Defending Complex Contracts from a Consumer Protection Agency

The White House unveiled details on a key part of its regulatory reform plan yesterday, sending a 152-page draft bill to Congress to create a Consumer Financial Protection Agency. The Washington Post reports the bill suggests establishing a five-member board to run the new agency: four individuals nominated by the president and confirmed by the Senate, plus the new head of the National Bank Supervisor (another proposed, consolidation agency, by the administration).

One of the main policy objectives of the administration is to protect consumers. Part of that objective is the proposed creation of the Consumer Financial Protection Agency (CFPA). This new federal agency would be tasked with protecting consumers from “unfair, deceptive, and abusive practices” of credit card companies, mortgage lenders, commodities traders, mutual fund brokers, and other firms that originate products.

President Obama said that, if the bill becomes law, “Those ridiculous contracts with pages of fine print that no one can figure out—those things will be a thing of the past.” I’ve seen a lot of this talk recently, about complicated contract terms. It is one of the leading issues driving reform efforts to make things easier for consumers. What I haven’t seen much of is anyone standing up for the complicated contracts.

I’ll grant that contracts are written with terms designed to maximise profit (that’s just good business) and often have sneaky tricks. But that said, the push for simplification seems incredibly American—the lazy part of being an American. Is it too much to expect that someone buying a house or taking out a credit card should be able understand the deal they are making? If someone is responsible enough to own a home, they should be responsible enough to read a mortgage contract. This doesn’t speak well to the education level in our country. Reading through a credit card contract should be a teenage rite of passage before getting your first card (I was nerdy enough at 15 to read several, trying to get my mind around the system). Or if you prefer, don’t read the contract (it is your free right after all) and find out through the learning process called experience.

I guess I just don’t understand how putting financial product contracts in simpler terms solves any problems. Fine print didn’t cause the financial crisis, irresponsible lenders and borrowers did. It would seem that understanding a contract is a good threshold for whether someone is a good credit risk.

Ironically, another American tradition has been a key driver of complicated contracts: the frivolous lawsuit. Many financial product contracts are highly detailed to cover all potential legal scenarios. How ironic would it be if the McDonald’s hot coffee lawsuit lady got confused about a mortgage contract and wound up defaulting? Sometimes, legal concepts just need to be put in legal terms… kind of like bills in Congress. Here is a challenge for lawmakers, if simplicity is important for protecting individuals, then write laws that the average American can understand. Put the CFPA bill in short, easy to understand terms. Why not?

To be clear: I understand the value of a simple contract. But I don’t understand how increasing compliance and production costs for firms by forcing simple contracts solves any problems. It seems letting banks use the simplicity of forms as a competitive advantage would yield better results: “We’re Wells Fargo: simple terms, simple prices” or “JP Morgan Chase: where the only complex choice you have to make is what to do with all the money you’ll earn through our products.”