The credit card legislation President Obama signed into law represents a sharp break from previous federal credit card statutes.
Ever since the landmark Truth in Lending Act was enacted in 1968, Congress has focused largely on disclosures of credit card terms on the theory that informed consumers would select the best credit terms available to them.
But rather than just mandating improved disclosures, the legislation contains outright prohibitions on certain credit card terms, such as increases in the interest rates charged on existing balances or sending monthly statements to consumers less than three weeks before the payment due date.
Put another way, you will not be able to agree to those terms with your credit card lender even if you wanted to. This shift reflects a better understanding of consumer decision-making. Classical economic theory of the sort in vogue 40 years ago presupposed that rational consumers, if properly informed, would choose wisely.
But researchers -- and the subprime crisis -- have raised doubt about that presupposition. Studies have demonstrated, for example, that consumers tend to be overly optimistic and so will pay less attention to the consequences of terms governing what happens when they default.
In the credit card context, that might mean consumers will apply for cards with high late fees, because they assume they will not make any late payments. Yet many do.
In addition, the length, complexity and sheer dullness of credit card contracts may dissuade consumers from reading them or taking more than a few terms into account in deciding which credit card to apply for. Thus, probably few consumers choose credit cards based on how the issuer calculates balances.
The new law requires lenders to post their contracts online, but it is not likely that consumers will wade through all those postings to find an appropriate credit card contract.
As a result, while the market restrains credit card companies on terms consumers care about, like the interest rate, annual fees and rewards for charging items, credit card lenders have had fairly free hands in writing the terms of credit card contracts that escape consumer notice.
Consequently, it makes sense for Congress to regulate those terms. Unfortunately, the task of proscribing objectionable but profitable terms may be like punching one of those children's punching bags that always bounces back. Credit card issuers are likely to devise troublesome new terms that escape consumer attention but generate significant revenue. That means Congress may have to return to credit card regulation before too long.
Unless Congress wants to make a habit of scrutinizing credit card terms, it might consider a different approach: convert the legislation from a statute that requires disclosure to one that requires comprehension.
For example, Congress could bar credit card issuers from using particular contract terms unless a specified percentage of their customers, say 80 percent, actually became aware of and understood them.
Such an approach might cause credit card issuers to eschew the use of incomprehensible terms. It also would give lenders an incentive to make their contracts more intelligible rather than less.
If consumers paid attention to and understood credit card contracts, the market would operate to eliminate terms that consumers found objectionable, and Congress would not need to make that judgment for them. As an interim measure, Congress could oblige credit card companies to publish the percentage of consumers who actually understood their contracts.
To increase the likelihood that consumers did not ignore terms that they anticipate will not affect them, such as late fees, Congress could require lenders to state in the contract the percentage of their customers affected by such terms in a recent year. Consumers inclined to ignore late fees disclosures might pay more attention if they knew, for instance, a third of the lender's customers had paid such fees in a recent year.
It may seem strange that credit card issuers should take responsibility for what their customers understand. But isn't it stranger still that we accept that those customers do not understand what they have agreed to?
Jeff Sovern is a professor of law at St. John's University in Jamaica, N.Y. He can be reached at firstname.lastname@example.org .