WASHINGTON — The Consumer Financial Protection Bureau unveiled a prototype for a simplified credit card agreement on Wednesday, the latest in a series of initiatives aimed at improving financial disclosures.
The agreement is roughly 1,100 words — compared to the average 5,000-word credit card agreement — and removed much of the contractually necessary legalese in favor of standard definitions and plain language, Raj Date, the bureau's de facto leader, said at a news conference in Cleveland.
"Credit cards can be complicated, with many moving parts that impact the cost to consumers," Date said in a speech. "When a consumer has to read through pages of legal fine print in their credit card agreement to figure out how their card works — it's easy to get confused. With a short, simple, easy-to-understand credit card agreement, consumers can clearly see the terms of the deal and make the decisions that are right for them."
The bureau plans to test the prototype with the $15 billion-asset Pentagon Federal Credit Union in Alexandria, Va., one of the largest credit unions in the country with more than a million members.
The prototype is part of the bureau's Know Before You Owe campaign, which has released simplified model disclosures for mortgages and student loans.
The prototype credit card agreement is organized into three sections: costs, changes and additional information. It explains the prices, risks and features of the credit card upfront, including how and when the costs change, and what to do if there is an error. It also establishes standard definitions for terms like "card" and "balance transfer."
For legal reasons, issuers often include long definitions to cover every possible definition in the card agreement, Date said. The bureau has developed its own definitions that cover these bases, but moved the definitions off the agreement to a website, making the form easier to understand and more useful for the average consumer, Date said. (Borrowers without Internet access can still obtain a copy of the definitions.)
Date said the prototype is intended "simply as a thought-starter," which the bureau intends to improve upon with feedback from the industry and from product testing.
"We realize there is a lot more science and a lot less art in developing a clear, easy-to-understand credit card contract — and we plan to put our idea through rigorous tests to make it as effective as possible," he said.
There are approximately 514 million credit cards in circulation in the United States, and an estimated $700 billion in credit card debt, approximately $6,000 per household, according to data provided by the CFPB.
Date acknowledged that the 2009 CARD Act has made the credit card market better for consumers, and some companies have undertaken efforts on their own to streamline agreements, but he said there is still room for improvement. Most agreements are still too dense for consumers to understand, and many agree to the terms without understanding or even reading what they're agreeing to.
An interim report released by the bureau last week on credit card complaint data showed consumers' number one complaint was difficulty understanding the terms of their agreements.
Kenneth Clayton, the chief counsel for the American Bankers Association, said the banking industry has supported efforts to provide simpler, easy-to-understand credit card agreements for more than 20 years.
"The model released by the bureau is a good first step, but could be made even shorter, as well as less susceptible to costly lawsuits and the higher consumer prices that come from them," Clayton said. "We look forward to working with the bureau to ensure disclosures provide exactly what our customers need and want to know, while maintaining consumer access to competition and choice in the marketplace."
Jeff Taft, a partner in the law firm Mayer Brown in Washington, said the credit card agreement is different from the bureau's previous Know Before You Owe proposals. Those prototype disclosures for mortgages and student loans were designed as initial disclosures.
"I don't think anybody thought that they could simplify the mortgage disclosure down to a simple document," Taft said. "Here they're trying to create a single document that would embody the entire relationship. I think that is a much more complicated task."
Consumers would still be required to refer to another document to find definitions, Taft said, and he questioned whether the agreements will be meaningful without them. Still, he said the idea is very ambitious.
"The notion that credit card agreements are too long is something that would be recognized as true by everyone," Taft said. "The question becomes, how do you reduce the length of these, reduce the legalese, when a lot of that is driven, in fact, by the legal requirements? If this is what you're sending out, you're going to have to modify Truth in Lending and Reg Z."