Reducing the Burden of Regulation Z: Can it be Done?
Regulatory Burden is the topic of the day. Everyone is talking about it. But the real question is whether there really can be burden reduction. So far, most ideas about regulatory burden sit at one of two extremes. One extreme is to get rid of the law. Don't get excited. This is not about to happen.
The other extreme is the nit-picking approach. We scour through laws and regulations looking for give-aways - items that are frustrating and burdensome that we think the world could do without. This doesn't accomplish a whole lot because there is no fundamental change.
To actually reduce regulatory burden, there has to be some re-thinking across the board. Tweaking won't do the trick. Burden reduction will only happen when we take a hard and careful look at what a law is intended to accomplish, what tools and services are currently in use, and how the law's goals can be met more efficiently.
Usually, it is industry members who ask for burden reduction. However, sometimes consumers want it too. Consider what Truth in Lending disclosures now look like. It should be no surprise that those representing consumer interests want improvement. And improvement just could be simplification.
The Consumer Advisory Council advises the Federal Reserve on issues of concern to consumers. The CAC's responsibilities include providing advice on consumer credit protection regulations. When the CAC met on June 23, it was the consumer advocate members of the council who made the strongest pleas for regulatory burden reduction. And, they had the best ideas.
The topic under discussion was the Federal Reserve Board's review of Regulation Z. At this point, the Fed is focusing attention on the open-end credit rules, also known as Subpart B of Regulation Z. The Fed has requested comment on what could be done to improve the regulation.
The Schumer Box
Most of the CAC's discussion of this topic revolved around the Schumer Box. There was fairly unanimous agreement that the box is useful and valuable. The interesting part of the discussion was about some suggested changes to the box. The consumer representatives on the CAC generally supported taking steps to simplify the box so that the information in it is clearer and less confusing. There were also suggestions that the box be used in initial disclosures as well as in solicitations.
The key to the usefulness of the Schumer Box is uniformity. The CAC recommended that the box have a mandatory format. The current flexibility allowed results in the presentation of information by creditors that is not easy to use to compare products. A mandatory format with strict information limitations would make the box easier to use. It could also make the preparation and review of the box less burdensome for creditors.
Some information should be taken out of or excluded from the box. The restriction of information in the box would enhance the clarity and usefulness of the box. At the same time, taking out information would make it more uniform. However, most of the information that might be removed is valuable and should be included elsewhere.
A prime candidate for information to be excluded was the balance computation method. Quite literally no-one spoke up in defense of this disclosure. One member described it as obscure information that no-one really understood. It was the only named disclosure that consumer representatives were willing to do without. Other disclosures might be removed from the Schumer box but should still appear somewhere on the disclosure.
Another part of the discussion centered on what information consumers use to shop. This is where the regulatory burden reduction issues got really interesting. It is one thing to have a requirement to disclose any and all information that might be useful. It is quite another to narrow it down to what information is really useful and actually used. This is where burden reduction can become a reality.
On the other hand, many CAC members suggested that the box and its utility would be enhanced by requiring the inclusion of all fees. Many consumers find that fees are the most significant issue when shopping for a credit card and comparing terms. Not all members of the CAC supported this recommendation. Industry representatives drew the distinction between fees that are part of the credit plan and fees that are imposed because the consumer violates the credit plan, by going over the limit or by making a late payment. Consumer advocates wanted these fees disclosed.
There was discussion about requiring disclosure of an historic APR for the card. Proponents wanted a true historical rate that would include all costs that are not presently in the APR. Such a disclosure would, the proponents argued, give the consumer an idea of the true cost of the card. Of course, the difficulty in any such disclosure for an open-end product is how each customer uses the line. Industry members felt that any historic APR would be based on assumptions that would not be accurate for every consumer and that the result would therefore be confusing. The proponents of the historic APR had no clear suggestions for how to account for open-end usage.
Unfair or Unclear?
The concern underlying these suggestions is bait and switch. Several members described concerns that credit card issuers can disclose attractive terms on the promotional piece and then quickly change those terms to a higher cost when the account is opened. The lack of uniformity in the Schumer box contributes to this. And when terms are changed, the change in terms notices are usually unintelligible. This led to the suggestion of using a Schumer box on change in terms notices.
One of the most interesting suggestions was that the Fed retain a marketing firm to design a format for the Schumer box. Most of the members agreed that the format could be improved. The suggestion to use a marketing professional would take the design of the box out of the hands of those focused on the regulatory requirements and put it into the hands of people skilled at presenting information.
While the regulation is open for reworking, consumer advocates are likely to use the opportunity to seek more protections, such as rate caps or fee limitations. The practice of setting and changing rates on credit cards has not been scrutinized in the same way as mortgage rates. One particularly vulnerable practice may be jumping the APR to the maximum level when a customer makes a late payment.
Another target is likely to be the process for making changes in terms. Under the current regulation, creditors have a great deal of flexibility in how and when they change terms. The only requirement is sending a change in terms notice to the customer. Several CAC members advocated placing limits on when and how creditors may change the terms of credit programs. Implicit was the concept that a credit agreement is a contract and that as one of the contracting parties, the creditor should not be able to change terms without giving the other party, the customer, the opportunity to make choices - such as find another credit plan. The only specific suggestion made was to extend the notice requirement from 15 days to 30 days to give consumers a fair opportunity to anticipate and adjust to the change.
A third idea drew on the recent changes to Regulation DD. One member suggested that creditors provide an annual statement for customers showing that customer's total usage and costs for the year.
Several CAC members put forward the recommendation that consumer education is an essential piece of effective credit disclosures. Without education, consumers may not know how to select credit programs that are best suited to their needs. This recommendation ties in with the FACT Act mandates to the federal agencies to develop and promote consumer financial education.
The bottom line is that some very interesting discussion is underway that could well lead to reduction of regulatory burden. To the extent that this can happen, this discussion could be a model for other areas that come under review. However, creditors should take careful note of the concerns raised by consumers. Those concerns must be responded to, either by industry practice or by regulation. The choice is yours.
- Ask customers what information is most useful to them in disclosures. Consider ways to present this most effectively.
- Find out what terms and costs consumers expect and which ones they resent. Use this information to design products and to prepare comments.
- Read your disclosures the way a customer would. Leave the regulation out of it and read for a sense of what you really learn from your disclosures. You might be surprised.
- Review customer complaints about open-end credit. Complaints, even those without merit, reveal much about how customers feel about your products and services.
Copyright © 2005 Compliance Action. Originally appeared in Compliance Action, Vol. 10, No. 8, 7/05
First published on 07/01/2005