Outside the Box: "Industry Standard Contracts"

In view of the horror stories of mortgage borrowers who suddenly find themselves in foreclosure because of little-understood fine print in their contracts, I offer a couple of thoughts, applicable not just to mortgages, but also to all major consumer contracts, including insurance (life, health, property, liability), loans, purchase/sale of major items, warranties, auto rentals, long-term membership programs, etc.

Have the federal government, with the participation of consumer advocacy and relevant business groups, hammer out and publish “Industry Standard” (IS) contract embodying industry "best practices" designed to give consumers a fair shake for each type of transaction. Such contracts would be written in language understandable to the average high school graduate. (The contract would be independently field tested with a representative sample of high school graduates to ensure comprehension.) The IS contract would have well-defined blanks where a few critical variables, such as interest rates, prices, duration of the contract, length of warranty, penalties would be filled in. Such variables would be summarized on the first page of the contract, so consumers could then readily compare critical variables among competing vendors, knowing that the remaining terms would be identical when the IS contract is employed. Buyers under this system of standardized contracts would be more likely to compare "apples to apples."

Businesses would be encouraged, though not required to adopt the IS contract. However, any business choosing not to adopt the IS contract as written would be required to use IS language wherever their alternative contract is congruent with the IS and be required to explain in writing and using videos (see below) — again in terms field-tested as comprehensible at the high school graduate level — any differences from the IS contract, explaining relative advantages and disadvantages. Consumers considering the alternative contracts would be able to focus on the divergences from the best practices of the government-promulgated "gold standard," confident that the remainder of the contract passed muster. However, businesses would be prohibited from including variances from the IS contract defined as “abusive” by the panel designing the IS contract. (The reintroduction of usury interest-rate ceilings comes to mind.)

The government would widely publicize the IS, urging consumers to favor those businesses using the IS contract and to be wary, or at least, skeptical of alternatives. This solution would afford consumers a high degree of protection, fairness, comprehension and uniformity of terms and conditions and ease of comparison, while preserving businesses’ ability to innovate. The precedent and analogy with International Organization for Standards (ISO) standards of quality control is apt. (See www.iso.org)

Every 5 or 10 years the IS contract would be revisited by the same Government/Consumer/Business committee to make revisions, if desirable and necessary, based on the experience of the intervening years.

In formulating IS Contracts, the government side would be represented by members of the executive, legislative and judiciary branches, each with equal votes to determine the federal government’s position. (Such contracts typically are issued by national franchises doing business across state lines, so federal law would be applicable, although it might be politic to solicit input from the states along the way.) Consumer advocacy groups and business industry associations would have one vote apiece, in the overall voting on each contract provision, so the government plurality (two out of three) in cases of disagreement between consumer and business advocates, would be the deciding vote. If consumers and business can agree from the outset, the government's vote would be moot.

Given the standardized language of the IS, videos would be prepared for each form of IS contract explaining the terms and conditions, again, at the high school graduate level. (We have become a society more able to acquire information via video than in writing.) These videos would be available for viewing and downloading online and, for those without online capability, in DVDs on request from the government. Businesses might also be required either to provide such videos or to reveal the availability of such videos when proposing a contract, which would be required to contain clauses giving consumers three days to view the video and the option to back out of the contract in certain cases (much as is common practice today in major long-term contracts). Consumers would sign a form certifying that they had been either given the video or advised of its availability. As previously mentioned, businesses would also be required to present videos explaining their divergences from the IS, if they choose not to adopt it verbatim.

It’s a start. What do you think?