Winners and Losers 3 Years After Credit CARD Act

In the three years since President Obama signed landmark credit card reforms into law, are consumers or banks better or worse off?

Banking industry representatives had warned before the credit card regulations were signed into law May 22, 2009, that the reforms would lead to higher interest rates for all users and that many people with bad credit would be shut out of the market completely. Those predictions have come, at most, only partially true.

As predicted, some credit card rates have risen -- on new card offers. It's less clear whether as a whole Americans who already had cards are paying higher rates.

And yes, some people with bad credit have had credit cards taken away and seen opportunities for new credit dry up, though it's hard to say how much of that is because of the law, and how much was the natural result of the recession pouring ice water on all forms of credit.

Other predictions -- such as the widespread return of annual fees and rewards card programs becoming stingy -- didn't happen at all.

"It helped consumers and it didn't destroy the banks. Credit cards are still profitable," says Chi Chi Wu, a staff attorney at the National Consumer Law Center, a Boston-based consumer advocacy group.

Here's a look at the credit card landscape before the act, what predictions were made about its consequence, which predictions have come true, which haven't and who has won and lost as a result.

Three years ago ...

First, let's go back three years.

Before the act, card issuers could:

Raise interest rates at any time, for any reason, including rates on existing balances. It was the only major form of consumer lending in which the terms of your loan could change after you borrowed, at the sole discretion of the lender.
Mail a bill 14 days before it was due, and change the due date and time at will.
Automatically push consumers into high-cost plans that let you exceed your credit limit, for a fee.
Market cards on college campuses and shower 18-year-old college students with freebies to induce them to sign up for credit cards.
Apply payments in a way that maximized finance charges, by paying off low-rate charges first, leaving high-rate charges churning up finance charges.

The CARD Act changed all that. When its major provisions took effect in February 2010, it instituted a sea change in how credit cards were priced, marketed and used.

Among other things, the law:

Banned "any time, any reason" interest rate hikes on existing card balances. Except under a limited number of circumstances, such as paying late by 60 days or more, the deal the card issuer offered had to stay intact for at least the first year.
Forced issuers to give consumers at least 21 days before bills were due and discouraged arbitrary due date shifts.
Changed the over-limit rules from "opt-out" to "opt-in." Instead of being automatically enrolled, consumers have to agree to be enrolled in such plans.
Barred card issuers from aggressively marketing cards on campus and limited the availability of credit cards to adults younger than 21.
Required that any amount consumers paid over the minimum payment to be applied to the balance with the highest rate, which helps knock down the size of the most costly balances.

In addition, card issuers that want to make major changes in their customers' terms can do so after the first year, but must give at least 45 days' notice to give account holders time to shop around for better terms with another lender. The CARD Act also limited most late fees to $25 and required such fees be reasonable and proportional to the offense.

All the changes put downward pressure on card issuers' profit margins, which set off a round of predictions on what they would do to make up for the lost income.

Moshe Orenbuch, a card industry analyst with Credit Suisse Group AG bank, says it has been a mixed bag of results for the predictions that were forecast in 2009. "Some did and some didn't come true," he says.

"Every time there is a proposal to regulate anything in the financial services industry, if you look at the history of this, those claims are almost always false," says Josh Frank, a senior researcher at the Center for Responsible Lending. "They are just scare tactics used by the industry."

Prediction: Higher interest rates for everyone

Did it come true? Maybe. "We saw that interest rates went up a little bit before the Credit CARD Act became law," says Nick Bourke, director of the Safe Credit Cards Project, a Pew research group that tracked credit card terms and features. "But very quickly after the act passed, we saw the rates leveled off."

Data on offer rates compiled by CreditCards.com using a sample of 100 of the most popular credit cards show the national average was 12.38% on May 21, 2009, compared to 14.91% on May 16, 2012. That's a 20% increase.

However, Frank, from the responsible lending group, says it's more appropriate to look at the interest rates actually assessed to revolving accounts. Between 2009 and February 2012, actual interest rates decreased from 14.31% to 13.04%, according to the Fed's monthly G.19 report on consumer credit.

