WASHINGTON — When Elizabeth Warren, the top administration official in charge of creating the Consumer Financial Protection Bureau, called last week for simplified, comprehensible credit card disclosures, the industry applauded the goal.
But the agreement may stop there.
While bankers support the idea in theory, many have problems with it. They say that liability concerns will undermine any effort to enact simpler disclosures and that the push could stifle product innovation.
"I think you can make huge strides in consumer understanding of agreements. But I think that artificial statements that we want agreements to be one page to two pages and that consumers are going to read it in four minutes is not really terribly realistic," said Oliver Ireland, a partner at Morrison & Foerster LLP. "I think she would do better by posing more realistic approaches to educating consumers about financial services."
Warren and consumer groups counter that the objective is not as hard to fulfill as it may seem.
"We need to get the market to the point where there are short, easy-to-understand credit agreements where price and risk are clear and consumers can make apples-to-apples comparisons among products," Warren said in a statement to American Banker. "This is an idea the financial services industry put forward three and a half years ago, and it's a key goal for the new consumer bureau. Since my first day on the job, I've spoken with leaders in the financial services industry who share this goal, and I'm confident that where there's a will we can find a way."
Warren touted the idea last week in her first extensive speech to the financial services industry, saying lawmakers and regulators have made disclosures too complicated by requiring vast amounts of information to be included. As a result, lawyers have told companies to use legalistic language in an effort to ward off lawsuits.
Warren said the industry needs to move away from complex, legalistic disclosures to provide customers with basic information about a financial product and what it will cost them. She is scheduled to host a meeting Thursday with trade group representatives on disclosures and the industry's liability concerns. The meeting is also intended to discuss the industry's suggestions for the direction of the new agency.
So far, even some lawmakers opposed to the creation of the CFPB are backing the drive for better disclosures. "I've been initially encouraged by at least some of the verbiage I hear out of Elizabeth Warren," Rep. Jeb Hensarling, R-Texas, said in an interview this week. "I, too, believe that there is a lot of work to be done on consumer disclosure, and so I heard … where she admitted that a lot of this confusing disclosure is frankly mandated by government."
But Hensarling said he would wait to see how Warren goes about trying to solve the problem.
"I hope this isn't another case where I agree with 80% of the verbiage and disagree with 80% of the action, but I think that in general that consumers have been poorly served by disclosure statements that tend to be voluminous and written in legalese as opposed to effective and written in English, and that's true for mortgages and credit card agreements," he said. "No one is going to read a 42-page disclosure statement written in legalese. It's not going to happen. I mean, there needs to be some real-world element with people who have expertise in consumer marketing figuring out what is it that is going to be most salient that you want consumers to know."
But many industry experts said simplifying disclosures is easier said than done.
"We probably can make our disclosures and contracts simpler than they were in the past but a credit card product is inherently complex because it involves revolving credit … it's never going to be a contract that is going to appear on one side of a piece of paper," said Robert Cook, a partner at Hudson Cook.
Some of the best regulatory and industry minds have already tried to make disclosures more clear-cut.
The Federal Reserve Board has long attempted to simplify credit card disclosures through Regulation Z or Truth in Lending Act. After a three-year review, the central bank proposed a number of disclosure rules aimed at helping borrowers understand the risks and penalties of their credit card accounts. The proposal was finalized in 2008 and became a requirement this July.
The rule, the agency's first overhaul since 1981, amended the so-called Schumer box, a summary table provided at application or solicitation to explain the details of credit card plans. Named for now-Sen. Charles Schumer, D-N.Y., the box was required by Congress in the late 1980s. The Fed's rule created a one-page summary box for consumers when they receive their card.
But many credit card companies have gone further with additional pages of disclosure full of legal jargon. In May, the Fed created a database that collects credit card agreements from issuers. The database shows discrepancies in how much companies vary their disclosures to deal with liability concerns. For example, Chase Bank NA has a five-page disclosure, while Discover Bank has an 11-page disclosure and Bank of America a 12-page agreement.
