Legislating Intelligence

The most recent proposal to amend Regulation Z opens Pandora's Box - under the pretext of modifying the Schumer Box. It raises some unsettling questions about the level of the creditor's responsibility for making sure that consumers know what they are doing. It takes the alarming step of making creditors into Jimminy Crickets for gullible consumers.

The proposal would impose requirements such as type size and placement with the stated goal of making the information more clear and understandable to consumers. The measurement of this goal appears to be whether the consumer actually read and understood the information. This is alarming. We can fiddle with type sizes, box shapes, and pieces of paper, but we can't make the consumer read it.

This also sets a dangerous precedent - the concept that type size is appropriate for regulators to dictate. Setting type size requirements for complex disclosures opens the full array of disclosures to similar size and placement requirements. Can you imagine applying a type-size standard to the HUD-1? The real problem with this proposal is that it is based on making disclosures more prominent relative to current advertising practices. The issue is one of relative type sizes; not absolute type size. What are the alternatives here? Should creditors use colors to make certain terms more prominent? Red, for example, could be very effective in calling attention to APRs. It could also be useful in flagging penalties, fees for late payments, and similar provisions.

There is one way of making sure that customers see - or have seen - the rate table. The magazine sweepstakes companies - such as American Family Publishers - have mastered this one. Simply require the customer to find and place the APR sticker on the response card. Without the sticker, the consumer's response card would not be valid. It works for publishers sweepstakes. Why not for consumer disclosures? Isn't there a limit to what banks should have to do to protect consumers who choose not to read documents that they sign? This proposal raises the troubling implication that if a consumer fails to read disclosures, the creditor is somehow responsible.

There is a huge difference between providing clear and informative disclosures and using deceptive methods to advertise. The test of a clear disclosure should be whether the consumer can find it, read it, and understand it. The test is accuracy and availability.

However, deceptive advertisements are an entirely different matter. In a deceptive advertisement, the important information is mis-communicated, misrepresented, or concealed. This doesn't happen by accident. It happens on purpose. If 12-point and 18-point type sizes are mandated in the regulation, such a rule may simply lead to new games for marketers who seek to deceive their customers by misrepresenting their products.

The solution lies not in mandating type sizes and placement, but in establishing issues of fairness. The industry has this issue within their control. Further changes to Regulation Z can be prevented simply by using fair advertising practices.

The test for clearness and fairness should be whether a consumer can find, read, and understand the important information; not whether the consumer does. Consumers are free to choose to be foolhardy. Those who do should reap the consequences of their own inactions.

The test for creditors should be one based on fairness. The question should be: do consumers have access to the information they need to make decisions in their own interest? The question should not be whether they actually did.

Fundamentally, this proposal is based on the assumption that appropriate regulation and related disclosures can make consumers more intelligent and more responsible. However powerful, there is a limit to what the printed word (or APR) can do. Some of this burden should rest with the consumer.

Copyright © 2000 Compliance Action. Originally appeared in Compliance Action, Vol. 5, No. 6, 6/00