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Warning: Your Toaster Will Explode

posted by Elizabeth Warren

Americans for Fairness in Lending (AFFL) is urging people to write Congress to say, "Disclosure is not enough."  AFFL is criticizing what CreditSlips' own Bob Lawless called the "weak gruel" of the Federal Reserve's new credit card restrictions.  The group says the Fed's disclosure approach isn't enough.  After all, disclosing abusive practices isn't the same as stopping abusive practices.  AFFL wants regulation, and they don't want Congress to hide behind the Fed's new gruel to avoid the problem. 

There is, of course, a huge policy divide between those who think regulation is needed in many areas and those who think free markets will provide the best results, so long as there is adequate disclosure.  But when I saw the AFFL petition, I didn't have to think about the big policy question.  I just thought bout exploding toasters. 

Bruce and I had to replace our toaster last month, and when I pulled the new one out of the box, I never read a single word of the paperwork tucked inside.  After all, I didn't think I needed help to plug in a toaster.

But what if the toaster had contained a disclosure buried somewhere between the puffing over the slick new design and an explanation of how to remove the crumb tray for cleaning?  What if the instructions said "Your toaster has a one in five chance of bursting into flames."  Would that be OK?

In fact, I'm sure--even thought I didn't read it--that such a statement did not exist.  Sure, I could start a fire if I tucked dirty socks in my toaster and turned it on.  But in ordinary use, I knew my toaster was reasonably safe because 1) it bore a UL sticker on it that said a private testing agency had made sure the wiring was safe, 2) the Consumer Product Safety Commission would have the company's hide if they were knowingly putting exploding toasters on the market, and 3) the private tort market would have made an exploding toaster company into a star Defendant in multimillion dollar lawsuits. 

But those forms of protection aren't in place for credit cards and other kinds of consumer financial products.  A home mortgage lender can sell a family a mortgage that the lender knows in advance will have a one in five chance of ending up in foreclosure.  Or sending out a credit card that claims to be a fixed rate credit card at 9.9%, which it is--right up until the company changes the interest rate to 19.9%  Surely that isn't right, whether it is disclosed or not.

AFFL is right to raise the question that should have preceded the Fed regulations.  Why didn't they start with a public discussion of what it would take to fix credit card abuses?  Why didn't they ask if there is any evidence to suggest that disclosure is enough to correct the problems in the credit card market?  And why didn't they indicate that they planned to test the effects of disclosure and, if it doesn't meet certain goals by certain times, they will take further steps? 


I know this sounds a bit nuts, but it will actually prove your point. A woman in my building had a horrific fire a couple of years ago when she was out of her apartment. The assumption was that she had left the gas on, but when the fire department sent their foresnic team in, they concluded her toaster caught fire. They said this was not unheard of and advised her to always unplug a toaster oven or toaster when not in use

This was in a Park Avenue building, and she is quite affluent, so it wasn't as if she had a downmarket toaster (in fact, the problem is likely that our building has wiring that is not up to code, which is the case in some of the so-called pre-war buildings in Manhattan).

So here you have a product where the UL standards are no assurance of safety. And if the UL standards aren't fail safe, imagine what it's like in the world of financial products where the uncertainty (both general credit environment and customer financial future) is vastly greater.

Elizabeth -- Your analysis cynically reminds me of some brouhaha in torts circles (I think regarding the new Restatement) about circumscribing duties of care in the face of "adequate warnings," in a sense trying to hobble private law the same way disclosure-focused regulation is never really as much about helping consumers as it is about providing safe harbor for producers (which, of course, lowers prices and hence helps consumers....).

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