Harvard Professor Elizabeth Warren explains her idea of creating a Consumer Financial Protection Agency in this Business Week piece. Congress is considering legislation which would create such an agency. Here’s an excerpt from her article:
President Obama’s proposed Consumer Financial Protection Agency would make loan contracts clearer—and simplify regulation
A century ago anyone with a bathtub and some chemicals could mix and sell drugs—and claim fantastic cures. These “innovators” raked in profits by skillfully marketing lousy products because customers were poorly equipped to tell the difference between effective and ineffective treatments. In the decades following, that changed with the advent of the Food & Drug Administration and some basic rules about safety and disclosure. Companies then had greater incentives to invest in research and develop safer, more effective drugs. Eliminating bad remedies made room for creating good ones.
Applying this basic economic principle to the marketing of financial products, President Obama recently proposed the creation of a Consumer Financial Protection Agency (CFPA), an agency that will promote financial product safety while supporting market competition and economic growth.
We’ve become familiar enough with the financial industry’s bad products and harmful “innovations” in the past several years: Lenders offering sound fixed-rate mortgages and straightforward adjustable-rate loans were undercut by those promoting exotic products—most with fees and complex pricing “explained” in incomprehensible fine print. Millions of consumers who qualified for traditional market-rate mortgages were pushed toward these subprime loans because they weren’t able to compare products and make real choices.
This information gap between lender and borrower exists throughout the consumer credit market. The average credit-card contract is dizzying—and 30 pages long, up from a page and a half in the early 1980s. Lenders advertise a single interest rate on the front of their direct-mail envelopes, burying costly details deep in the document. Faced with legalese and obfuscation, consumers can’t really compare offers or make clear-eyed choices about borrowing at all.