The Credit CARD Act Turns 10
I'm Congresswoman Carolyn Maloney Vice Chair of the Joint Economic Committee and you're listening to the economic explainer podcast and the Joint Economic Committee Democrats here we explain bills from the Jaycees Democratic Committee members and talk to experts about how those bills could affect our economy ten years ago the Credit Card Act established a credit card holders bill of rights for the first time in our country's history in this our first podcast of the one hundred sixteenth Congress will be talking with Dr Neil Mahoney from the University of Chicago Booth School of business about my two thousand nine Credit Card Act Act and how it saving Americans nearly twelve billion as in billion a year while protecting them from unfair deceptive predatory lending practices from the credit card companies prior to the Credit Cards Act's passage credit card companies had fewer restrictions and how they treated consumers they could establish arbitrary cutoff times for payment deadlines raise interest rates without warning or change the terms of your agreement at any time I had one example where a consumer bought a car. They advertised it for eight percent to buy the car for for the life of the loan. Once he took out the credit card payment they raised the rate doubled it and it caught him in a never ending cycle of debt they could entice minors to open in credit accounts by using misleading practices game how charges and payments were calculated to maximize their profits and more so on the card axe tenth anniversary. Let's hear here from Dr Mahoney about his study which showed how enacting my bill turned out for American consumers. I'm randy from the J._C.. Democratic staff and I'm here with Dr Neil Mahoney. Tony First of all just discuss some that you and your colleagues performed an exhaustive study on the effectiveness of the card act. What were you expecting to find going into this study in? Did you think that the law would work so so we weren't sure <hes> you know that's why we did this study because we wanted to figure out <hes> you know whether it worked <hes> but <hes> we were in the right way to put a skeptical Nicole. When we applied <hes> to work with the data we titled Our Research Proposal a whack a mole the unintended consequences of the card act because we were interested in looking at whether sort the restrictions on over limit late fees were offset by banks charging higher interest rates or cutting back on access to credit so that was our our concern going into the project? What do you mean by whack-a-mole how how does that work? I don't know if you remember playing this Arcade Game Lacombe. Although you got this like I think it was a Fuzzy Mallet you would hit down on a mole <hes> and then another mole would pop up through another hole so this was sort of the metaphor metaphor we had in mind that <hes> well-meaning regulators would push down <hes> fees and you know in a competitive market <hes> you know if banks were charging prices which were close to their costs <hes> if you push down one source of revenue sort of have to make up that revenue by by raising some other price and so we thought maybe interest rates would pop up or banks would cut back on the supply of credit and an and we thought whack-a-mole was a good metaphor for sort of this <hes> tug of war between the regulators and the industry. Can you briefly describe the methodology for your study. It seems like it was very thorough. Yeah so you know the the Karnak was passed away almost ten years ago so may twenty second. Two thousand nine was implemented over the subsequent. On year and this was a time when probably everybody remembers the U._S.. Economy <hes> was going through the financial crisis so lots of things where we're moving around and so for us to <hes> <hes> understand the impact of the car act you know we wanted to have a control group. which would tell us so? Why would they happening to this market? If the law hasn't been passed and so fortunately from a research perspective there was a group of credit cards which were carved out of the car deck so these were a small business credit cards so people own a small business <hes> often use a credit card both for transactions and for <hes> borrowing <music> <hes> to procure supplies other costs <hes> in these markets the small business market and the consumer credit market very similar so if you looked at the years leading up to the card act interest rates credit limits utilization -Ation on small business cards and regular credit cards moved together <hes> and so this convinced us that this is this was a valid control group it would teach us of how things would have progressed if the card act <hes> hadn't been passed and so our research strategy was then to compare outcome in the consumer credit market to outcomes in this control group into see how they diverged <hes> after the phased implementation. Take the card act in a nutshell. What were your findings were? What did you discover what the study so so too big findings one that <hes> we anticipated and one that we didn't so the the finding that we anticipated was that the car tax restrictions on fees <hes> and these were primarily on over limit fees so if you say at a credit limit of two thousand bucks and you know you went to the mall and you bought a a couch and then cup of coffee and you've paid your parking ticket <hes> that you could be charged three over limit fees the couch would pull you over the limit and then these two other transactions would also entail bill over limit fees of thirty or forty dollars <hes> in the card act eliminated those and then the other main thing they did was they <hes> reduced late