Did the Credit CARD Act Lead to Higher Interest Rates or Just More Honest Rates?

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Results of research on the impact of the CARD Act on the credit card market. Based on the report "Credit Card Clarity", presented at the American Council on Consumer Interests annual conference in 2011.

Published in: Economy & Finance, Business
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Did the Credit CARD Act Lead to Higher Interest Rates or Just More Honest Rates?

  1. 1. Did the Credit CARD Act Lead to Higher Interest Rates or Just More Honest Rates? Josh Frank Senior Researcher Center for Responsible Lending 510-379-5518 [email_address] www.responsiblelending.org
  2. 2. Card Act passed in May 2009 <ul><li>Implemented in 3 phases, with most provisions taking effect in February 2010 </li></ul><ul><li>Many major changes to rules including: </li></ul><ul><ul><li>No changes to price on existing balances </li></ul></ul><ul><ul><ul><li>(except in certain special circumstances) </li></ul></ul></ul><ul><ul><li>Payments no longer allocated low APR 1 st </li></ul></ul><ul><ul><li>More payment time/reduced penalty fees </li></ul></ul><ul><ul><li>Many other price gimmicks eliminated such as rate floors and “pick-a-rate” </li></ul></ul>
  3. 3. There have been claims of rising rates due to CARD Act in the media <ul><li>Claims that reforms cut credit access and raise price are highly misleading </li></ul><ul><ul><li>Claims rest on limited, incomplete data </li></ul></ul><ul><ul><li>Claims do not consider economy </li></ul></ul><ul><ul><li>“ Record high rates” especially wrong </li></ul></ul><ul><ul><ul><li>Raw rates only “record” with data series of less than 5 years history (and again wrong data to use) </li></ul></ul></ul><ul><ul><ul><li>Spread over prime also misleading </li></ul></ul></ul><ul><ul><ul><ul><li>Spread statistically highest when prime is low and losses high </li></ul></ul></ul></ul>
  4. 4. CRL Examined Several Data Sources <ul><li>Federal Reserve tracks offered and actual rates </li></ul><ul><li>Bank financial statements </li></ul><ul><li>Mintel Comperemedia tracks mail offers </li></ul><ul><li>Creditcards.com tracks consumer and business rates </li></ul><ul><li>Data examined both graphically and through regression analysis controlling for economy to see if there was evidence of credit tightening/rising prices linked to regulatory events (CARD Act passage, CARD Act implementation, and Federal Reserve pre-CARD Act final rules). </li></ul>
  5. 5. What data should be used?
  6. 6. What the RIGHT data show…
  7. 7. No Evidence of Rate Increase from New Rules
  8. 8. Full Regression Results
  9. 9. Full Regression Results Difference Model
  10. 10. Mail Volume Shows NO Evidence New Rules Cut Access Mail increase was to all credit risk segments.
  11. 11. Full Regression Results Mail Volume
  12. 12. Full Regression Results Mail Volume-Difference Model
  13. 13. NO Evidence of Rate Increase: Business Card Comparison <ul><li>CARD Act does NOT apply to business cards </li></ul>
  14. 14. Full Regression Results Business vs. Consumer Cards
  15. 15. Full Regression Results Business vs. Consumer Cards-First Differences
  16. 16. Key Findings <ul><li>Transparency: Stated rates closer to actual rates </li></ul><ul><li>If the interest rate gap is interpreted as related to transparency, this translates to $12.1 billion in obscure costs now clearly stated </li></ul><ul><li>Prices level, once economic downturn considered </li></ul><ul><li>Mail offers’ volume are up since CARD Act passage and implementation </li></ul>
  17. 17. Long term impact <ul><ul><li>Long-term price impact is unknown </li></ul></ul><ul><ul><li>Historic low prime rate does suggest prices will rise </li></ul></ul><ul><ul><li>But </li></ul></ul><ul><ul><li>Transparency lowers costs by spurring competition </li></ul></ul><ul><ul><li>Most of CARD Act price rules affected how prices change—not what they are. Issuers made short term changes to counteract long-term benefits. This suggests long-term credit card environment will improve for consumers. </li></ul></ul>
  18. 18. Did the Credit CARD Act Lead to Higher Interest Rates or Just More Honest Rates? Questions? Josh Frank Senior Researcher Center for Responsible Lending 510-379-5518 [email_address] www.responsiblelending.org

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