Way back in 2009, a law was instituted with the sole purpose of protecting American consumers from funny business by the credit card companies. The law, called the Credit Card Accountability Responsibility and Disclosure Act, the CARD Act as it was conveniently called, enacted some major changes in the way banks can advertise, charge fees, assign interest rates, and made them more responsible for disclosure of terms. So after these years have passed, how has it affected the public? Economists recently released a report with some interesting answers to that question.
The CARD act introduced legislation to protect borrowers on several different levels, but industry experts and analysts, knowing the power and arrogance of the big banks, assumed that they’d find away around the measures and continue to do business as normal, perhaps by jacking up interest rates or tacking on more indecipherable fees. The banks would keep squeezing the consumer with little regard for the law, they thought, and studying empirical evidence was just a formality.
But what Neale Mahoney, an economist at the University of Chicago’s Booth School of Business, found was something completely different – the CARD act had actually worked.
“I went into the project with this sort of conventional wisdom that well-intentioned regulators would force down fees and that other fees and charges would increase in response,” said Mahoney, but “we find no evidence of an increase in interest charges or a reduction to access to credit.” In fact, the legislation had effectively forced down fees and payments for many cardholders, particularly those with less-than-perfect credit scores or low incomes.
The study, co-authored by Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Office of the Comptroller of the Currency and Johannes Stroebel of New York University’s Stern School of Business, went on to estimate that in those 3 odd years and change, the act has saved American consumers about $20.8 billion a year, dwarfing any benefit even drafters of the financial regulations could have hoped for.
The research has left everyone scratching their heads - how is it that the credit card companies, unrivaled behemoths in the financial services industry, have failed to adjust to the laws, finding ways to keep collecting business as usual?
Ostensibly, after the CARD act was passed and pashed in, the only recourse the banks would have was to raise interest rates on borrowers. But in the complex and overwhelming world of terms, fees, limits, overdrafts, late payments, and APR, raising interest rates is the ONE thing that consumer can track – and carefully monitor. The bottom line is that if a bank just hiked up their interest rates to compensate, they’d lose a lot of business as consumers have more information available at their fingerprints than ever to shop around for a good deal.
The bank’s malfeasance was legendary. They would dragnet people in with introductory offers and balance transfer options, only to stick them with usury-level interest rates once they had them engaged. They raised interest rates at will, without warning. However, the shell game of charging fees outpaced all other sources of revenue for them. The two most popular fees (with the bank) included penalties for late payments and levying borrowers who spent over their credit limits. In fact, the banks would rearrange the posting sequence of transactions in order to be sure to assess a higher volume of overdrafts, instead of simply not permitting the charges to go through. They would also float the payment due date to different days of the month, in order confuse consumers and assess more late fees, as well as charging fees for Internet or phone payments. The Draconian code of fees and charges went on, far past the point of the ridiculous.
2009’s CARD act set to clean up the bank’s unmitigated fleecing of their credit card consumers. Banks were no required to send out their statements and bills at least 21 days before payments were due. The monthly due date had to remain fixed, and if it happened to fall on a weekend, any payments that posted the following Monday were not to be hit with a fee. Spikes to interest rates could only come to effect with a 45-day notice, and fees like late fees, were limited to once a month. No more would there be fees for a consumer who wanted to pay by phone or via the Internet.
The study concluded that the new laws saved each consumer an annualized 2.8% of their average daily balance, and subprime or low-credit borrowers were paying a typical balance of 20.3% plus an additional 23.3% in fees, most of which have been eradicated out of existence.
It wasn’t the conclusion they expected to find, but so far, so good for consumers, thanks to the CARD act.
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