A Great Example Of Why We Need A Consumer Financial Protection Bureau


I was a huge supporter of the CARD Act of 2009. I wrote extensively about it on the pages of this blog. Detractors in the banking industry proclaimed ingenuously that this law would hurt consumer’s ability to receive credit cards, while having the effect of raising interest rates and annual fees while curtailing cash back and loyalty points. Some consumer groups complained that the law wasn’t strong enough, and that the credit industry would easily exploit the loopholes in it.

How Did Those Predictions Fare?
In a world where toddlers and pets were receiving pre-approved credit card offers, I saw the possibility that some people would receive fewer credit cards as a feature, not a bug. There was also a trade off to be realized when it came to fees and interest rates. Credit card companies were forced to give up their arsenal of tricks and traps. Short grace periods, over the limit fees, double cycle billing, and ever changing due dates were outlawed. In exchange, we expected and received higher interest rates and higher annual fees on many cards. There are still may cards offered with no annual fee and long, introductory 0% APRs.

As for the consumer advocates who opposed CARD because it didn’t do enough, I really thought they were not being very appreciative of this monumental achievement.  I would call them “glass half full” people, but really, the glass was about 90% full and they were complaining about the last 10%. Congress had been fighting for decades to curb credit card industry abuses of their customers, yet they were being thwarted each time by intense opposition by the banking industry. That said, it was easy to see that they were correct in their predictions that the credit card industry would circumvent the CARD Act provisions.

Case In Point: Marketing To College Students

One of the abuses the CARD Act was designed to prevent was the bank’s aggressive marketing of credit cards to college students.  Cynically, banks realized that students would spend money recklessly with no personal income to finance their purchases. Then, they would rely on student loans and parental bail outs to begin to pay back their debts. Finally, college students would carry their balances into past graduation, ensure many years of hefty interest payments. As an added bonus, they were doing their part to create new generations of higher income consumers that were quick to user their credit cards to finance purchases beyond their means. In order to recruit students, they would set up shop on campus and at sporting events. Often, they would offer token giveaways such as a t-shirt or a duffel bag. They found that college students would gladly apply for a credit card in order to receive these items for free.

In response, the CARD Act prohibited the banks from utilizing college campuses and offering freebies.  Credit card applicants under 21 were required to prove that they had a means of income or obtain a co-signer that was at least 21 years old.

It has not taken the industry long to adapt and overcome these legal hurdles. As this piece in the Wall Street Journal points out, nearly every restriction of the CARD Act has been circumvented through creative interpretations of the letter of the law. Students are allowed to provide completely unverified claims of income, banks offer “intangible” sign up bonuses that are as valuable as statement credits, and students are easily recruiting their friends to co-sign for them.

That these developments were predictable does not make for a good argument against the law. No piece of legislation can ever adequately foresee the ability of the regulated industry to evade the spirit of the law while complying with the letter. The intention of the Consumer Financial Protection Bureau was to keep up with the “innovations” of industry in evading the spirit of the law. The Republican Congress is now trying their best to do the bidding of the industry by removing funding for the nascent regulatory body. They are also trying to block the appointment of Elizabeth Warren on the premise that she will actually do a good job of protecting consumers.

The credit card industry has not collapse since the CARD Act went into effect. When will the banks, or any other industry, realize that common sense consumer protections are not a threat to their existence. By imposing industry wide regulations, they set a level playing field for all companies.  This prevents bottom feeders from tarnishing the industry while ensuring that other companies no longer have to compete at the level of the lowest common denominator. The Consumer Financial Protection Bureau must be allowed to perform its function for the protection of consumers as well as for the long term financial health of the industry.

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