Making Credit Safer
The case for regulation
It 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 your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?
The difference between the two markets is regulation. Although considered an epithet in Washington since Ronald Reagan’s presidency, the “R-word” supports a booming market in tangible consumer goods. Nearly every product sold in America has passed basic safety regulations well in advance of being put on store shelves—but credit products are regulated by a tattered patchwork of federal and state laws that have failed to adapt to changing markets. Moreover, thanks to effective regulation, innovation in the market for physical products has led to more safety and cutting-edge features—but innovation in financial products has produced incomprehensible terms and sharp practices that have left families at the mercy of those who write the contracts.
Sometimes consumer trust in a creditor is well placed. Credit has provided real value for millions of households, permitting the purchase of homes that can add to family wealth accumulation and cars that can expand job opportunities. Credit can also provide a critical safety net, a chance for a family to borrow against a better tomorrow when they confront layoffs or medical problems today. Life insurance and annuities also can greatly enhance a family’s security. Consumers may not spend hours poring over the details of their credit-card terms or understand every paper they sign at a real-estate closing, but many of those financial products are offered on fair terms that benefit both seller and customer.
But for a growing number of families steered into over-priced credit products and misleading insurance plans, trust in a creditor proves costly. And for families tangled up with truly dangerous financial products, the result can be wiped-out savings, lost homes, costlier car insurance, job rejections, troubled marriages, bleak retirements, and broken lives.
Consumers entering the market to buy financial products should enjoy the same protection as those buying household appliances. Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, a new regulatory agency is needed to protect consumers who use financial products. The time has come to recognize that regulation can often support and advance efficient and more dynamic markets.