Op/Ed: CFPB’s 2-page Credit Card Contract is Neither 2 pages, Nor Contract

By Nessa Feddis


Even the simplest of products often requires lengthy explanations. My husband recently bought an old-fashioned manual push-mower. Given the basic operation of the machine (to use, push), he was rather startled to be confronted by a 13-page “operating manual.” It included a suggested 15 minute assembly time which led to a lot of banging and grunting and cursing as he was determined not to be the one to take more than the allotted time.

Of course, the push-mower operating manual contains necessary and useful information, but the point is to illustrate that often “instructions” for even simple products can and must be more complicated and lengthy than ideal. That is not to say they shouldn’t be as simple as possible, but that there are limits, and it is important to be realistic.

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Which leads to a discussion of the last few years’ refrain calling for a “two-page” credit card contract. Is it possible from a legal perspective, and if so, is such a contract useful to card holders? Are there better ways to achieve the goal of ensuring people understand what they need to understand about their credit cards?

In December, the Consumer Financial Protection Bureau announced with great fanfare that it had designed a two-page legally valid credit card contract. The problems are: the “two-pages” aren’t two pages, its legal status as a contract is uncertain, and there are better ways to ensure consumers understand their credit card without having to comprehend the underlying legal technicalities of the agreement.

[Related Article: Why the CFPB Changed Course on Lowering Fees]

Contrary to its advertisement, the Bureau’s proposed contract prototype is not short. It is simply broken into several separate pieces scattered in different locations. It consists of two printed pages, a one-page summary repeating important terms contained in the two-pages, eight pages of definitions available online, and presumably and necessarily a “users’ manual” or other document that provides other necessary information also to be found online. Indeed, the Bureau stated that the printed portion of the proposed contract is 1,100 words.  However, when definitions alone are added, it increases by 3,334 words, to a total of 4,434 words, just short of the 5,000 words the Bureau states is the average for a credit card agreement. If important omissions are included, the proposed contract becomes even longer.

Not only is the prototype not short, its legal status is uncertain. The Bureau relies heavily on the risky assumption and hope that all relevant courts and all states will recognise as part of the contract important terms that are not provided with the printed portion of the contact, but “incorporated by reference” and available elsewhere.  In fact, it is very conceivable that courts may void all or part of the proposed contract on the basis that the provisions available online are not part of the contract because they were not “provided” to the consumer. Equally, there may be issues about contract enforceability based on the argument that information needed to understand the printed portion of the contract is provided separately and inconveniently in a different location. Everyone supports avoiding “legalese” but under our legal system a certain amount of legalese is unavoidable—and required—in a legal agreement. Like any party to a contract, if credit card companies do not comply with contract law, the contract or certain of its provisions is not enforceable. There is no escaping that reality. Concerns about litigation risks and costs should not be dismissed as overly cautious, especially in our litigation-prone society. Even if a card issuer ultimately wins in court, it incurs huge costs, both financial and reputational. If it loses, the financial loss is potentially astronomical. And it is easy to suggest that someone else should take the risk, so long as the one making the suggestion is not the one to have to suffer the consequences.

Not only are there questions about the validity of the proposed contract, it does not comply with various of the Bureau’s own disclosure regulations, including the one implementing the Truth in Lending Act, that add length to credit card materials. For example, the proposed prototype omits common fees such as annual and over-the-limit fees, as well as important consumer protections and responsibilities related to unauthorised transactions and lost and stolen cards—disclosures required under the Truth in Lending regulation.  Nor does the proposed prototype contemplate the various state laws that may be inconsistent.

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Most puzzling about the Bureau’s initiative is that just prior to the creation of the Bureau, the Federal Reserve Board’s highly innovative new simplified disclosure rules went into effect. Under those rules, consumers receive, among other improved disclosures, an industry-supported one-page agreement summary of important terms in an easy-to-understand table format similar to the one found on applications that consumer testing found consumers recognise and value. Indeed, the Federal Reserve Board went further and also required card companies to provide in a prominent box on monthly statements, a summary of the interest and fees incurred during that billing period and year-to-date. This helps consumers understand at a teachable moment what they actually pay for their credit cards.

The Bureau’s proposed contract, coming on the heels of the improved disclosures, raises questions about its real purpose. If it is necessary to improve consumers’ understanding of their agreement, why not simply improve the one-page agreement summary? With such a simple solution at hand, why risk up-ending long-established contract law and creating uncertainty and unnecessary legal costs that one way or the other consumers pay for in the form of higher fees, fewer choices and less service? Is the purpose to take the first step toward standardising credit card products so that they only vary by the few terms that the Bureau determines are appropriate, regardless of consumer preferences? Is it using an appealing topic to get publicity for the Bureau?

[Related Article: Can the CFPB Help Clear Up College Cost Confusion?]

Everyone is in favour of understandable contracts and products, but we have to acknowledge that some products are more complicated than others, and that there are valid reasons for providing certain information and using certain language. Those reasons include customer need and education and the demands of our legal system.  Even the simple push-mower, for which the basic operating instruction is a single word, “push,” requires a 13-page document. However, it gives useful information, needed at different times, the assembly instructions, needed immediately, and replacement parts, needed later, though hopefully not at all. Whether it is a push-mower, car, appliance or a credit card, the same principle applies. The goal should be to ensure that users have what they need when they need it and not be slave to an artificial and unrealistic goal of limiting legal contracts to an arbitrary length.

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