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Director of the Consumer Financial Protection Bureau
CARD Act Field Hearing
October 2, 2013
Thank you so much for being here with us today. I am always happy to be back in Chicago, where I spent three good years as a law student. We are hosting this field hearing to discuss the effects of the Credit Card Accountability Responsibility and Disclosure Act, a law commonly known as the CARD Act. The CARD Act was passed with the specific goal of making the credit card market fairer and more transparent for consumers. Today, we are releasing a report that Congress required us to prepare about the impact of the CARD Act on the marketplace.
Before we discuss the results of our report, however, it is important to describe conditions in the marketplace when the CARD Act was signed into law. The economic landscape in May 2009 was quite poor. The housing market had crashed. Unemployment had risen to 9.4 percent. A whopping 14.5 million people were out of work, and that number was expected to continue to grow. Gross domestic product had moved sharply into negative territory, falling by 8.3 percent and 5.4 percent in the previous two quarters, and the Federal Reserve was predicting it would drop even further.
At that time, I was serving as Ohio’s Attorney General, and we saw firsthand how hard people were struggling to stay afloat. Particularly with respect to credit cards, people were extremely frustrated, and they were complaining loudly and frequently about being dinged by unexpected fees and about dealing with card agreements full of fine print and legalese they could not decipher or understand. The bottom line at the time was that consumers had no good way to assess the true cost of their credit card upfront. Some members of Congress became interested in how to address the challenges raised by their constituents, and the Federal Reserve had swung into action and developed some new rules in this area. Against that backdrop, Congress passed the CARD Act to address troublesome practices and reform the credit card markets.
One problem that consumers faced was hidden, excessive, and unfair fees. These fees made it hard for consumers to anticipate costs. In some cases, they could not avoid these fees and did not know they were coming. Maybe a consumer’s check payment was due on a holiday and there was no mail delivery, so the check was not received in time. Or maybe the consumer unwittingly spent more than the credit line. Some consumers set up mechanisms to pay their bills regularly, but were ambushed when payment due dates changed from month to month. In these cases, the consumer would be charged an unexpected fee.
The CARD Act took action to address these problems. The law set standards for when late fees can be assessed. Congress established that credit card bills must be due on the same date each month and that card issuers generally cannot charge a late fee unless consumers are given at least 21 days to pay their bill. The law also established limits on how much can be charged in late fees. As a result, we found that the average size of late fees declined since the passage of the CARD Act. Based on the credit card accounts we studied, representing most of the market, we estimate that the average late fee decreased by $6 after the CARD Act took effect. That means that these consumers paid $1.5 billion less in late fees in 2012 than they would have paid had late fees remained at their pre-CARD Act levels.
The CARD Act also tackled over-limit fees, which often surprised those consumers who had no idea that they had spent past their credit limit. Prior to the law, card issuers could charge a fee for transactions that put cardholders over their credit limit, and each over-limit transaction could result in an additional fee. The CARD Act barred companies from charging a fee to cardholders who exceed their credit limit unless the cardholder has affirmatively opted in to pay over-limit fees. Additionally, card issuers can no longer charge more than one over-limit fee during a billing cycle. With these changes, over-limit fees have been largely eliminated as a source of cost to consumers and revenue to issuers. Based on the credit card accounts that we studied, we estimate that if everything else had remained equal except for the changes made by the CARD Act, those consumers would have paid about $2.5 billion more in over-limit fees in 2012 than they actually paid.
We did find that annual fees and interest rates have increased since 2008, which indicates a shift from hidden back-end pricing toward more transparent front-end pricing that consumers can understand and evaluate more easily. Even more significantly, however, we found that the total cost of credit, which includes all fees and finance charges, declined between 2008 and 2012 by two percentage points.
Consumers were also struggling with a lack of transparency when it came to their credit cards. Credit card agreements were long and difficult to understand. These agreements often contained provisions which allowed the credit card issuer to hike the rate if the consumer tripped any of several complicated wires, including the notorious “universal default.” Cardholders would open their monthly statements and be surprised to find that their interest rate had jumped. Credit card agreements also allowed issuers to change the terms at any time and for any reason, and the new terms could be applied to existing balances. Such price changes made it difficult for consumers to predict the cost of their credit card and manage their finances accordingly. The CARD Act sought to make credit card costs clearer to consumers – and we found that it dramatically improved overall transparency in the market.
