Wednesday, May 27, 2009

Ensuring Openness in Financial Products

By Amelia Warren Tyagi

Imagine buying a tube of toothpaste. After using the toothpaste, you are rushed to the emergency room to have your stomach pumped. The paste contained rat poison. But, when you try to complain, you are told that you should have read the label more carefully, as the ingredient list included hydroxycoumarin. You are told that you should have known that meant rat poison.

Now imagine if the conclusion of most pundits and policymakers were “no new laws are needed; you just need more chemistry education.” Sounds ridiculous, doesn’t it?

But that’s the same situation consumers face every day with financial products that are advertised at one rate, but that rate mysteriously sky-rockets months later.

How do we protect consumers? In the real world, toothpaste is regulated as a product, and the government ensures a basic level of safety. But credit cards, mortgages, and other financial products are treated as contracts. When it comes to contracts, the government views its job as nothing more than enforcing the terms of the contract, regardless of the outcome.

This makes a certain amount of sense when the contract is between two small business owners who are agreeing on the price of installing a new roof. But when it comes to financial products, the law is behaving as if the average consumer were on the same footing as a $1 trillion bank, and that you can quickly analyze the contract and bargain at will.

This is absurd. Just try reading the lengthy contract that comes with your next credit card -- and then try calling the bank to tell them you’d like to amend the arbitration clause and the rate disclosure notification period.

The recent hubbub in Congress about a Credit Card Bill of Rights is certainly a step in the right direction. After decades of being held captive by the ultra-powerful banking lobby, it’s great to see Washington thinking about consumers for a change.

But does a bill of rights really solve the problem? It certainly tackles a few of the worst abuses: double cycle billing, retroactive rate hikes, and abusive practices toward college students.

But the proposal is silent on a variety of other nasty practices. It doesn’t do a thing about those ridiculous penalty fees when the check is 10 minutes late. And while it requires a 45-day notice to increase your rate, card issuers still have the right to raise your rate any time, by any amount, even if you haven’t done anything wrong.

A better approach to dealing with the credit card debacle would be a simple proposal to create a Consumer Financial Product Commission.

In the 1970s, Congress created the Consumer Product Safety Commission (CPSC), tasked with establishing safety standards, recalling unsafe products, and banning products that pose unreasonable risks. Since then, the CPSC has played a major role in ensuring safer products and a fairer marketplace. They work to keep us safe from lead paint, car seats that collapse on impact, arsenic in kids’ toys, and, yes, rat poison in our toothpaste. In fact, the CPSC estimates that standards for three products alone -- cigarette lighters, cribs, and baby walkers -- save more than $2 billion every year.

Modeled on the CPSC, the proposed Consumer Financial Product Commission would take on the job of ensuring that disclosures are clear, financial products do what they’re supposed to do, and the playing field is level and fair. Most important, it could act quickly and nimbly.

If done properly, the new agency would not try to fix prices. Nor would it prevent consumers from ever charging too much on a credit card or taking on a mortgage they can’t afford; it would be absurd to try to guarantee that no one would ever behave foolishly. (After all, the CPSC can’t prevent someone from throwing a blender into the bathtub.) But the new agency could eliminate the long contracts and give us fewer surprises when we open our credit card statements. And it could stamp out marketing that advertises a 5 percent interest rate in large print and buries the 35 percent interest rate in the fine print.

A Financial Product Safety Commission certainly doesn’t sound as exciting as a “Bill of Rights,” but it really is a far better way to govern, and could go a long way toward helping consumers. Isn’t that worth giving it a try?
Tyagi is co-founder of Business Talent Group, and co-author of “Two-Income Trap” and “All Your Worth.”
Copyright (C) 2009 by the American Forum. 5/09