Predatory Credit Cards:Unsafe, Unsound for Consumers and Companies Josh Frank email@example.com
New Research: Harm the Customer, Harm the Bank• Consumer safeguards don’t conflict with banks’ safety and soundness— the two go hand-in hand• What’s bad for consumers is bad for business• The Credit CARD Act works
CRL Examined:• 23 pricing and marketing practices common among top 100 credit card issuers in summer 2009, before the CARD Act took effect• Credit losses for these companies in 2006 through 2010
We Looked at Deceptive Practices…• Hair triggers for penalty rates• Imposing penalty rates even when consumers paid on time• Manipulating indexes to calculate interest rates to the disadvantage of card holders• Assessing late fees with no relation to default risk• High minimum finance fee: $2 for penny balance
And at Better Practices…• Limits to fees for cash advances• No high-cost, penalty interest rates• More time after due date before charging late fee• Longer grace period before interest charged
How We Measured…• Scoring system: how often issuer used good practices, how often unfair and deceptive ones: Factor analysis• Doesn’t rely on researcher’s judgment but tallies similarity of variables, how they group
We Found: Before CARD Act Reforms… Issuer with one unfair and deceptive tactic tended to have many Practices linked to lender’s type, size : --Larger issuer: Worse practices --Credit union, regional bank: Better practices Better Business Bureau complaints linked to certain practices regardless of issuer type, size
Bottom-Line Cause and Effect Issuers’ claim that high-cost fees and interest were risk-management tools: False These fees, rates didn’t mitigate risk, they became the risk---they amplified it.
Bottom Line: The more often a bank engaged in consumer- unfriendly practices, the greater its jump in losses during the downturn Going into the recession, an institution’s size, type or loss rate didn’t predict its change in credit losses Practices best predictor of loss
Long-term Impact of Practices An Example: The Impact of Practices on Losses 12% 11.3% 10%Credit Losses 8% 6% 5.0% 4% 3.2% 3.2% 2% 0% Issuer with Safer Practices Issuer with Deceptive Practices Pre-recession Losses Recession LossesNote: change in losses is based on regression coefficients using isuers in the 10th and 90th percentile on UDAP score.
Happier Customers = Healthier Banks Consumer safeguards don’t conflict with banks’ safety, soundness—the two go hand-in-hand What’s bad for consumers is bad for business More evidence the Credit CARD Act works