Prof. Elizabeth Warren on why we need the CFPA, Part 4

Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this fourth Q&A segment, she discusses personal finance education, disclosure, and personal responsibility.

CR: Does anything in the current proposal to create the CFPA address the role of personal finance education for school-aged children and adults?

EW: Financial education is important, and the Administration and others are examining how the current education models can be improved and expanded.  One advantage of the CFPA is that it can be a home for policy innovation in this area and also a platform for advancing financial literacy. At the end of the day, however, no amount of education will empower consumers to compare reams of mortgage disclosures or dozens of pages of credit card fine print that are designed to be incomprehensible.  Consumer protection regulations need to be streamlined and simplified so that consumer education can work. 

CR: If you could design a new mortgage disclosure form for individuals, what information would be in it? And what would you like to see changed in the Schumer box, used to diclose credit-card terms?

EW: The American Enterprise Institute, a conservative think thank in Washington, has developed a one-page mortgage disclosure form that covers a lot of ground–amount of loan, interest rate, type of loan, beginning interest rate, possible future interest rates, percentage of monthly income, prepayment fee, balloon payment, costs and fees, and so on. That one-page form should be a model for further development in this area.

A one-page credit card  form can include blanks for interest rate, penalty amount, when a penalty is triggered, what the free gift is, and so on. The lender would fill in the blanks and could, of course, still use risk-based pricing. The problem with the Schumer box is not what is included within it, but that lenders can bury a wide assortment of tricks and tracks further down in the contract.  The purpose of streamlined disclosure is to get rid of the incomprehensible legalese that hide the true cost of credit.

CR: What role does personal responsibility play in making good consumer financial choices?

If someone goes to the mall and charges thousands of dollars to buy things they can't afford, they should have to deal with the consequences.  And if someone signs on to buy a budget-busting home or car, they should expect to lose it. The CFPA would enable real consumer choice and real market innovation by putting consumers in a position to understand and compare financial products. The CFPA would not substitute for personal responsibility. It would support personal responsibility.

Click here for a summary from the White House of the proposed CFPA's role and authority. To support Consumers Union's efforts toward consumer-focused financial reform, click here.