Bob Sullivan is quickly becoming one of my heroes, based upon my reading of his new book: Stop Getting Ripped off: Why Consumers Get Screwed and How You Can Always Get a Fair Deal (2009). Bob also offers a blog called the Red Tape Chronicles, where he reports on numerous consumer issues. It’s well worth your while.

I recently mentioned Bob’s book on a post focused on America’s profound case of Innumeracy.

I’m a bit deeper into the book now, and I am highly impressed with Sullivan’s ability to write clearly and persuasively with regard to consumer issues. I am also impressed with his ability to give an evenhanded account of many consumer issues. He doesn’t deny that consumer greed has played a role in modern-day screwing of American consumers. On the other hand, consumer greed is only part of the story. The other big part of the story is that our federal agencies that we have had set up to serve as watchdogs for Americans, are doing a pathetic job. Consider the case of Bernie Madoff. The securities and exchange commission (SEC) was presented with overwhelming evidence that Madoff was running a Ponzi scheme way back in 1999. They did nothing about it. Sullivan as “if the SEC isn’t hunting down folks such as Madoff, do you really think it’s protecting you?”

This is a terrific question. If federal agencies such as the SEC aren’t catching the obvious cases of fraud, of what are they actually capable of doing? Sullivan explains on page 38 of his book:

Of course, an alphabet soup of government agencies is charged with making sure the American marketplace is fair and honest. Sadly, their track record isn’t much better. Cell phone companies fraudulently extending consumers contracts without their knowledge? That’s the Federal Communications Commission’s area. What do the agency do about it? Forward complaints to the companies. Toys painted with lead sent to US kids by Chinese companies? The Consumer Product Safety Commission told its a single toy tester to step it up a notch. Poisoned food seeping into the nation’s ports? The Food and Drug Administration reduced its ranks of inspectors. Mortgage advertisements or ring home-buyers with promises of 1% or 2% mortgages? The Federal Trade Commission issued a press release asking for them to stop advertising these misleading “teaser” rates–in 2007, six years after the practice began, and after the housing bubble had all ready to burst.

Sullivan concludes that “The real reason Americans get screwed so often is because our government permits it and, in many ways, encourages it.”

These are tough words to read, but I’ve seen too many examples of the same sorts of things in my own consumer law practice to disagree with Sullivan. For instance, I’ve seen dozens of cases of mortgage fraud involving undisclosed prepayment penalties, yield spread premiums (which constitute legalized bribes paid under the table by the lender to the broker), and the mortgage company’s willingness to set the borrower up with a mortgage that is rigged with an “exploding” ARM (adjustable rate mortgage), which will be guaranteed to jack up the monthly mortgage premium to a level that will be unaffordable by the borrower. Just think about that . . . how could it be that an entire industry can acquiesce in this behavior, putting millions of people into mortgages that will explode into higher rates of interest that will drive these people into foreclosure and bankruptcy. And how could it be that the Wall Street bond rating agencies could possibly promote packages of these fraudulent and flimsy loans as highly rated?  And how is it that the government grants these rating agencies immunity for their own fraud? And how is it that the government has not put any Wall Street bankers in prison for the financial meltdown, even though many of these wealthy bankers knew full well what they were doing, and then proceeded to come to Washington DC to demand taxpayer monies to bail them out? Many people might think that these homeowners are at fault too, and I’d agree. On the other hand, think about the balance of power in mortgage transactions. Who knows more about how the numbers actually work? The consumer or the financial institutions? Who has control over the mortgage paperwork that is so complicated that most lawyers I know don’t read it all, and claimed to not understand it?

The financial services industries know that consumers are terribly afflicted with Innumeracy, and they are rigged to take advantage of this shortcoming. That’s not the way it always was, however. As a Sullivan notes, there was a time (about 10 years ago) when those who sold home loans required their borrowers to keep their payments near or under 25% of their household income. From 2000 to 2006, however, the average cost of housing increased by 32%. During this period, “banks began approving mortgages for buyers who spent 40, 50 or even 60% of their income on housing expenses. As Sullivan also notes, back in 1975, only 9% of US consumers spent more than 35% of their income on all housing related costs, including insurance. By 2006, however, 15% of consumers spent a full 50% of their money on housing.

Again, there is a lot of greed to go around, including the greed of consumers. On the other hand, the best way to nip this problem in the bud is to have strong government regulation. Why were the banks allowed to put millions of people into loans that they were guaranteed to not be able to pay only three years down the line when those loans adjusted? This brings you back to Sullivan’s earlier point, that our government is a shill of many big industries, especially financial services industries, and Americans get screwed so often because our government allows this to happen and even encourages this to happen.