Credit Card Regulation Has Limits

Elizabeth Warren, the Harvard law professor who chairs the Congressional Oversight Panel, was a guest on HBO’s Real Time with Bill Maher show on Friday. And she drew an analogy that graphically explains the limitations of new credit card regulations that come into force today.

She said that relying on laws to control credit card companies was like building a fence on open prairie. The new act erected 10 fence posts (one for each of its key provisions, depending how you define “key”), but any half-decent lawyer–and card issuers employ armies of them–could get around them.

Ms Warren advocated the creation of a super regulator. To extend her simile, the regulator would be like cowboys, permanently stationed at each end of the fence, who would turn back stampeding steers.

Credit Card Terms Already Changed

Issuers have already taken advantage of the nine months between the signing of the act and its implementation to change many credit card terms in ways that disadvantage their customers.

For example, the law prevents companies from hiking credit card rates except in certain very specific circumstances. So the issuers simply switched many cards from fixed-rate deals to adjustable-rate deals, allowing them legally to increase the interest charged when wider rates increase.

More Loopholes

Yesterday’s Washington Post carried a piece under the headline, “Beware of the Loopholes in the New Credit Card Law” that detailed other potential abuses. These include pressurizing customers to opt into costly overlimit fee programs, the re-balancing of fee structures so that those not covered by the new law become more expensive, and the imposition of exorbitantly high penalty interest rates, which are still not capped by the federal government.

Chi Chi Wu, who is a staff attorney at the National Consumer Law Center, told the Post:

We’ve always known credit card companies are very, very clever in getting more profit out of consumers. And they are going to be even more clever in finding ways to make more money even with these new rules.

Credit Card Rates Up

Meanwhile, ABC News reported–also yesterday–that the average rate offered to those making new credit card applications was 13.6 percent last week, up from 10.7 percent during the same period last year.

At the same time, the number of credit card offers for accounts with annual fees jumped from 25 percent in the last quarter of 2008 to 43 percent during the same period in 2009. And issuers have been imposing other new sorts of fees, including those for paper statements and account inactivity.

Fees levied on balance transfer credit cards have also increased widely. For instance, JPMorgan Chase has hiked its balance transfer fee from three percent to five percent.

Credit Card Companies Feeling the Pinch

Sunday’s Financial Times covered the story from the industry’s point of view. It said:

US credit card issuers are facing a $12bn revenue shortfall this year from price limitations imposed by new rules that take effect on Monday, according to an analysis by law firm Morrison Foerster…. Over five years, the overall hit to the industry could exceed $50bn, analysts and industry groups said.

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