- Barney Frank, former chairman of the House Financial Services Committee, says significant progress has been made to reduce the amount of imprudent household lending in the past 10 years, but consumers are still borrowing way more than is manageable.
- Reading the fine print on contracts from financial institutions — and understanding what it means — could save consumers thousands.
Having served as chairman of the House Financial Services Committee during the Great Recession, from 2007 to 2011, I became convinced of the importance of increased financial education and am very pleased that CNBC has launched Invest in You: Ready. Set. Grow. to educate Americans in the areas of saving, spending and investing.
While we have made significant progress in reducing the amount of imprudent household lending in the past 10 years, the financial pressures people face have not abated, and the incentive to borrow more than is manageable remains strong.
We have regulated effectively to prohibit the worst-if of these loans, especially in home mortgages. But other protective measures work fully only if consumers take advantage of them. This means reading the fine print in every financial agreement you sign and understanding what the contract terms and language really mean.
Credit card contracts that drive the interest rates set by the company, for example, can cost you big-time if you give up on reading them. But with all the legalese buried within these agreements, understanding them is easier said than done. To familiarize yourself with many of the terms and conditions and to compare the terms of one credit card issuer over another, the Consumer Financial Protection Bureau provides a database of credit card agreements on its website.
Here are three protection measures put in place that every consumer should know about.
Clarifying the fine print. The print is not as fine as it used to be — or as confusing. That's because there are now legislative and administrative mandates in existence that require consumer choices to be more clearly spelled out than in the past. If you still find the language too obscure, complain to the Consumer Financial Protection Bureau, which has a mandate to enforce the clarity rule.
Announcing proposed rate increases well in advance. Because respect for market forces remains strong, other than the outright ban on abusive predatory lending, our regulations do not forbid high borrowing costs to consumers but rather require the offering institution to make these terms very clear. For example, credit card providers now must announce proposed rate increases well in advance of implementing them so that consumers have the chance to switch to a less expensive card. The prospect that people will switch rather than stay with a card with a steeper rate has some competitive effect in moderating increases.
Offering the opt-out election. Finally, while my preference was to institute what we call "opt-in" procedures for changes in the terms offered by financial institutions, the banks had enough political power to require that they be "opt-out." (Their power was not unchecked; they would have preferred no option at all.)
Opt-out means your lender can implement planned increases into effect without your explicit approval unless you choose to opt out. Opt-in, on the other hand, protects you against being subjected to any change unless you explicitly agree.
More from Invest in You:
Credit card mismanagement adds to millennials' financial woes
Wealth manager: Here's how to retire with $1 million in 20 years
Your five worst spending habits and how to change them
Recently, I experienced personally how important it is to read the fine print, not only on initial credit card agreements but on the documents credit card providers periodically send you in the mail about a change in their terms.
JPMorgan Chase sent me a lengthy document about a change they were planning to implement in the near future that would alter the terms of their initial agreement. It included a notice that unless I send them a signed letter by next month specifically refusing the change, I would lose my right to sue them if they violated my rights and I would instead be required to submit any dispute to arbitration. I immediately sent them the refusal — or opt-out — letter.
For several reasons, arbitration heavily favors the institution in cases where one individual consumer is disputing the action of a megabank or other financial firms. The firms deal frequently with arbitrators, giving them both greater familiarity with the process and the not-always-subtle influence, to avoid being too pro-consumer.
Compulsory arbitration also prevents borrowers from banding together to stop abusive practices, such as those of Wells Fargo, in which hundreds of thousands or more customers are deprived of amounts too small to justify the expense of a single proceeding but can be stopped if they can be litigated.
Indeed, the tendency to substitute compulsory arbitration for judicial action as the means for combating the derivation of individual rights is a major ongoing threat to laws protecting against fraud, discrimination and other abuses.
So read carefully not just before you initially borrow but at any time you receive information throughout a relationship. And to borrow from another institution, you will often be best served if you just say no.
— By Barney Frank, a CNBC contributor and former U.S. representative of Massachusetts and chairman of the U.S. House Committee on Financial Services. During Frank's first two years as chairman, he cooperated closely with leading officials of the Bush administration to cope with the financial crisis. In 2009 and 2010, he was a major author, along with Sen. Chris Dodd, of the comprehensive Financial Reform Bill.
Disclosure: NBCUniversal and Comcast Ventures are investors in Acorns.