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Laura Rowley Money & Happiness

Laura Rowley, Money & Happiness

Feds Finally Take on Financial Predators

by Laura Rowley

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Posted on Thursday, November 13, 2008, 12:00AM

As the U.S. Treasury, Federal Reserve, and multiple banking authorities reshape the financial industry amid the worst crisis since the Great Depression, which regulator is watching out for the average American? The answer, in a nutshell, is none of them.

Failing on All Fronts

That's why a growing number of economists, academics, and members of Congress support the idea of a federal safety commission for financial products, similar to the Consumer Products Safety Commission, which ensures deadly toys and other goods aren't marketed to consumers.

"It's the job of government is to set the rules that make markets work for the people, businesses, and the economy -- and right now we are failing on all three fronts," says Harvard Law School professor Elizabeth Warren, who first articulated the idea in the journal Democracy.

"Financial products don't have to be idiot-proof, but they should not be deliberately designed to fool people or make risk evaluation difficult," she adds. "The rules of the game matter to all of us -- they're what keep all of us safe. People are losing value on their homes who never took out a subprime mortgage; people are losing jobs who never carried a dollar of debt on a credit card."

An FDA for Mortgages?

Rep. Bill Delahunt (D-Mass.) and Sen. Richard Durbin (D-Ill.) recently introduced bills in the House and Senate that would establish a Consumer Credit Safety Commission to oversee any category of lender that extends credit to borrowers.

"What we're learning from the crisis is that the consumer is unaware of the hazardous instruments they can get roped into," says Mark Forest, spokesperson for Rep. Delahunt. He cites studies that show some subprime borrowers qualified for lower-interest loans, but were steered into more expensive products by mortgages brokers seeking higher commissions.

"There is the notion of caveat emptor, but we don't expect consumers to have to test their own food or drugs -- we have a Food and Drug Administration," says Forest.

Wanted: Regulator

Warren argues that the patchwork of federal and state regulatory agencies with overlapping responsibilities has resulted in "crazy" rules. "The typical credit card contract has gone from one page long in 1980 to more than 30 pages long by the early 2000s, and part of that is required disclosure that is frankly incomprehensible," she says, citing one credit card contract that posted an interest rate with an asterisk leading to 47 lines of fine print.

"The last line said, ‘Notwithstanding the forgoing, the company reserves the right to charge any interest rate it chooses at any time for any reason,'" she notes. "To me that's not an effective disclosure, because basically it said, ‘If you take out credit there, they will charge you whatever they want whenever they want.' That's a very different thing to communicate."

Yale Economics Professor Robert Shiller says the issue isn't one of more regulation, but better focus. "We have regulatory agencies, but not ones with a consumer culture," says Shiller, author of the new book "The Subprime Solution: How Today's Global Financial Crisis Happened and What to Do About It." "We are not calling for a fundamental change of our philosophy, but a way of coordinating the regulatory framework. We want a regulator focused on the consumer."

Spotty Enforcement, Shady Practices

Shiller says he visited the Office of the Comptroller of the Currency and the Federal Reserve a few years ago, and urged them to crack down on predatory mortgage practices. He received little response. "One thing they told me is that's not their main mission -- the OCC is there to protect the banks," he recalls.

Moreover, agencies typically regulate based on the issuer of financial products, not the products themselves, so enforcement is diffuse and spotty. For instance, consumers filed 17,000 complaints about credit cards with the Better Business Bureau in 2004. But the OCC, the Federal Deposit Insurance Corporation (FDIC), and the Office of Thrift Supervision (OTC) have initiated only a handful of enforcement actions relating to unfair or deceptive lending practices, according to Sen. Hillary Clinton (D-N.Y.), who has endorsed the notion of a consumer credit commission.

A consumer credit commission would help clean companies compete. "As long as the law says we will reward companies that bury tricks and traps in the fine print, a company is almost foolish not to do this," says Warren. She cites a credit card issuer who publicly dropped the practice of universal default -- then quietly resumed it. "It turned out that they couldn't compete [by eliminating universal default] because consumers can't see it," she explains. "Putting a cleaner product on the market didn't drive more consumers in their direction, it just cost money."

David, Meet Goliath

The Delahunt/Durbin bill envisions an agency led by a five-member bipartisan board that would oversee such products as mortgages, credit cards, auto loans, and savings and checking accounts. The commission would "prevent and eliminate unfair practices that lead consumers to incur unreasonable, inappropriate, or excessive debt," including practices or product features that are abusive, fraudulent, deceptive or predatory.

