http://www.responsiblelending.org
Did the Credit CARD Act Lead to Higher Interest Rates
or Just More Honest Rates?
Josh Frank Senior ResearcherCenter for Responsible Lending510-379-5518joshf@responsiblelending.orgwww.responsiblelending.org
http://www.responsiblelending.org 2
Card Act passed in May 2009
Implemented in 3 phases, with most provisions taking effect in February 2010
Many major changes to rules including: No changes to price on existing balances
– (except in certain special circumstances) Payments no longer allocated low APR 1st
More payment time/reduced penalty fees Many other price gimmicks eliminated
such as rate floors and “pick-a-rate”
http://www.responsiblelending.org 3
There have been claims of rising rates due to CARD Act in the media
Claims that reforms cut credit access and raise price are highly misleading Claims rest on limited, incomplete data Claims do not consider economy
“Record high rates” especially wrong– Raw rates only “record” with data series of less than 5 years history (and again
wrong data to use)– Spread over prime also misleading
– Spread statistically highest when prime is low and losses high
http://www.responsiblelending.org 4
CRL Examined Several Data Sources
Federal Reserve tracks offered and actual rates Bank financial statements Mintel Comperemedia tracks mail offers Creditcards.com tracks consumer and business rates
Data examined both graphically and through regression analysis controlling for economy to see if there was evidence of credit tightening/rising prices linked to regulatory events (CARD Act passage, CARD Act implementation, and Federal Reserve pre-CARD Act final rules).
http://www.responsiblelending.org 5
What data should be used?
Card Comparison
Websites used in Media Reports
FRB Stated Rate (All Accounts)
FRB Actual Rate Paid
(Accounts Assessed Interest)
Measures rate in credit card offers associated
with new purchases
Includes all accounts at banks, not just new offers
Measures actual charges to consumers
Includes cash advance and other non-purchase rates
Includes penalty rates and rate changes
Weighted by balances to reflect total costs to
consumers
http://www.responsiblelending.org 6
What the RIGHT data show…
10
12
14
16
18
Fe
b-9
5
Fe
b-9
6
Fe
b-9
7
Fe
b-9
8
Fe
b-9
9
Fe
b-0
0
Fe
b-0
1
Fe
b-0
2
Fe
b-0
3
Fe
b-0
4
Fe
b-0
5
Fe
b-0
6
Fe
b-0
7
Fe
b-0
8
Fe
b-0
9
Fe
b-1
0
Fe
b-1
1
Inte
res
t R
ate
(%
)
Stated Rate (all accounts) Actual Rate Paid (accounts assessed interest)
Source: Federal Reserve G.19.
CARD Act
Passed(May 2009)
Gap betw een Stated and Actual
Card ACT Implemented (Feb 2010)
Federal Reserve Credit Card Rules
Finalized
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No Evidence of Rate Increase from New Rules
-2.5
-2
-1.5
-1
-0.5
0
0.5
1
1.5
2
2.5
Stated rate Rate actually paid Difference between stated andactual rate In
tere
st R
ate
Ch
ang
e L
inke
d t
o R
egu
lati
on
(p
erce
nta
ge
po
ints
)
Fed Rules Finalized CARD Act Passed CARD Act Implemented
Note: Results from regression analysis of interest rate level. All "Stated rate" and "Difference betw een stated and actual rate" changes are statistically signif icant. None of the changes to "Rate actually paid" are statistically signif icant.
http://www.responsiblelending.org 8
Full Regression Results
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Full Regression ResultsDifference Model
http://www.responsiblelending.org 10
Mail Volume Shows NO Evidence New Rules Cut Access
100
200
300
400
500
600
700
800
900
Jan-
05
Apr-0
5
Jul-0
5
Oct-05
Jan-
06
Apr-0
6
Jul-0
6
Oct-06
Jan-
07
Apr-0
7
Jul-0
7
Oct-07
Jan-
08
Apr-0
8
Jul-0
8
Oct-08
Jan-
09
Apr-0
9
Jul-0
9
Oct-09
Jan-
10
Apr-1
0
Jul-1
0
Mo
nth
ly M
ail
Vo
lum
e (m
illi
on
s) Fed Rules Finalized
Card Act Passed
Card Act Implemented
Source: Mintel Comperemedia; CRL calculations.
Mail increase was to all credit risk segments.
http://www.responsiblelending.org 11
Full Regression ResultsMail Volume
http://www.responsiblelending.org 12
Full Regression ResultsMail Volume-Difference Model
http://www.responsiblelending.org 13
NO Evidence of Rate Increase: Business Card Comparison
0
0.5
1
1.5
2
2.5
3
3.5
4
4.5
5
Business Card Offer Rate(creditcards.com)
All Cards Offer Rate(creditcards.com)
Business Card Estimated ActualRate
Ch
an
ge
in R
ate
(P
erc
en
tag
e P
oin
ts)
Note: Change in rate is from period before Federal Reserve f inal card rules (3rd Quarter 2008) to the most recent period (2nd Quarter 2010). Business Card Estimated Actual Rate is adjusted to take into account the change in gap betw een actual rates and offer rates.
CARD Act does NOT apply to business cards
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Full Regression ResultsBusiness vs. Consumer Cards
http://www.responsiblelending.org 15
Full Regression ResultsBusiness vs. Consumer Cards-First
Differences
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Key Findings
Transparency: Stated rates closer to actual rates If the interest rate gap is interpreted as related to transparency, this
translates to $12.1 billion in obscure costs now clearly stated
Prices level, once economic downturn considered
Mail offers’ volume are up since CARD Act passage and implementation
http://www.responsiblelending.org 17
Long term impact
Long-term price impact is unknown Historic low prime rate does suggest prices will rise
But
Transparency lowers costs by spurring competition Most of CARD Act price rules affected how prices
change—not what they are. Issuers made short term changes to counteract long-term benefits. This suggests long-term credit card environment will improve for consumers.
http://www.responsiblelending.org
Did the Credit CARD Act Lead to Higher Interest Rates
or Just More Honest Rates?
Questions?Josh Frank Senior ResearcherCenter for Responsible Lending510-379-5518joshf@responsiblelending.orgwww.responsiblelending.org