Make Your Lending Agreements Clear

As the government moves toward ensuring credit card agreements are clear to customers, credit unions can voluntarily do the same.


We’re pleased to start off our new monthly Theme Week with a look at lending topics in the credit union industry. Our newsletters and website this week will feature data-filled content addressing various lending topics — from opportunities in student loans to trends in short-term loans. In that vein, we’d like to start our blog posts with a topic credit unions, with their member-friendly priorities, should tune into: making loan agreements easier to read.

It’s Elizabeth Warren’s favorite cause: ensuring consumers fully understand the prices, risks and terms they are agreeing to when they sign on for credit cards. Warren, who's essentially the founder of the U.S. Consumer Financial Protection Bureau, must be relishing the bureau’s latest moves toward getting more clarity in credit card agreements.

Last week, the protection agency released a prototype of a credit card agreement that uses much simpler language and an easy-to-read design as a part of its “Know Before You Owe” initiative. It’s also pared back to only 1,100 words from the average credit card agreement’s 5,000 words. The CFPB recently posted the design for public comment.

So far, the new agreement isn’t going to be mandatory. But credit unions can move toward easing member confusion over the finer details of credit card terms by revising their own format. Pentagon Federal Credit Union ($15.1B, Alexandria, VA) has moved toward simplification by agreeing to test the CFPB’s new model. Pentagon FCU, with 56.4% of members holding credit cards, is the second-most successful credit union in terms of credit card penetration as of Sept. 2011, according to Callahan & Associates 2012 Credit Union Directory. School Employees Lorraine Count Credit Union ($136M, Elyria, OH), which has 56.9% of members with a credit card, ranks first.

“Credit cards can be complicated, with many moving parts that impact the cost to consumers,” says Raj Date, the Special Advisor to the Secretary of Treasury on the CFPB, in a statement. “When a consumer has to read through pages of legal fine print in their credit card agreement to figure out how their card works – it’s easy to get confused. With a short, simple, easy-to-understand credit card agreement, consumers can clearly see the terms of the deal and make the decisions that are right for them.”