Sunday, May 17, 2009

About That New, "Friendly" Consumer Contract

Out of the ashes of the financial crisis small flowers are beginning to bloom. One is an initiative in Washington—and among some companies—to curb ambiguous and sometimes abusive consumer contracts, especially in the credit-card industry. But before anyone celebrates the budding reforms, it's worth looking at how an earlier campaign to clean up customer agreements led right back to confusion and frustration.

Democratic lawmakers see an opportunity to take advantage of popular hostility toward banks and other financial-services companies. Committees in both the Senate and the House in recent weeks have approved new restrictions on credit-card interest rates that would go beyond curbs adopted by the Federal Reserve in December. President Barack Obama called bank CEOs to the White House on Apr. 23 to tell them that he backs the legislation and will fight to see it enacted.

Rising consumer impatience with contracts for credit cards, cell phones, health insurance, and cable television has also spurred action in the marketplace. Western Alliance Bancorp's (WAL) PartnersFirst unit is pitching a card that would guarantee some customers no interest rate hikes in the first year or on any existing balances. "PartnersFirst is already well ahead of proposed legislation when it comes to offering consumer-friendly credit-card programs," according to a marketing presentation PartnersFirst is sending to credit unions, which would promote the card to consumers.

Upstart Virgin Mobile and other smaller cell-phone companies are selling monthly service without the baffling one- or two-year contracts that lock in customers of giants Verizon (VZ) and AT&T Wireless (T). "It's not about inventing a new technology; it's about providing better service in an industry where [service] is done poorly," says Peter Lurie, general counsel of Virgin Mobile. In the mortgage field, ING Direct (ING), the country's largest Internet-based bank, is advertising a simplified two-page home-loan agreement. "The marketplace is coming to us," says Arkadi Kuhlmann, ING Direct's CEO. "I don't want to be judged by what is in the fine print, but what [consumers] think is right."

As promising as these developments seem, any enthusiasm should be tempered by experience. In the 1970s, the consumer movement inspired by Ralph Nader sparked a revolt against legalese. Enthusiasm for "plain language" spread through some state legislatures and major corporations. In 1975, Citibank (C) reduced its standard consumer loan agreement from 3,000 words to 600. Other banks followed. "Control by obfuscation was minimized," Nader now says.

The victory was short-lived. Building on the plain-language breakthrough, state and federal lawmakers approved disclosure laws intended to provide consumers with more information about their credit arrangements. But some companies responded by reviving lengthy and confusing credit agreements, notes Katherine Porter, a law professor at the University of Iowa. "The more things we make [companies] say, the more places they have to hide stuff," she argues.

By 1990 the typical credit-card agreement was back up to five dense pages. Today it is more than 30. The plain-language movement "failed miserably," says Duncan E. MacDonald, a former Citibank lawyer who helped write the bank's consumer-friendly contracts in the '70s, and later served as general counsel of Citi's North America and Europe card unit.

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