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Confusion reigns
I've been thinking about comments Elizabeth Warren made this week on how regulation always moves toward complexity and away from the simplicity that consumers crave. And the more complex the regulation, the more complex the "compliance" (see also: rule-bending) by the banks. The result is complete and utter confusion.
Here's what Warren said in her report, which you can access here:
Faced with impenetrable legalese and deliberate obfuscation, consumers can't compare offers or make clear-eyed choices about borrowing. Creditors can hire an army of lawyers and MBA's to design their programs, but families' time and expertise have not expanded to meet the demands of a changing credit marketplace. As a result, consumers sign on to credit products focused on only one or two features -- nominal interest rates or free gifts --in the hope that the fine print will not bite them. Real competition, the head-to-head comparison of total costs that results in the best products rising to the top, has disappeared.
Warren also notes that in 1980, Bank of America's credit card agreement was one page and 700 words long. Today's it's 30 pages. She says banks want to make reform complicated so that only experts can understand it, which is why she's pushing for an independent Consumer Financial Protection Agency.
But in a Felix Salmon post about this, a commenter makes this point about the new credit card regulations recently passed by Congress (Regulation Z):
The requirements within Reg Z are byzantine. I have not heard from one banker, thrifter or credit unioner who thinks the complexity of the rule is a welcome addition. Warren's comments almost imply that all of these changes were born within the financial industry. Not so. The complexity of disclosures often is a direct response to the complexity of financial regulation. Creating a new regulator will not solve this problem. It will only worsen it.
To that point, the final credit card rules wound up being almost 1,200 pages. Yesterday, the Federal Reserve proposed an amendment that's 157 pages long. The amendment is 157 pages. An excerpt:
As discussed in the February 2010 Regulation Z Rule, card issuers are required to provide 45 days' advance notice of rate increases due to a change in contractual terms pursuant to § 226.9(c)(2) and of rate increases due to delinquency, default, or as a penalty not due to a change in contractual terms of the consumer's account pursuant to § 226.9(g). The additional notice requirements included in new TILA Section 148 are the same regardless of whether the rate increase is due to a change in the contractual terms or the exercise of a penalty pricing provision already in the contract; therefore for ease of reference the proposed notice requirements under § 226.9(c)(2) and (g) are discussed in a single section of this supplementary information.
It'll make you go blind. This proposed rule would apparently prohibit card issuers from charging late payment fees that exceed the dollar amount of a customer's violation. I think. Read here for another example of card companies finding loopholes in the complex rules.
It may well be that an independent CFPA can promote simplicity for customers. Or maybe there should just be a reading comprehension test for loans and credit cards. If the person doesn't pass, the loan isn't made and the bank doesn't get the business. Both sides would have an incentive.
So far, no matter what kind of regulation has been passed, I haven't heard from one person who says they better understand what the hell they're signing up for.
I for one do enjoy the new statements I have been getting from my credit cards and lenders. They show me explicitly in bold letters and boxed-out sections how long it will take to pay off my balance if I only pay the minimum (usually 20-30 years -- !!) and how much additional I would end up paying. This was a already good change, in my opinion.
The debate over "legalese" is missing the point. The answer to one question is all that really matters: is this new system of financial regulation better for consumers than the old one? If yes, then enact it. If no, then don't. No legislation, at any time or any level of government, is perfect, nor has any ever existed without unintended consequences. Quit splitting verbal hairs and move on. Financial markets are really, really complicated, so the legislation to regulate it needs to be as well. Is anyone surprised by this?
I've had a bit of a crazy idea for awhile, and can't think of many holes, maybe someone else can tell me how this falls apart.
If you want to have a contract over a certain number of words (500-1000?) you need to have someone with a law degree who is independent either side sign along side you to testify that you understand the contract.
It would allow for complex contracts between corporations where presumably they both have legal council, while forcing simplicity on things like credit cards and cell phones because no one is going to be able to sell a phone (or computer software, or health insurance) if they say, 'okay, well now i'll need you to hire your own lawyer and have him read the document and sign along'.
1000 words would certainly be too little for the todays crazy byzantine insurance packages, but couldn't you write a feasible plan in that few words?
Too slow. How about an Internet plebesite for consumers? The once and future dept. of real consumer protection polls consumers on their credit card 'contracts'. If a majority claim they do not understand the terms then the contract is declared null and void and the credit card company must go back to the drawing board.
One wonders whether a contract be legit in America if it were written only in, say, Attic Greek?
“The complexity of disclosures often is a direct response to the complexity of financial regulation. Creating a new regulator will not solve this problem. It will only worsen it.â€
No. The commenter to Salmon’s post talks as if regulators initiated complexity to which the regulated are only responding in kind. But, of course, federal laws and regulations are either written by big business lobbyists or crafted to suit their interests. That is the kind of “access†lobbyists pay for.
Creating a new consumer regulator could offset regulatory capture of the Fed, SEC, FDIC, and so on. Placing it inside one of these agencies would result in a caricature of consumer protection. It’s like when IBM started the PC division in the early 1980s. IBM made the division autonomous and located it in Florida to prevent it from being captured and emasculated by existing IBM divisions.
Of course, we now see how captured the legislative, executive and judicial branches of government are. Their response to the financial crisis and Great Recession has been to exacerbate the causes and call them ‘reforms’. One or all of these branches might well prevent a new consumer protection agency from doing anything to make the regulated less predatory, even though it would promote competitiveness, efficiency, financial stability and strengthen America.
It’s worth reading Make Markets be Markets by the Roosevelt Institute (8MB).
What would really be great is if credit card agreements and other consumer financial documents were written in plain English. Some life insurance companies have already done this. This would mean taking lawyer speak and translating it so the average person knows what they are signing. This is not asking for anything beyond the ability of the financial giants. As is stated above Bank of America at one time had a one page credit card agreement, now it is 30 pages and growing, written by their legal experts.
PLEASE! Everyone, just PLEASE pay off your debt on credit ASAP. The move in the right direction for this country is away from financial industries and towards internal self sufficiency. It is obvious that our current "model" of greed based on capitalist principles needs adjustment and does not work for society and the majority of citizens. We seem to forget that it just takes small incremental changes each day in our behavior that will result in reaching our goals of restoring a prosperous and healthy nation. LOOK at what we have become! DO NOT listen to the crap that is coming from the media and even your elected officials. They are towing the same line and taking the same money they always have from those who want their interest over the majority of the people. WRITE your elected officials and talk to as many people as you can about this before it proceeds down the same path of financial rape of poor to middle and even (now) upper middle income folks.
The reason the regulations are supposed to be so complex is to prevent people from intentionally distorting the system.
To be fair there probably be some sort of movement to simplify and standardize "fine print" similar to food labels.
So in the end you have two sets of rules that are functionally identical. The "plainspeak" for people who do not have the time, energy, and/or capability to decipher the legalese and the "legalspeak" to prevent people and/or companies from "gaming" the laws and regulations when enforcement is actually required.
