This country's economy is predicated on individual consumerism. Indeed, with America's 217 million adults and 116 million households, individual consumption represents as much as 70% of this country's economy. Consumerism creates jobs. Individual households thrive when jobs are aplenty, and the country prospers when households thrive.
Much of that consumption is supported by consumer loans in the form of home mortgages, home equity lines of credit, auto loans, student loans, and of course, ubiquitous credit card loans. There is nothing intrinsically bad or dangerous about credit as long as it is used wisely and prudently. People would not want to return to the ‘good old days' when one could only purchase a big ticket item like a house or car after saving a satchel full of cash to pay for it. Consumer credit facilitates the modern economy. (In fact, in the past bankers used to even call consumer loans ‘credit facilities'.)
Unfortunately, the market for consumer credit products is broken. It is broken because consumers lack trust and confidence. The system is unnecessarily complex and opaque. Loan agreements now consist of incomprehensible fine print and legalese burying a wide assortment of potential tricks and traps. While lenders offer low teaser rates to win more market share, they hide the numerous fees and practices, their real profit-makers, in the fine print -- where the consumer can't find or understand them. Consumers are unable to easily compare products or choose the ones with the lowest cost or lowest risk. "Financial innovation" now centers around the invention of new incomprehensible fees rather than better serving consumer preferences.
Because the true cost of credit is now so badly distorted, consumers use too much credit. And the government's approach to oversight is presently unwieldy, complex, costly, and ineffective. This has resulted in a consumer credit market that is broken, dangerous, and, because left unchecked, has greatly contributed to the current economic meltdown.
Fortunately, this situation may be about to change. There is an initiative being debated in Congress to establish a Consumer Financial Protection Agency (CFPA). The CFPA would be a dedicated advocate for users of financial products in this country. Its scope would encompass consumer financial products and services including selling practices, advertising and underwriting. It would establish minimum federal standards by product, so consumers could compare various offerings more easily and have confidence in their decisions. Lenders would all face the same set of guidelines and disclosure rules. They wouldn't be able to escape regulation by changing their corporate charters, geographic location, or regulatory supervisor as is the case now.
America's Consumer Product Safety Commission has long been established and has the authority to develop uniform safety standards for physical products, order the recall of unsafe products, and ban products that pose unreasonable risks. This is similar to the FDA's authority over food and pharmaceuticals. It is long overdue for John Q. Public to have uniform protection and standards for financial products.
A CFPA would concentrate the review of financial products in a single location but would not limit competition among lenders. Lenders would still evaluate risk, set prices, and design marketing campaigns and activities. However, a CFPA would focus primarily on expanding consumer safety rather than corporate profitability.
Unfortunately, there is an oft unstated fact that financial transactions are far riskier for consumers today than even a mere ten years ago. As complexity and opacity have increased with these financial products, with the advent of practices like immediate cross default, penalties with no notice, myriad nuisance fees, and the devilish practices of double-cycle billing, and with the evolution of a much smaller safety net, consumers are much less secure than they once were. Consumers need -- and deserve -- an advocate and a level playing field.
Richard Wolf has 29 years experience in business administration, risk management, and professional development and training in the financial services industry.