The commission would also collect data on which credit products are most harmful, giving borrowers an objective source to help them make better choices.

Warren hopes that consumers, fed up with rip-offs and bailouts, will demand that Congress make financial products safer -- just as they did for automobiles in the 1960s and the environment in the 1970s. But she admits it would take an avalanche of grassroots effort to overcome the financial services industry, which spent more than $100 million on lobbying over the last five years.

"Polluting industries strongly resisted the creation of an Environmental Protection Agency," she notes. "But there reached a point when the American people said, 'We want this,' and the political influence purchased through political contributions had to give way to the will of the people." (To support the Consumer Credit Safety Commission bill, email Rep. Delahunt.)

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  • Yahoo! Finance User - Thursday, November 27, 2008, 11:52AM ET  Report Abuse

    • Overall: 1/5

    Why Is Americans still watching Desperiate Housewifes and those stupid shows while we could have watched more economics shows or political shows more instead... Also do we need dozens of different cops and robbers shows?? PBS educates Americans while ABC, CBS, NBC educates dumbed down Americans!!

  • Yahoo! Finance User - Thursday, November 20, 2008, 9:12AM ET  Report Abuse

    • Overall: 5/5

    I think what all these politicians are trying to say (although they remain deeply buried under piles of BS) is that "usury is illegal." If our politicians had any intelligence at all, they would never have passed the "Depository Institutions Deregulation and Monetary Control Act of 1980," which authorized the states to abandon laws against usury, which is exactly what the state lawmakers did. What has flipped our economy upside down is treating money as a commodity (also authorized by the DIDAMCAct), so that money's value varies from day to day based on unregulated and unlimited interest rates. When things finally got out of control, the banks, who were supposed to benefit by getting off the gold standard and allowed to compete by market-controlled interest rates, were in the end the victims of their own greed. I am not advocating return to the gold standard. Nothing is a "standard," unless people believe it is a standard. A good place to start would be by eliminating unconscionable interest rates on paycheck loans and rapid refund loans for tax refunds. Both of these instruments snag borrowers for interest rates in excess of 300% per annum. Duh, duh, duh !!!!!!!!!!!!!!!!! "Usury," my friends, is the name of the problem. And the present crisis was provoked by the mortgage lenders who thought they would be foreclosing on homes when Adjustable Rate Mortgage payments skyrocketed along with inflation, interest rates, and real estate prices, and they would be cashing in big time.

  • Yahoo! Finance User - Thursday, November 20, 2008, 8:47AM ET  Report Abuse

    • Overall: 1/5

    At what point are we going to have to accept the fact that Americans must learn how to think. I do not want to continually pay more taxes for bigger government to cover for ignoramuses. Here's a hint: If you are going to sign a contract where you own hundreds of thousands of dollars (i.e., a mortgage), why not actually read the contract before signing it? Our economy is shot because we spend too much on government. To fix this we need more government?

  • Yahoo! Finance User - Thursday, November 20, 2008, 8:26AM ET  Report Abuse

    • Overall: 5/5

    That the law has been making it economic for lenders to add fine print is a powerful perception. Surely there are other areas in this world where we also have been making bad behavior economic.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 10:37PM ET  Report Abuse

    • Overall: 1/5

    Please don't think that adding another layer of government into the lending process will help these problems. Keep in mind that in about 1999 the government created the subprime mortgage product that, along with out of control home appreciation in many markets, has caused many of the problems were face today. Please read the NY Times article dated 9-30-99 for some interesting reading. The lenders currently have to comply with hundreds of various consumer oriented regulations that comprise thousands of pages of text that are CURRENTLY IN PLACE. Some of these consumer oriented regulations and their size in about 8 point font are as follows - Truth in Lending Act - 250 pages; Home Mortgage Disclosure Act - 24 pages; Community Reinvestment Act - 25 pages; Truth in Savings Act - 36 pages; and the Real Estate Settlement Procedures Act - 59 pages. The link if you want to read the text of some of these are as follows - http://www.access.gpo.gov/nara/cfr/waisidx_04/12cfrv2_04.html If any of you have purchased a home lately you know what I am talking about. The disclosures have become so overwhelming that nobody reads them. Adding more regulatory burden, oversight, and governmental red tape will only increase the consumer confusion. I have been a banker for 16 years and have never promoted nor am I aware of a client of mine or our bank ever getting a sub-prime mortgage loan. And although the mortgage brokers out there are getting a lot of bad press, they are generally not at fault either. FNMA and FHLMC (Freddie Mac) designed these programs "to get more below average borrower into homes". And the commissioned based mortgage brokers followed the governmental rules to get homes for these people. Of course they were some bad apples in the mortgage industry but what industry doesn't have some bad apples. This problem was caused by our government and this problem will not likely be fixed by our government. The Consumer Credit Safety Commission will only add another layer of useless legislation to an already overburdened consumer.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 8:12PM ET  Report Abuse

