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Fallout: The Financial Crisis

Progress report on consumer protection

Marketplace Staff Oct 2, 2009
Fallout: The Financial Crisis

Progress report on consumer protection

Marketplace Staff Oct 2, 2009


Tess Vigeland: Over the summer there was big talk from the Obama administration about the need for a new Consumer Financial Protection Agency. A kind of financial parallel to the Food and Drug Administration or the Consumer Product Safety Commission.

But the legislation moving through Congress is missing lots of the elements the White House touted, including the need for so-called “plain vanilla” financial products — like 30-year mortgages and easy-to-read credit card terms.

Harvard Professor Elizabeth Warren has been calling for this kind of agency for years and we wanted to get her thoughts on what’s happening. Thanks for joining us.

Elizabeth Warren: Thank you.

Vigeland: At this point, none other than the Treasury Secretary Tim Geithner has said that the administration will be OK with not requiring these vanilla products. Might you suggest another spice for the administration?

Warren: You know, my view is that there’s a world of difference between requiring that every lender create a plain vanilla product and making plain vanilla products more attractive for lenders to offer and obviously, for customers to buy. Maybe not every lender wants to be in that market, but at least my view of it is, if you’re selling mortgages to consumers, here’s the basic set of rules. And one of the key rules is, if you can’t explain it to people, you can’t sell it to them.

Vigeland: Then how would the agency go about, in your words, making these plain vanilla products more attractive. These products were out there, certainly, over the housing boom; a lot of people chose not to use them.

Warren: I think I’d take issue — if you’ll forgive me for being a little picky here. I actually don’t think on the mortgage front that there really were any plain vanilla products. Everything got buried in 300 pages of documentation. I think the same thing is true right now in credit cards, because the whole model right now is that you build these really, really complex agreements and then hidden back in page 16, was what the company called ‘revenue enhancers.’ Do you like that term? Revenue enhancers and where they really made their money was that nobody could actually figure out how to get the 7.9 percent financing or those double frequent flyer miles.

And so what plain vanilla is about, is about not more disclosure, what we need are agreements that people can look at and read them, like a-page-and-a-half long. You’ve got to be able to read it at an ordinary high school reading level, and you’ve got to be able to read it in about four minutes. Then you can make real comparisons and the market would start to work for consumers.

Vigeland: Let me back up a step. Obviously, when we’re even talking about folks having access to these plain vanilla, and the documents involved around that, that assumes there is a Consumer Financial Protection Agency. The Obama administration proposed this back in June. There’s been quite a bit of action against it. Are you confident at this point that we’ll get it?

Warren: Well, you know, you probably should ask somebody who understands politics better than I do. But it’s important to look at the Consumer Financial Protection Agency and see who’s opposed. It’s exactly two groups: It’s the large financial institutions, who are making tens of billions of dollars off the tricks and traps they’ve built into various consumer financial products. And the regulators who permitted them to do this.

Frankly, this is a moment in time, at least in my view where a lot of Americans — let me describe that differently. A lot of voters I think are paying real attention to what happens to this agency.

Vigeland: What about the banking industry’s argument that this kind of agency will serve to give consumers less choice, that it will tamp down on financial innovation in the markets and in the marketplace?

Warren: Right. What has innovation brought us over the last 30 years?

Vigeland: The option ARM.

Warren: Right, there you go, thank you. Credit cards. Actually, there’s a perfect example — because I’ve got a great little piece of documentation. Do you know how big Citibank’s credit card agreement was in 1980?

Vigeland: No.

Warren: It was a- page-and-a-half long. It was 600 words. And now that same credit card agreement is more than 30 pages long. What they’ve really brought us is the kind of innovation, what that’s come to mean in financial services, is how many ways can I fool people about the new products? That is the current marketplace, and quite frankly, that’s the one that some of the largest financial institutions in America want to protect right now. Because they’re raking in tens of billions of dollars off it.

Vigeland: Elizabeth Warren is law professor at Harvard University and she also chairs the Congressional Oversight Panel for the TARP money, the bail out money from last year. Thank you so much more coming in and talking with us about the Consumer Financial Protection Agency and where we are at this point.

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