Protection For Consumers Is Help For Us All

December 18, 2009 by · Leave a Comment
Filed under: Bond Regulation 

As much as we all hate bureaucracy and its associated expense, a “Consumer Financial Protection Agency” may be a good idea.  Truth be told, there are many well-educated Americans who lack even a rudimentary understanding of finance.  (A business executive was once overheard saying that he wasn’t going to refinance because he didn’t want to lose all that interest he had paid to his mortgage company). And there is a huge industry that is more than willing to exploit this lack of knowledge.

Unlike the FDA or the CPSC, however, the “CFPA” can do more than protect just consumers from dangerous products — or more often to protect consumers from themselves.  By helping to assure upfront that debt instruments that eventually get packaged and sold as securities are solid, the CFPA will help us all.

Because the issuer rarely holds loans, we can no longer trust that the person writing the loan will thoroughly vet the applicant. These loan brokers have very little risk, so they have very little incentive to ensure the candidate is creditworthy.  Instead they are more motivated to close as many loans as quickly as they can, regardless of quality.

Preventing the most dangerous loans from ever being made will help to ensure that the toxic loans that make regardless of quality us all sick never get into the system.  Subsequently we can also have greater confidence in the rating agencies’ assessments.  The consumer benefits directly, but we all benefit indirectly from a more reliable securities market.

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