    • Overall: 3/5

    Of course we need regulations, having none is how we got into this mess in the first place. Regulations should've been put into place a long time ago.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 4:39PM ET  Report Abuse

    • Overall: 2/5

    Everyone made money by the lending institutions making loans to borrows with limited resources and knowledge. Even the lawyers made money, but I don't see anyone blaming them for not watching out for their client's best interests. I feel sorry for those caught up chasing the American Dream and falling flat on their face. Get back up and learn from your mistake. Don't hold your hand out like all the others. As my mom always told me; If it seams too good to be true, it probably isn't true. My $80,000 of the national debt is enough. I don't want politicians asking/taking any more. Lastly, if you think the government can provide the safety like FDA, Consumer Products Safety Commission, etc. turn on the light and check your wallet.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 3:20PM ET  Report Abuse

    • Overall: 1/5

    The Department of Energy was created to reduce dependence on foreign oil and increase sources of energy, the 2009 FY budget request was for 25 Billion. What makes anyone think this won't be a waste of time and money. You can blame the mortgage brokers, but the lenders were the ones who said give out this loan and we will pay you 3 times as much. Investors who created the mortgage pools wanted more and more subprime products, the lenders (who never really had the money because it was borrowed) said okay lets throw this out as well as the rest of those items. Then they still asked for more. Who really thought it was a good idea to defer the your mortgage payments in order to let the equity on your house increase and buy a boat or another car. I think there were and still is dirty mortgage brokers and loan officers, but they were not the ones who created these loans. There are also lots of good people who would not put people in the loans, but the government is the one who said you can't tell someone not to apply for a loan it is discrimination. The goverment would fail at the creation of this agency and it would be more money wasted.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 2:09PM ET  Report Abuse

    • Overall: 5/5

    Great article! Simpler, more transparent financial products would be a boon to everyone. One should not have to read 30 pages of deliberately misleading legalese in order to open a line of credit. And it shouldn't require a phone-book sized stack of paper to buy a house. There's no "basic economics" in that pile of paper. The marketers and financial companies know perfectly well that very few people will read all the paperwork, and of those who do, very few will comprehend it all. Complexity stacks the deck in favor of the "experts" and those who run the system, at the expense of consumers. Simpler systems would save everyone time. While this would leave legions of paper-pushers looking for new jobs, there would be substantial economic side benefits because _everyone_ would have more time available for more productive pursuits.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 1:16PM ET  Report Abuse

    • Overall: 5/5

    We must save the American capitalist system, but not the racket pursued by Greenspan & Co.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 12:26PM ET  Report Abuse

    • Overall: 2/5

    I love reading these comments. It reminds me how dumb the average American really is. Basic economics is obviously not being taught in school.

  • Yahoo! Finance User - Wednesday, November 19, 2008, 10:40AM ET  Report Abuse

    • Overall: 3/5

    More government and regulation is not necessarily a good thing... That being said, this instance might be a time for some intervention -- it seems many financial institutions have gotten completely out of hand!

  • Yahoo! Finance User - Wednesday, November 19, 2008, 12:30AM ET  Report Abuse

    • Overall: 4/5

    Too bad all the people that got commissions on those mortgages couldn't help out with the crisis. But at least the banks they work for are getting help from our taxes. I would assume that after 'helping' consumers find mortgages that fit like a glove, they were compelled to donate thier commissons to charities with great compassion. So if thier employer went under, most of these 'mortgage saints' probably wouldnt have the resources to support their family for months on end just off commissions they, um, earned. How does that saying go? "Do unto yourself as you would like others to do unto you." You know, the motto of, well, most people and companies, it seems.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 5:06PM ET  Report Abuse

