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

http://www.responsiblelending.org 7

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

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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

http://www.responsiblelending.org 14

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