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Consumer Financial Protection Bureau: Please Ban These Four Products!

I was crushed the other day when I heard testimony before a House hearing from Elizabeth Warren, the top candidate to head up the new Consumer Financial Protection Bureau, which launches this coming Thursday. She said that the agency wouldn't seek to ban products. An outright ban, she declared, "is a tool in the toolbox, and that's where it should stay." (UPDATE: The President announced that he plans to nominate former Ohio Attorney General Roger Cordray to run the new agency. Republicans, however, have said that they will not confirm any appointee until the White House agrees to weaken the consumer watchdog bureau.)

Apparently, Warren was trying to mollify critics like the U.S. Chamber of Commerce which has fielded about a dozen lobbyists to persuade Congress to disembowel the agency. The Chamber claims that if the Financial Bureau bans certain products, the recovery would be stalled (which it is already), credit would be hard for consumers to get (which is also already true) and, I suppose, flower gardens would turn to deserts (which might happen but probably not because of any government financial agency). Oh, and, worst of all, consumer choice would be limited.

Well, folks, I am here to say that limiting consumer choice is not necessarily a bad thing. Some items are toxic and should never go on the market. As an analogy, take meat. Governments -- state, local and federal -- prohibit food processors, not to mention retailers, from selling rotten meat. The meat industry, like the Chamber of Commerce, could argue that such laws limit choice, particularly for low-income consumers who might not be able to afford the higher price of un-rotten meat. Common sense tells you, however, that curtailing people's opportunities to get sick and possibly die is a good idea.

And so it is with financial offerings. Some of them are just plain awful. While they may generate huge revenues for banks and other financial institutions, they cause consumers as much or more harm as dishwashers that burst into flame and SUVs that flip over when rounding a turn. And should they be banned? You betcha!
There's no shortage of rotten financial products. But here are my top choices for banning.

  • Payday Loans. Say your car desperately needs about $300 worth of work. To get a loan, you give the payday lender a postdated personal check or authorization for automatic withdrawal from your bank account when you're paid, usually in two weeks. You get the cash, minus the lender's fees. According to the Center for Responsible Lending, a consumer group, a $350 loan costs about $60 in fees, leaving you the borrower with only $290. Part of the fees go for interest which payday lenders say is 15 percent; but that's not 15 percent a year but for two weeks. If expressed as an annual rate, the loan would cost about 390 percent. You could probably get a better rate from the likes of Tony Soprano. Moreover, most borrowers, some 75 percent, according to a 2009 study by CRL, cannot repay after two weeks and have to renew the loan, which runs another $60. After the typical 9 flips a year, the borrower winds up paying $450 in fees and interest and still owes $300. Don't think this is bad? Well, even hard-hearted analysts at Morgan Stanley, when examining the financials of Advance America, a leading payday lender, found such loans predatory, noting that "38.1 percent of customers took out 9 to 14 or more advances per year. This statistic is worrisome. These customers bore the exceedingly high APRs associated with payday loans for almost half a year or longer. At a 300 percent APR, the interest on a payday advance would exceed the principal after about four months. In these circumstances, the loan starts to look counterproductive: rather than bridging a gap in income, the payday advance may contribute to real financial distress." No kidding. Regulating these monsters doesn't make sense because payday lenders boo-hoo that if they can't flip the loans or charge high fees, they'd go out of business. I say, that can't happen fast enough. Even a credit card with a 40 percent APR would be a more merciful option for those desperate to borrow.

  • Negative Amortization Mortgages. With such loans, which were popular during the housing boom, payments do not cover the amount of principal and interest due. If your principal and interest come to $1,500 a month, but you pay only $1,100, the remaining $400 is tacked onto your balance and accrues more interest. The upshot: you pay interest on interest. Over the years, the mortgage balance rises while your ownership stake in your home decreases. At some point, after five years usually, the lender starts to require a much bigger payment, one that will cover interest and the newly enlarged balance. The only way to escape this trap is to sell the house and pay off the mortgage or vastly increase your monthly payment. When housing values plummeted and people began losing their jobs, they couldn't sell or meet payments. This so-called financial innovation was designed to lower payments -- at least for a time -- for those who couldn't pay the full freight. Instead it sent many of them into foreclosure and lost lenders tons of money. Such loans make sense for neither borrowers nor lenders. Better to prohibit them.
  • Credit card debt protection programs. Supposedly, this insurance promises to cancel your credit card balance or suspend the minimum monthly payment and waive interest should you die, become disabled or lose your job. According to the Government Accountability Office, which studied the product this year, the coverage is very expensive, about 85 cents to $1.35 a month for every $100 of balance owed, say about $120 a year for a $1,000 balance. What's more, consumers get very little for their investment. The GAO found that of the $2.4 billion in fees large credit card companies raked in in 2009, they paid out only 21 percent in claims. That compares to a 95 percent payout rate for car insurance, 83 percent for group life and 80 percent for health insurance. Some 55 percent of the money collected is pure profit. Many of the policies have gaping loopholes which credit card companies do not feel obliged to disclose until you enroll, possibly because if you knew about them, you'd never bother.
  • Negative option marketing. I don't know whether the new Financial Bureau has power to do anything about this sleazy practice -- but if it can, it should. The Federal Trade Commission, in whose province this falls, has done little to curb what I believe to be nothing less than a fraud. Here's how it works: You make a purchase, online or by phone, and then get offered a free trial of something or other, usually a subscription or membership in a buying club. You figure you'll try it for a month, and that will be that. But, because the vendor has your credit card number, he enrolls you and bills you every month -- until you happen to notice the item on your credit card statement and complain. By that time, you may have shelled out hundreds of dollars for something you never wanted. And, needless to say, most vendors don't make it all that easy to cancel whatever it is that you didn't want to buy; some over-eager salespeople have even stuck subscriptions and memberships to consumers who said "no" to the free trial. Nobody knows how much Americans shell out each year in such deals, but my guess is billions. I think that after a free trial offer, a vendor should have to get your permission to sign you up for a subscription or membership. And, if not enough people sign up to sustain the business, well, the market has spoken.
Elizabeth Warren has said that the thrust of the new agency will be disclosure -- making financial offerings transparent so that consumers know exactly how much a mortgage or a loan will really cost. But, you can't make rotten meat safer by disclosing the names of the bacteria it contains. Really bad things need to be taken off the market.

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