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Regulating Financial Products
Old 07-12-2007, 02:22 PM   #1
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Regulating Financial Products

from the LA Times...

Regulation, not red tape, is urged

A Harvard law professor says the public needs to be protected from dangerous financial products.
July 8, 2007


Americans don't have to worry that a $29 toaster could burst into flames, but the same can't be said for a $290,000 mortgage.

The reason, Harvard law professor Elizabeth Warren contends, is the U.S. has a Consumer Product Safety Commission that demands that all manufactured goods sold in the country meet minimum safety standards. But it doesn't have an equivalent for financial products.


Warren, an expert in the field, argues that it should.

"No one has to be an engineer to buy a toaster. You shouldn't have to be a lawyer to take out a loan or get a credit card," she said. "Markets work best when there are minimum standards for safety."

Not everyone agrees.

"If she is calling on government to make a determination about whether a product is good for a consumer, we think market forces should be dictating that," said Michael Ryan, executive director and senior vice president of the U.S. Chamber of Commerce's Center for Capital Markets Competitiveness. "We would be opposed to another layer of regulation."

Warren chuckles when asked about the opposition, which she knows is broad. Regulatory agencies as well as industry may oppose the idea, she said. After all, no one wants to give up turf. And right now, there are more than a dozen state, federal and local agencies that monitor issuers of mortgages, credit cards and auto loans.

That's part of the problem, Warren said. Much of the current regulatory regime watches over the industries that issue financial products, rather than over the products themselves.

Sub-prime mortgages provide a stark example, she said. Thrifts and savings banks accounted for 23% of the sub-prime mortgages issued in 2005, while bank holding companies, regulated under another federal regime, accounted for 25%. But 52% of sub-prime mortgages were written by independent mortgage brokers and finance companies, which are subject to no federal oversight.

"This division not only creates enormous loopholes, it triggers a kind of regulatory arbitrage," she said. "If regulators push those institutions too hard, they're likely to reincorporate under another regulatory umbrella — or under no regulator at all."

Other products end up being subject to numerous, duplicative rules, creating lengthy and redundant disclosures. Consequently, a credit card agreement that once explained terms in a single page now often spans 30 pages packed with legalese, Warren said.

"People are trying to cook dinner and help the kids with their homework," she said. "To deal with the complexity of today's financial products, Americans would have to spend weeks reading disclosures that most lawyers can't understand."

Like the Consumer Product Safety Commission, established in 1972, a financial product safety commission would establish guidelines for consumer disclosure, collect data about the uses of different financial products, review new products for safety and require modifications of products considered too dangerous to sell, Warren said.

Many financial-product disclosures are dictated by statutes, so changing them would entail an act of Congress that would come after only a time-consuming legislative process. That makes the rules like "flies caught in amber" unable to adapt to a changing world, she contends. If Congress authorized a commission to monitor financial products, Warren said, it could respond more quickly and effectively to product innovations and a changing marketplace.

She said it was likely to result in fewer regulations rather than more.

"This isn't so crazy," she said. "I don't want to get tainted meat or take prescription drugs that are placebos. I don't want to buy toasters that have a 1-in-5 chance of bursting into flames. Regulation protects me from that.

"I think the same, minimal protection should extend to financial products."

The idea may find a receptive audience, thanks to rising consumer debt, soaring delinquencies and mortgage foreclosures.

In hearings this spring, legislators listened to a lineup of consumers contending that they got into trouble with their mortgages and credit card loans because they were presented with terms they couldn't understand and documents that were voluminous and unreadable. A recent study by the Federal Trade Commission largely underscored the point, finding that a majority of borrowers couldn't accurately determine the most basic and pivotal terms in their loan agreements.

Mortgage disclosures are largely dictated by two federal laws — the Truth in Lending Act and the Real Estate Settlement Procedures Act — neither of which has been updated in decades. The Federal Reserve and the Department of Housing and Urban Development acknowledge the problems with disclosures and say they're working on revisions. But years of such consideration have yet to result in a new law.

Just last week, members of the House Financial Services Committee blasted another group of federal regulators for failing to work together and implement consumer-oriented protections in a credit reporting law passed four years ago. One frustrated legislator, complaining about the glacial speed, said he would sponsor a bill to force action if the regulators were unable to do it themselves.

"It's a new day in Washington," Warren contended. "People are fed up and they're complaining to their legislators. And legislators are listening.

"We have plenty of organizations that represent financial institutions," she added. "We need somebody to cut through the red tape and represent consumers in Washington."
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Old 07-12-2007, 02:48 PM   #2
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"This isn't so crazy," she said. "I don't want to get tainted meat or take prescription drugs that are placebos. I don't want to buy toasters that have a 1-in-5 chance of bursting into flames. Regulation protects me from that.
"I think the same, minimal protection should extend to financial products."
Next we'll be hearing "Subprime mortgages don't kill people-- criminals kill people!"

