The CARD Act Four Years Later

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Director Richard Cordray of the Consumer Financial Protection Bureau gave remarks and hosted a field hearing in Chicago on Wednesday to release a report on the Credit Card Accountability Responsibility and Disclosure Act, passed in 2009. Director Cordray was joined on a panel by National Consumer Law Center Managing Attorney Lauren Saunders, Legal Assistance Foundation of Chicago Supervisory Attorney David Yen, U.S. PIRG Consumer Program Director Ed Mierzwinski, Sanjay Sakhrani, equity researcher with Keefe, Bruyette & Woods, and Citi Retail Services CEO Bill Johnson.

Director Cordray began by reminding us all of the conditions in the market place when the CARD Act was passed: the housing market had crashed; unemployment had risen to 9.4 percent; and 14.5 million people were out of work. Within this landscape, consumers faced hidden, excessive, and unfair fees which made it impossible for them to anticipate the true cost of credit. Citi Retail Services CEO Bill Johnson explained that prior to the CARD act, credit card providers primarily competed on front end fees and interest rates. If one card offered an interest rate of 11.99%, the next had to offer a rate of 10.99% to effectively compete. With interest rates and annual fees squeezed by tight competition, card issuers turned to back end fees to make up the difference. Such fees included over the limit charges, late fees, retroactive interest on unpaid balances, and default clauses that raised the interest rate for the card once late payment was received. Mr. Johnson claimed Citi had tried to end some of these practices but was forced to back off when other companies refused to do the same. Enter the CARD Act, which forced revisions to these policies on all card issuers.

The CARD Act set rules for when late fees could be assessed, how much they could be, and how often they could be charged. The Act also sharply curtailed over-the-limit fees, limiting them to customers who opted in to approving charges over their limit. The Act further limited issuers from raising interest rates on past balances until a consumer has missed two consecutive payments.  As a result of these and other changes, back-end fees have decreased, and average interest rates and annual fees have increased since the Act was passed, indicating “a shift from hidden back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily,” according to Director Cordray.

Industry analyst Sanjay Sakhrani noted that competition among card issuers has largely shifted from interest rates and annual fees to rewards benefits and other card features as a result of changes imposed by the Act. Mr. Johnson confirmed that change and explained that Citi is attempting to form a deeper emotional connection with their customers through rewards programs and social media.

Director Cordray also highlighted a number of continuing concerns in the industry, including credit-card add-on products that are not clearly disclosed to consumers. Another disturbing development is the large up-front fee some cards are charging consumers, sometimes in excess of 25% of the card’s available balance. LAF Supervisory Attorney David Yen noted that his clients who are able to qualify for credit cards value them as an alternative to the new whipping-boy of the consumer credit industry, pay day loans. Mr. Yen noted that even the highest interest credit cards are preferable to triple digit rates offered by predatory lending institutions.

Director Cordray closed his remarks by summarizing the CARD Act as having accomplished a number of its intended goals, including the elimination of unfair fees, more transparent market practices, and easier comparison shopping where consumers can see true costs up front. Director Cordray’s full remarks are available here. 

About the Author

Mike Wood has been a member of NACA since 2011, when he left Fortune 100 corporate management to attend law school in Chicago, IL. As a law student, Mike externed for now Chief Judge in the Northern District of Illinois, the Honorable Ruben Castillo. Mike also externed for the Illinois Attorney Registration and Disciplinary Commission, and has clerked with several legal aid organizations in the Chicago area. Mike practices as a senior law student under Ill. S. Ct. Rule 711, and is currently working with other consumer advocates to address the debt buyer problem in Cook County, IL, through a new project called Debtors Legal Clinic, which provides direct legal services and education to consumers facing debt buyer issues. Mike can be found on twitter @mikewoodondebt, or by email at mike_at_michaeljacobwood.com.