BLOG VIEW: Help Wanted: Financial Product Czar

Written by John Clapp
on March 12, 2009 No Comments
Categories : Blog View

Sen. Dick Durbin, D-Ill., on Tuesday suggested via legislation that a commission be created to keep an eye on the financial services industry and, more specifically, its products.

This is an idea that is long overdue.

The so-called Financial Product Safety Commission would achieve three things, Durbin says:

Protect consumers by ensuring all financial practices are on the up and up, and by providing borrowers with education on how to responsibly use financial products;

  • Essentially establish what it is that makes a consumer financial product safe, and then create limitations preventing products from falling into unsafe territory; and
  • Provide updates to the public, including suggestions for how to improve the value of financial products for consumers.

The concept of the commission – thought up by TARP watchdog Elizabeth Warren, who chairs the Congressional Oversight Board – has tremendous merit in today's world, where financial products and markets have become so complex that clearly, some policing may be necessary. The mad scientists who dreamt up some of the products currently in circulation may not have had predatory lending in mind, but they certainly didn't have consumer protections in mind, either.

Of course, as the industry struggles to navigate its way out of the present-day mess, everyone shares a heightened awareness and sensitivity to the "What Ifs" involved in developing and marketing certain financial products. Although no one wants the housing market in shambles, a bruised mortgage industry, or cashflow avenues knotted by a metaphorical tourniquet, all of these elements have had at least one positive effect: It's (hopefully) taught us all a lesson.

Let's assume everyone is on their best behavior from here on out. Let's assume fraud is no longer an issue, and there are no questions of unethical behavior. Even then, there is currently very little stopping the financial services industries from creating more and more complex products – products by which even responsible and financially secure but uneducated consumers might be mystified.

The key component of Durbin and Warren's commission is not that it would supposedly establish a "safety floor" beneath which no product should drop, for I'm not sure I trust the government's assessment of what's safe and what's unsafe. Rather, the divine piece of the proposal is that it aims to educate. With or without a commission, financial products are irreversibly moving toward incorporating more layers of risk, more complexities. It's only natural that, in 2009, financial products that are offered to all, won't be understood by all.

Speaking of education, the Making Home Affordable plan offered by the Obama administration, while hit-and-miss in some aspects, did hit at least one ball out of the park. Its requirement for borrowers with particularly high debt loads to receive HUD-approved counseling in order for their mortgages to be modified is the right move.

Some recent analyses have found that borrowers with modified loans in many instances do not adjust their budgets appropriately and only use the relief provided by a mod to buy into other debt obligations. Risky borrowers and risky behavior, but hopefully, the Making Home Affordable initiative can steer some of these folks back on the path of responsible financing.

– John Clapp, editor, Servicing Management

(Please address all comments regarding this opinion column to clappj@sm-online.com.)

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