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Choice and Financial Products

Our friends at the Baseline Scenario persuaded Elizabeth Warren to contribute a guest post on the virtues of the Consumer Protection Financial Agency. The whole thing is worth reading, but this rejoinder to those who say the CPFA would reduce choice is particularly important:

At a recent hearing on the CFPA, Rep. Brad Miller challenged an industry representative to identify one consumer who chose double-cycle billing to be included within the terms and conditions of his or her credit card contract. It was a great moment. If the status quo is about choice, then explain why half of those with subprime mortgages chose high-risk, high-cost loans when they qualified for prime mortgages. If the status quo is about choice, then explain why Citibank declared itself consumer friendly, dropped universal default, then quietly picked it up again the following year because they said consumers couldn’t tell whether they had the term or not.

The truth, of course, is that no consumer “chooses” to accept the tricks and traps buried within the legalese of financial products. Rather, consumers must choose among various products with one feature in common: dozens of pages of incomprehensible fine print.

The CFPA will not limit consumer choice. Instead, it will focus on putting consumers in a position to make choices for themselves by streamlining regulations, making disclosures smarter, and making financial products easier to understand and compare. The Agency will promote plain vanilla contracts—short, easy to read mortgages and credit card agreements. The key principle behind the new agency is that disclosure that runs on for pages is not real disclosure—it’s just a way to hide more tricks. Real disclosure means that a lender has to be able to explain what it is selling so that the customer can read it and understand it. Once consumers can understand the risk and costs of various products – and can compare those products quickly and cheaply – the market will innovate around their preferences.

By Ezra Klein  |  July 21, 2009; 2:32 PM ET
Categories:  Financial Regulation , Solutions  
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Hopefully this can end up being one of the key piece of legislation to emerge from the Democratic-controlled Congress. I remember during the bankruptcy "reform" debate, Democrats couldn't even get the GOP to accept an amendment which would have prevented bank and credit card companies from screwing over military families where the breadwinner was shipped overseas. Obviously on health care, climate change and the stimulus, elections had consequences, but this will be an under-appreciated victory if it happens.

Posted by: smhjr1 | July 21, 2009 3:43 PM | Report abuse

Isn't the issue not the demand side, i.e., that consumers want the specific provision, but the supply side, i.e., that fewer credit cards or whatever will be available with the other terms that they do want/care about?

Posted by: lfstevens | July 22, 2009 1:52 AM | Report abuse

Arent' the pages and pages of disclosures all included in response to one or another mandate from government?

Besides, the fact that one mortgage has a higher rate than another is not hidden in the pages and pages of disclosures. Warren is talking about one thing while the bill does something else.

Posted by: tomtildrum | July 22, 2009 10:53 AM | Report abuse

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