Unsafe at Any Rate
If it’s good enough for microwaves, it’s good enough for mortgages. Why we need a Financial Product Safety Commission.
When markets work, they produce value for both buyers and sellers, both borrowers and lenders. But the basic premise of any free market is full information. When a lender can bury a sentence at the bottom of 47 lines of text saying it can change any term at any time for any reason, the market is broken.
Product safety standards will not fix every problem associated with consumer credit. It is possible to stuff a toaster with dirty socks and start a fire, and, even with safety standards, it will remain possible to get burned by credit products. Some people won’t even have to try very hard. But safety standards can make a critical difference for millions of families. Families who are steered into higher-priced mortgages solely because the broker wanted a higher fee would have a greater chance of buying–and keeping–a home. A student who wanted a credit card with a firm credit limit–not an approval for thousands of dollars more of credit and higher fees and interest–could stay out of trouble. An older person who needed a little cash to make it until her Social Security check arrived would have a manageable loan, not one that would escalate into thousands of dollars in fees.
Industry practices would change as well. Corporate profit models based on marketing mortgages with a one-in-five chance of costing a family its home would stop. Credit card models that lure 18-year-olds with no income and no credit history into debt with promises of “no parental approval”–on the assumption that their parents will pay it off, rather than see their children begin their adult lives with ruined credit histories–would stop. Rollovers that can turn a simple loan into a mountain of debt would stop.
Personal responsibility will always play a critical role in dealing with credit cards, just as personal responsibility remains a central feature in the safe use of any other product. But a Financial Product Safety Commission could eliminate some of the most egregious tricks and traps in the credit industry. And for every family who avoids a trap or doesn’t get caught by a trick, that’s regulation that works.
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