How New Credit Card Rules Are Helping Consumers -- and Banks

With U.S. politics mired in partisan warfare, it's easy to forget how effective government can be.

Case in point: In 2009, lawmakers from both sides of the aisle united to pass legislation prohibiting banks from suddenly hiking credit card rates and gouging consumers with hidden fees. Exactly one year after the so-called CARD Act took effect, that law is proving highly effective, according to new research by the Consumer Financial Protection Bureau and another financial regulator. Their findings:

Banks have "dramatically curtailed" the practice of abruptly raising interest rates on cardholders
Consumers are paying far less in late fees
Card issuers have largely eliminated overlimit fees
Account terms, while still confusing, are easier to understand

Card fees plunging
In a separate study, the OCC found that the CARD Act has cut the amount that consumers pay in late fees by more than half, from $901 million in January 2010 a month before the new rules partly took effect to $427 million less than eight months later. Average late-fee penalties dropped from $35 to $23.

Even financial firms, not typically known for supporting government regulation, agree the new law is working. Financial Services Roundtable head Steve Bartlett, who heads one of the industry's most important trade groups, said today at a conference today in Washington that the improved disclosures brought about by the CARD Act "provide American consumers with an effective tool for controlling the cost of the financial products they use every day. One year later we are all in a better place."

The use of high "overlimit" fees, which card issuers charged when consumers exceeded their credit limit, has also virtually disappeared, the agency found. That's because the law requires consumers to explicitly agree to let issuers process overlimit transactions, while banks must notify people of their right to "opt out" of such arrangements any time an overlimit fee is charged.

More disclosure -- and it's good for competition!
Consumers are also benefiting from clearer disclosure. The card law requires banks to indicate on customers' monthly statement how long it would take to pay off the balance if they only pay the minimum amount. Statements also must indicate how much cardholders must pay each month to settle their debt in three years, the total cost of such a payment plan and how that compares with what they would fork out making only the minimum payment.

Do banks benefit in any way from such reforms? The good ones do. Credit cards have gotten so confusing over the years that consumers struggle to distinguish the benefits of different cards. When issuers introduced new product features, customers often couldn't tell. So making cards easier to understand can help financial firms market them on their merits and attract customers by developing new features. In short, the CARD Act is good for competition.

Republicans still gunning for CFPB
One reason why the CARD Act has succeeded is that big banks have not only complied with the new law, but in some cases gone beyond its requirements. Elizabeth Warren, who President Obama appointed last year to help set up the consumer protection bureau, said in prepared remarks at the conference that bank executives deserve credit for "moving in the right direction." She added:

[T]he data we have assembled indicate that much of the industry has gone further than the law requires in curbing re-pricing and overlimit fees. A number of issuers have eliminated some of the practices that can confuse customers and cost them money they reasonably did not expect to pay.

I believe the CARD Act has pushed in the right direction. It has brought about significant reforms in both the pricing practices of card issuers and the information provided to consumers.

The new law isn't perfect. Fewer than half of U.S. cardholders understand the CARD Act, while fully a third have no idea what it is, according to the bureau. Meanwhile, anyone in the market for a new card knows that it remains hard to figure out their costs or risks. Warren said the bureau will now focus on clarifying card prices and helping consumers compare cards.

If banks are resigned to changes in the credit card business, by no means are they at peace with the CFPB, itself the product of financial reform. House Republicans with ties to the financial industry this month moved to slash the bureau's funding by 40 percent. That's outrageous. Government regulation isn't the answer to everything. But as the CARD Act shows, with some things it's the only answer.

Thumbnail from Flickr user Andres Rueda; Elizabeth Warren photo from Wikimedia Commons, CC 2.0
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Alain Sherter

Alain Sherter covers business and economic affairs for CBSNews.com.

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