fees? If you're. There you know couple of days late. <hes> paying your bill. You forget to put an envelope in the mail again. Credit Card issuers could charge people <hes> large amounts in the card act <hes> limited those late fees and so I first set of results is well if you put in regulations which limit those fees <hes> the amount of revenue that that banks can get from those two types of fees were <hes> strongly reduced <hes> and so in particular thing we calculate the average account was paying something like twenty five dollars less per year in a fees in these two categories and so over all all accounts all consumers in the United States. That's a twelve billion dollar reduction in these paid on their credit cards so that was the first main result and then the second main result so to speak to this idea <hes> of wackle that we anticipated that banks would increase interest rates or reduce access to credit <hes> but when we looked in the data we saw absolutely no response on the interest rate margin on access to credit on the opening of new cards <hes> and at first it'll be completely honest. We were puzzled with that result <hes> but you know that's the beauty of looking at data it forces you to I think more and we realized actually the result makes a whole lot of sense <hes> and so I will briefly describe <hes> you know how we came to understand this sort of lack of offsetting response <hes> and I think the way to think about as the fall if markets are perfectly competitive <hes> than if you reduce the revenue banks were setting price equal to their costs they have to reduce interest rates cut access to credit credit <hes> if consumers are if consumers understand every price they're paying so they understand the interest rate they understand the fees then if they're charging less than fees they can charge more interest rates consumers. Basically understand they're paying the same price the product <hes> but if markets aren't competitive and we know actually from a large body of literature that credit card markets are not competitive and if consumers aren't fully paying attention to fees and actually seems very plausible we call them hidden fees or reason then <hes> if a regulator reduces fear avenue banks might not find it optimal to Jack up interest rates in response and so so <hes> what we find in the date is interest rates. Stay flat credit limits say flat <hes> no reduction in <hes> the opening of new cards and you know having thought about the industry more we realized that's actually very consistent with how we think about the industry <hes> and that's what bank executives were saying when the cardiac was coming down the pike that this is going to reduce their profit so it looks like what happened was. There was a reallocate nation. <hes> of profits to lower costs for consumers so if you think that you know consumers should be getting more value out of this market. That's what the regulation seems to have done so from a regulatory perspective. It sounds like the law was successful yeah if if you if your interest is in providing more value to consumers which is certainly my interests than I think it was a huge success. <hes> you know obviously you know. People who <hes> place more weight on bank profits were not as as happy about the bill but <hes> you can't please and you mentioned that you went into this study skeptical. Did you leave with a different outlook on a consumer financial regulations. Yeah I think we we left with a much more nuanced out outlook that this bill <hes> made it very family and to us that there are no parts of consumer financial markets <hes> where there's not a huge amount of competition where consumers don't understand all the prices and in those settings regulation. Asian can be <hes> beneficial to consumers. I should say in this market. The consumers who are helped the most were folks with lower credit scores so prior to the card act people with a FICO score below call at six sixties about the bottom one third of the market. We're paying huge amounts in fees the typical account <hes> someone's borrowing about two thousand dollars on their card <hes> paying a hundred and fifty two hundred dollars a year in over limit and late fees in some other fees they were charged and for these folks the Card Act reduced the amount they paid mm fees by up to fifty percent so sixty seventy dollars per year per account in savings. If you're someone who had a bunch of credit cards <hes> and we're getting whacked by all these these <hes> <hes> this was a huge <hes> change too. You know your household balance sheet. <hes> and I don't think this is probably the only market where <hes> this sort of regulation as possible obviously <hes> this isn't GonNa work in every single market but it certainly made me more optimistic about consumer financial regulation great that interests my questions than I really appreciate you taking the time yeah it was great to be on the call and that's the end of our first episode of the economic explainer with the J E C Democrats. I'm Congresswoman Carolyn Maloney and today we talked about my two thousand nine credit card the bill of rights and how it increased credit card consumer protections in my opinion the biggest takeaway from the card act is that smart financial regulation and action from Congress can save consumers billions and and eliminate deceptive and exploitive practices but we still have a long ways to go if you've enjoyed the podcast we hope you'll subscribe on items Google play Stitcher or wherever you get your podcasts follow the Joint Economic Committee at J._B._C. dims and check the show notes for more information on what we'd covered today. We're looking forward.