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Credit card regulation: Do we really need it?

by Peter Andrew

In a recent news blog, IndexCreditCards.com reported that federal regulator the Consumer Financial Protection Bureau (CFPB) is asking interested parties -- from individual citizens and consumer-advocacy groups to credit card companies and trade bodies -- to comment on how effectively the Credit CARD Act of 2009 is working. Will the doubtless authoritative conclusions that flow from this consultation shut down the great regulation debate? Rarely in the annals of porcine aviation has a prospect seemed less airworthy.

Writing on Jan. 23 in Collections & Credit Risk magazine, a trade journal, Kevin Wack described the CFPB's current exercise as a "monumental challenge." That's because, in today's highly partisan political discourse, few on either side of the debate recognize much validity in the other's arguments, and those in both camps can find plenty of so-called "facts" to prove conclusively -- though only to their own supporters' satisfaction -- that their view is correct. One might enjoy the oft-quoted remark of British jurist Lord Wigoder: "The arresting officer is as convinced of a defendant's guilt as the defendant's mother is of his innocence. Neither is a reliable guide."

Credit card companies' case

MoneyRates.com Senior Financial Analyst Richard Barington identified two key areas in which consumers might have suffered as a result of some unintended consequences of the CARD Act:

  1. Higher credit card rates: Between the end of 2008 and late 2011, the prime bank rate remained static. While mortgage rates generally fell during this period, credit card rates increased by an average 2.1 percentage points. Given that the Fed believes national credit card debt was approximately $800 billion at the time, that rate hike could have cost consumers as much as $16.8 billion. Ironically, given the act's objective of protecting vulnerable consumers, it was people with poor credit who likely suffered the highest rate increases.
  2. Balance transfer credit cards' fees: Before the act, nearly one in three balance transfer credit cards capped the fees they charged on the amounts transferred. After, just 4 percent did -- and the fees themselves had generally risen.

But…

However, things may be more complicated than they first seem, and some, most or all of that $16.8 billion and other consumer costs may not have resulted from the CARD Act. In acknowledging this, Barrington points to the aftermath of the credit crunch, the worst effects of which were being felt at precisely the same time that the legislation was being proposed, enacted and implemented. It's simply not possible to differentiate between the impacts on card issuers and their customers of the new law and the wider economy.

That's especially true of credit card rates. In the credit cards chapter (PDF) of its December 2012 report The State of Lending in America, the Center for Responsible Lending (CRL) points to the sharp post-credit crunch fall in credit card debt -- to $855 billion in Aug. 2012, down from over a trillion dollars in 2008. That, at least in part, must surely have been a result of shocked American households deleveraging. Isn't it likely that some of that 2.1 percentage-point hike in card interest rates was an attempt on the part of card issuers to compensate for the consequent fall in their revenues? And isn't it equally likely that those same card issuers, faced with then unknown bad-debt write offs, closed the accounts of those they regarded as bad risks, so reducing the availability of credit for reasons wholly unconnected with the new law?

Card sharps

So we're back to where we started: two sides equally convinced of their correctness, and ready to spin the available facts and figures to make their cases. It's actually quite startling to realize just how impossible it is to find even a glimmer of objective truth and certainty among such a wealth of recent empirical data.

If it finds the CARD Act hurt through higher costs and lower credit availability the very people it was designed to protect, then the chances of similar consumer-protection laws being enacted in the future are likely to shrink. However, if it determines that the law worked well, then it's pretty much inevitable that the chorus calling for ever-greater price controls in the card market is going to be both loud and insistent.

Sign on the dotted line

Perhaps the most likely outcome is a report that avoids these two extremes. Government intervention in private marketplaces frequently brings unintended consequences, and the CFPB (even though, as a regulator, it would be like a turkey voting for Thanksgiving) would be wise to acknowledge this. However, in an advanced, industrial -- or post-industrial -- society, 18th-century libertarianism may have only limited applications. The original libertarians envisaged two parties of equal standing willingly entering into a contract that both parties fully understood. That made sense then: It was a time when only a tiny, educated elite could sign their names at all, let alone on a legally binding contract that could ruin their lives.

Today, nearly everyone can sign their name, but very few can fully understand the complex legal documents to which they're expected to attach their "John Hancocks" on a regular basis. Twenty-first century credit card agreements are written and enforced by highly paid armies of specialist lawyers, and signed -- and their consequences endured -- by consumers who are sometimes ill-educated, vulnerable and wholly incapable of comprehending the obligations they are undertaking.

Published 02/04/13 (Modified 11/20/13)


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