an act of Congress that would come after only a time-consuming legislative process. That makes the rules like “flies caught in amber” unable to adapt to a changing world, she contends. If Congress authorized a commission to monitor financial products, Warren said, it could respond more quickly and effectively to product innovations and a changing marketplace.
She said it was likely to result in fewer regulations rather than more.
“This isn’t so crazy,” she said. “I don’t want to get tainted meat or take prescription drugs that are placebos. I don’t want to buy toasters that have a 1-in-5 chance of bursting into flames. Regulation protects me from that.
“I think the same, minimal protection should extend to financial products.”
The idea may find a receptive audience, thanks to rising consumer debt, soaring delinquencies and mortgage foreclosures.
In hearings this spring, legislators listened to a lineup of consumers contending that they got into trouble with their mortgages and credit card loans because they were presented with terms they couldn’t understand and documents that were voluminous and unreadable. A recent study by the Federal Trade Commission largely underscored the point, finding that a majority of borrowers couldn’t accurately determine the most basic and pivotal terms in their loan agreements.
Mortgage disclosures are largely dictated by two federal laws -- the Truth in Lending Act and the Real Estate Settlement Procedures Act -- neither of which has been updated in decades. The Federal Reserve and the Department of Housing and Urban Development acknowledge the problems with disclosures and say they’re working on revisions. But years of such consideration have yet to result in a new law.
Just last week, members of the House Financial Services Committee blasted another group of federal regulators for failing to work together and implement consumer-oriented protections in a credit reporting law passed four years ago. One frustrated legislator, complaining about the glacial speed, said he would sponsor a bill to force action if the regulators were unable to do it themselves.
“It’s a new day in Washington,” Warren contended. “People are fed up and they’re complaining to their legislators. And legislators are listening.
“We have plenty of organizations that represent financial institutions,” she added. “We need somebody to cut through the red tape and represent consumers in Washington.”
Kathy M. Kristof welcomes your comments but regrets that she cannot respond to every question. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof@latimes.com. For past Personal Finance columns, visit latimes.com/kristof.
