Where are the Subprime Toasters?

Harper's calls for a Financial Product Safety Commission

Sometimes we come across pieces that are so clear, relevant and to-the-point that we feel like quoting them to you in toto.

So it is with Elizabeth Warren and Amelia Warren Tyagi’s short piece in Harper’s, advocating a commission that would “protect homebuyers and investors from the finance industry’s most dangerous offerings.” The piece is a beacon of common sense in a business press that is, quite frankly, too often awash in slight statistics and financial jargon.

Warren and Tyagi address what leaders from Henry Paulson on down tell us is at the heart of the credit crisis, confidence.

So they start out by talking toasters:

Go into any appliance store in America and look for a toaster with a one-in-five chance of exploding. You won’t find one. But at any mortgage brokerage in the country it has been possible to purchase a loan with a one-in-five foreclosure rate, and the broker doesn’t even have to tell you the odds.

Yep. Seems like a problem. On the bright side, if you lose your life savings, you can always survive on Pop-Tarts. But perhaps you want to know how we arrived at this strange set of priorities. Warren and Tyagi continue:

For most of the country’s history, state and local usury laws imposed modest consumer protections by setting caps on interest rates and fees. But in 1978, a federal statute was used to bypass these laws. Creditors quickly rewrote the rules, issuing unintelligible contracts that increased fees, penalties and interest rates. The fragmented financial regulatory bodies that remain have operated as if their main goal were lender profitablility. Real oversight has been left mostly to a handful of consumer advocates who struggle to examine and review hundreds of complicated financial products and publicize problems while financial institutions spend about $100 million each year lobbying Congress for less regulation and more privilege.

And then the consequences:

The ever-widening information imbalance between consumers and creditors has only made borrowers easier marks. In a Federal Trade Commission study conducted last year, for instance, nine in ten mortgage customers examining relatively straightfoward fixed-rate loan agreements could not figure out the up-front costs on the loan; half could not identify the loan amount.

Okay, we pause here to let those numbers sink in. Continuing:

Of all the borrowers who were sold subprime mortgages in the past five years, nearly 60 percent would have qualified for prime mortgages if brokers had offered them; the subprime mortgages carried so many rate escalators, prepayment penalties, and other traps that even would-be prime borrowers defaulted.

Thus, Warren and Tyagi make a convincing case for a Financial Product Safety Commission. We’ll leave the details for you to read, but we do note that they are not arguing risk should be entirely eliminated from financial products, only that it should be controlled. Consumers need to understand the risks they are taking.

Ultimately, the effectiveness of this piece lies in its ability to make us see how skewed our regulatory apparatus has become. We live in a world where, thankfully, consumer goods like televisions and toasters are “held to increasingly higher standards of safety.”


The world of physical products has become safer, while the world of financial products has become far more dangerous. That’s a problem that can be fixed.

Here’s to a country where, if investments aren’t always as safe as toasters, at least their risks are clear and fair.

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Elinore Longobardi is a Fellow and staff writer of The Audit, the business-press section of Columbia Journalism Review.