Any effort to increase or reform statutory regulation of financial products is met by a powerful industry lobby on one side that is not balanced by an equally effective consumer lobby on the other. As a result, even the most basic efforts are blocked from becoming law. A decade ago, for example, mortgage-lender abuses were rare. Today, experts estimate that fraud and deception have stripped $9.1 billion in equity from homeowners, particularly from elderly and working-class families. A few hearty souls have repeatedly introduced legislation to halt such practices, but those bills never make it out of committee.

Beyond Congress, some regulation of financial products occurs through the indirect mechanism of the Federal Reserve, the Office of the Comptroller of the Currency (OCC), and the Office of Thrift Supervision. Each agency, for example, has some power to control certain forms of predatory lending. But their main mission is to protect the financial stability of banks and other financial institutions, not to protect consumers. As a result, they focus intently on bank profitability and far less on the financial impact on customers of many of the products the banks sell.

The current regulatory jumble creates another problem: Consumer financial products are regulated based, principally, on the identity of the issuer, rather than the nature of the product. The subprime mortgage market provides a stunning example of the resulting fractured oversight. In 2005, for example, 23 percent of subprime mortgages were issued by regulated thrifts and banks. Another 25 percent were issued by bank holding companies, which were subject to different regulatory oversight through the federal system. But more than half–52 percent, to be exact–of all subprime mortgages originated with companies with no federal supervision at all, largely stand-alone mortgage brokers and finance companies. This division not only creates enormous loopholes, it also triggers a kind of regulatory arbitrage. Regulators are acutely aware that if they push financial institutions too hard, those institutions will simply reincorporate in another form under the umbrella of a different regulatory agency–or no regulatory agency at all. Indeed, in recent years a number of credit unions have dissolved and reincorporated as state or national banks, precisely to fit under a regulatory charter that would give them different options in developing and marketing financial products. If the regulated have the option to choose their regulators, then it should be no surprise when they game the rules in their own favor.

Unfortunately, in a world in which the financial services industry is routinely one of the top three contributors to national political campaigns, giving $133 million over the past five years, the likelihood of quick action to respond to specific problems and to engage in meaningful oversight is vanishingly slim. The resulting splintered regulatory framework has created regulatory loopholes and timid regulators. This leaves the American consumer effectively unprotected in a world in which a number of merchants of financial products have shown themselves very willing to take as much as they can by any means they can.

The Financial Product Safety Commission

Clearly, it is time for a new model of financial regulation, one focused primarily on consumer safety rather than corporate profitability. Financial products should be subject to the same routine safety screening that now governs the sale of every toaster, washing machine, and child’s car seat sold on the American market.

The model for such safety regulation is the U.S. Consumer Product Safety Commission (CPSC), an independent health and safety regulatory agency founded in 1972 by the Nixon Administration. The CPSC’s mission is to protect the American public from risks of injury and death from products used in the home, school, and recreation. The agency has the authority to develop uniform safety standards, order the recall of unsafe products, and ban products that pose unreasonable risks. In establishing the Commission, Congress recognized that "the complexities of consumer products and the diverse nature and abilities of consumers using them frequently result in an inability of users to anticipate risks and to safeguard themselves adequately."

The evidence clearly shows that CPSC is a cost-effective agency. Since it was established, product-related death and injury rates in the United States have decreased substantially. The CPSC estimates that just three safety standards for three products alone–cigarette lighters, cribs, and baby walkers–save more than $2 billion annually. The annual estimated savings is more than CPSC’s total cumulative budget since its inception.

So why not create a Financial Product Safety Commission (FPSC)? Like its counterpart for ordinary consumer products, this agency would be charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new financial products for safety, and require modification of dangerous products before they can be marketed to the public. The agency could review mortgages, credit cards, car loans, and a number of other financial products, such as life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks and traps that make some of them far more dangerous than others.

An FPSC would promote the benefits of free markets by assuring that consumers can enter credit markets with confidence that the products they purchase meet minimum safety standards. No one expects every customer to become an engineer to buy a toaster that doesn’t burst into flames, or analyze complex diagrams to buy an infant car seat that doesn’t collapse on impact. By the same reasoning, no customer should be forced to read the fine print in 30-plus-page credit card contracts to determine whether the company claims it can seize property paid for with the credit card or raise the interest rate by more than 20 points if the customer gets into a dispute with the water company.

Instead, an FPSC would develop precisely such expertise in consumer financial products. A commission would be able to collect data about which financial products are least understood, what kinds of disclosures are most effective, and which products are most likely to result in consumer default. Free of legislative micromanaging, it could develop nuanced regulatory responses; some terms might be banned altogether, while others might be permitted only with clearer disclosure. A Commission might promote uniform disclosures that make it easier to compare products from one issuer to another, and to discern conflicts of interest on the part of a mortgage broker or seller of a currently loosely regulated financial product. In the area of credit card regulation, for example, an FPSC might want to review the following terms that appear in some–but not all–credit card agreements: universal clauses; unlimited and unexplained fees; interest rate increases that exceed 10 percentage points; and an issuer’s claim that it can change the terms of cards after money has been borrowed. It would also promote such market-enhancing practices as a simple, easy-to-read paragraph that explains all interest charges; clear explanations of when fees will be imposed; a requirement that the terms of a credit card remain the same until the card expires; no marketing targeted at college students or people under age 21; and a statement showing how long it will take to pay off the balance, as well as how much interest will be paid if the customer makes the minimum monthly payments on the outstanding balance on a credit card.

With every agency, the fear of regulatory capture is ever-present. But in a world in which there is little coherent, consumer-oriented regulation of any kind, an FPSC with power to act is far better than the available alternatives. Whether it is housed in a current agency like the CPSC or stands alone, the point is to concentrate the review of financial products in a single location, with a focus on the safety of the products as consumers use them. Companies that offer good products would have little to fear. Indeed, if they could conduct business without competing with companies whose business model involves misleading the customer, then the companies offering safer products would be more likely to flourish. Moreover, with an FPSC, consumer credit companies would be free to innovate on a level playing field within the boundaries of clearly disclosed terms and open competition–not hidden terms designed to mislead consumers.

The consumer financial services industry has grown to more than $3 trillion in annual business. Lenders employ thousands of lawyers, marketing agencies, statisticians, and business strategists to help them increase profits. In a rapidly changing market, customers need someone on their side to help make certain that the financial products they buy meet minimum safety standards. A Financial Product Safety Commission would be the consumers’ ally.

A Well-Regulated Market

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.