Consumer Protection Agency Takes A Page From ISDA's Playabook
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.