    • Overall: 5/5

    Don't forget insurance companies! Credit card companies take advantage of consumers in a host of ways. Banks take advantage of consumers in a host of ways. Insurance companies take advantage of consumers in a host of ways. They all abuse the fine print. It's more than even a very intelligent consumer can keep up with. Have you ever tried to read the full text of a credit card agreement or an insurance policy? And could you even begin to understand it if you did? Bank and credit card policies should be both fair and comprehensible. There need to be disclosure standards regarding expected values of insurance policies (ie, what percentage of the premium is statistically likely to ever be paid out). Too many people are buying insurance that they don't even need.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 4:20PM ET  Report Abuse

    • Overall: 3/5

    This article was pretty good, but keep in mind that Fannie Mae and similar organizations were chartered by the federal government in part to help the poor afford housing not to mention laws like the Community Reinvestment Act. Government programs can and will be corrupted by the very conflicts of interest they create. So it's not as simple as it seems. I believe that the large majority of the sub-prime/ no doc/ low down payment borrowers knew what they were doing. If the property value tanked they would walk away. This scenario is playing out now.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 1:57PM ET  Report Abuse

    • Overall: 4/5

    Just my thought on a NEW BAILOUT IDEA... Why can't the government help everyone else instead of the people who are in trouble? Imagine this... through government intervention, which is already in place with the $700B bailout, 1. GOV'T SPONSORED LENDING: Working through banks, force the 30 yr mortgage lending rate to 1 or 2% for everyone using taxpayer money. It may even work with 3%, but please keep reading. 2. Allow people to refi if they wish to do so. 3. ENSURE THE TERMS ARE RESONABLE AND THAT PEOPLE CAN REPAY. 20% down etc. 4. Ensure banks will not make too much on the easy money with their crazy fees, but will make enough to stay in business. 5. REGULATE THE CRAP OUT OF IT SO IDIOT BANKS DONT END UP WHERE THEY WERE AGAIN!!!!!!!!!!!! 6. Probably other things will need to be in place, but this is the main idea. BENEFITS: 1. 95% of people with good credit and good standing can refi legally without ruining the credit system. this gives money to the economy to get restarted. 2. This will bring buyers out of the woodwork to buy new houses. 3. This will keep a % of the foreclosures from happening because the borrowers could refi into more reasonable terms. 4. MORE CHANCE "THE PEOPLE" GET PAID BACK WITH THEIR TAX MONEY AT RISK. It will guarantee that money will likely get paid back to the people UNLIKE the current $700B bailout. 5. There are plenty more benefits, too many to list here. 2nd way to implement this idea: You could even do the GOV'T SPONSORED LOANS in steps by starting at 5% and see where it goes, if it is not enough drop to 4%, then to 3% and keep dropping until the refi biz can get the economy back on its feet. In this 2nd scenario, the kicker will be that borrowers will not know how low the gov't will go thus spurring refi's at every level until the economy picks up. It may never have to reach 2%.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 12:14PM ET  Report Abuse

    • Overall: 5/5

    Warren Buffet as always pointing to the critical point. I remember the first time i read the terms and conditions of a credit card and found the infamous "we reserve the right to change interest rate at any reason for any moment". Basically they are telling you if we lend you money we can charge whatever we want and we will tell you when we decide. Have you guys seen something more stupid that borrowing money like that? Thats why we are in this mess...

  • Yahoo! Finance User - Tuesday, November 18, 2008, 10:15AM ET  Report Abuse

    • Overall: 1/5

    Its the predators that we need laws for, not a bureaucracy for consumers. Outlaw selling of bundled mortgages as security products, and credit default swaps, that are really insurance policies.

  • Yahoo! Finance User - Tuesday, November 18, 2008, 12:01AM ET  Report Abuse

    • Overall: 4/5

    Totallyawsome explenation of current circumstances that is heavely affecting the American people.

  • Yahoo! Finance User - Monday, November 17, 2008, 11:56PM ET  Report Abuse

    • Overall: 1/5

    Notwithstanding the forgoing, the government is always right and has the only right.

  • Yahoo! Finance User - Monday, November 17, 2008, 10:48PM ET  Report Abuse

    • Overall: 1/5

    predators my ass, people have choices.

  • Yahoo! Finance User - Monday, November 17, 2008, 9:15PM ET  Report Abuse

    • Overall: 5/5

    Once upon a time, a people's trust of investment governance disappeared. Instead of using investments to improve life on the planet, a lot of ceo's, cfo's and directors, acted "shamefully" and got all of us in the mess we are. But then again, their objective was not to "improve life on the planet". So,,, we can blame the borrower who borrowed more than what he could afford, or we can do something about it and legislate ethics. The later is more difficult, but it works.

