Decoder: ‘Plain vanilla’ products

Amy Scott Jun 26, 2009

Decoder: ‘Plain vanilla’ products

Amy Scott Jun 26, 2009


TESS VIGELAND: Last week we had Harvard Law professor Elizabeth Warren on the show. She’s chief watchdog of the government’s bank bailout program. Warren is also the brains behind a proposed new agency that would protect consumers from risky adjustable rate mortgages and credit cards.

Elizabeth Warren: 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.

The Obama administration wants “plain vanilla” to be the standard for mortgages, credit cards and other financial products. But what exactly does that mean?

Marketplace’s Amy Scott has this latest installment of the Decoder.

Amy Scott: We all know what plain vanilla implies.

Chorus of voices: Boring!

Eric Halperin heads the Washington, DC office of the Center for Responsible Lending. It’s a nonprofit that fights abusive lending practices.

Halperin says, when it comes to financial products, boring is good.

Eric Halperin: The idea behind plain vanilla is we have products in the mortgage, credit card, checking accounts, other areas, which are straightforward, easy to understand and have clear benefits for consumers.

Like a nice 30-year mortgage, with a fixed-interest rate and no hidden fees, A checking account that spells out overdraft charges or a credit card with clearly defined fees and penalties.

Halperin: When we think about vanilla, we think about a base flavor without any complicated things added in.

Tom Erd: I hate the term plain vanilla. Vanilla is anything but plain. If anything, vanilla’s the most exotic of all flavors.

Tom Erd owns the Spice House, a specialty spice and seasonings shop in Evanston, Ill.

Erd: These big babies are the Tahitian vanilla beans.

Erd tells me that vanilla comes from orchid blossoms that opens for just one day. And there are several varieties, some creamy, some spicy.

Erd: Here, if you just smell, see, it’s far more fruity. I like to say black cherry.

Just as vanilla is more complex than you might think, there’s more to some 30-year fixed mortgages than meets the eye. Some can carry an early repayment penalty. So if you try to refinance you get smacked with a hefty fee.

The Center for Responsible Lending’s Eric Halperin says regulators will have to be particular when applying the plain vanilla label.

Halperin: We have to be very careful to make sure that it’s really a straightforward product, and that we don’t expand the definition to include products that are difficult to understand.

But what if you don’t want vanilla? Maybe you’d prefer strawberry or chocolate or Chubby Hubby.

Wayne Abernathy is a vice president at the American Bankers Association. He says not every homeowner wants a 30-year fixed mortgage.

Wayne Abernathy: My first mortgage was a five year ARM. I liked that, because interest rates were falling. Had I locked in a fixed rate, I’d have been paying more than what the market was for a long time. That’s the problem when you decide that one size fits all, usually only the average person fits that size.

The Obama administration says customers will still have choices. But bankers might have to slap warning labels on all but the most basic loans. Borrowers might have to prove they understand the risks.

As for what to call the safest products, Tom Erd has a better idea.

Erd: I think he should use the term brown paper bag rather than plain vanilla. It’s an insult to great flavor.

The Brown Paper Bag Association couldn’t be reached for comment.

I’m Amy Scott for Marketplace Money.

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