Helping Borrowers Save Themselves

An 11th Commandment could read: Thou shalt not cheat the meek.

Morality is reason alone for a Consumer Financial Protection Agency to shield the little guys from the lending barracudas -- as well as from their own bad decisions (some of them, anyway).

There's also the matter of how these toxic loans were laundered into debt-linked securities sold around the world. Such risky vehicles brought the world to the brink of financial Armageddon.

A well-designed consumer-oriented agency would tame the tricky subprime mortgages and loans with exploding interest rates. Like St. Patrick, it could drive the snakes out of the fine print. Products would be regulated and some practices banned.

The financial industry doesn't like this at all. Its ideal customer is not the careful borrower, who pays in full and on time, and can command the lowest interest charges.

Lenders prefer the somewhat tarnished creditor who occasionally loses bills under a pile of lottery tickets but in the end pays the monthly minimum. The ideal mark will also pony up the extra fees and bear exorbitant interest rates without having any idea what's happening to him.

This describes a lot of middle-class people, but especially the working poor. Such sterling names of American finance as Wells Fargo and U.S. Bancorp have made a big business out of targeting lower-income Americans with annual interest charges reaching 120 percent. At the height of the borrowing binge, five payday-lending chains were listed on the New York Stock Exchange or NASDAQ.

Dan Ariely, a behavioral economist at Duke University and author of the book "Predictably Irrational," likens borrowing to driving. "Leveraging is the equivalent to driving over the speed limit," he told me. "Every mistake you make is more dangerous."

We expect regulations on the road, such as speed limits and laws against texting while behind a wheel, he notes. "But when it comes to the financial domain, we think people have no physical limitations."

In addition to telling lenders where they cannot go, the agency can steer consumers to choose the things that are best for them. "I can tell how many people have taken this loan and been happy with it in the past,"

Ariely says. Consumers who have multiple choices could be offered a safe default option and recommendations.

The consumer agency plan seems to center on some of these principles. It would give financial companies incentives to offer "plain vanilla" products -- for example, 30-year, fixed-rate mortgages and credit cards without penalty interest rates. It might require "warning labels" on loan terms deemed complex and dicey.

Of course, these rules would threaten billions in lenders' profits. The industry insists that a vigilant Federal Reserve already monitors their practices.

"It's not like the current regulators don't have all the authority they need," American Bankers Association President Edward Yingling has complained. "You don't have to blow up the system."

True, the Fed has had the power to regulate mortgages and credit, no doubt a surprise to many. The new agency would take over that function, letting the Fed better concentrate on the other things it hasn't done well.

There will always be those who take on extravagant risk and are too lazy to read contracts, even in eighth-grade English. At the least, better regulations would put some speed bumps on their road to ruin.

The hope is that many more borrowers will save themselves. They would also save the rest of us from having to bail out lenders making big bucks off swindling the unsophisticated. And it should leave our culture feeling a lot better in the morning.

COPYRIGHT 2009 THE PROVIDENCE JOURNAL CO.

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Views expressed in this column are those of the author, not those of Rasmussen Reports.