Full Version: Financial Products Safety Council?
Harvard Law's Elizabeth Warren has a thought provoking article in the current issue of Democracy Journal(reg required, but free) regarding the current state of financial products for consumers. In it, she recaps the current state of financial risk that many consumers, sometimes unknowningly, embrace:
While consumers do share the blame when they use a product in a way that wasn't designed, thus resulting in injury (and sometimes silly lawsuits), and the same is true when making financial decisions, it seems as though in today's marketplace its hard to divine the difference between a safe financial product and one that could provoke devastation down the road.
With that foundation in mind (and I highly encourage those responding to read the article):
Questions for debate:
1) Do you support the idea of a Financial Products Safety Council, modeled on the present Consumer version? Why or why not?
2) Do Financial lenders own some of the responsibility for their products or is it a pure caveat emptor (let the buyer beware) transaction?
3) If you answered yes to #1, what features would you advocate for inclusion (or exclusion) from this regulatory board?
QUOTE
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?
While consumers do share the blame when they use a product in a way that wasn't designed, thus resulting in injury (and sometimes silly lawsuits), and the same is true when making financial decisions, it seems as though in today's marketplace its hard to divine the difference between a safe financial product and one that could provoke devastation down the road.
QUOTE
Indeed, there can be no doubt that some portion of the credit crisis in America is the result of foolishness and profligacy. Some people are in trouble with credit because they simply use too much of it. Others are in trouble because they use credit in dangerous ways. But that is not the whole story. Lenders have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt.
To be sure, creating safer marketplaces is not about protecting consumers from all possible bad decisions. Instead, it is about making certain that the products themselves don’t become the source of the trouble. This means that terms hidden in the fine print or obscured with incomprehensible language, unexpected terms, reservation of all power to the seller with nothing left for the buyer, and similar tricks and traps have no place in a well-functioning market. (emphasis mine)
To be sure, creating safer marketplaces is not about protecting consumers from all possible bad decisions. Instead, it is about making certain that the products themselves don’t become the source of the trouble. This means that terms hidden in the fine print or obscured with incomprehensible language, unexpected terms, reservation of all power to the seller with nothing left for the buyer, and similar tricks and traps have no place in a well-functioning market. (emphasis mine)
With that foundation in mind (and I highly encourage those responding to read the article):
Questions for debate:
1) Do you support the idea of a Financial Products Safety Council, modeled on the present Consumer version? Why or why not?
2) Do Financial lenders own some of the responsibility for their products or is it a pure caveat emptor (let the buyer beware) transaction?
3) If you answered yes to #1, what features would you advocate for inclusion (or exclusion) from this regulatory board?
1) Do you support the idea of a Financial Products Safety Council, modeled on the present Consumer version? Why or why not?
Not really, because this sort of thing is usually handled by professional licensing. Colorado recently passed laws that address this specific problem in an unregulated marketplace. What we're talking about here are ARMs (Adjustable Rate Mortgages) that are supposedly tied into the prime lending rate. So, when the prime is low, the interest charges are low, usually lower than a fixed-rate mortgage. But when the prime goes up, then the homeowner has to pay more each month.
I've never been a fan of ARMs. If money tightens up, generally so does the job market. Getting doinked with a big jump in interest on the monthly house payment sure won't help in that situation. But the ARMs can be locked into the low interest rate for up to 15 years, so that might be a good deal for young home buyers or those who figure on moving on. You get to buy more house, and with good timing/luck, make more profit. You can also get a shorter-term lock on an ARM and refinance a year or so later into a fixed rate.
Reputable mortgage companies will tell you this. The crooks will only emphasize how much money you'll save.
Good real estate agents will know a good mortgage deal from a bad one, and should tell you what's up. It's the next best thing to hiring a mortgage contract lawyer to figure the thing out and translate into plain English.
2) Do Financial lenders own some of the responsibility for their products or is it a pure caveat emptor (let the buyer beware) transaction?
