What next?

When Congress was debating whether to establish the Bureau, the Bureau was like a Rorschach ink blot. Supporters (disclosure: I was one) saw an agency that would create new consumer protections, while opponents feared an office that would impose costly new regulations.  But that ink blot remains blurry: Congress provided the Bureau with considerable power, but little guidance about how the Bureau should use that power.

Because the Bureau was sold in part as a device to prevent the type of lending that brought on the Great Recession, that lending offers a logical starting point.  The federally-mandated subprime mortgage loan disclosures were misleading, but maybe that didn’t matter because most consumers didn’t use them anyway.  If consumers are to make informed decisions about whether they can afford loans—thus avoiding defaults and foreclosures—or even choose the best loans for themselves, the Bureau must fix those problems.  While lawmakers have already taken important first steps on that path, more are needed.

But the Bureau was never intended just to solve the problems of the past. Instead, it is supposed to respond more nimbly than Congress can to current and future consumer protection issues.  For instance, last year Congress passed a statute to prevent troublesome practices in credit and debit card use.  Card issuers have already attempted end runs around the statute, and surely will devise more.  With its busy agenda, Congress cannot return to such cards soon, but the Bureau can plug the holes.

For another example, because many consumers overdrew their bank accounts by charging items on their debit cards and incurring substantial fees—leading to consumers unknowingly paying $38 for a cup of coffee—Congress barred banks from providing overdraft protection unless consumers affirmatively said they wanted that protection.  So far, so good.  When the new law went into effect in the summer, banks told consumers the arguments for opting in to overdraft protection, as of course they should be able to.  But unless consumers stumbled across the contrary arguments from consumer advocates—that many consumers unwittingly incur fee after fee–they never heard the reasons not to opt in. The Bureau should take steps to assure that consumers make informed decisions, so that they understand what they are letting themselves in for if they opt in to overdraft fees.

These examples point up another problem the Bureau will have to wrestle with.  Providing consumers with information often doesn’t protect them.  Evidence increasingly confirms that many consumers don’t read contracts and disclosures before entering into transactions. Thus, when a British computer game company’s contract provided that consumers surrendered their souls to the company, 7,500 consumers signed on—ignoring the opt-out they could have clicked on to keep their souls and, incidentally, earn five pounds—and confirming the old saw that the devil is in the details.

So for the Bureau to protect the consumers most in need of protection, it will either have to come up with disclosures that consumers actually read and understand, or else resort to outright prohibitions on troublesome contract terms.  Yes, that’s paternalistic, but the only other alternative is to bind consumers to contract terms they don’t understand and don’t read—and we all saw how well that worked in the subprime crisis.  All this will require the Bureau to engage in lots of testing on consumers to find out what disclosures, if any, work.

In sum, Professor Warren has lots of work to do.  It’s good she’s getting started.

Jeff Sovern is a professor of law at St. John’s University School of Law and co-coordinator of the Consumer Law and Policy Blog.