Tricks, Traps, and Accountability

As we mark the one year anniversary of the Consumer Financial Protection Bureau (CFPB), I’ve been thinking about how for years leading up to the 2008 financial crisis, I asked students in my contract law class to read a credit card agreement — either an offer that they’d received in the mail or the actual agreement they’d signed onto — and answer some basic questions. Some were easy: When is your bill is due? Do you get points? The students always answered those.

The next questions went to the heart of the deal: Does your credit card have an arbitration clause, preventing you from suing in court if the company cheats you? No one knew. How long it would take you to pay off a $1000 purchase with interest if you paid the minimum monthly payment? They didn’t know. And when I assigned that basic question as homework, almost all of them spent hours knee deep in fine print without finding an answer.

Markets work when people can evaluate the prices and risks of different products, then pick the ones that work best for them. But when the terms of the deal are hidden, competition doesn’t work. And customers aren’t the only ones who are hurt. If a small bank with a limited advertising budget offered a better card, no one could figure that out and switch. That had been the state of the consumer credit market for years.

Following deregulation in the 1980s, a number of big banks figured out that they could build a very profitable business based on deception — tricks and traps buried in fine print, teaser rates that hid the true costs of mortgages, and obscure terms (like double-cycle billing) than no one understood. They sold a lot of mortgages, credit cards and other loans, sometimes deliberately targeting people they knew wouldn’t be able to pay in order to rake big fees off the top before they sold the loans to someone else.

Eventually the lousy mortgages crashed the economy. Families that already had been squeezed for a generation got hit from every direction. Their pensions and savings were wiped out, their friends and family members lost their jobs, and the values of their homes plummeted.

After the crash, it was clear that restoring a working consumer credit market was among the most urgent challenges. The broken consumer credit market had to be repaired by making sure that consumers had the right information and could use it effectively. That meant consolidating the bloated patchwork of ineffective agencies and regulations so that a single agency could act as a voice for consumers. It also meant leveling the playing field so that small banks and credit unions could compete for a customer’s business against big banks and unlicensed lenders.

The new CFPB was designed to level the playing field for small players — families, students, seniors, community banks, credit unions, small businesses. It aimed to cut complexity out of the system, mowing down the fine print that hid bad surprises, using easy-to-read forms, and getting rid of tricky language. It aimed to let people make apples-to-apples comparisons when shopping for financial products, so people could evaluate three mortgages head-to-head or the terms of three student loan offers. The new agency was also designed to be a cop on the beat to make sure that even the biggest banks follow the law.

Not surprisingly, the Wall Street banks fought against the consumer agency, but it was passed into law because more than 200 groups and countless people came together to create real reform.

Now, one year later, the CFPB is already moving toward clearer prices and risks so consumers have the information to make good choices — with a new student financial aid shopping sheet, the prototype of a shorter credit card agreement, and rapid progress toward a new, simpler mortgage disclosure form.

The CFPB is also already helping military servicemembers better navigate the financial challenges of multiple moves and deployments and passing on targeted information to protect seniors, students, and young families about their financial options. For those who have had disputes with lenders, the CFPB’s Consumer Response Center is helping to get those problems solved. The agency has hired examiners to supervise the largest banks for compliance with the law and established procedures for overseeing previously unregulated mortgage servicers and payday lenders.

And just last week, the CFPB announced that its first public enforcement action will require Capital One to refund two million consumers a total of $140 million, in addition to paying a $25 million penalty, as a result of the company’s deceptive and misleading practices on credit cards.

Progress is unmistakable, but the fight over CFPB’s existence continues. The big banks, their lobbyists, their friends in Congress, and even Mitt Romney have pushed for repeal of the new agency. Despite the pressure, the new agency stays focused on its mission, helping make sure that everyone — no matter how big — has to follow the same rules.

A working market needs rules, and the CFPB is starting to level the playing field. That’s a good thing for consumers — and it didn’t come a moment too soon.