In order to address unexpected interest rate hikes, the CARD Act generally stopped card issuers from increasing the interest rate on an existing balance unless the cardholder has missed two consecutive payments. The law also added new requirements for monthly statements. Now the statements must include useful information like how long it will take to pay off the bill if the consumer pays only the minimum amount due and how much doing so will cost the consumer. These disclosures give consumers a clearer sense of the consequences in deciding how to handle their credit card payments.
The CARD Act’s new disclosure requirements and the end of surprise interest rate increases resulted in a market where pricing is more predictable and transparent for consumers. In this market, shopping for a credit card and comparing costs are far more straightforward. And every credit card user can now make a purchase confident that when the bill comes due, the interest rate will not have skyrocketed without notice. They can count on the fact that if they make their payments on time, the terms of the deal they made at the time of purchase are the terms of the deal they will live with over time.
We also determined that credit card contracts have become shorter and easier to understand in recent years. Our report showed that the card agreements we studied from the largest card issuers have decreased by more than 2,000 words on average and that readability has gone up – making the market more accessible and transparent for consumers. This is not something the CARD Act required, but it is something that we have been urging in order to help consumers process the key information more easily and “know before they owe.” Many card issuers have chosen to embrace the spirit of the new law in this respect. We applaud those who are making this effort, we will continue to push others to follow their lead, and we remain willing to work with credit card issuers in finding ways to serve their customers better.
Consumers have responded positively to these market-wide changes. When JD Power released its 2013 U.S. Credit Card Satisfaction Study, it showed credit card satisfaction at an all-time high since the study was first conducted. Significantly, the study concluded that “overall, customers appear to be increasingly happy with their credit cards” and JD Power attributed some of that satisfaction to the CARD Act.
We also believe that the increasing satisfaction customers are expressing about their credit cards reflects the manner in which some issuers have intensified their focus on customer complaints. More operations are prioritizing and incentivizing efforts to remediate individual complaints and to analyze and respond to patterns in the complaints they receive. These are powerful market developments that naturally improve customer service and customer loyalty. They also pay tangible dividends by reducing legal risk, reputational risk, and regulatory risk.
In order to get a complete view of changes in the credit card market, we examined the overall availability of credit. Credit availability started declining in 2008 – before the CARD Act had even passed, but after the financial crisis had begun – and by most measures began to rebound in 2009. This is not surprising, as credit is known to be cyclical and the nation’s economy was experiencing its sharpest downturn in decades. So as the crisis hit, credit losses ensued, and creditors implemented more restrictive credit standards. Even with the changes that occurred during those unusual economic conditions, consumers with credit cards still have plenty of available credit overall. In fact, there is currently about $2 trillion worth of unused credit in the market.
The CARD Act has provisions that were explicitly designed to better protect young consumers from getting credit cards they cannot afford. In the years prior to the CARD Act, it was often too easy for students to rack up credit card debt they could not pay back and damage their credit rating for years to come. When I was serving as the Treasurer of Ohio, I heard many bitter complaints from parents about the aggressive marketing practices on college campuses that targeted naïve 18-year-olds just away from home for the first time. With the CARD Act, consumers under the age of 21 cannot get a credit card unless they can demonstrate an independent ability to repay the debt or unless they have a cosigner over the age of 21. Our report found that the number of credit card holders under 21 has been cut in half in recent years. This decrease, which contributes to the decline in available credit, is an intended consequence of the CARD Act and is good news in promoting responsible access to credit.
We have seen two other factors that may be contributing to the dip in available credit. First, we have seen a notable drop in the number of consumers who receive unsolicited credit limit increases on their accounts – meaning that more consumers have to ask for their credit limit to be raised rather than having it happen automatically. Second, the ability-to-repay provisions in the new law have had at least a modest effect on credit availability. We have seen that at least a small slice of consumers whom card issuers may deem to be creditworthy have been declined for credit cards because they cannot prove they have the means to pay back the potential debt. We addressed one such issue that came to our attention by issuing a new regulation earlier this year. This rule made it easier for stay-at-home spouses or partners to get their own card if they have access to resources that allow them to make payments. Consumers need access to credit; we simply want to ensure that they have responsible access to credit.
