Buyer Beware: Consumer Finance

The incessant chatter about financial industry legislation reveals more talk and less action. Opponents of financial reform stand to lose big bucks if the status quo is changed. Okay, so they have the right to free speech in the USA, but why would anyone of sound mind and independent means bother to listen to that tired old rant? If you are not working for the Big Four Banks that currently control monetary policy in America or any of its subsidiary arms or lobbyists, then logic should compel you to join the public campaign for financial reform. 

For the sake of American economic security, the financial system needs to transition from anti-public to pro-public by ceasing to favor private interests over public concerns. What we need is a Ralph Nader of consumer financial products. (I nominate Elizabeth Warren, chairwoman of the TARP Oversight Committee and a staunch advocate of the new Consumer Financial Product Agency.) Ms. Warren’s activism aside, establishing an independent agency is vital for the health and welfare of consumer finance.   Back in the zippy American sports car hey day circa 1960s, the hot car of the decade was a jazzy little number called the General Motors Corvair. The car sold in record numbers allowing consumers to live out their American dreams of sexy convertibles and high speed travel. Yet the sports car’s poor safety record was hidden from the public and put unsuspecting drivers at risk. Enter Harvard educated lawyer Ralph Nader. The consumer superhero wrote an expose in 1965 entitled Unsafe at Any Speed detailing flagrant safety issues like unstable driver control, spinouts and rollovers.   While the report damaged sales for GM’s wundercar, it conceivably saved lives. Perhaps the most important advance from Nader’s activism was the establishment of the National Traffic and Motor Vehicle Safety Act in 1966 which transferred the onus of quality and safety from consumers to manufacturer.   The Act effectively changed centuries of English common law based on Caveat Emptor i.e. Buyer Beware. Caveat Emptor declares that if a seller withholds information in a transaction, it does not constitute fraud. The rule declares that buyers are responsible for their own due diligence. Nader’s law changed that perception in a dramatic way.   The concept of consumer protection was so foreign at the time of Nader’s activism that corporate executives such as W.R Murphy, the president of Campbell Soup, claimed that consumer advocacy was “a fad” that would disappear in six months. Nader was considered such a threat to the bottom line that he was harassed, coerced, and investigated by automakers. Rather than spend their money on building safer vehicles, top brass spent pots of gold trying to discredit Nader’s character including unsuccessful attempts to get him to solicit prostitutes. His passionate defense of the public welfare posed a genuine challenge to the profit and loss statements of the Big Three.   A New Day   The result of the changes in the auto industry literally shifted the way we think as a culture. The Lemon Laws that Nader’s work inspired made it illegal to defraud car customers by withholding information. It reinforced the view that sellers were responsible for product quality. CARFAX disclosure (used car history) and the recent Toyota recall are direct results of the changes in law established four decades ago.   The cultural support for consumer rights that escalated in the 1960s inspired drug and food testing, air and water pollution control, aviation, trading and commerce laws, and the environmental movement. We accept it as normal to regulate products for quality on the open market.   In 2010, we would not consider Nader’s consumer advocacy radical in any sense of the word. It represents the status quo. Standard operating procedure in 21^st century America guarantees public safety comes before private profits in the airline, food, pharmaceutical, medical and education industries. We created complex government departments like the Food and Drug Administration (FDA) whose sole job it is to protect your daily quality of life.   Yet somehow one enormously important area of society we have failed to adequately supervise is the financial industry. In the quest to preserve the sanctity of “free markets,” we continue to follow a buyer beware philosophy in finance. No where else in society do we sacrifice consumer rights to private interests except in the areas of banking, credit, lending, and mortgages.   Common myth dictates you should do your homework before you sign a mortgage document. If you don’t know that you are signing your own financial death warrant, well…tough luck. You shouldn’t be playing with the big boys.   Yet America is made up of ordinary folks like you and me. We should not be dodging bullets to buy a home, preserve our savings or safeguard our futures. That is the job of the Securities and Exchange Commission (SEC), the Commodities Futures Trading Commission (CFTC), Office of Comptroller of the Currency (OCC), and the Office of Thrift Supervision (OTS).   Unlike the FDA and similar government agencies, the banking regulatory agencies OTC and OCC are not funded by the U.S government. Instead these “federal agencies” derive their income directly from the institutions they monitor. (That would be like the FDA getting paid by pharmaceutical companies to approve medicines.) One of the unfortunate blunders of the subprime years was that competition for market share was so fierce, it drove the two regulators to focus on profits rather than quality of mortgage lending.   The financial industry regulators, SEC and CFTC are funded by the government; yet their offices are stacked with so many industry executives they have become a revolving door for conflicting interests.   “Private” rating agencies like Moody’s, Fitch, and Standard & Poor’s, sell ratings to securities firms that ultimately affect the health and welfare of the entire financial system. An inherent conflict lies in the basic compensation structure of these companies. They are paid to rate client holdings. The subprime crisis revealed these “trusted” agencies sublimated standards to attract revenues. Despite this fact these agencies remain unregulated today.   The remarkable conundrum is that what is viewed as “reasonable” in finance would not be acceptable in any other area of society. For example, we don’t we allow Ecoli-tainted spinach on our supermarket shelves. Why? Because it is dangerous to our health. Vioxx was recalled when a connection to heart failure was discovered, because it endangered people’s lives. Who is held responsible when a drug is sold on the market? Certainly, not the patient. The presumption of society is that the patient relies on the expertise of doctors and pharmaceutical companies to prescribe the best medicine.   Yet in mortgage lending, an ordinary layperson is supposed to understand the 100 pages of legal and financial documents representing his or her family’s soon-to-be shelter. Do you sign a document forgoing your legal rights to product quality when you receive a doctor’s prescription? The legal system reflects that consumers are protected in medical matters.   The average homebuyer is not an expert in finance or loan products. They are relying on the mortgage broker or lender not to swindle them, but to advise them. Lenders and brokers are the experts. They should be held personally liable for withholding information or irresponsible counsel- just like a medical professional. After all, your financial health is at stake.   For example, lethal financial instruments like NegAm mortgages (zero down, low interest teaser rate balloon loan) or NINJA loans (no income, no job, no assets) were marketed to people deliberately without regard to their personal welfare or the economy as a whole. These dangerous financial products led to a defaulting mortgage epidemic that we continue to suffer from three years later. They should be outlawed under Lemon Loan Laws or pulled from the banking shelves like Vioxx.   As the laws of finance stand, who is responsible? Not the “experts” who hawked products they knew were deadly. But the lay public who were tricked by smooth talking, profit seeking mortgage “professionals” who would sell you anything in order to build a castle in Palm Beach.   A brilliant Madoff-Ponzi-like scheme without any legal protection or recourse for unsuspecting victims. The homebuying public were like lambs to the slaughter in the subprime decade. They didn’t know what hit them until the housing bubble created by unethical lenders and finance pros burst. Unlike Madoff, however, your mortgage broker or lender may have ruined your financial health, but he won’t go to jail.   Why? Because there is no adequate law protecting consumers from financial industry predators. Isn’t it time we created one?   editor@goodb.net   Click for GoodB Blog - provocative and informative.   Click for the latest updates on GoodB