The Federal Reserve recently solicited comments from the public about problems in the credit card industry. Yesterday's lead editorial in The New York Times, "Listen to the 56,000," takes its title from the number of responses that poured into the Fed from the public, a torrent of complaints that covered a range of more-than-questionable industry policies, including “universal default,” which the Times describes as "the practice of raising interest rates on accounts in good standing when a borrower falls behind on other bills." The editors call upon Congress to step in with stronger protections against various abusive practices.
While I agree that better laws are needed, I have come to think that this is yet another area where we are so tied up in our own rhetoric that much-needed reform will fall victim to absolutist posturing. The problem is in our use of classical contract terminology to describe modern impersonal transactions. We all sign (or click through) a "cardholder agreement," which has the look and language of a formal contract. In most such documents, we (the cardholders) seem to be agreeing to all of the things that we are now complaining about. Moreover, even if some industry practices are not actually in the agreements that we signed, the typical contract allows the company to change its policies at any time and without notice. So what are we complaining about?! Suck it up, be a grown up, and live by our promises, right? This is ultimately the argument against helping people in danger of defaulting on mortgages as well. If the company is not actually committing fraud, anything that it does within the letter of the agreement is fair game.
Moreover, there is at least a plausible argument for each of these policies. Universal default, after all, can be defended by pointing out that a company will naturally view a loan as being at greater risk if the borrower is found to be in arrears elsewhere. Higher risk means higher rates. Even the foundational "unconscionability" case in the 1L Contracts class, Williams v. Walker-Thomas Furniture, describes a practice to which a well-informed borrower might agree in exchange for other consideration.
The problems with that basic assumption (that the two parties have agreed to the terms of the contract in the way that offer/acceptance logic presumes) are legion, and legal scholars have increasingly drawn on psychological theories to describe the cognitive limitations that lead us quite rationally to "agree" to things with which we would not agree. My purpose is not to rehash those arguments here but to point out that, as usual, the political debate will be about absolutes rather than line-drawing. Anything that Congress proposes as a consumer protection measure will be attacked as: (1) undermining freedom of contract and/or being paternalistic, and (2) ultimately harming those whom it purports to help. (The banks "warn of unintended consequences, mainly that less credit would be available to consumers.")
The only possible answer to #1 is that, yes, of course these laws will prevent some contract terms from being available that some parties might have agreed to in a face-to-face, hard-nosed negotiation; but we're making a policy decision to limit some of the options based on an assessment that the credit card contracting process doesn't look like the simplified world that even classical contract theorists like Williston understood a century ago to be over-stylized. As to #2, again, yes. Some credit really should not be extended to some consumers. This is not a surprise to anyone. In fact, reducing credit card indebtedness is, in other contexts, often held up as an important public policy goal.
"But they agreed!" Again, my argument is not that every credit card agreement should be invalidated or that Congress should adopt every policy proposal that might be gleaned from those 56,000 complaints. What it should do, though, is understand that we already live in a world where "agreements" are sometimes invalid or will not be recognized. Even though this is not a hot-button political issue in the category of taxes or terrorism, though, we can still expect that it will be sound-bitten beyond recognition. As is so often the case, I hope to be proven wrong.
-- Posted by Neil H. Buchanan