Opinion: What Protections Do Consumers Really Need?

(July 27) -- Now that we have a Consumer Financial Protection Bureau (CFPB), and President Barack Obama is deciding whether Harvard Law professor Elizabeth Warren will be its initial chairperson, can someone please tell me from whom or what the agency is supposed to protect us? It might be nice for everyone to know so that the agency can set its initial agenda and the Senate can intelligently consider who is best for the job.

We're told by The Wall Street Journal that the agency will "have independent powers to write and enforce rules governing how loans and other financial products are offered, bearing on everything from the type of mortgages people can get to the fees on their credit cards."

This still leaves me wondering just what this means. I can think of a few interpretations, but I see problems with all of them:

Enhancing the Clarity of Disclosures of Terms. Makes sense, but we already have Fed Regulation Z for this purpose. There's certainly room for improvement in Regulation Z, but I'm not sure we need a whole bureau to do the job. There are a few basic terms that are pertinent to consumers: amount of obligation, maturity of obligation, payment amount, effective interest rate, interest rate adjustment terms and associated fees. This shouldn't be a lifelong mission for anyone.

In any event, despite people railing against supposedly greedy, crooked mortgage lenders and credit card issuers for having caused the Great Recession, can anyone cite an actual case where poor disclosure was an important factor in someone's inability to pay their debts? There's been plenty of lousy disclosure in cases where people couldn't meet their obligations, but I suspect that in the overwhelming majority of such cases, they couldn't pay under any circumstances.

Protecting People from Borrowing Too Much. Might there be a credibility problem here in the world's largest debtor nation, with a national debt in the trillions and a current budget deficit of more than a trillion dollars, telling people not to borrow too much? In any event, what is "too much"? Business finance scholars have endlessly debated the optimal levels of debt and equity in a firm's capital structure. The business credit rating services have demonstrated that they are anything but perfect at determining whether a firm can meet its obligations, and the consumer credit raters are only slightly better.

Ultimately, though, isn't America about individual choice and accepting the consequences of those choices? I know there are external consequences of excessive debt that have caused the Great Recession, but doesn't this call for better underwriting by lenders instead of government mandates?

Protecting People from Spending Too Much. See above regarding the inconsistency of the government's message, the difficulty in determining how much is "too much" and the importance of individual choice. How can we expect any agency to competently take into account individual circumstances and preferences? Someone may be willing and able to sacrifice on one front in order to spend "excessively" on another. Who is the CFPB to tell him he is wrong? In the midst of what is at best a feeble recovery from the Great Recession, why do we want to discourage any spending?

Protecting People from Borrowing on "Bad" Terms. We've heard a lot about the need to simplify financial products so that they are understandable to consumers. "The Obama administration wants 'plain vanilla' to be the standard for mortgages, credit cards and other financial products," as the public radio program Marketplace puts it. Sounds good, but again, can someone identify a specific default connected to complicated terms that would have been avoided with a simpler structure? Yes, I know many mortgages have onerous interest-rate adjustment terms that can drive up payments by hundreds of dollars per month, and which were defaulted. But was the ultimate problem the principal amount or the amount of payment increase? Before proceeding on this premise, I'd like to see some real research demonstrating that a substantial number of defaults would have been avoided with fixed rate or simpler products. The CFPB is supposed to reduce the likelihood of another Great Recession, but I'm not sure what fee levels have to do with that.

In any case, as noted, as long as there's fair disclosure, isn't America about individual choice? Who is the CFPB or anyone else to tell people what structure is "right" or "wrong" for them? Again, by definition, if we prohibit certain structures that would have been freely chosen by informed consumers, we will reduce borrowing and spending. This is the last thing our economy needs right now. Lenders don't use complicated structures for their amusement, but to connect risk and reward -- i.e., maintain a lender's viability. With the need for regulators to conduct stress tests to assure the public of bank solvency, why would we eliminate an important tool used to further it?

Many of us have heard about professor Warren's childhood, her family's bad experience with financial institutions during the Depression, her view that the middle class is being destroyed and her antipathy toward today's institutions. With all due respect to professor Warren and appreciation for her service as chair of the Congressional TARP Oversight Panel, I think we would be better off with someone with a more balanced perspective and perhaps less of an ax to grind about the perils of financial products; someone who will focus more on how consumer protection promotes economic stability than on what seems fair or unfair.

Pending decisions about the CFPB will have huge implications for our economy and individual options. We need to make our voices heard about the importance of preserving individual choice and avoiding unfocused crusaders.