Regulation, Working As Designed
Apparently the Credit Card Accountability Responsibility and Disclosure Act, or the CARD Act, has basically worked. The CARD Act was a 2009 initiative to cut down on the nasty tricks that credit card companies play on their owners. Deceptive interest rates and billing practices, hidden charges, the whole shebang. Naysayers said that these were vital parts of the credit business and with government-enforced fair billing practices the supply of credit to low-income households would be cut off.
The result of a recent evaluation has shown fairly beneficial effects. Whole huge areas of fees were declared off-limits, including particularly sleazy ones like hidden fees for paying electronically.
The study shows just how the fees added up before the Card Act took effect. Those with the worst credit — the subprime borrowers — were paying an effective interest rate of 20.6 percent, plus an additional 23.3 percent in fees. Most of those fees are now gone.
But Ken Clayton, the chief counsel of the American Banking Association, told me there was another cost. “It’s also contributed to a reduction in the availability of credit cards, particularly for people with imperfect credit histories or no credit history at all,” he said, citing a study his association did. Even that, however, is not clear. Certainly banks have tightened credit standards, but the new paper concludes that tightening came in the aftermath of the financial crisis and was not related to the Card Act.
So the net result was no real contraction of credit, no rises in interest rates, and no cutting off credit to needy consumers. All in all, this sounds like a wholeheartedly excellent result for consumer protection. The effective cost of revolving credit to high-risk customers has been cut in half without negatively impacting issuer’s willingness to lend. For all the noise about how Obamacare shows that the liberal state cannot effectively intervene in the economy without screwing up everything, it’s worth noting counterexamples. By their very nature functional interventions tend to go unnoticed.