So when the latest Democracy Journal was delivered to my inbox this week, I found an amazingly simple idea from Elizabeth Warren, the nation's premier expert on middle class bankruptcies: a Financial Products Safety Commission
I t is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance an existing home with a mortgage that has the same one-in-five chance of putting the family out on the street–and the mortgage won’t even carry a disclosure of that fact to the homeowner. Similarly, it’s impossible to change the price on a toaster once it has been purchased. But long after the papers have been signed, it is possible to triple the price of the credit used to finance the purchase of that appliance, even if the customer meets all the credit terms, in full and on time. Why are consumers safe when they purchase tangible consumer products with cash, but when they sign up for routine financial products like mortgages and credit cards they are left at the mercy of their creditors?Sharp practices such as raising your interest rate on one credit card because you were a day late on another one, and raising it to some usurious rate of near 25%, only because some states in the nation allow that (most do not, but it's based on the state where the card company operates. Hullo, South Dakota!).
The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan swept into the White House, the "R-word" supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of reaching store shelves. Credit products, by comparison, are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features. By comparison, innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.
Why do people go into debt? Basically, debt is an advance on your income, with the promise to pay it back over time. Usually, you do this when you need to buy something, like a house or a car, that will last a long time and costs a lot of money.
But credit is also a trap, more so for people who get addicted to the feeling of wealth one gets from being flush with cash and able to buy things.
Consumers can enter the market to buy physical products confident that they won’t be tricked into buying exploding toasters and other unreasonably dangerous products. They can concentrate their shopping efforts in other directions, helping to drive a competitive market that keeps costs low and encourages innovation in convenience, durability, and style. Consumers entering the market to buy financial products should enjoy the same protection. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, we need the same for consumers of financial products – a new regulatory regime, and even a new regulatory body, to protect consumers who use credit cards, home mortgages, car loans, and a host of other products. The time has come to put scaremongering to rest and to recognize that regulation can often support and advance efficient and more dynamic markets.Isn't my credit rating at least as important as the fact that my house might burn down from a faulty toaster?
Particularly given the recent changes to the bankruptcy law that make it less likely that a consumer will ever be discharged from his debts if he gets in too deep over his head, this proposal is now more vital than ever. Things are only going to get worse for people as banks compete harder in a tighter mortgage and credit market for consumer dollars.
Americans are drowning in debt. One in four families say they are worried about how they will pay their credit card bills this month. Nearly half of all credit card holders have missed payments in the past year, and an additional 2.1 million families missed at least one mortgage payment. Last year, 1.2 million families lost their homes in foreclosure, and another 1.5 million families are likely headed into mortgage foreclosure this year.Indeed. To most of us, the language in a credit card agreement may as well be Sanskrit, for all we understand of it. The Schumer box, which is supposed to summarize the rates included in the agreement in plain English, can't possibly cover all the contingencies that are spoken about in the small print in which those rates may change.
Families’ troubles are compounded by substantial changes in the credit market that have made debt instruments far riskier for consumers than they were a generation ago. The effective deregulation of interest rates, coupled with innovations in credit charges (e.g., teaser rates, negative amortization, increased use of fees, cross-default clauses, penalty interest rates, and two-cycle billing), have turned ordinary credit transactions into devilishly complex financial undertakings. Aggressive marketing, almost nonexistent in the 1970s, compounds the difficulty, shaping consumer demand in unexpected and costly directions. And yet consumer capacity–measured both by available time and expertise–has not expanded to meet the demands of a changing credit marketplace. Instead, consumers sign on to credit products with only a vague understanding of the terms.
Will this proposal ever see the light of day? I doubt it, without a concerted effort on the part of consumers and advocacy groups. Banks and other financial institutions make enormous contributions to politicians of both parties, precisely to keep regulations as lax as possible.
But something needs to be done and soon. Consumer debt to the United States is as big a problem as global warming is to the planet: it could cause the entire meltdown and collapse of the US economy, which is run on the fuel of consumer spending. For sure, the economy is going to take massive hits over the next several years as the mortgage market contracts, which will create opportunities for the fleecing of Americans, both legally and fraudulently, by legitimate financial concerns and, to put it politely, shady lenders and Nigerian princes whose money is trapped in Lagos.
It currently costs the American consumer $89 billion just to make the interest payments and fees on credit card debt. That doesn't include auto loans and mortgages, you'll notice. That's money that could be spent on shoes, books, clothing and laundry. Pretty essential stuff, and I chose those because they rank only slightly higher, in toto, than credit card servicing costs to the average Amerian family.
Yet, most people can tell you who makes quality clothes and shoes, or writes books worth reading.
We need an agency, not to protect Americans from falling into bankruptcy, that would be way too hard to do, but to help Americans understand what they are getting themselves into long before they get into trouble. Loan and credit language is deliberately obtuse, and that's the equivalent of putting rat poison into a teddy bear.
And poison is precisely what this language is designed to sugar-coat, or at least obscure. Most card companies will do as they damned well please, no matter how much you beg or complain, and the legal recourses you have are usually stacked in the lenders favor. You can't take them to court, you have to go to an arbiter that they get to choose. And so on.
I could go on, but Ms. Warren states the case more plainly than I could. What troubles me most about this is, its such an obvious solution to a pressing problem that it should be getting much more attention than some backwater webjournal and blog.
Spread the word, folks. We need this. Now.