Thursday, August 9, 2012

The CARD Act: Score One for Financial Regulation

When the subjects of financial regulation and consumer protection come up they are usually met with warnings of impending economic disaster.  Views on the subjects are now completely polarized between the two political parties. Bloomberg Businessweek provided an article by Karen Weise that reminds us of a time just a few years ago when bipartisanship could be overcome in order to put an end to some egregious abuses by credit-card issuers. In 2009 congress passed the CARD Act. "The bipartisan CARD Act ended some questionable—and lucrative—bank practices, like charging hidden fees and offering low introductory interest rates only to jack them up suddenly. The industry hated the reforms and issued dire predictions that they’d mean the end of plastic."

Yes, the standard claim was made that regulation would mean the end of the credit-card industry.
"Before the law, banks didn’t have to be as careful about picking customers. If a borrower missed payments, the lenders would raise his rates, cut his credit limit, and bury him in nuisance fees. That’s one way to manage risk and discourage bad behavior, but it’s hardly the most efficient, and it infuriated cardholders."

And what were the horrible, terrible, frightening constraints placed on the credit card companies?
" companies must account for a customer’s likelihood of default before they issue the card. They can still offer low teaser rates, but they can only raise the permanent rate in limited cases, such as when the account is 60 days delinquent."

So, basically, financial institutions had to begin acting less like loan sharks and more like responsible businesses. Clearly such a notion would be seen as a threat to their livelihood. What actually transpired? Consider this chart.

"That’s helped reduce late payments to the lowest level on record. And so-called charge-offs, the debts lenders deem uncollectible, are at their lowest since the end of 2006. In May the industry identified $276 million in charges they assume won’t be paid, down from a peak of $821 million in August 2009."

By forcing financial institutions to switch to better business practices, their business, and profit, actually improved. What a concept!

Let us applaud when financial regulation works, and continue to move ahead cautiously.

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