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What your bank hides in the fine print


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What your bank hides in the fine print

Your bank, lender and credit card company have a vested interest in making disclosure statements tough to decipher. Here's what you might miss about your accounts.

By Liz Pulliam Weston

Ever looked at one of those "privacy notices" banks are forced to send out these days?

They're usually densely printed little brochures tucked in with the advertisements for life insurance and "free" pen sets. If you actually read them, you'd have to puzzle through the stilted legalese to discover you're being given the chance to protect your privacy. If you want to actually prevent the bank from selling the details of your financial life, you have to figure out how to respond -- many banks don't provide detachable forms or postage-paid envelopes.

These notices were required by the Financial Modernization Act of 1999, also known as the Gramm-Leach-Bliley Act. But banks' compliance has been less than enthusiastic.

They're acting like 5-year-olds who, told to wash their hands, spend an hour in the bathroom with the faucet running and never touch the soap.

An intent to muddle consumers?

The disclosures that banks and other lenders make increasingly seem designed to obscure, rather than highlight, the information consumers need to make sound financial decisions, contends banking regulator Julie Williams. She's the acting Comptroller of the Currency, charged with regulating national banks, and she's been on a bit of a tear lately when it comes to banks' fine print.

"How many of you actually read and understood the (mortgage) documents you received in the application and approval process?" Williams asked in a January speech to a Washington, D.C., group. "How many of you have been dazed by the detail and fine print of your credit card agreement?"

Consider that Williams was talking to a group called Women in Housing and Finance, which consists largely of highly educated financial professionals. If they can't understand these disclosures, what chance has the average consumer got?

Tricky mortgage moves

Viv in Chatsworth, Calif., thought she did her due diligence when she got an offer for a "no closing cost" refinance from a national bank. It was only when she did her taxes the next year that she noticed the amount of the new loan was $1,700 larger than the payoff amount for the old loan. The bank hadn't charged her upfront for the refinance; it had just tacked its fees onto the new loan.

"I checked this one out as carefully and thoroughly as I'm capable of," Viv said, "and it seemed on the up-and-up, so I went through with it."

If Viv knew a little more about mortgage finance, she might have known there is no such thing as a true "no-cost" refinance; you pay for it one way or another, usually in a higher interest rate or fees folded into the amount of the loan.

But the point is that consumers shouldn't have to be mortgage experts to evaluate a loan offer. The information we need to have to make our decisions should be clear, conspicuous and concise.

Traps set by credit card companies

My e-mail box is full of letters from outraged consumers sucker-punched by their credit cards, thanks to interest rates that spiked, due dates that suddenly changed or new fees that abruptly appeared on their statements.

Stephen Smith got caught by a fairly common trap: He transferred a balance to a card offering a 0% rate, then discovered his payments were applied first to that low-rate debt, rather than toward the new purchases he made which were racking up big finance charges.

"Luckily, I . . . noticed this little trick while viewing my bill online," Smith said, and paid off his balance in full.

The language justifying these changes is usually somewhere in the fine print of the credit agreements or the brochures mailed to consumers after they sign up for the cards. But there's no reason it has to be so obscure. Credit card issuers find brilliant, concise and catchy language to market their plastic to consumers, so why can't they use some of the same talent to advertise important policies and changes?

The threat of empowered consumers

Perhaps because understandable disclosures make bank marketing departments nervous, Williams said. "If they are done well, they will also empower consumers to make some decisions that a particular bank may not like."

Williams is no wild-eyed socialist, demanding more layers of regulation on banks. Far from it. She knows that lenders need to be free to innovate to meet consumers' needs.

She takes consumer advocates to task for encouraging more red tape and believes that banks might do a better job if lawmakers didn't try to dictate so many of the details of these disclosures. Regulators are at fault as well, she says, for failing to take consumers into account when drafting the rules.

"Throwing a bunch of lawyers in a room, regardless of how talented those lawyers may be," Williams said, "is not an effective way to create consumer disclosures."

A better model, she thinks, is the "nutrition facts" disclosures the FDA requires on food packaging. The information consumers need to make sound food choices is right there, presented in a clear format that just about anyone can understand. It's hard to argue that you didn't know Chocolate-Frosted Wing Wangs were fattening when the box tells you they have 2,000 calories per serving and account for 100% of the average adult's daily fat intake.

The need for straight talk

The disclosures not only give people the information they need, Williams said, but they have also influenced food producers to create more products that consumers want. The recent explosion of "low carb" and "carb conscious" choices in supermarket aisles may seem like a silly fad to you, but it has been a gold mine for many companies.

The FDA standards were developed with plenty of market research, input from consumers and product testing, Williams said. We need a similar expenditure of care, effort and time when it comes to designing "financial facts" disclosures.

Williams has the OCC working with a consumer product testing consultant to overhaul the rules for privacy notices, and she'd like to see similar efforts to rehabilitate all financial consumer disclosures.

After all, any Economics 101 student will tell you that free markets work best when consumers have all the facts they need to make smart decisions. Otherwise, the system breaks down. The most devious companies get rewarded rather than the most innovative. In the United States, that often leads to regulators stepping in with new and even more cumbersome rules.

So for reasons of self-preservation, if nothing else, banks need to start scrubbing away the layers of obfuscation and start giving consumers the straight, legalese-free scoop. It's sound policy, not to mention good public relations.

"It's not in the interests of the institutions for customers to feel like they're not getting good information, or to feel like the institution is trying to hide the ball," Williams said. "You want the customer to feel good about the relationship they have with their financial institution and to want to keep their business there."

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