Credit card regulations badly applied

When the Credit CARD Act of 2009 was signed into law, protections for students and young people were widely seen as among its most important provisions. Personal finance columnist Michelle Singletary, writing in the Washington Post, recently said those who harbored such high hopes were naive.

Sadly, she’s probably right. Who in their right mind would think that something as trifling as a federal law could stand between credit card companies and a profitable target market, especially when the Federal Reserve appears to regard its regulatory role as that of industry lapdog?

Student credit cards for all

Think that’s a bit hyperbolic? Well, one of the key provisions of the act was to ban people under 21 years from being given credit cards without an adult to co-sign. Since that could have been unfair to rich kids, and those who were working and more than capable of maintaining a card, a single exception was allowed: those under 21 who had sufficient independent means to make payments could have cards without a co-signer.

Sounds sensible? It was–right up until the Fed decided to define sufficient independent means so widely as to make it meaningless. Credit card companies could choose to count all income as independent: not just wages, trust fund incomes, dividends and so on, but also scholarships and grants, parental contributions and even student loans.

And, just in case there was a single student out there who still failed to qualify, the Fed decided that card issuers had no obligation to verify any income claims. So if 18-year-old S.Tony Broke said he was making $40,000 a year, there was no requirement to check out his story.

Credit card offers uncontrolled

Ms Singletary’s Washington Post story highlighted other areas in which the Credit CARD Act’s provisions are being poorly enforced. For example, the law tried to prevent credit card companies from offering tangible inducements to students on campus. This was supposed to end promotional activities that traditionally lured first-year students into making credit card applications.

But a study of 300 students by the University of Houston Law Center found that 32 percent of first-year students interviewed recalled seeing credit card companies’ promotions on campus. That’s very close to the numbers in previous years, before the new law came into effect. Seventy-six percent claimed to have received a pre-approved card offer in the previous 12 months.

And, although the Fed agrees that card issuers can’t say that you’ll get a free slice of pizza or T-shirt if you sign up for a card, it sees nothing wrong with them saying you can have exactly the same tangible inducements if you listen to their pitch. And other credit card offers that provide intangibles (discounts, introductory rates, rewards points and so on) are completely unregulated.

Credit card regulation and regulators

Of course, it’s perfectly reasonable to argue that government has no business meddling in private contracts, and that all credit card regulation is wrong. That’s a valid political position. But it’s not one for a regulator to take. When an act of congress is properly signed into law by a president, the regulator’s job is to enforce it as best it can–like it or not. When it comes to student credit cards, the Federal Reserve seems not to have lived up to its duties.

Published 01/13/11 (Modified 11/19/13)