"The rate people actually pay is down, but the rate that people see is maybe up slightly," Frank notes. "The CARD Act did work in making rates more honest and making pricing more clear."

Nessa Feddis, vice president and senior counsel for the American Bankers Association trade group, challenges assertions that interest rates are truly down. "People are paying more than they would be paying but for the Credit CARD Act," Feddis says. "People who would be paying higher rates are just simply not getting credit cards. That will bring down the average."

She adds: "A lot of people lost access to credit cards. The interest rates may look lower, but you have to look at it more holistically."

Clouding the answer is the recession. With or without the CARD Act, the recession caused banks to clamp down on all forms of lending by, among other things, raising rates.

"It would be difficult to say the CARD Act actually made rates go up," says Bourke. "It's very difficult to clearly say whether the CARD Act is the source of a certain outcome or if it's the economy or if it's a mixture. After the CARD Act passed, the economy was hurting. You can't separate the two. We saw a lot of consumers tighten their belts. We saw a lot of credit card balances go down as people started to pay off their balances more. Availability of credit went down as a result of issuers trying to limit their exposure during the economic downturn."

The Center for Responsible Lending published a 2011 study of credit card clarity following the CARD Act and compared the APR advertised online with those actually paid. "There was a big difference between what people were told they would get and what they actually paid, with the actual rate being higher," Frank says. "What happened with the CARD Act is that gap narrowed substantially. It's been 1 percentage point different."

The winners here are the same consumers as before: those who pay off their balances monthly and don't incur interest charges.

Prediction: Less credit for everyone

Did is come true? Yes. "Total lines of credit have fallen," says Orenbuch. The G.19 is evidence of how card balances plummeted in the months between September 2008 -- when it hit a high of $972.2 billion -- and March 2012, when it plummeted to $798.5 billion. "They took credit away from riskier customers." He adds: "Three years later, issuers are a little less risk averse, but only marginally so." Losers: People with bad credit, who saw access to loans dry up.

Prediction: More cards with annual fees

Did it come true? No. "Annual fees never came back," Orenbuch notes. As before, annual fees are concentrated at the ends of the credit spectrum. At the high end, high-rolling consumers with great credit scores can opt to pay them if the rewards are good enough. At the low end, annual fees are one of the prices high-risk consumers have to pay if they want access to credit. Winner: Consumers who don't want annual fees. They can still easily find cards that don't carry them.

Prediction: Fixed rate cards vanished

Did it come true? Yes. The CARD Act accelerated an existing trend toward card issuers offering cards with only variable rates. By the time the CARD Act was passed, variable rates were nearly universal. Variable interest rates are typically tied to an index, such as the prime rate. APRs can increase or decrease as the prime rate changes. The winner in this change is the card issuers. Once the business cycle reverses itself and the Fed begins raising rates from their current historic lows, card issuers are in position to automatically pass along those increases. The CARD Act permits issuers to pass along those index-based increases.

Prediction: Rewards would become less rewarding

Did it come true? No. "The opposite happened. You had this big war to offer more rewards," says Orenbuch. Consumers have been the winners, as rewards card offers have increased over the past year, due in part to competition for prime customers and to federal regulations that capped debit card interchange fees collected by banks from merchants. At the same time, plain-vanilla credit cards with no rewards staged a comeback. They have neither the rewards that are costly to the issuers, nor annual fees.

Prediction: Card issuers would find new ways to dodge the law and squeeze consumers Did it come true? Only in a few cases. First Premier, for example, fought in court and won the right to impose an application fee for its subprime credit cards offered to customers with poor credit. Federal regulators saw it as an effort to duck the CARD Act's provision that caps fees, but gave up the fight after First Premier's victory in court.

Overall, though, the prediction hasn't come true. Analysts say banks haven't felt the need to fill holes in their balance sheets because the tentative recovery from the recession means the holes don 't look as deep as they did in 2009.

