The Consumer Financial Protection Bureau, the socialist conspiracy politburo set up to allow Elizabeth Warren to terrorize the banks until her Senate seat is ready for her, or something, today released a new model credit card agreement. It’s two pages long and looks sort of comforting and friendly, like a new Facebook competitor or something. Matt Yglesias likes it:
Basically what they did was sit down and try to apply some basic design principles to the question “how can we convey to consumers information about their credit card.” Currently the way credit card agreements are written is more like the reverse, they apply basic design principles to the question “how can we maximize the chances that consumers will neglect something or get confused while meeting our technical legal obligations toward disclosure.” In an increasingly attention-constrained world, these kind of design questions around disclosure rules matter more and more.
I had my doubts that a two-page agreement in a normal font size could convey the level of detail and obfuscation you can get in a good credit card agreement, but I agree with him, this is a nice effort. The way they manage to keep it to two pages is by putting all the definitions on the CFPB web page. So you have a very skeletal document that just fills in basic numeric and economic terms – your APR, how long you have to dispute charges – while all the legalese, and lots of things that have economic effect like how interest is calculated, are squirreled away in definitions that you can find elsewhere.
Now because I was once a derivatives marketer, rather than a human, this made me think of the ISDA documentation system, which basically allows dealers and customers to send each other two-page confirmations documenting their derivatives transactions while all the nasty guts of the agreement are buried elsewhere, in a Master Agreement or in ISDA definitions. And so you get two pages that say things like “Fixed Rate: 1.25%,” which is pretty clear and very efficient, but also things like “Loss and Second Method apply,” which is totally inscrutable.
Occasionally, though much less often than you might expect, a client would ask me to explain what “Loss and Second Method” meant, and I didn’t know. I still don’t know (it might be this). This was no problem because clients could look up terms in ISDA’s master agreement and definitions, which are available from ISDA on the web for the low low price of $60 and $500 respectively. Which is a bargain in the context of a hundred million dollar transaction, but it doesn’t reflect the real cost item, which is paying a lawyer a thousand dollars an hour to spend dozens of hours to figure out what the definition actually means in the context of your transaction.
I love ISDA. I do. They are amusing and open and, full disclosure, they’ve sent me copies of the definitions just for being a quasi-journalist and promising to use them only for quasi-journalistic purposes, which was nice of them. And they do a really hard and important job, standardizing and documenting all sorts of different transactions with trillions of dollars of notional into one reasonably uniform set of terms, and they do it quite well.
But some people, not naming names, suspect that much of what they do is tilted to the banks and derivatives dealers who make up the bulk of their primary members. And if you were a conspiracy theorist like that, you might think that a structure where dealers send you a simple brief confirm and all the important terms are contained elsewhere in a series of paywall-gated, really quite dense legalese documents, would be a good and subtle way to tilt the playing field in favor of the banks. Certainly my knowledge of ISDA terms, though alarmingly vague, was much clearer than that of my clients.
So I came to the CFPB hide-the-definitions simplified form skeptical. But I was wrong. The definitions are regular English words used in regular English ways; they never get much worse than “daily balance method with compounding,” which I feel like you could figure out with just a few hours of CFA Level I study. They’re lowercased so as not to scare you, they’re available free online, and if you’re reading the agreement online you can even mouse over the terms to see their definitions. It all just seems well designed to tilt the playing field a bit back in favor of customers understanding what they’re signing up for. I would say it’s much clearer and simpler than my current credit card agreement, but I actually can’t access that agreement online. Which seems worse.
The CFPB form and definitions obviously cover a much smaller and simpler set of transactions than the ISDA complex and are not really comparable. But their cheery clarity suggests that having someone writing on behalf of customers, rather than banks, can do quite a bit of good.
Matt's cock is this big and I am being generous.
You beat me to it.
What's a "Playabook??
Matt, most of the fratboys bitching about column length are dicks. Truly. But this is just awful: I had to read about your summer trying to sell derivatives in order to come up with, "Yglesias like this so go read his thing in Slate."
I mean, that's like making you read, in excruciating detail, about the difference between ISDA and IDE for natgas futures before saying, "Yglesias is a smart mofo, read his shit."
Cool story bro
Seriously, who the fuck is Matt Yglesias and why should people who do real work care what he thinks?
Matt Yglesias is a thoroughly uncredentialed blogger who, for reasons that are not entirely clear to anyone, has been promoted to the unearned rank of being considered a respectable journalist. His various ramblings are otherwise indistinguishable from those of any comfortably-left-of-center blogger, but – again, for reasons which are not clear to anyone – are taken more seriously than those of the average HuffingtonPost "super user".
This is why so many people were opposed to the CFPB – because, with a loosely defined mandate and questionable powers of enforcement, there was a concern that they would do nothing but engage in busywork that would encumber the industry, to no real benefit to consumers. And what has it produced? An excellent, very attractive piece of busywork that will be ignored by the industry and will be of no use to consumers.
When it comes to credit cards, there is one simple solution to many of the problems – ban financial contracts that let one party change significant terms of the contract after the fact. A contract that lets one party change the terms at will after it has been signed is a clear abuse of the system, as can be seen in the simple fact that any entity with any amount of power (e.g., most financial companies, as opposed to individual consumers) will not enter into such contracts. When credit card companies are not able to make after-the-fact changes to the contracts they dictated to consumers, many of the egregious abuses of the credit card industry will go away. But a well-intentioned-but-poorly-staffed-and-generally-powerless government agency can't make that change, only Congress can, and, of course, the whole reason Congress went along with the CFPB in the first place is so that they wouldn't have to make hard decisions on issues like this.
Can't wait for consumer credit to dry up every time pricing has to be adjusted. That'll grease the ol' economic cogs.
It doesn't seem like it's being ignored. They're trialing it and then will make it a model form with a safe harbor. I think consumers could be annoyed they didn't do more, but industry loves this thing. It's voluntary and changes nothing but makes banks look better without cost.
Matt, dude, why would you ever cite to someone who does something other than finance, especially a non-financial journalist who has probably never even come close to a real trading desk! That is just pure f'n stupidity on your part. You are losing the masses. You must have tiny genetalia. And you must be a huge loser.
Bess, can we get someone back in here who can stick to the game plan of reinforcing my own bullshit infantile attachments and convictions instead of trying to bring something more substantive to the table?
Thx bitches
This was pretty useful. Interesting that everyone gets their panties in a twist about Yglesias.
BTW, sorry, previous post better version of same comment.