American Banker
Thursday, July 14, 2005

By Lavonne Kuykendall

In hopes of spurring tougher
credit card regulations, a consumer group released a study that compares the
rates and terms offered by the top bank issuers with those of credit
unions.

The Woodstock Institute’s
finding in the report, released last week, that banks’ prices are significantly
higher, and their terms more onerous and complex, is hardly surprising, since
credit unions are nonprofit member-owned cooperatives and largely tax-exempt.

Also, one of the practices
criticized in the report – universal default, in which a cardholder’s rate is
increased because of a late payment on an unrelated bill – appears to already be
falling out of favor among banks.

The American Bankers
Association argues that credit unions serve narrower, more affluent demographic
groups than banks, which must price for the higher risk. Still, the
Chicago consumer group says risk
factors and banks’ more diverse customer base cannot explain all of the
differential in pricing and policies.

The study, conducted in
December, was the group’s first on credit cards. (It has examined other types of
lending and financial services.)
Woodstock looked at the 10 largest
issuers (by receivables on March 31,
2004), the 10 biggest
U.S. credit
unions (by receivables at yearend), and the 10 largest Chicago-area federal
credit unions (by asset size on Jan. 1).

Malcolm Bush, the group’s
president, said it chose to stick with basic offerings in the study and ruled
out any secured cards and most reward cards. The researchers chose either the
simplest card offering or took the first standard card the issuer offered during
a phone call without getting any information about the caller.

“Banks tend to have fancier
cards” than credit unions, so choosing which cards to study was difficult in
some cases, Mr. Bush said. “We needed to choose a card that was comparable
between banks and credit unions. They are not always called standard cards, but
that is a good word” to describe them.

The report notes that eight
of the top 10 issuers advertise different rates for purchases, cash advances,
balance transfers, or penalties – a practice that makes price-shopping
difficult, the group says. Only half of the national credit unions surveyed, and
one of the locals, advertised a range of rates, the report says.

The top rate advertised by
any institution was 20.25% for banks, versus around 17% for credit unions. In
addition, the banks charged more types of fees, and more triggers that would
land a cardholder in a punitive interest rate, according to the
study.

Interestingly, the
Chicago-area credit unions charged higher over-the-limit and cash advance fees
than the national credit unions. Mr. Bush called that difference puzzling but
said it could probably be attributed to the difference in size. “The large
credit unions are very large, and you probably come down a couple layers in size
for the Chicago credit
unions.”

The group’s report called for
bank regulators to require simplified card offerings, an end to universal
default pricing, and improved disclosures and notice of the effective rate in
billing statements.

“Vigorous enforcement of
existing laws and the banning of practices which have a deceptive effect because
of their complexity are needed,” the report said.

Keith Leggett, a senior
economist at the ABA, said, “Big
credit card issuers are marketing to a very diverse population.” By contrast,
“credit unions at least historically serve a more homogenous population; they
cherry-pick their membership.”

Studies show that credit
union members are more affluent than the general population, he said.

Defaulting on a credit union
card can be embarrassing, according to Mr. Leggett, who cited one credit union’s
newsletter that published the names of customers whose membership was in doubt,
possibly because of defaults.

Though Mr. Bush acknowledged
credit unions’ membership limits, he also said, “In the last 10 years federal
regulators have expanded the field of memberships. The potential for diversity
is there.”

Risk factors cannot entirely
explain the higher costs of bank cards, he said. “It is not about credit risk.
It is just a matter of maximizing fee income at every point.”

Nessa Feddis, a senior
federal counsel at the ABA, said
universal default is not applied as often as the
Woodstock study portrayed. “It
wouldn’t make any sense,” she said. “Why would you increase … [the customer’s] rate, so they would open one of many solicitations they get and go somewhere
else?”

A spokeswoman for JPMorgan
Chase & Co. said it stopped using universal default pricing in
March.

Citigroup Inc. modified its
policy recently. It notifies customers in advance when their rates are about to
go up because of delinquencies with other creditors. The customers can then “opt
out” of the increased rate, in which case they cannot renew the cards after they
expire but may continue to pay off their balances under the old rates and
terms.

Bank of America Corp.,
Capital One Financial Corp., and BB&T Corp. say they never had universal
default policies. A spokeswoman for National City Corp. says it still has one,
which it discloses in contracts.

Mr. Bush said he was
“delighted” to hear that some issuers were dropping universal default. He said a
House committee’s approval last month of legislation that would prohibit the
practice could be having a chilling effect.

His group describes its
mission as promoting economic development in lower-income and minority
communities. It is funded mostly by foundations, though it receives some backing
from the banking industry. An executive from ABN Amro Holding NV’s LaSalle Bank
Corp. is the board’s treasurer, and the directors include executives from two
other Chicago financial
institutions: MB Financial Inc. and North Side Community Federal Credit
Union.

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