Although the CARD Act effectively addressed many problematic practices in the market, we do highlight a number of outstanding concerns in our report. One area of concern is credit card add-on products, where we have seen first-hand how the deceptive marketing of these products can harm consumers. The Bureau has already issued a bulletin to put issuers on notice of these problems, and we have brought several enforcement actions that have put more than $700 million back in the pockets of consumers. We will continue to use both our supervisory and enforcement authorities to protect consumers by rooting out unfair, deceptive, or abusive acts or practices.
Second, we recognize that some card issuers charge upfront fees that exceed 25% of the initial credit limit, which is the cap on fees that the CARD Act sought to impose, but those practices have been held not to be covered by the law because a portion of the fees are paid prior to account opening. We plan to keep a close eye on how card issuers use application fees in connection with opening accounts, and we will determine if we should take action under our available authorities.
Third, we plan to study the impact of deferred interest products. These are credit cards that come with a 0% interest rate but with a catch. If the balance is not paid in full by a certain time, the company will assess interest retroactively. The data we obtained indicates that over 40 percent of borrowers with subprime credit histories end up being charged retroactive interest. We will be examining the risks and benefits of such products and will take action if it appears to be justified.
Fourth, we have identified a number of areas in which transparency concerns remain. One such area relates to online disclosures. While the CARD Act requires certain disclosures to appear on monthly statements, those consumers who pay their bills online may not see the disclosures. We will be monitoring the steps that card issuers take to provide consumers with these beneficial disclosures when they access their accounts in different ways.
Fifth, we are concerned about the quality of disclosures that are made about rewards products. Many consumers are picking their credit cards based on rewards programs. These offers, however, can be highly complex, as consumers may face detailed and confusing rules about how they can actually use their rewards. We will be reviewing whether rewards disclosures are being made in a clear and transparent manner, and we will consider whether additional protections are needed.
Lastly, we are concerned about the disclosures used to inform consumers about grace periods. Most cards allow consumers to avoid paying interest on purchases when they pay their balance in full each month. This period between the end of a billing cycle and the payment due date is called the “grace period.” We want to make sure consumers know that once they carry a credit card balance into a new month, they no longer have a grace period on new purchases. While we have not yet studied the level of consumer understanding about grace periods and how they work, it is an area that merits our future attention.
Our CARD Act report was a comprehensive undertaking which showed that, on the whole, the CARD Act accomplished a number of its intended goals. Based on the information we have available to review changes in the credit card market, the Act eliminated many unfair fees, made some market practices more transparent, paved the way for easier comparison shopping, and created a market where consumers can see the costs upfront. These changes are critical to strengthening consumer protections in the marketplace and helping us rebuild our economy.
Today’s report was based on extensive research. We looked at data spanning the period from before the law was passed through December 2012. To dispel any myths, let me just say that we use anonymized industry data to better understand how the markets are working. We never receive a card holder’s name or other direct or unique identifiers, we never receive information describing the specific transactions on any account, and we do not monitor any individual’s financial transactions. We are only interested in market trends, and as a result, the data is limited to items like interest rates, account balances, total purchases, total payments, and fees charged to consumers. In fact, for purposes of this report, industry participants submitted to us analyses they developed from similar data. Without all of this information, we would not be able to study the market, to understand the benefits of the CARD Act, and to flag areas of possible risks to consumers. In short, we would not be effective in carrying out our responsibility to report to Congress and the American public.
Today, I am looking forward to vigorous discussions about the state of the credit card market and the impact of the CARD Act on both consumers and the industry. Thank you for joining us.
The Consumer Financial Protection Bureau is a 21st century agency that helps consumer finance markets work by making rules more effective, by consistently and fairly enforcing those rules, and by empowering consumers to take more control over their economic lives. For more information, visit consumerfinance.gov.