While supporters of 2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act promoted it as good for credit card consumers, actual experience has been different, writes Todd Zywicki in The Wall Street Journal. Limits on how credit card issuers can charge their customers has driven people to payday lenders and pawn shops for credit, the very thing lawmakers wanted to curtail.
Key points of Zywicki’s article include:
- For many Americans the law has meant higher interest rates, increases in fees, and reduced credit limits.
- Unintended consequence number one: If companies can’t raise interest rates on risky borrowers, they raise interest rates on all borrowers, even those with spotless records.
- Unintended consequence number two: If companies can’t price risk efficiently and rationally, they cut off customers, which pushes them to payday lenders, which are really expensive.
- Unintended consequence number three: If companies can’t price risk efficiently and rationally, they will reduce their lending, which means credit card limits are lowered.
- Banks also drop customers altogether: “In his letter to shareholders last spring, Jamie Dimon of J.P. Morgan Chase reported that, ‘In the future, we no longer will be offering credit cards to approximately 15% of the customers to whom we currently offer them. This is mostly because we deem them too risky in light of new regulations restricting our ability to make adjustments over time as the client’s risk profile changes.’” … “Meet the new payday loan customers,” wrote Zywicki.
- “Nontraditional financial products serve an important role in the marketplace for the millions of consumers who count on them. Even pawn shops and loan sharks are more palatable and less expensive than the bounced checks and utility shut-offs that would result in their absence.”
Some states are stepping up regulation of payday lenders, which is one of the places people go to for loans if they can’t get a credit card. Montana is such a state, having recently passed — by a citizen ballot measure — a 36 percent interest rate cap on loans. As a result, the Great Falls Tribune reports that nearly all such lenders have closed, with some staying open to collect on existing loans without making new loans.
Comments left to the Wall Street Journal article wonder where the authors of this bill — Former Connecticut Senator Chris Dodd and Representative Barney Frank of Massachusetts — were aware of these entirely predictable consequences. Or, were they just out for a power grab?
No matter what the answer, this is yet another of endless examples of where government regulation — whether well intended or not — harms the people it is intended to help, and others along the way.
Dodd-Frank and the Return of the Loan Shark
In the name of consumer protection, Congress has pushed more Americans outside the traditional banking system.
By Todd Zywicki
The least surprising event of 2010 was that, in the wake of new federal limits on how credit-card issuers can price risk and adjust interest rates, more Americans had to go to payday lenders, pawn shops and local loan sharks in order to get credit. It’s simply the latest installment in the old story of regulators thinking they can wish away the unintended consequences of consumer credit regulation.
Proponents of the 2009 Credit CARD (Card Accountability Responsibility and Disclosure) Act argued that it would protect Americans from exploitative credit-card companies by limiting penalty fees and interest-rate adjustments. For many Americans, though, the law meant higher interest rates, an increase in other fees, and reduced credit limits.
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