Would this be the same financial activist Elizabeth Warren who wrote "All Your Worth", "The Two-Income Trap", "The Fragile Middle Class", and a number of other books?
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Old 07-12-2007, 02:57 PM   #3
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Looks like it...

Elizabeth Warren - Wikipedia, the free encyclopedia
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Old 07-12-2007, 02:59 PM   #4
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At least in the mortgage world, the industry needs some cleaning up, espcially those parts of it not subject to bank regulations. I would not be at all upset to see a client suitability standard imposed similar to that required in the securities and insurance sales industries.
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Old 07-12-2007, 03:15 PM   #5
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I've seen what the "market forces" result in.

Paris Hilton, $1200 a month healthcare insurance and steamed pork buns made out of cardboard treated with an industrial chemical and flavored with pork fat.

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Old 07-12-2007, 03:50 PM   #6
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Oh we lay people are just too dumb to do things for ourselves. Please, give us more government regulation for our safety
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Old 07-12-2007, 03:53 PM   #7
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Saluki, perhaps you suffer from the smart persons illness of not understanding how difficult some things are for the average person to grasp.

By survey, most college grads dont understand how to balance a checkbook or how their cell phone plan actually works.

Yet these same people are supposed to grasp and execute an adjustable rate interest only 40 year mortgage that their realtor and broker are trying to slide them into so as to sell them the most expensive home possible?
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Old 07-12-2007, 04:19 PM   #8
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Saluki, perhaps you suffer from the smart persons illness of not understanding how difficult some things are for the average person to grasp.
By survey, most college grads dont understand how to balance a checkbook or how their cell phone plan actually works.
Yet these same people are supposed to grasp and execute an adjustable rate interest only 40 year mortgage that their realtor and broker are trying to slide them into so as to sell them the most expensive home possible?
By any chance would these people be propagating their genes before the inevitable catches up to their lifestyle?
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Old 07-12-2007, 04:27 PM   #9
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Saluki, perhaps you suffer from the smart persons illness of not understanding how difficult some things are for the average person to grasp.

By survey, most college grads dont understand how to balance a checkbook or how their cell phone plan actually works.

Yet these same people are supposed to grasp and execute an adjustable rate interest only 40 year mortgage that their realtor and broker are trying to slide them into so as to sell them the most expensive home possible?
While I appreciate the compliment, I should have made my point a little clearer.

From my 10 years in the financial services business, I can see how government regulation has made the experience worse for the consumer. In the olden days you had a bunch of brokers (mostly old men) who while they sold expensive mutual fund they still had a lot of good advice to give and did a lot of ministerial work.

The NASD and SEC have so tightened the rules that many of the old timers have left the business. Unless somebody is willing to register as an RIA and basically start over from an income perspective brokers have gotten to where they can hardly give ANY advice to their clients other than sell things to them. This is brought on the generation of brokers who do nothing but push variable annuities and give no advice, because they don't want the risk.

So, pardon me if I'm not all that enthused about regulation of the mortgage business.
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Old 07-12-2007, 04:49 PM   #10
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...The NASD and SEC have so tightened the rules that many of the old timers have left the business. Unless somebody is willing to register as an RIA and basically start over from an income perspective brokers have gotten to where they can hardly give ANY advice to their clients other than sell things to them. This is brought on the generation of brokers who do nothing but push variable annuities and give no advice, because they don't want the risk...
Even worse, the broker-dealers could not care less about how the customer is doing. The ONLY two things they care about are 1) Selling 2) CYA.

We need to cut out the broker-dealer and give an across-the-board standard commission to the financial advisor that comes directly from investment company and is reported directly to the customer so it's all transparent and the same for everyone, no matter the financial institution.

There is already plenty of regulation out there, in fact maybe too much so that nobody knows what's being buried in the terms and conditions anymore. Wouldn't more people read and understand terms and conditions if they were only a few sentences long instead of a few pages long?
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Old 07-12-2007, 04:51 PM   #11
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This is brought on the generation of brokers who do nothing but push variable annuities and give no advice, because they don't want the risk.

So, pardon me if I'm not all that enthused about regulation of the mortgage business.
aaah, interesting take on it...here's this expensive "financial wonder product" but i can't tell you what or why?



i'm for good regulation, not bad ones...does that help?
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Old 07-12-2007, 04:57 PM   #12
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By any chance would these people be propagating their genes before the inevitable catches up to their lifestyle?
Unfortunately they frequently reproduce before successfully Darwin'ing themselves...

Its a lot better where I live now vs my old area. I wanted to take a big bottle of bleach with me to the gene pool around there...
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Old 07-13-2007, 04:09 AM   #13
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As long as it is a non-profit and the government does not do it or pay for it... I don't care.

