Consumer Law

A Comment on the New Credit Card Solicitation Disclosures

By Jeff Sovern

by Jeff Sovern

I have commented before on the December amendments to the credit card provisions of Regulation Z (here and here) but I find that as I prepare to teach them, I have a bit more to say.  You can see the new model form for the "Schumer Box," that is, the box that is to appear on credit card applications and solicitations and that is intended to provide consumers with the information they need to decide whether a particular credit card is for them here.  A model for the current form appears in our casebook at page 142. One change that I very much like: while the old form places the method of computing the balance for purchases (such as "Average Daily Balance (including new purchases)") inside the box, the new form places it less noticeably--and therefore, less distractingly--underneath the box.  Because, as the Fed observes in its accompanying statement, this disclosure is meaningless to most consumers, consumers are unlikely to take it into account in making a decision whether to apply for a particular card, and so it makes sense to make it less noticeable.  Another positive change: the old "Grace period for repayment of the balance for purchases" has been replaced with the more meaningful "How to avoid paying interest on purchases."  And another: fees have been collected together to make for easier comparison.  The new form also has a new item: "Penalty APR and When It Applies" in which applicants are told that the penalty APR might apply if the consumer makes a late payment, makes a payment that is returned, etc.  That seems like a positive change.  But I would have combined this last with two more.  First, the disclosures don't take into account the optimism bias: the tendency of consumers to overoptimistically assume that they won't default, etc. (you can find lots of discussion of the optimism bias if you look; I wrote about it in the text accompanying notes 145-150 of my article Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 Wm. & Mary L. Rev. 1635 (2006)).  Thus, I suspect many consumers don't pay attention to that disclosure on the theory that it won't apply to them.  The disclosure could be made more effective if the lender is required to state also something like "In a recent year, X% of our credit card holders were obliged to pay the penalty APR."  (and wouldn't that be an interesting statistic?).  Second, the penalty APR disclosure is separated from the penalty fee disclosures, and so consumers might not realize that late payments trigger both a penalty fee and a penalty APR.  I think I would have inserted a very brief cross-reference to the penalty fees in the penalty APR box.  But despite these quibbles, I continue to believe that the new forms are a significant improvement over the old ones.

Full post as published by CL&P Blog on January 29, 2009 (boomark / email).