usury

Congress Mulls More Credit Card Restrictions, in Legislation Likely to Backfire on Consumers

by Hans Bader on January 5, 2010 · 3 comments

in Deregulate to Stimulate, Economy, Legal, Politics as Usual, Precaution & Risk, Sanctimony

Some in Congress want to impose interest rate ceilings on credit cards and restrictions on interchange fees.  Australia tried the same thing, and it backfired, harming consumers by forcing credit card companies to increase annual fees on responsible credit cardholders and scale back rewards programs.  (Ironically, recent interest rate hikes are partly the product of a law recently passed by Congress, the CARD Act, which forces responsible people to bear the costs of irresponsible borrowers.)

As law professor Todd Zywicki notes in the Wall Street Journal, the proposed legislation would harm both consumers and small businesses, since it would

reduce the quantity and quality of credit cards by restricting credit availability and cutting back on product innovation or ancillary card benefits. This is exactly what happened when Australian regulators imposed price controls on interchange fees in 2003: Annual fees increased an average of 22% on standard credit cards and annual fees for rewards cards increased by 47%-77%. Card issuers also reduced the generosity of their reward programs by 23%. Innovation, especially in terms of improved security and identity-theft protection, was stalled. Card issuers also increased their efforts to attract higher-risk customers who generate interest and penalty fees to offset lower interchange revenues from lower-risk transactional users.  The most important pro-consumer innovation in payment systems of the past two decades has been the general disappearance of annual fees on most credit cards. Cardholders now carry and use multiple cards at little or no cost. The consequences for consumer choice and competition have been profound—card issuers compete for consumer business literally every time they open their wallet to make a purchase.  Annual fees are essentially a tax on card-holding. Policies that produced a return of annual fees would strangle this process of competition by making it more expensive for consumers to hold multiple cards and to switch cards easily. Small businesses, three-quarters of which rely on credit cards, would also have to pay more to maintain access to multiple credit lines, stifling the most potent engine of economic recovery.

Earlier, Congress and the President misguidedly attempted to reduce burdens on irresponsible credit card borrowers, through a new law, the CARD Act of 2009 (Credit Card Accountability Responsibility and Disclosure Act), that backfired and resulted in the return of annual fees, bizarre interest rate hikes for some responsible borrowers, and the elimination of many cash back and rewards programs.

All these bailouts are taking their toll on the economy.  Economists and real estate experts say a $75 billion mortgage bailout program devised by the Obama administration is actually harming the economy, the housing market, and the construction industry.

Regulation of the Day 93: Predatory Lending

by Ryan Young on January 2, 2010 · 1 comment

in Deregulate to Stimulate, Economy, Regulation, Regulation of the Day

Congress has used the financial crisis as an excuse to regulate what it calls “predatory lending.” As so often happens, its new regulations have had unintended consequences.

A bank in South Dakota, in order to comply with the new rules, is charging 79.9 percent interest for one of its low-limit credit cards. The pre-regulation rate was 9.9 percent.

The Credit Card Accountability, Responsibility and Disclosure Act of 2009 makes it illegal to charge annual fees greater than a quarter of a card’s limit. For small-balance cards, the allowable fees are tiny now. That leaves banks with three options:

-1. Lose money. The Wall Street Journal correctly notes that “Banks can’t be expected to give money away, even if Congress is in the habit of doing just that.” So this option is unlikely.

-2. Stop offering low-limit cards. This will hurt people who need them, such as people with low incomes, people with bad credit records, and young people who are trying to establish a credit record.

-3. Charge higher interest rates to make up for the money lost in fees. This is exactly what is happening here with the 79.9 percent rate for a $250-limit card.

If the bank calculated correctly, the 79.9 percent rate will be roughly a wash compared to the earlier high-fee, low-rate policy. But different customers will be paying. The people who incur a lot of interest-rate charges are usually the people who can’t afford them. And they’ll be paying a lot more than they were before the CCARD Act.

People who can afford to pay their balances on time often don’t pay little or no interest interest anyway. The 79.9 percent rate doesn’t really affect them. And now their annual fees have gone way down. The CCARD Act is, completely unintentionally, a wealth transfer from poor people to richer people. Congress is actively hurting the very people it intended to help.