Elizabeth Warren has proposed, as one of her first initiatives, that banks should simplify their standardized credit card contracts with customers to insure that customers understand what they are signing.This proposal has generated lots of enthusiasm among centrists as a modest, relatively non-political initiative, something that hardly anyone could be against, but that holds out the possibility of reducing fraud and confusion in the credit markets by at least ensuring that consumers know what they are getting into.
But what this research does suggest is that a regulator with an appreciation of how different kinds of documents shape people’s sense of their obligations might restructure the documents in order to restructure the relationship between the parties. For example, although Warren has emphasized how simplifying the terms of loan agreements might alter the negotiation between the loan officer and the consumer, it would be worth thinking about how this document mediates lots of other important relationships that impact on the stability and justice of a loan: How about the relationship among different units in a bank, or different players in the chain of economic actors involved in the packaging and resale of mortgages? We now know that one big problem in the housing crisis was the sheer difficulties in making sense of what was being bought and sold. Could different kinds of forms do some work in making these values more transparent to future potential buyers? Or how about the relationship between financial institutions and their legal departments–could certain kinds of forms make it more likely that legal staff do not cut corners? Or again, on the consumer side, would there be a style of document that would encourage an equally open conversation among spouses, for example, about their mutual obligations regarding this loan? For example, taking a page from the wider value of asking banks to produce wind-down plans for giving bank executives a palpable sense of their institution’s mortality, one could imagine a set of questions in a loan document that would encourage borrowers to actively contemplate a scenario in which they would not be able to meet their monthly payments and what would happen as a result, that might in turn spark a private conversation among spouses about how to plan for all possible contingencies or indeed about whether the risks are really worth taking in the first place.
Seen from this point of view, what looks like a very modest, minimally interventionist policy initiative–revising loan agreements–could set in motion a much larger chain of reforms.