Warren: Make loan terms transparent

By:
Peter King | December 07, 2010

Saying there is a limit on what “thou shalt not” rules can accomplish, the head of the new Consumer Financial Protection Bureau is calling for a more proactive approach to ensure than consumers are not taken unfair advantage of in mortgages and other financial transactions.

 
Special Advisor Elizabeth Warren said the new bureau should take a lesson from consumer safety agencies such as the Food and Drug Administration and Federal Aviation Administration, which organize around core principals such as ensuring that medications are safe and airplanes do not crash.
 
“It is this simple:  No customer should be asked to take out a loan without knowing the costs or the risks of the deal,” Warren said. “And every customer should be able to compare different financial products straight up.  Regulations should be about making sure that customers have the information they need to make the decisions that are right for them.”
 

Says disclosure used to obscure

 
Addressing a meeting of the Consumer Federation of America last week, Warren said that instead of providing information to consumers, financial disclosure forms on credit cards, mortgages and other financial products are too often used to obscure information and hide the real costs to the consumer.
 
“There was a time when the basic terms governing a credit card were understandable for the average consumer.  But the landscape has changed,” she said. “Today, too many creditors devise complex terms embodied in impenetrable credit agreements that undermine comparison shopping.  Too many creditors have decided that there are profits to be made from keeping customers confused or uncertain about costs and risks.”
 
Warren argued that when customers cannot know the true costs of a credit card or if the risks associated with a mortgage are disguised, then the free market isn’t working as it should. She argued that confusing mortgage terms contributed to the economic crisis of 2008, by fueling the housing boom with high-risk loans.
 
“If the two parties to a contract don't actually have the same transaction in mind, then the fundamental premise of an efficient market--we both understand the deal and engage in deals that we think are good for us--is missing,” she said.
 

Restrictions give rise to loopholes

 
Warren cited the recently enacted CARD act, which prohibited certain types of fees and rate changes by credit card companies, as an example of the limits of “thou shalt not”-type rules. She said that even before the new rules took effect, some companies were seeking ways to sidestep them.
 
As an example, she noted how some credit card companies were already trying to get around a ban on raising interest rates on existing credit card balances by charging a high interest rate but offering a rebate for customers who pay their bills on time.
 
Warren said the new agency should follow the examples agencies like the FAA, FDA, National Highway Safety Administration and Consumer Product Safety Commission. Such agencies, she said, enjoy widespread support because they limit risks consumers cannot readily detect on their own.
 
Though she did not say so explicitly, those agencies also tend to establish standards that regulated businesses must meet, rather than simply restricting practices seen as risky.
 
“Those agencies have made the markets they regulate more efficient,” Warren said. “Safety rules outlaw deceptive or dangerous innovations, making room for good innovation.”
 
Warren is overseeing the creation of the new Consumer Financial Protection Bureau in her role as an Assistant to the President and Special Advisor to the Secretary of the Treasury, the department under which it was created.

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