The Consumer Financial Protection Bureau was Built to Look Out For You

After the financial crisis, one of the complaints was that often ordinary consumers were not savvy enough to know what they were buying in terms financial products. Economic theory assumes that both parties in an economic transaction have full and complete knowledge, but in terms of getting a credit card, or getting a mortgage, what happens in reality is an gross information asymmetry in terms of the financial institution having much more knowledge of what they are offering than what the consumer knows. This is, in part, what we can point to as a cause of the financial crisis. The adjustable rate arms resetting on people who didn’t know that the rate would pop like it did, doubling the monthly payments and driving that loan into default – but the originator didn’t care if they weren’t holding that loan on their books anymore.

So, it was situations like this that led the Harvard Law Professor, now Senator and presidential candidate to say, “There ought to be a law”. Her proposal for a regulator facing consumer to institution transactions helped lower that informational asymmetry. One of these initiatives is in implementing the Credit Card Accountability, Responsibility and Disclosure Act Of 2009. This law was put into place to eliminate abusive lending practices and let consumers know the cost of fees and penalties. Specific parts of the legislation include information about how long it will take to pay off a balance at a minimum payment rate, limiting marketing towards college students, and helps limit interest rate hikes.

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Personally, I try to limit holding a balance on credit cards, but this might have helped me when I was younger. I first signed up for a card so I could get a basketball hoop on my dorm. I spend and didn’t always pay off the balance, and I missed deadlines, so my interest rate was almost 30% annualized on a balance that was near the limit. I had to keep paying more than the limit to keep the interest rate from adding to the principal, which would take me over the limit and incur more fees.

There are critics that say that the CARD act didn’t go far enough in limiting deceptive practices, but if they couldn’t get the full wish list passed in 2009, there’s no chance of getting more robust consumer facing regulations passed in today’s regulatory environment. Just one example of how large financial institutions exercise their power over consumers. Just a couple of weeks ago, I received an email about changes to my user agreement with Chase, in that by continuing to use my Chase Card, I implicitly accept. In this agreement, buried deep, was a notice that one of the terms changings was an acceptance to join in mandatory arbitration if I had any disagreement. The banks write into your contract the right to sue them being removed. And the only way to opt out of this part of the agreement is to write a letter to the bank by a certain time. I want to do it, but even though I think of myself as a savvy consumer and I don’t like those terms, I most likely will not remember to sit down and write a letter to the bank and then mail it in. (And I worry about them not receiving it. Do I need to send it certified mail?). So even though we have an institution newly in place, the banks and other financial institutions are doing their best to circumvent the regulations and the regulators. This, of course, is being aided and abetted by the people in charge at a higher level, where the ideology is that government can only do bad things, and corporations are always acting in the best interest of society by maximizing shareholder value.