The CFPB hosted a hearing in Chicago on the impact of the Credit Card Accountability Responsibility and Disclosure (CARD) Act on the credit card market, the same day it released a report on the CARD Act.
The CARD Act was passed to limit the worst practices of credit card issuers. The act limits the amount of fees issuers can charge, requires issuers to consider a borrower’s ability to repay before extending credit, prevents interest rate increases during the first year, requires advance notice of rate changes after the first year, limits rate increases on existing balances, requires borrowers to opt-in to over-limit protection, and enacts special protections for borrowers under the age of 21.
The CFPB’s report found that the CARD Act largely succeeded in achieving its goals: it reduced the amount that consumers paid in fees, increased transparency in pricing, and decreased the availability of deceptive credit. Increased interest rates on existing balances and over-limit fees largely disappeared, while the size of late fees decreased substantially. It is now easier for consumers to compare credit cards because the act’s limitations on hidden fees result in stated fees more closely reflecting the true cost of credit. Overall, the total cost of credit declined by 194 basis points from the fourth quarter of 2008 to the fourth quarter of 2012. Outstanding subprime credit card debt decreased substantially, as has credit card debt among borrowers under 21.
Issues remain in the credit card market, however. Woodstock Institute Vice President Spencer Cowan testified at the CFPB hearing about our concerns. He thanked the CFPB for recent enforcement actions against Chase and Discover for deceptive practices regarding add-on products such as identity protection and credit monitoring and asked the CFPB to assess the value of these products relative to their costs to consumers. He also noted that fee-harvester cards can still charge high up-front fees that can eat up a substantial percentage of the credit limit and result in over-limit charges. Cowan pointed out that many consumers cannot qualify for credit cards and instead look to high-cost, small-dollar loans. He urged the CFPB to enact consumer protections for all small-dollar loans, including longer-term installment loans.
Other consumer advocates brought up pressing concerns to the CFPB as well. Lucy Mullany of the Illinois Asset Building Group pointed out the dangers of allowing credit on prepaid cards. Attorney Angie Robertson discussed how mandatory arbitration clauses harm consumers, while Jerome Lamet of Debt Counsel for Seniors, Veterans, and the Disabled urged a return to strong usury caps for all forms of credit.
The CARD Act demonstrates how strong legislative reform and carefully crafted regulations can vastly improve credit options for all consumers, but we must remain vigilant as new predatory practices emerge.