Warren wants to slash the length of those disclosures. She emphasizes a short — about two pages — easily understandable disclosure statement that would have 90% comprehension with a 12th-grade reading level and be able to be read in around five minutes. She has even suggested that the Schumer box itself could become the disclosure rather than attached to a mountain of other information.
But the industry insists the additional information is necessary to shield its members from lawsuits.
"Disclosures get complicated because banks get sued a lot. So if the government wants to simplify disclosures, it needs to protect banks from litigation over what is and what is not disclosed," said Jaret Seiberg, an analyst at Washington Research Group, a division of Concept Capital. "I can't believe that any bank out there wants to keep printing endless pages of small-type print to go along with every product offering. It's going to take a very brave bank to ditch all of the legal disclosures unless they are very confident that they are not opening themselves to endless litigation."
Nessa Feddis, regulatory counsel for the American Bankers Association, said the credit card industry has a history of supporting shorter disclosures, but she said banks must be protected from litigation.
"Lengthy notices required by law as well as lawsuits challenging the enforceability and meaning of credit card agreements has led to lengthier and more complicated contracts," Feddis said. "Simplifying the required notices and providing safe harbors from lawsuits will be critical in shortening and simplifying agreements, an effort the industry supports. Any solution should also ensure that credit card companies may continue to set their own terms and features."
Steve Zeisel, vice president and general counsel for the Consumer Bankers Association, said he wants more details on how Warren intends to achieve her goal. Until then, he still has concerns.
"Clarity and rules are important to help protect institutions so they can get their compliance right, so they can protect their liability, so we have to make sure anything that comes out has clear guidelines to operate," Zeisel said. "The biggest challenge has always been to make that clear in a disclosure and at the same time offer an array of products that consumers will find attractive."
Even consumer groups acknowledge liability concerns have been an impediment to reaching agreement. "If the generic claim is all of these government regulation has made disclosures longer, it is not true," said Travis Plunkett, legislative director for the Consumer Federation of America. "On credit cards, the reason those contracts have grown so long is that credit cards companies see a need to protect them from legal liability. … One of the barriers was issuers reserved the right to layer on new and abusive practices and then they had to limit potential liability to cover themselves."
Linda Sherry, national priorities director for Consumer Action, agreed the industry is wont to add to the disclosures out of such concerns. "The liability is such a huge barrier that I wonder how easy it's going to be to overcome," Sherry said. "In my workplace, people are always trying to add more to every document. It's human nature, so things have to be stripped down to their bare essentials and that's going to be a task. The days of the 44-page, minuscule agreement are not gone," she said.
The industry also worries that short, simple disclosures would stifle innovation in the market by encouraging the proliferation of simple, plain-vanilla products. They argue that banks would feel compelled to offer products easily subjected to streamlined disclosures and worry about offering something creative.
"What it's leading to is a standard product that has a simple set of disclosures, and if you want anything different than the standard product you're going to be confronted with pages of small type," Seiberg said. "I think that consumers are going to be suspicious of that and I think banks are not going to feel comfortable with this choice. … The fact that you are going to have a simple disclosure for one product is going to make it much more difficult for products that have more comprehensive disclosures."
But David Berenbaum, chief program officer for the National Community Reinvestment Coalition, said some "creative" products have turned out to be deceptive, and maintained that any innovative product should be subject to clear disclosure requirements.
"Innovation and product choice are very important to our mortgage market … but consumers must understand the product," Berenbaum said. "I think what we saw in the past was consumers didn't understand products such as option ARMs or no-income loans offered for professionals. … What we need to ensure is that we have creative products that meet the needs of consumers and communities but are safe and sound."
Plunkett said more complex products are not always better ones.
"Complexity is usually the enemy of consumer protection," he said. "Complex products in mortgage and credit cards led to abusive practices because they gave great discretion to creditors to treat consumers unfairly."
New restrictions from Washington could aggravate matters. Under the Dodd-Frank Act, the CFPB is required to combine TILA and Real Estate Settlement Procedures Act mortgage disclosures by July 21, 2012. But it also requires including more information.
"Mortgage disclosures are going to get more complicated, just because Congress told us to add more information," Cook said. "I'm left shaking my head when we are told to simplify things but we have to include additional information that will make the disclosure documents longer."
