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 Â§ 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 Â§ 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 Â§ 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.