Elizabeth Warren, the White House adviser in charge of setting up a consumer financial protection bureau, said the new agency should require greater simplicity in credit-card agreements instead of writing rules to ban abusive practices.
In her most detailed comments yet on how the agency might regulate credit cards, Warren said the Credit Card Accountability Responsibility and Disclosure Act of 2009 relied too much on a strategy of prohibition.
“The problem is that thou-shall-not rules do not fundamentally change the credit markets,” Warren said in a speech today to the Consumer Federation of America in Washington. “Right now, there are a lot of lawyers who are working overtime to figure out how to render the CARD Act rules ineffective.”
Warren has said that her top priorities for the bureau are to improve regulation of mortgages and credit cards, which would affect issuers including JPMorgan Chase & Co., Bank of America Corp. and Citigroup Inc.
“It is this simple: No customer should be asked to take out a loan without knowing the costs or the risks of the deal,” she said. “And every customer should be able to compare different financial products straight up.”
Warren cited as an example one credit-card issuer who sought to circumvent the law’s prohibition on “hair-trigger” provisions that raise interest rates automatically when a cardholder falls behind on a payment. Instead, the issuer raised the card’s interest rate and promised a waiver or rebate for customers who paid on time.
“The effect is precisely the same as the practice that had been banned,” Warren said. She didn’t identify the issuer.
The Federal Reserve has since proposed amending the rule, Warren said. In the meantime, cardholders face a “complex pricing scheme” that “drains more money out of the pockets of American families,” she said.
She also said that mandating more disclosure doesn’t necessarily render credit-card agreements more comprehensible to consumers.
As an example, she cited the “Schumer box” that appears on agreements to set out annual fees and percentage rates. Named after Senator Charles Schumer, the New York Democrat whose 1998 legislation mandated it, the wording of the box has become too complicated, Warren said.
“Today there is much more disclosure, but there is much less understanding,” she said.
Warren did praise the 2009 CARD law for banning practices such as retroactive interest-rate increases on existing balances, that she said amounted to hidden costs.
“Right now, across America, families are saving money because the CARD Act makes credit cards safer for consumers and makes it harder for card issuers to hide the real cost of credit,” Warren said.