FINANCIAL REGULATIONS AS A CULTURE WAR?

Peter Wallison has an op-ed in the Post today striking a tone of high dudgeon over the attempts of "elites" to to limit the ability of regular folks from obtaining predatory mortgages and pay-day loans. (No matter that the possible regulations, which would be enacted by the Consumer Financial Protection Agency proposed by the Obama administration, would apply to elites as much as everyone else.) Consider this a forecast of the upcoming conservative and industry-sponsored rhetoric against the provision, which we also got a look at it in the form of Texas Republican Jeb Hensarling's grandstanding at a hearing on the subject. This line of argument is both false and morally odious -- it's amazing to see Wallison gin up populist outrage in defense of the worst practices banks use to gouge consumers.

The whole piece is premised on distorting the notion of "plain vanilla" financial products that the CFPA would mandate. The plain vanilla products would be safe, long-term loans like traditional 30-year mortgages or the standard credit cards that make sense for most consumers. But if a consumer wanted to get a subprime loan or the credit card with a high APR, they would have to "opt-in" to that loan and make clear that they understood the risks they were taking. Wallison wrings his hands:

And one can only imagine the humiliation of the consumer who must fill out a questionnaire to establish his capacity to purchase anything more than the plain-vanilla product.

I have trouble imagining that, actually. I'm better at imaging the humiliation of millions of Americans who right now have lost their homes thanks to loans they didn't understand -- loans that have driven them deeper and deeper into debt. Some of these loans didn't require borrowers to prove their income or even that they had a job, much less demonstrate any understanding of what would happen to their financial health when the initial teaser rate jumps stratospherically a few years after the start of their Adjustable Rate Mortgage loan.

The CFPA isn't for the purposes of protecting people from themselves. This is a collective issue, as anyone who has seen the results of the last two years clearly can say, or anyone who has seen their home value drop because other houses in their neighborhood have been foreclosed. To expand on Elizabeth Warren's famous toaster analogy -- you can't buy a toaster with a 10 percent chance of catching fire, why can you buy a mortgage with a 10 percent chance of ruining your financial health? -- that toaster fire can spread to your neighbor's home and costs public money to fix, just as these inappropriate loans caused losses that spread throughout our economic system.

Here's the worst of Wallison's disingenuous attempt to arouse populist sentiment against the article:

So who will be able to get those more complex products and services? Not ordinary Americans, whose lack of financial sophistication will make the risks of selling to them too great for most providers. The more complex products, the ones that are better tailored to the needs of the particular consumer, will be offered only to the more sophisticated and better educated -- in other words, to the nation's elites.

Emphasis mine. In fact, the loans the CFPA are designed to ban were premised on the idea that they were risky and consumers didn't understand them, since that was a better way for banks to make money. That's why banks offered kickbacks to mortgage brokers to convince borrowers who qualified for prime loans to take out subprime loans instead. (More on the big business of predatory lending here.) And it's not like the "nation's elites" are somehow immune from financial stupidity: see the Madoff victims, for instance, or the edifying case of New York Times reporter Edmund Andrews. Disclosure isn't the answer here because no one understands the contracts drawn up by credit card companies -- not even lawyers! -- in part because they are designed to elide the fact that they can be amended unilaterally by the banks at any time.

This agency isn't about the condescension of America's elites, who have already proven that they know just as well as anybody how to make huge financial mistakes. This isn't about the stupidity of common Americans; the products that the CFPA is working against are designed to take advantage of anyone who isn't extremely savvy. This is about putting commonsense rules in place so that everyone has fair access to credit. And I'd go further and say this: if the CFPA works, there will be more credit available to low- and middle-income people as community banks and other responsible lenders have the chance to recapture a larger market share from predatory lenders whose huge profits allowed them to advertise and market relentlessly.

-- Tim Fernholz