NOT THE SHARPEST KNIVES IN THE DRAWER: Sometimes, Nanny Knows Best
In a Washington Post op-ed Peter Wallison, a senior fellow at the American Enterprise Institute and White House counsel from 1986 to 1987, decries the Obama administration’s proposal to create a Consumer Financial Protection Agency (CFPA):
Traditionally, consumer protection in the United States has focused on disclosure. It has always been assumed that with adequate disclosure all consumers - of whatever level of sophistication - could make rational decisions about the products and services they are offered. No more. If the administration's plan is adopted, many consumers will be told that they cannot have particular products or services because they are not sophisticated, educated or perhaps intelligent enough to understand what they have been offered.
Conservatives have always argued that liberals are elitists who do not respect ordinary Americans; this legislation seems to prove it. …
[U]nder the proposed legislation, every provider of a financial service (a term that includes organizations as varied as banks, check-cashing services, leasing companies and payment services) is required to offer a "standard" product or service - to be defined and approved by the proposed agency - that will be simple and entail "lower risks" for consumers. These standard products are called "plain vanilla" in the white paper that the administration circulated in advance of the legislation. …
So who will be able to get those more complex products and services? Not ordinary Americans, whose lack of financial sophistication will make the risks of selling to them too great for most providers. The more complex products, the ones that are better tailored to the needs of the particular consumer, will be offered only to the more sophisticated and better educated - in other words, to the nation's elites.
Ordinarily, The Stiletto resists anything that smacks of a nanny state. But frankly, public schools do a lousy job of teaching the basic mathematical skills one needs for daily life (second item) – in particular, how to understand percentages and statistics. It's not elitist to assume that the average American does not understand the risk and complexity of mortgage loans and financial instruments. Moreover, the legalese and coma-inducing language that lenders use doesn't help comprehension, either, considering that the average reading level of adults hovers around 8th grade and more Americans have dropped out of high school than graduated college (25 percent vs. 15 percent).
But we don't need a new government agency to determine which Americans are too unsophisticated or poorly educated to understand their obligations under the mortgages they seek - the loan officer needs to ask the applicant just one question and wait 30 seconds for the answer (counting on one’s fingers is permitted; using a pencil and paper or a calculator is not):
A department store is running a one day sale. Another 25 percent will be taken off the price at the register on a $275 suit (or dress) that was previously marked 40 percent off. Before the sales tax is added to the bill, how much will the suit (or dress) cost?
Anyone who can’t do the grade-school calculations needed to arrive at the answer within the time limit cannot possibly understand complex financial instruments. Ditto anyone who reads on an 8th grade level – most “consumer friendly” documents are written on a 10th grade reading level, and documents that use legalese are written on a 12th grade (or higher) reading level. But it will take too long to administer a reading comprehension test to every mortgage loan applicant (and there will be the inevitable liberal charges that the test is “biased” against minorities and non-English speakers) so this real-life mathematical problem that every shopper deals with at the mall will suffice.
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