Saturday, April 26, 2008
Posted by Jeff Lipshaw
Just to prove, I guess, that even Harvard law professors, and distinguished ones at that, can get carried away with analogical reasoning, Elizabeth Warren has proposed a Financial Product Safety Commission, on the theory that, if government regulation can protect you from an unsafe toaster, it ought to be able to protect you from an unsafe mortgage.
I thought about this yesterday morning driving out Massachusetts Avenue, and looking at the significant number of small law offices in North Cambridge and East Arlington, and the number of law students who seem to be saying that they were misled (or something more benign but no less significant financially) into running up $100,000 or so in debt to go to law school, but now cannot find jobs paying sufficient incomes to repay the loans. And I thought, what this country needs is Career Decision Safety Commission. After all, if the government can protect people from bad toasters and bad loans, it ought to be able to regulate career decisions so that people don't end up bitching and moaning about their inability to pay their student loans.
There's no end to the possibilities (not to mention the job creation for young lawyers who can't pay back their loans). I would have appreciated it, back in the 80's, if there had been a Videotape Format Safety Commission that would have kept me from buying Betamax (see above left). Or a Personal Computer Operating System Safety Commission that would have mandated disclosures that kept me from buying that Apple IIGS computer (right) whose primary value was its ability to run the "Dinowalk" and Carmen Sandiego programs. Or some agency that would have kept me from buying the worst car ever made: the 1984 Chrysler Laser. (Why did I need to be protected? Because in 1984 I was turning thirty, about to become a father for the first time, and experiencing my first of several mid-life crises. I was the poster child for somebody about to make a really bad decision about buying a quasi-sports car that had room in the back for a baby seat. If I had known that it was a decent looking body clamped on top of a K car chassis, I never would have bought it.)
Here's the problem with Professor Warren's analogy. A bad toaster or a bad baby stroller is dangerous without exception, and the problem is latent. The problem with a variable rate loan is not that the dangers are hidden, or that it is always unsafe, but that it's sometimes unsuitable. I'm not a huge fan of litigation, but it strikes me that the unsuitability doctrine that gives a cause of action to a securities purchaser against a broker (e.g. if Gordon Slicko talks Grandma on a fixed income into short selling troubled companies on margin) makes more sense than a team of government bureaucrats writing incomprehensible disclosures about financial instruments that may make a hell of a lot of sense for some people.
But that's just my opinion. I could be wrong.
UPDATE: By the way, it occurred to me that the federal government indeed did impose regulation on this process about thirty years ago: the Real Estate Settlement Practices Act, or "RESPA." When you close on a house, and spend about 45 minutes signing a whole raft of forms you never read, including the disclosures and disclaimers on your adjustable rate mortgages, and including the Truth-in-Lending disclosure on the actual annual percentage rate, and including the amount you will actually pay for your house in absolute dollars over the life of the loan (usually three or four times the amount of the purchase price), that's RESPA regulation at work.
FURTHER UPDATE: On the very serious subject of law school student loans, Alan Childress makes the very good point that the lesson of the recent Henderson and Morriss study is that entering students need to be thoughtful about slavish adherence to USNWR rankings in law school choice when considering attractive financial packages offered by "lower ranked" schools.