Now that we have a director for the Consumer Financial Protection Bureau (CFPB), the opportunity for real banking reform has significantly improved.
Here is a bold change that would do great service to consumers, financial institutions and the economy - have standard agreements written by CFPB for consumer financial products - savings and checking accounts, credit cards, debit cards, auto loans, mortgages, broker accounts, etc.. Have these agreements be the required agreements as a condition of Federal insurance programs at banks, credit unions, savings and loans, brokerage firms, etc..
At the top of these agreements would be a table of interest rates and fees, and notes if optional terms were included that the financial institution would set (subject to other laws and regulations). In this way, banks can compete on price, breath of products and service but not rely upon surprises in the terms of their agreements, or requiring extremely unfair terms knowing that essentially no customer will ever read the agreement.
This approach would have major impacts on consumers, financial institutions, and the economy:
- Consumers could more readily compare what different financial institutions offer. While rates and fees may be different, they would all be operating under the same general agreements. This will make for a far more competitive marketplace for consumers.
- Third parties such as Consumer Reports, bloggers, etc., could more readily provide advice on various financial products.
- Terms that are dangerous to consumers, financial institutions and the economy can be more readily avoided. For example, no documentation mortgages would not be permitted.
- Auditing financial institutions and risk management becomes easier.
- The terms of these agreements should be fair and practical to consumers, financial institutions and to the government insurance programs of FDIC, National Credit Union Administration (NCUA - "FDIC" for credit unions), SIPC, etc..
- The terms of these agreements will be very well understood as the same agreements will be litigated many times.
As some sophisticated consumers may need terms beyond what these standard agreements provide for a provision for exceptions is needed. Agreements between consumers and financial institutions that are not based on these standard agreements should only be allowed upon the consumer passing a sound financial licensing exam, establishing that the consumer has the necessary sophistication to understand and evaluate a non-standard agreement.