VIEWPOINT: Case for Financial Product Safety Panel

Article excerpt

Byline: Rep. Brad Miller

The financial crisis revealed many sins in the financial system, but reform without effective regulation of consumer lending is a crisis gone to waste.

Lending practices that the industry celebrated as a triumph of "innovation" have cheated borrowers, bankrupted lenders and plunged the nation into the worst recession since the Great Depression.

An undeniable lesson is that trapping borrowers in debt they cannot repay will eventually become a problem for the lender.

For years, the industry's justification for every consumer credit practice was the same: "innovative" credit terms that might appear predatory to the unsophisticated made it possible to extend needed credit to consumers who were excluded from traditional lending.

A generation ago, there was ample need for innovation in lending practices. Bankers followed the advice to "know your customer" by joining the country club and literally drew red lines on city maps around neighborhoods in which banks would not lend.

Lenders developed more objective measures of creditworthiness than a borrower's social standing, and more flexible credit practices extended credit to underserved groups, all useful innovations.

But the financial crisis has diminished the appeal of financial innovation.

Subprime mortgages, credit-default swaps and structured investment vehicles helped inflate the housing bubble, dodged regulations and created risks that were dimly understood by regulators, investors or even by the directors and CEOs of the companies that created them.

"One could be forgiven for concluding that the assumed benefits of financial innovation are not all they were cracked up to be," Fed Chairman Ben Bernanke said recently.

Differentiating between beneficial innovation and harmful products, deciding where the bathwater ends and the baby begins, should be routine for a regulator, but none of the 10 existing federal financial regulators have that as their primary assignmentandall 10 have done an abysmal job of it.

President Obama has joined the call for a new financial product regulator modeled on consumer product safety.

Elizabeth Warren, a Harvard law professor, argues that the Consumer Product Safety Commission would prohibit the sale of a toaster that had a one in five chance of bursting into flames, but financial regulators, until very recently, allowed subprime loans that had similar odds of going to foreclosure. …