Dennis Moroney, research director for the Tower Group, a card industry consulting firm, says credit card profits have returned to pre-recession levels. He cites the Federal Reserve's data on return on assets (ROA) for credit cards issued by the largest banks. "Profitability is the same," Moroney notes. "ROA is back after really being very, very weak and in some cases negative."

Two key credit card business indicators -- charge-off and delinquency rates -- are both down significantly, which is good news for banks. The May 2012 Fed report data on consumer credit card borrowing shows consumers pulled their plastic out more for purchases in March 2012 than the previous month.

The winner: Card-issuing banks and consumers both. The banks aren't as hurt as before, so consumers have fewer consequences to pay.

Unpredicted consequences

Stay-at-home parents who have no income probably didn't think credit card reforms debated three years ago would harm them, but this segment of consumers are on the list of CARD Act losers.

Why? A provision requiring banks to assess credit card applicants' ability to repay card debt before they can open new accounts has blocked these moms and dads from getting credit cards. The Federal Reserve rule requires card issuers to consider individual rather than household income when determining ability to pay. Since stay-at-home parents generally don't have income of their own, they can't get cards in their own names to help them build individual credit histories.

Lawmakers are working on a fix for the problem and a group of parents have petitioned the federal Consumer Financial Protection Bureau to ease the restrictions.

Wu, from the consumer law center, said the Fed restrictions are valid. Many of the people impacted were applying for instant credit in stores. "We do believe if a consumer gets a credit card based upon someone who is not liable on the account, it puts them at risk if there should be something that happens," Wu says. "We think that the principle of requiring that consumers have the ability to pay the debt they're about to incur is more important than access to impulse credit."

Banks benefitting from reform

In addition to posting credit card profits, banks are competing more openly and transparently for customers. Transparency benefits the entire industry, both bankers and consumer advocates agree.

Feddis, from the bankers association, said consumers are more satisfied with their credit cards and complaints are down. "Credit card companies have benefitted from improved satisfaction," she says.

"The banks are better off in many ways because the market for credit cards can be truly competitive based on upfront pricing rather than the situation we had before the Credit CARD Act," Bourke says. "The market really wasn't working. It was much more difficult for consumers to identify a good card from a bad one."

"Consumers are clearly better off now that the CARD Act has passed," concludes Bourke, from Pew's Safe Credit Cards Project. "Before the Credit CARD Act, 100% of the cards we looked at included practices regulators found to be harmful or unfair."

Industry analyst Moroney shades it slightly differently. He says consumers are "better off even if they don't like it. They are being protected. There were things that were going on that were taking advantage of people that can't go on now because of the [CARD Act] restrictions."

And banks? "Banks are pretty much the same. I can't say they are better off and I can't say they are worse."

Looking ahead

Wu says even though the CARD Act made significant improvements, there is still work to be done to protect consumers. She cited deferred interest payment plans and credit protection insurance as two areas in need of greater safeguards against abuse and deception. Companies that offer sales terms of 0% interest when you purchase electronics, furniture or appliances are charging interest retroactively to customers who don't pay their entire balance in full before the due date.

"If you don't, you get hit with all the retroactive interest that's been accruing," Wu says. Although disclosure of these types of payments are covered in the CARD Act, the Federal Reserve later issued rules that weakened the measure.

Wu says a second area targeted for future protections are credit insurance products such as credit card payment protection plans. A Government Accountability Office study indicated these products -- which offer to pay the account holder's monthly credit card bill should he or she be unable to do so -- are expensive forms of insurance that rarely pay as advertised.

Finally, there's a new player in the card regulation game that didn't exist when the CARD Act went into effect -- the Consumer Financial Protection Bureau, the new federal agency created as a consumer watchdog. Part of its responsibility includes CARD Act enforcement. Director Richard Cordray, is holding the door open for further CARD Act tinkering.

"We can say without a doubt the statutory provisions have made a positive difference in any number of different ways," he said in March. "Whether it's the be-all and end-all in the credit card market is something we'll have to assess over time and as we hear more from consumers about their individual experiences."