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New agency to protect consumer rights
A copy of the Obama administration's plan on regulating the financial system.
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TEXT OF INTERVIEW
Tess Vigeland: Harvard Professor Elizabeth Warren has been in the headlines recently, because she's the watchdog over the TARP money being doled out to the nation's banks.
But we're talking to her because of her previous activism on another issue that came to the fore this week. Two years ago, she wrote an article proposing the idea of a financial product safety commission. She argued that we consumers needed the same protection for our finances that we get for the toys and appliances that we buy. Well this week, the Obama administration proposed just such an agency.
Elizabeth Warren, welcome to Marketplace Money. And how about we talk about something other than TARP?
Elizabeth Warren: Oh, I'd like that.
Vigeland: So when you first proposed this idea two years ago, what were you seeing in the marketplace that prompted your concern. Was it a specific financial product?
Warren: No, it's that the marketplace is broken. Put four credit card contracts down on a table and try to make a comparison. Try to figure out which one's cheaper, try to figure out which one's safer. It's not possible. The average contract is more than 30 pages long and let's face it, most of the terms are written in a form of legalese that even a Harvard law professor would have a lot of trouble with.
And what that means is that we switched over to a different kind of pricing model for credit cards. The company holds up two or three things to show you -- like the nominal interest rate, the free gifts and the warm and fuzzy relationship. And then they build all the so-called "revenue enhancers" into that 30 pages of unreadable text. So if you can't tell whether card A, card B, card C or card D is the cheaper card or the better card, the market isn't working.
Vigeland: Well, explain what we're talking about when we compare the Consumer Product Safety Commission with something that would be similar for really non-tangible products. One is about protecting us from, I don't know, exploding gas car tanks and lead toys. This one would protect us from what beyond credit cards?
Warren: The idea behind both of them is it protects us from the things we can't see. The notion is markets don't work when certain elements of the competition or certain elements among the products are not visible. So what happened in the case of the Consumer Product Safety Commission, basically, is they said, "Look, here are the minimum safety standards. So if you want to compete, find other ways. Don't compete by taking out the insulation and making your manufacturing cheaper."
It's really the same thing with credit cards. All we're saying here is don't compete by hiding a bunch of terms in 30 pages of incomprehensible text. Put the product right up front, anyone can see it, and make a good decision.
Vigeland: What do you see as the tipping point from the need for regulation to the need for personal responsibility? I mean, at some point, shouldn't we all recognize that credit cards are not inherently safe for us?
Warren: You bet. The financial protection agency is not about protecting consumers from themselves. You can go out to the mall and spend $2,000 on things you can't afford, by golly, you ought to be responsible for it.
What this is about is the heart of the personal responsibility. It's hard to have personal responsibility if someone is trying to trick you or deceive you about what the terms of the agreement are. My view on this is let's put that all out front, let's have plain vanilla products and then they should be responsible for honoring those contracts.
Vigeland: You know, this isn't all about incomprehensible contracts and language. Isn't this agency supposed to be able to stop some financial products from even getting out on the market?
Warren: It's about dangerous products and about what consumers can understand. Let me give you the best example I can, that is I was in a hearing before Congress and one of the senators asked one of the bank executives sitting next to me to explain double-cycle billing.
Vigeland: Good luck with that
Warren: The bank executive mumbled and fumbled and started and tried again and finally said, "I can't." Well my view is, if you can't explain it, then you can't sell it.
Vigeland: Again, I think the question is: Will this agency potentially be able to stop such destructive practices, as -- not just credit cards -- but the option arm. Will that still be available to people, even though it's so hard to understand?
Warren: There may be a place for complicated financial products. For people in certain circumstances, it may be appropriate. But it's appropriate only if there has been enormously careful disclosure and qualification of that customer for that kind of product. This is not about limiting consumer choices; this is about making sure that those choices are real. For most of us, that means plain vanilla products.
Vigeland: But would an agency like this be able to prevent, say mortgage brokers, from offering a mortgage like that?
Warren: The key thing is it would prevent mortgage brokers from deceiving people about these mortgages. That's been a large part of the problem we've got right now. People have been steered into products that are entirely inappropriate for them and that were never fully explained. That's the practice that will be stopped.
Vigeland: Elizabeth Warren, thank you so much for talking with us.
Warren: Thank you.
Several months ago while in a grocery the cashier asked if I would like some cash back. Unthinking, I said yes to something like $20 or so, just because my wallet was low on actual cash, even tho I realized cash from a credit card is expensive. Hey, it was only twenty dollars (or so). I should have gone to my bank, which, incidentally was next door, but I said yes. Bad move. Now, as long there is any kind of balance on my credit card they will charge me something like $1.50 a month...forever...or until I pay off the entire credit card balance, then it stops. I understand them charging once, but forever? What is the reasoning behind that, aside from taking my money? That is doubtless one of the obscure charges they include in my contract with the credit card company. I am now attempting to find what other obscure charges they will lay on me when I transfer the entire debt to another card in order to get rid of that charge.
I can save the good professor and everyone else's time, and a lot of tax payer money.
"Don't borrow money on a credit card, it's expensive. Use the credit card for transactional convenince."
As for homes loans, don't worry about it. Unlike a car loan, home loans are nonrecourse loans, it doesn't matter what the terms are, you can always just throw the keys in the mailbox and walk away.
I like Prof. Warren's idea. She's not saying limit the amount of choices you get or even stop selling any product all she is saying is word it and phrase it so the common person can understand. If I work for a bank doing I.T work and I tried to explain lack of bandwidth by talking about binding and network collisions my boss, lets say a CFO, probably wouldn't understand a word I said,he or she would need it broken down in laymen's terms to justify funding or any other measure bring proposed. Same way, she's suggesting contract's be broken down in laymen's terms.
I find Prof. Warren's fretting how to protect consumers from opaque credit card contracts ironic. I've never bothered reading them because I always pay off the balance before it's due. That's credit cards should be used under ordinary circumstances.
Meanwhile the federal government with Chris Farrel's blessing is about to mandate people to buy health insurance which has equally opaque contract language and potentially greater financial consequences.
Why do you think that of the 61% of Americans who file for bankruptcy due to medical reasons 80% of those had health insurance. Maybe it's because, like comparing credit cards, comparing insurance plans requires law school literacy leaving in place a financial minefield.