They do now in Colorado. This wasn't the case before the Democrats took over. Getting dinked here on real estate was business as usual, with poor inspectors, worse appraisers and crooked schemes all over the place. It really was caveat emptor. When we bought this place, we only went with highly reputable people, including the real estate guy. Had to pay a little more interest and higher fees, but it was worth it because -- lucky us -- this place is booming with highly priced retirement homes springing up like mushrooms after a summer rain. We've made back the extra costs many times over and sit on a nice fixed rate mortgage. The job market is still having fits and starts though. Well, that's a whole nudder ting.
But the regulation is in the court system now. Mess with real estate, spend time near beautiful Canon City, along with all the meth heads. I do think that's more effective than trying to put together a consumer financial safety board. Who wants to risk slammer time and the destruction of career? Another state is like Colorado was, Alaska. Guess the crooks are headed that-a-way. Hope they like bears bigger than grizzlies and buyers who come to the closing bearing their Second Amendment rights.
BTW, if you want to see everyone bolt from the closing table in a mad frenzy of cell phone dialing, point out something that's wrong with the contract, turn to your spouse or partner or whatever, and say: "This contract is no longer valid. Screw this, where d'yah wanna grab lunch?" It was a .25 percent raise in the mortgage interest rate cuz the mortgage company neglected to get a lock. We really could have walked, but decided not to after they suffered for a few minutes.
That was fun
Not really, because this sort of thing is usually handled by professional licensing. Colorado recently passed laws that address this specific problem in an unregulated marketplace. What we're talking about here are ARMs (Adjustable Rate Mortgages) that are supposedly tied into the prime lending rate. So, when the prime is low, the interest charges are low, usually lower than a fixed-rate mortgage. But when the prime goes up, then the homeowner has to pay more each month.
I've never been a fan of ARMs. If money tightens up, generally so does the job market. Getting doinked with a big jump in interest on the monthly house payment sure won't help in that situation. But the ARMs can be locked into the low interest rate for up to 15 years, so that might be a good deal for young home buyers or those who figure on moving on. You get to buy more house, and with good timing/luck, make more profit. You can also get a shorter-term lock on an ARM and refinance a year or so later into a fixed rate.
Reputable mortgage companies will tell you this. The crooks will only emphasize how much money you'll save.
Good real estate agents will know a good mortgage deal from a bad one, and should tell you what's up. It's the next best thing to hiring a mortgage contract lawyer to figure the thing out and translate into plain English.
2) Do Financial lenders own some of the responsibility for their products or is it a pure caveat emptor (let the buyer beware) transaction?
They do now in Colorado. This wasn't the case before the Democrats took over. Getting dinked here on real estate was business as usual, with poor inspectors, worse appraisers and crooked schemes all over the place. It really was caveat emptor. When we bought this place, we only went with highly reputable people, including the real estate guy. Had to pay a little more interest and higher fees, but it was worth it because -- lucky us -- this place is booming with highly priced retirement homes springing up like mushrooms after a summer rain. We've made back the extra costs many times over and sit on a nice fixed rate mortgage. The job market is still having fits and starts though. Well, that's a whole nudder ting.
But the regulation is in the court system now. Mess with real estate, spend time near beautiful Canon City, along with all the meth heads. I do think that's more effective than trying to put together a consumer financial safety board. Who wants to risk slammer time and the destruction of career? Another state is like Colorado was, Alaska. Guess the crooks are headed that-a-way. Hope they like bears bigger than grizzlies and buyers who come to the closing bearing their Second Amendment rights.
BTW, if you want to see everyone bolt from the closing table in a mad frenzy of cell phone dialing, point out something that's wrong with the contract, turn to your spouse or partner or whatever, and say: "This contract is no longer valid. Screw this, where d'yah wanna grab lunch?" It was a .25 percent raise in the mortgage interest rate cuz the mortgage company neglected to get a lock. We really could have walked, but decided not to after they suffered for a few minutes.
That was fun
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