Credit Card Reform Act of 2009 – Is It Working?

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Since the enactment of the Credit Card Act of 2009 back in February of 2010, are credit card holders really better off? Studies show confusion still lingers and questions still abound regarding terms of the card deals, how cards are marketed, billed, and regulated in the United States. Gone are the surprise interest-rate hikes, shifting due dates for monthly payments, and sky-high fees for minor infractions.

Credit Card Industry Survey

During a conference in Washington, D.C., the Consumer Financial Protection Bureau says the law is working and they released the results of the first government analysis of the CARD Act’s impact. According to Elizabeth Warren, the bureau’s acting director at that time, “One year after the CARD Act took effect, we think it is appropriate to ask whether it has had its intended effects and how the credit card marketplace has changed.” The conference, called “The CARD Act: One Year Later”, focused on what has changed since the law took effect, what those changes mean for consumers, credit card issuers, and the market, and what still needs to be done to improve consumers’ ability to compare credit card products and fully understand their terms.

The CFPB conducted voluntary surveys of the nine largest credit card issuers, representing 90 percent of the credit cards issued in the United States. The Office of the Comptroller of the Currency also conducted surveys of credit card pricing practices and the bureau polled consumers about their experiences since the new regulations took effect. Among the findings released in the fact sheet:

  • Surprise interest rate hikes on existing credit card balances have been significantly curtailed, from 15 to just 2 percent today.
  • Late fees have been substantially reduced.
  • Over-limit fees, once common in the industry, have virtually disappeared.
  • Consumers say their credit card costs are clearer but terms are still confusing.

What Do the Banks Think About the Reform?

Bankers say the law is beneficial to consumers but those benefits come with a cost. The day before the bureau’s credit card conference, Bank of America, the second-largest issuer of credit cards, made clear the act’s cost. The bank issued a statement saying that its credit card division’s bottom line was affected by the CARD Act regulations and that it had to adjust its 2009 financial statements to reflect a $20.3 billion write-down due to “deteriorating credit quality and the adverse impact from The CARD Act on Bank of America’s credit card operations.”

However, Warren also noted that the year saw some card issuers focusing their efforts on skirting the new card law by finding loopholes or creating new services that weren’t specifically banned by the law. “As soon as the CARD Act became law, it seems that some industry lawyers were asked to find slightly different ways to accomplish that which the legislation was intended to outlaw. To its credit, the Federal Reserve Board responded with a rule-making proceeding designed to close the loopholes.” Warren said that continually writing new rules to cover every potential industry practice was costly for consumers and the industry, especially small banks and credit unions.

The Costs of the CARD Act

So, to get a true reading on the impact of this law, it was necessary to go back to late 2008 for a look at how things were before the CARD Act started to change things. To do this, compared terms on roughly 500 credit card offers from late 2008 and late 2011, and found the following impacts that may be attributed to the CARD Act:

  • Higher Interest Rates. From the end of 2008 to 2011, the prime bank rate was unchanged but credit card rates rose by an average of 2.1 percent. Based on roughly $600 billion in outstanding U.S. debt, a 2.1 percent increase translates to an annual consumer cost of $16.8 billion.
  • Heavier Burden on Customers with Poor Credit. The CARD act was supposed to protect consumers with credit problems. But instead of lowering the interest rates on subprime cards, the market actually saw an increase of 3.4 percent from 2008 to 2011.
  • Ballooning Balance Transfer Fees. Balance transfer fees also have risen over the past five years from 2.1 to 3.3 percent – costing consumers an additional $120 on a $10,000 balance transfer.

Benefits of the CARD Act

We don’t want to focus entirely on the negative aspects of this new credit card reform act. There have been some benefits as well:

  • Fewer Late Fees
  • Fewer Over-the-Limit Fees
  • Lower Over-the-Limit Fees

At this point, it is impossible to tell how much the lower fees in some areas are counteracted by higher fees in others as a result of the CARD Act, but the 800-pound gorilla is the $16.8 billion added annual cost due to higher interest rates. But, one thing the CARD Act has done is shift the way the cost burden is distributed among cardholders. By protecting cardholders who are late with payments or have credit problems, the CARD Act seems to have caused cardholders to pay higher interest rates.

The consistent theme is that when regulators micromanage the banking business to benefit certain customers, the outcome seems to be higher costs for everyone.

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