New Rules Could Save Borrowers from Themselves

Article excerpt

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 u as well as from their own bad decisions (some of them, anyway).

ThereAEs 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 doesnAEt 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. 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. …