by Sally Greenberg, NCL Executive Director
Can a faulty toaster be compared with a faulty credit card? Several weeks ago at the Consumer Federation of America’s annual gathering on financial services, I heard Harvard Law Professor Elizabeth Warren speak on just this topic. Warren, who wrote an article for Harvard Magazine called “Making Credit Safer: The Case for Regulation,” is recommending a radical new system for protecting consumers from credit card and other debts that are dangerous to their financial health. The new regime would be the financial equivalent of the Consumer Product Safety Commission – the independent federal agency that regulates the safety of 15,000 consumer products all of us use daily. Warren would call the new agency the “financial services product safety commission.”
The analogy Warren uses is this: you buy a toaster that had a wiring diagram and other documents, 31 pages long, single spaced. On page 25 is the diagram which shows a clearly faulty wiring system that means the toaster could burst into flames and burn down your house. If that happens, well, you should have known of the dangers; they are described right there in the manual. Warren argues that the financial documents that accompany credit cards, mortgages, or payday loans are the equivalent of that diagram. Consumers cannot be expected to read through a 31-page document to look for signs of danger in a toaster. No, the toaster is expected to be safe, and, if it is not, the Consumer Product Safety Commission will come in to protect you.
Like the toaster diagram, consumers don’t read the 31 pages that accompany a credit card agreement, and even it they did, they are unlikely to recognize the dangers signs. She argues that it is possible to refinance your home with a mortgage that has the same chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, while it’s impossible for the seller to change the price on a toaster once the consumer has purchased it, with a financial agreement, your credit-card company can triple the price of the credit even if you meet all the credit terms. Warren asks why consumers are safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards.
Warren says that lenders have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt. She believes that creating a safer marketplace means making certain that the products themselves don’t become the source of trouble. This means that terms hidden in the fine print or obscured with incomprehensible language, reservation of all power to the seller with nothing left for the buyer, and similar tricks have no place in a well-functioning market.
How did financial products get so dangerous? Warren believes that disclosure has become a way to obfuscate rather than to inform. In the early 1980s, the typical credit-card contract was a page long; by the early 2000s, that contract had grown to more than 30 pages of incomprehensible text that no typical consumer can digest.
Her recommended solution is this Financial Product Safety Commission (FPSC), which could set guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new products for safety, and require modification of dangerous products before they can be marketed to the public. The agency would review mortgages, credit cards, car loans, and so on. It could also exercise jurisdiction over life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks that make some of them far more dangerous than others, and ensure that none pose unacceptable risks to consumers.
While there are undoubtedly many issues to work out with Warren’s plan, it does jumpstart the conversation. Consumers should feel they can enter credit markets confident that the products they purchase meet minimum safety standards. A financial products safety commission could collect data about which financial products are least understood, what kinds of disclosures are most effective, and which products are most likely to result in consumer default. Consumers deserve far stronger protections from predatory loans and gotcha late fees and finance charges – and this commission, or a bill that addresses these same issues, might just be the answer.