Credit Card Regulation Imminent

Most of the provisions of the Credit Card Accountability, Responsibility, and Disclosure Act of 2009 (the Credit CARD Act) are due to come into force four weeks today, on February 22. But opinion is divided on just how effective the new credit card regulation will prove.

Credit Card Companies’ Shares Down

Last Friday, ABC News reported that shares in two credit card companies tumbled when Scott Valentin, an analyst at FBR Capital Markets, predicted that the credit card market would shrink as a result of three factors, one of which was the new law. American Express shares fell 8.5 percent, while Capital One fared even worse with a 12.1 percent drop.

The ABC News report said:

During a conference call Thursday, American Express Chief Financial Officer Dan Henry noted that the regulations could lower AmEx’s yields on credit cards, which were at 9.7 percent in the latest quarter. Margins at Capital One are also expected to decline to about 15.5 percent, down from 16 percent, Valentin noted.

Credit Card Trends Uncertain

But not everyone sees credit card trends as being so clear cut. Also last week, the New York Times carried a piece questioning whether the new law would have teeth as sharp as Mr. Valentin thinks.

It pointed out that the current regulator, the Office of the Comptroller of the Currency (OCC), is on record as opposing some of the key provisions of the Credit CARD Act, and questioned just how enthusiastically it would enforce laws with which its senior officials disagree. And it quoted Travis B. Plunkett, legislative director for the Consumer Federation of America, thus: “The O.C.C. to the end fought the rules and tried to get huge exceptions, carrying water again for the large banks they were regulating. Now they have to enforce this law that they disagreed with.”

New Law Already Leaky

Back in May, when the President signed the new act, Congresswoman Carolyn B. Maloney (D-NY), wrote about the law, which she had co-authored: “This legislation, Public Law 111-24, will end the most abusive practices of the credit card industry and level the playing field between cardholders and credit card companies.”

But her optimism already seems misplaced. Since May, card issuers have found highly creative–and entirely legal–ways to generate new streams of income that are likely, at least in part, to make up for the revenues that the new law cut off.

For example, Alliance Data Systems recently announced that it would charge its customers a dollar a month for the privilege of receiving statements by mail. And, of course, many companies used the grace period between the act’s signing, and its implementation to hike rates, introduce fees, and generally change credit card terms and conditions in ways that were disadvantageous to consumers.

Nature of the Beast

Some question whether it is possible to frame laws that can effectively contain those who issue credit cards. Last July, Shailesh Mehta, who used to be chairman and CEO of Providian Financial, recorded a remarkably candid interview for PBS’s Frontline program. In it, he observed:

[Some industry people will say,] “As long as I’m in compliance with what the government says, it’s none of anybody’s business to tell me what to do.” That’s the kind of mind-set with which … some people work. … “You make the stupid laws, I’ll comply, and I’ll make money. … Tell me the rules, and then I’ll outsmart you all.” …

A New Regulator?

Whether or not it will ultimately turn out to be possible to rein in credit card companies, many in government plan to keep trying. Their latest move is to propose the creation of a Consumer Financial Protection Agency, which, they hope, can close off legislative loopholes even as issuers discover or create them. Chuck Bell, who is programs director for the Consumers Union, is an advocate for the new agency. He was quoted earlier this month as saying:

Not surprisingly, the credit card companies have been resisting and stonewalling fair consumer protections every step of the way. Many consumers are reeling from the industry’s last-minute efforts to impose drastic rate increases on balances, add new fees and penalties, and jack up minimum payment requirements, before the law went into effect. Creating a national Consumer Financial Protection Agency is the next critical step to stamp out new tricks from the credit card industry, and help millions of Americans get out of the cycle of never-ending debt.

Published 01/25/10 (Modified 04/23/12)