June 17, 2015
Dodd-Frank tasked the Consumer Financial Protection Bureau with ensuring that “consumers … understand the costs, benefits, and risks associated with” financial products. Despite this ambitious mandate, and despite the Bureau’s self-branding as a “21st century agency,” the Bureau’s pursuit of consumer comprehension has thus far focused on the same twentieth century tool that has already proven ineffective at regulating financial products: required disclosures. No matter how well the Bureau’s “Know Before You Owe” disclosures perform in the lab, or even in field trials, firms will run circles around disclosures when the experiments end, confusing consumers and defying consumers’ expectations. Even without any intent to deceive, firms not only will but must leverage consumer confusion to compete with other firms that do so. While firms are not always responsible for their customers’ confusion, firms take advantage of this confusion to sell products.
If the Bureau wants to ensure that consumers understand the financial transactions in which they engage, then to meet the challenge posed by the velocity of today’s marketplace, the Bureau must induce firms themselves to promote consumer comprehension, either by educating consumers or by simplifying products. To generate this change in firm behavior, the Bureau should require firms to regularly demonstrate, through third-party testing of random samples of their customers, that their customers understand key costs, benefits, and risks of the products they have bought. Rather than attempting to perfect the format of price disclosures, for example, the Bureau should require firms to prove that their customers understand the price at the moment when the customers are deciding whether to take the actions that will trigger it, whether those actions be taking out a mortgage, overdrawing a checking account, or calling customer service to inquire about the balance on a prepaid debit card. Where consumers are confused about benefits rather than costs, such as the benefit of signing up for a credit repair service, buying credit life insurance, or paying off a debt that is beyond limitations, firms should be required to show that their customers understand the actual benefits the firm is offering before the consumer commits to the purchase or action. (1, footnotes omitted)
This paper poses an important challenge to the CFPB — can disclosure regimes be replaced with something better? One hopes that the answer is yes, although Willis’ previous work on financial education makes me somewhat pessimistic.
This new paper does offer some reason for optimism though. Willis argues that comprehension rules may induce firms to simplify products, so such rules may have a positive impact even if the CFPB cannot move the dial on consumer comprehension all that much.| Permalink