Enough Teeth To Fight the Loan Sharks
Pity the neighborhood loan shark.
The credit card companies have stolen his customers by taking a softer approach to charging outrageous interest rates. During the subprime lending boom, mortgage banks shouldered into shark territory, too.
Loan sharks are called mobsters. Thieving legitimate lenders are called capitalists -- free to impose any terms short of kneecapping on their troubled borrowers. Washington treated capitalist sharks as role models and beloved campaign contributors -- that is, until the economy collapsed and debtors (a.k.a. voters) emitted a collective scream.
Now, maybe, borrowers might catch a break. There is serious talk in Congress and the White House about creating a Financial Product Safety Commission, charged with protecting consumers and the country from the depredations of irresponsible lending.
Creators of financial products have been running ahead of the hangman for many years. Every other market has had to accept consumer-safety rules, mandated by the Consumer Product Safety Commission or some other government body. Laws regulate the ingredients that go into cosmetics, the buckles on children's car seats, the freshness of meat shipped to supermarkets and the safety of prescription drugs. You can't buy firecrackers in many states. If car tires explode, they can be recalled.
Yet no law required the recall of the exploding mortgages that drove tens of thousands of borrowers into foreclosure and bankruptcy. No one recalled the dangerous subprime credit cards that arrived in the mail already loaded with high-rate debt from application fees. The consumer-credit industry can dream up any sneaky product it wants, and no one polices it for harm. As it turned out, the harm went viral.
"This financial crisis started one mortgage at a time, one household at a time, and it destabilized the world economy," says Elizabeth Warren, a Harvard University law professor. She is chairman of the Congressional Oversight Panel, which aims to bring accountability to the hundreds of billions of dollars flowing through the government's Troubled Assets Relief Program.
Warren proposed a Financial Product Safety Commission two years ago in an influential article written for "Democracy: A Journal of Ideas," a progressive publication. Recently, her idea was endorsed by the White House and introduced as legislation in the House and Senate.
The powerful financial industry will oppose it at every turn, but Warren isn't discouraged. "They said we'd never get food labeling because of the influence of the food lobby," she says. "But now you can walk into any supermarket and see how much sugar is in each type of cereal."
Today, almost every borrower has an enraging credit card or mortgage story -- if not their own, then one from a child or friend. The political moment for ending legalized loan sharking may finally have arrived.
As Warren sees it, a safety commission could have jurisdiction over all consumer-credit products: mortgages, credit cards, payday loans, installment loans, car loans, and consumer-credit reports as well as consumer privacy.
The commissioners would have two principal jobs. One would be true disclosure. They would require simple, standardized price and interest-rate disclosures so you could compare the cost of one credit product with another. If a pricing mechanism were too complex to explain simply and it trapped consumers into paying more than they expected, it would be banned.