  • Yahoo! Finance User - Monday, November 17, 2008, 8:48PM ET  Report Abuse

    • Overall: 5/5

    I laugh when I read those comments from those neocons who think that the blame lies with consumers who allegedly lied about their incomes and resources. These overstuffed windbags are the first to moan and groan when sales go down, but complain about "easy credit." They want to have it both ways. A major cause of these massive mortgage failures is the wholesale layoffs by fat-cat corporations outsourcing to other countries to save on labor costs, as well as firing workers in order to turn loses into profits in their quarterly stockholder reports so that they can "justify" their obscene bonuses. You can fire only so many people. Now Obama votes for bailouts to help his capitalist masters. Would he do “whatever it takes” by going to war for them too?

  • Yahoo! Finance User - Monday, November 17, 2008, 7:49PM ET  Report Abuse

    • Overall: 5/5

    The new government next year should allocate fund to beef up the SEC and federal agents to rund up these crooks that are now free and running loose. Freeze and use their assets as part of the bailout instead of wasting taxpayer money.

  • Yahoo! Finance User - Monday, November 17, 2008, 7:40PM ET  Report Abuse

    • Overall: 1/5

    Predators? You mean the people buying homes they can't afford and lying about their income aren't to blame? The people who couldn't or refused to carefully consider the terms of the loans were "exploited"? These people who didn't understand the biggest financial choice of their lives deserve sympathy after the fact? You still deserve 0 stars for weeks in a row after that horrible retired stay at home mom article that Yahoo finally pulled. Typical Liberal media with a false and shocking headline just to get you to read the story. Shame on you.

  • Yahoo! Finance User - Monday, November 17, 2008, 7:30PM ET  Report Abuse

    • Overall: 1/5

    Since when has more government regulation resulted in a more transparent, efficient solution to anything? Usually you get 5 stars from me, but not today. Only when those who make mistakes are held acountable will the blundering stop. Yes, the system could do better at this, and it will hurt us all in the meantime, but more regulation is not the answer. The cited successes of EPA and consumer safety have come only at tremendous expense and bureaucracy that can seemingly never be streamlined (just try to read the CFR and imagine having to comply with it, and see if you still think adding more regulation is the answer). Such a heavy price is not necessary here when simple common sense (the advice you normally dispense) would keep people out of trouble, and hold them responsible when they fail (whether it's the morons who borrow too much, the fools who lend it to them, the boneheads who buy the bundeled securities, or the bad management and uncompetitive labor at GM).

  • Yahoo! Finance User - Monday, November 17, 2008, 5:20PM ET  Report Abuse

    • Overall: 4/5

    My Gosh........ This could absolutely decimate the value of an MBA. What we the unwashed call predatory, those in positions of power refer to as revenue generation. In the credit industry, just like so many others when the product is cookie cutter, whenever profits increase thats BONUS money! (and someone is gonna get the......if you get my point). Blaming the supposed red neck crowd doesn't help, Sadly there is a floor to what basic existence costs, and if one has trouble maintianing that then credit is the only thing left. You can bet banks (and their lily white partners real estate "professionals) were salivating whenever they saw references to Japanese multigenerational mortgages. (Imagine residual commission payments, I'm sure it almost drives them to life support) What we call scalping at the less prosperous levels is seen as "leadership and innovation" above.

  • Yahoo! Finance User - Monday, November 17, 2008, 3:41PM ET  Report Abuse

    • Overall: 2/5

    Just what we need is more government control at the tax payers expense. Maybe its time those in office do the jobs they were elected to do. It is the governments greed and uncontrolled over spending that is ruining our great country. Its a lot easier to point the finger than it is to take responsibility.

  • Yahoo! Finance User - Monday, November 17, 2008, 2:33PM ET  Report Abuse

    • Overall: 5/5

    Isn't it funny that the most ignorant, least educated, and - as such - the most vulnerable part of the population - KKK-type right wing cowboys are opposed to meaningful regulation of the very same industry that preys on them most! Nothing to wonder about though - these individuals are so proud of their "machoism" that cannot show it any other way than by sticking their sorry a^sses in monster trucks - that way they feel important because they can cause most damage.

  • Yahoo! Finance User - Monday, November 17, 2008, 2:07PM ET  Report Abuse

    • Overall: 1/5

    What a load. Our elected representatives who deserve to be executed for their corruption are now going to "rescue" the taxpayer. When is the real revolution going to start or are the majority of taxpayers still simply waiting for CNN to tell them what to think?

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