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Full Disclosure
It hardly needs to be repeated that credit card contracts are nearly impenetrable. A similar point can be made about monthly credit card statements. Sure, they tell you what your balance is and what the minimum payment is, but that’s about it. The bottom line is that consumers must make key decisions (e.g. how much credit card debt to pay off this month?) with very limited information.
In response, advocates of greater market transparency have suggested that credit card issuers add two simple numbers to monthly statements: (1) how many months it would take to pay off the debt on the card by making only the minimum payment each month, and (2) how much it would cost to do so. From a consumer perspective, the benefits of doing so are obvious: more informed decision making, better debt management, less vulnerability to sneaky fees and charges.
The state of California passed a law a few years ago requiring such disclosure. The credit card companies immediately went to court for an injunction, claiming that the federal regulation (such as it is) of nationally chartered banks pre-empts any state law efforts to require basic information for their citizens. The federal banking regulators at the Office of the Comptroller of the Currency jumped in on the side of the credit card companies, saying that if consumers needed to know this, they (the OCC) would decide it. Thus the industry revenue stream of more than $90 billion in fees and interest was carefully protected.
This is an optimal area for consumer regulation. We regulate in precisely this way in other areas, and with great success. For example, car dealers are required by law to have copies of the federal Fuel Economy Guide (containing information related to vehicle performance and gas mileage) available to consumers. Food manufacturers are required by law to publish nutritional information on their products’ labels. There are myriad other examples. The idea is to allow consumers to make better decisions, which, in turn, fuels healthy market competition.
Given the tremendous legislative influence the credit lobby has purchased (see the recent bankruptcy “reform” debacle), I won’t hold my breath for any market-friendly federal regulation requiring more transparent credit card statements. But why hasn’t a credit card company done this of its own volition? The cost of doing so would be minimal and the potential upside is apparent: widespread publicity and public goodwill. There would certainly be lots of free advertising in the form of news stories, blog discussions, and the like. And the company itself could use the move as a marketing device. Millions of people feel concern and confusion when they open their credit card statements each month; I’m no advertising executive, but my sense is it would be enormously effective to market to those fears.
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Something else that blows me away is how rarely violations of the existing Truth in Lending Act get enforced. I recently attended a training session for consumer lawyers, all of whom had to be walked through the very basics of how TILA works and what kind of recovery you can get on a TILA action.
Of course, what TILA already requires may be fairly useless anyhow. One advocate told about a client who asked her lender, "What's this box that says APR?" The lender said, "Oh, don't worry about that, it's not important."
August 3, 2005 6:07 PM | Reply | Permalink
TILA is nothing more than a law that allows credit card companies to hide what is in the contract. Sure they disclose some of the more significant parts of the contract, but it is possible to carefully craft the agreement so that traps can be strategically placed to not require disclosure, and effectively invalidate the disclosed terms. This was done with "universal default" and now they have been discovered. However, the credit card industry denies "universal default" exists.
Consumers need to understand that consumer protection laws don't necessarily protect them. There is even a gaping loophole in the dispute process in Regulation Z, that allows credit card companies wide discretion on whether they have to even give serious consideration to a dispute.
Bottom line, these credit card statement disclosures aren't the solution. Real reform is, and it goes very deep into our banking and monetary system. If it isn't done, things will only get worse.
August 4, 2005 7:54 AM | Reply | Permalink