Proposed Consumer Protection Agency

Proposed Consumer Protection Agency

The prospect of a consumer protection agency being debated in Congress that protects consumers from predatory lending practices is a very welcome development in my view and experience. The world of finance has because more and more complex and the public has understandably not kept up with these developments. As long as one believes that the government should protect citizens health and wealth as it does by funding police, firefighters and the armed services, it should also protect them from sharp practices from sophisticated and rapacious lenders.

The best line of defense, however, should always the first line of defense. That first line should be education so that the fiscal fleecing doesn’t happen in the first instance. The government can only intervene after the damage is done, which may deter future fleecing if it is punitive enough, but the criminal justice system has been around for centuries and we still have criminals. Most crime is avoided by common sense like locking your car and house and hiding valuables, not by jails.

As a bankruptcy attorney, the population I represent may not be indicative of the population as a whole, but neither are they very far removed from the overall practices of Californians. I don’t know too many people who don’t use credit cards these days, even if they’ve filed bankruptcy before. I know of very few people who really understand mortgages whether they are my clients are not. Basic concepts such as the time value of money and discounting to present value that are taught in every introductory finance course are alien concepts to most people I know who did not get an advanced degree or major in finance or accounting as undergraduates. I made it through my legal training without knowing anything about it. In fact, I practiced for 10 years as a financial attorney and only learned these concepts when I studied financial planning at UCI in the course of earning my Certificate in Personal Financial Planning.

I know believe that basic financial principles should be taught in high school. The new credit card laws restrict the solicitation of college age students because in our society even the students going beyond high school are deemed, with good cause, as not being able to understand the use of revolving credit. Why not immunize the largest part of our citizenry from financial abuses and the inefficiency of trial and error learning (which is what we have now) in financial matters?

The reasons this has not occurred and is not called for regularly are many, and are not good. One of them is that the financial industry makes money from our ignorance and its profitability would be hurt if there was widespread financial literacy. Moreover, many people in power outside the financial industry are only marginally more financially literate than the inner city and rural people who are the most financially illiterate. Bernie Madoff did not just scam the SEC, he also ruined many of the most financially astute, or at least wealthiest Americans there are.

The financial sector takes a larger part of our GDP now than it did in decades past with both beneficial and detrimental results. Like much of economics the financial sector is run on game theory. On the surface it is always portrayed as a win/win proposition for all the players, but just like the casinos make the rules on the tables, the companies that control the money also make the rules and they rig the game just as much as the casinos do. The same math principles that run casinos apply in the world of finance.

I don’t expect the public at large to study the world of finance like I have, but I plan at least in some respects to make it my life’s work to educate the public and my clients as best as I can so that the value they bring to society is not dissipated by sharp operators who don’t really bring any value to society, even if that operator is Wells Fargo Bank or some other big, branded player.

My clients are often the most in need of a financial education. As much as I hated the passing of BAPCPA in 2005 for making bankruptcy harder, it required every debtor to take at least a few hours of education to receive the discharge order. Most of my clients are really enlightened by the course we use which is taught by Dave Ramsey. That is good, and I wish the 2.5 to 3 hour course gave them all they need, but it doesn’t. Many more hours need to be devoted to actually gain financial literacy, as well as the motivation to achieve it. My job is to get my clients out of the critical care part of their financial problem and point them toward the long road to financial health and independence. Hopefully the federal government will also put some smart and dedicated people in charge of making sure the Wall Street sharpies don’t do their job too well.