I have no problem with an independent group of experts labeling financial products. I think one should assume that the SEC is already policing whether or not the company/security is legit... (that is already happening -- unless it is some private deal).

For example:
  • CD - Safe for all Investors even with limited investment knowledge.
  • Stock mutual Fund - Safe for the Average Investor with limited investment knowledge that understand basic risk.
  • Options - Safe for Skilled investors that have a high level of understanding about derivatives that understand the complex nature of the Derivative Type... (Don't try this at home)
  • Structure Products - Don't hurt yourself
  • Variable Annuity - Bend Over
But then again... aren't these things already labeled that way in billions of lines of text in books and periodicals?
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Old 07-13-2007, 06:41 AM   #14
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As long as it is a non-profit and the government does not do it or pay for it... I don't care.
IMO, this s the crux of the issue with mortgages. The gummint does it (via Fannie/Freddie/Ginnie) and pays for it (when banks that make stoopid mortgages go balls up). So I think there is plenty of scope for gummint regs on the mortgage industry.

The banks already have to live with lots of (mostly common sense) regulation on mortgages. The non-bank lenders are the ones most at issue.
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Old 07-13-2007, 10:17 AM   #15
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I'm in the middle of reading "The Two-Income Trap" right now. My take on it so far is that the Ms. Warren would like readers to believe that middle class families are going bankrupt through no fault of their own. It's "the system's" fault. Her thesis, as far as I can tell, is that there is a structural failure in this country that impoverishes the middle class and forces many of them (particularly those with kids) into bankruptcy.

It's been a while since I took Consumer Law during law school, but I seem to recall that the Truth in Lending Act provided a pretty simple solution to disclosure. I think all key interest rate terms and costs had to be disclosed and included in a single-page document along with total interest costs over the life of the loan, among other things. In other words, if you just signed a crappy subprime loan, you should have seen this TILA disclosure that had "YOU WILL PAY $436,000 IN INTEREST DURING THE COURSE OF THIS LOAN" in bold (or something to that effect). Shouldn't most folks pause and wonder why they are paying hundreds of thousands in interest?

The remedies available to folks who received inadequate disclosure include suing under the TILA and state law remedies are probably available under the "unfair or deceptive acts or practices" statutes (UDAP statutes) that sometimes allow triple damages and attorney's fees.

A problem arises when the bad-guy lender is under capitalized and has no money from which to pay judgments.

Maybe I'm a cynic, but it seems like people spend more time voting for their fave on american idol or selecting their drafts in their fantasy football league than they do on reviewing loan documents where they are signing away hundreds of thousands of dollars of debt. And Ms. Warren seems ok with that. She seems to think that folks are genuinely too busy in their lives to review loan terms or skim through the documents and ask critical questions.
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Old 07-13-2007, 11:14 AM   #16
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huh, there isn't any consumer group that monitor's financial products?

hmmm... seems like a great idea to me...and much faster than trying to get regulations passed!
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Old 07-13-2007, 01:01 PM   #17
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Maybe I'm a cynic, but it seems like people spend more time voting for their fave on american idol or selecting their drafts in their fantasy football league than they do on reviewing loan documents where they are signing away hundreds of thousands of dollars of debt.
Only one of those activities requires actual functional literacy and a questioning mind. I think that Sanjaya is a good example of the latter, but maybe I'm a cynic too.

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She seems to think that folks are genuinely too busy in their lives to review loan terms or skim through the documents and ask critical questions.
In fairness to someone who has quite an agenda, IIRC at the end of the book she does mention that people should only have as much mortgage as they could pay if they had to live on one of their incomes. The "trap" is that people try to pay non-discretionary expenses with incomes that are all too discretionary.
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Old 07-13-2007, 09:39 PM   #18
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huh, there isn't any consumer group that monitor's financial products?

hmmm... seems like a great idea to me...and much faster than trying to get regulations passed!
Agreed, I think an industry watch group can be much more effective than government intervention.

Best example I can think of is UL listing for electrical goods. When companies first wanted to sell electrical appliances, people were scared (Edison ran a FUD campaign against AC) and insurance companies did not want to take on the additional risk. UL, an independent lab, popped up to list appliances as safe.

Result: appliances are very safe, considering each one has lethal power in it and millions of exposures each day, and no government regulation.

So, if the finance industry wants to clean up it's act, let an outside company 'certify' their advertising and documents as 'fair' and develop an easy to understand standardized language for their products. If you don't comply you don't get the 'good housekeeping' symbol.

If they keep their act clean through these procedures, no govt intervention required. Everyone wins.

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Old 07-13-2007, 09:47 PM   #19
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I'm terribly pleased that I dont know who "sanjaya" is.
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