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 second Q&A segment, she explains how the marketing of consumer financial products might change under the CFPA.

CR: Can you explain the “plain vanilla” financial products mentioned in connection with the CFPA?

EW: The CFPA will approve templates for “plain vanilla” contracts [such as 30-year fixed mortgages] designed to be read in a few minutes.  …  Consumers would be able to lay out a half dozen simple-to-read contracts on the kitchen table and see which product best fits their needs. Banks and other lenders could continue to offer complicated or risky products, so long as the risks are disclosed clearly enough that customers can understand them without a lawyer nearby.

Once consumers can understand the cost and risk associated with products, they will be able to make clear-eyed choices and comparisons.  This will ultimately make the market work by making the costs of credit products clearer and by steering innovation toward consumer preferences.

CR: So, is there anything in the statute that says the CFPA will dictate the types of products that can be made available to consumers? 

EW: No. The CFPA will offer pre-approved templates (that's the plain vanilla part) and also allow anything that is comprehensible (meets the rules for meaningful disclosure). It will more closely regulate anything that is incomprehensible.

CR: In your view, how would the agency's existence affect the ability of financial companies to innovate new products?

EW: I think that the CFPA will support innovation.  When people can't compare different products because the fine print buries all the tricks and traps, companies innovate by developing more tricks and traps.  When products are easy to compare (for example, 2-page credit card agreements on 1-page mortgages), then innovation works. 

Two years ago, Citibank was under a lot of pressure from Congress, so it made a
big deal out of promising to stop a nasty practice called universal default.  Less than a year later, it quietly picked up the practice again. Why? With all those 30-page credit card agreements, Citibank itself said that customers couldn't see that their card was actually a little better.  So Citi made it worse again. That's how a broken market works.  When customers can't make comparisons, better products don't get more market share -- and real market innovation goes south.

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.