On December 7, 2011, the CFPB released its “prototype” credit card agreement, cautioning that it is “not a model form” and that its use is “not mandatory.”  Although the prototype agreement is being referred to as a “2-page agreement,” it incorporates a series of definitions by reference that comprise a further 4 pages of text.  So, it is probably more accurate to refer to it as a “2 + 4 page agreement.”

There are plenty of problems with the prototype agreement, including certain definitions that won’t work for a variety of credit card products unless they are modified, and the absence of several important terms like an arbitration agreement; provision for joint account-holders; the cardholder’s duty to report a lost or stolen card; the issuer’s right to accept partial or restricted payments without waiving its right to collect the balance owed; and the cardholder’s consent with regard to telephone communications with the issuer.

Here, however, I want to focus on even more fundamental issues with the 2+4 agreement: whether it is even enforceable as a contract under state law, and whether the incorporation-by-reference concept that underlies the agreement is the best, fairest way to inform consumers about their credit card terms.  I have serious doubts about both.

These issues arise because, in pursuit of simplification, the Bureau has pushed a great many important contract terms into the separate “definitions” document, which the cardholder must either seek out on the internet or ask the card issuer to send in print.  The default choice—a concept central to the behavioral economics so favored by the Bureau—is that the cardholder will accept the terms of the agreement without seeing the definitions that explain how important aspects of the agreement work. 

From this construct spring two serious problems.  First, from the standpoint of state contract law, will a court find that a contract was formed including the definitions if those definitions were not sufficiently accessible to the cardholder at the time of assent?  There have been decisions finding no agreement to contract terms incorporated by reference where those terms were not immediately available to a consumer at the time of contracting, and the CFPB’s prototype agreement seems to squarely raise this problem.  Card issuers will likely be reluctant to use the prototype form out of fear that their cardholders will later claim that are not bound by the definitions available on the internet.

Second, I question whether the incorportation-by-reference concept is really the fairest way to inform cardholders of the terms to which they are agreeing.  For years, consumer advocates have expressed concern over important terms “hidden in fine print” in an agreement, but the Bureau’s approach would hide terms on the internet, where they are surely less accessible than in the much-maligned “fine print.”  Wouldn’t it be fairer to give cardholders a single document that has all the important terms?

The real issue here is that the Bureau has taken the concept of simplification of credit agreements too far.  Credit card agreements are inherently not capable of being set forth in a two-page document, as the 4 pages of definitions in the Bureau’s prototype amply demonstrates.  Indeed, one of the reasons that card agreements are so long is that card issuers have been forced to add language over the years as a result of lawsuits brought against them.  It would be far better for the Bureau to promote TILA disclosures that highlight important terms separate from the cardholder agreement, because such disclosures would not endanger the enforceability of agreements in an effort to over-simplify them.