Citibank CEO Vikram Pandit Says Banks Should Explain Credit Products in "Plain Language"

Here. An excerpt:

I believe that all financial institutions should be required to disclose, in plain language, the essential facts about their products, especially credit offerings. The disclosures currently required by law theoretically tell the customer all he needs to know—provided, of course, that he can get through the fine print. But the information can be complex, confusing and hard to access.

For instance, consumers tend to assume that a credit card with the lowest annual percentage rate is best, but that’s not always true. At Citi we offer a product called the Simplicity Card. Customers are not charged annual fees or late fees and are not assessed penalty rate hikes. The interest rate is higher than the rate for many other cards. But for a customer used to being charged those fees, the actual cost of using the card is lower.

Yet we can’t make that crystal clear because other card issuers are not required to disclose the total potential cost of credit for their products. Hence consumers can’t make direct comparisons. They should be able to—which means that issuers should be required to disclose the full cost of credit for their products, which includes late fees and interest increases, in one clear sum.

Third, we need stronger product regulation to protect consumers against behavioral arbitrage. This is one instance where market mechanisms are inadequate to protect consumers’ interests.

What happens is often similar to the card example I just cited. When buying a car, for instance, a consumer is likely to choose the financing plan with the lowest up-front cost. Yet once every other cost and fee is factored in, the car with the lower monthly payment is often more expensive than the one parked next to it with the higher monthly payment. Think of the pre-crisis explosion of ARMs, Option ARMs, no-down payment loans and the like—they looked cheap but turned out to be very expensive.

Other countries have addressed this problem by setting loan-to-value ratios for mortgages. These countries have clearly decided that it’s not enough to leave things at caveat emptor. Some of the real-life patterns we see in consumer behavior lead to decisions that harm individuals’ balance sheets and threaten systemic safety. As we learned from the credit crisis and housing bubble, bad individual consumer decisions are not necessarily isolated events that hurt only the decision makers. In the aggregate, they can threaten the prosperity of the entire global economy. The point of rules against behavioral arbitrage is less to protect individuals from their own poor decisions than it is to protect the rest of us.

And here's what he says about credit scores:

We in the U.S. have historically relied on credit scores—an imperfect and backward-looking measurement that focuses on past borrowing. But many Asian countries have gone to a forward-looking approach. Credit bureaus and regulators have jointly created databases and regulations that foster information sharing on both sides of borrowers’ balance sheets and their income statements. Lenders then scrutinize this data to make informed assessments of creditworthiness and the affordability of debt.

 

Comments

[Moncler Online]

well this blog is great i love reading your articles.

[Martin Christy]

What can a citizen do to end the relentless barage of constant credit card solicitations from Citibank for their credit cards? Without exageration, I have received no less than 5 solicitation letters in just the last 2 weeks. This is excessive, especially since I responded twice by returning their letters with their applications indicating I am not interested in their credit offer(s), and that was only a month ago._ Is there such a thing as harrassment through the mail with excessive solicitation from the same company? How would the CEO of this company like being constantly pesterd with a sales pitch?

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