CARD Act Has Improved Transparency, Eroded the Customer Experience

(New York, NY):  The Credit CARD Act has benefited consumers through improved transparency but also hindered access to credit and eroded the customer experience, Auriemma Consulting group (Auriemma Roundtables) said in a letter to the government’s consumer finance watchdog.

The letter, submitted to the Consumer Financial Protection Bureau (CFPB) in response to an information request, details how the 2009 reform law has impacted the marketplace over the past two years. The Act’s signature consumer protections – more transparent pricing, fewer back-end fees – have continued to benefit applicants and borrowers over the period. And, building on previous efforts, card issuers have continued to make consumer-facing materials easier to understand.

At the same time, unintended consequences set in motion by the law’s passage have become entrenched. Credit card APRs have remained elevated and credit is less available to marginalized borrowers, pushing more consumers to fringe financial services such as payday and auto-title loans. These products have lofty interest rates and little in the way of consumer protections.

Meanwhile, the customer experience has suffered. The CARD Act has contributed to a substantial increase in compliance costs overall, requiring issuers to divert investments in technology and product innovation that would benefit customers and expand credit availability. Additionally, draconian restrictions on risk pricing have limited issuers’ ability to lower a borrower’s APR and accommodate other unique circumstances for their customers. In its commentary, ACG examines the factors underlying these unintended consequences and recommends regulatory solutions.

In addition to the CARD Act’s impact on the marketplace, Roundtables commented on six “areas of further interest” raised in the CFPB’s information request. Key points include:

• Secured credit cards are a valuable tool for borrowers with limited or damaged credit history: Secured products are designed and marketed to help borrowers build or rebuild a positive credit record through responsible use. In fact, several issuers offer “graduation” programs based on payment and credit history following account opening. There is evidence of highly positive consumer outcomes associated with secured credit cards, including high payment rates, low delinquency rates, and high rates of “graduation” to unsecured products.
• Credit card rewards are increasingly accessible and popular: The vast majority of cardholders now have at least one rewards product, and consumers across the credit spectrum are earning and redeeming unprecedented value from them. Cardholders are highly satisfied with key program features, including the ease of earning and redeeming rewards, contributing to record-high satisfaction with credit cards in 2016. Issuers have taken steps to improve the clarity of rewards program marketing materials and disclosures.
• Online and mobile banking sites have become more user-friendly and navigable: Cardholder agreements, periodic billing statements, and other key information are readily available to cardholders in online and mobile access channels. Additional disclosure requirements risk distracting cardholders in channels designed for convenience.
• Debt collection communications via traditional channels is in decline: Borrower contact is at a record low due to a range of factors, including antiquated laws and a lack of clarity in the regulatory framework.
• With proper disclosure, deferred interest products are a beneficial short-term financing option: Many private-label cards offer “deferred interest” financing programs that charge 0% interest if paid in full during a six- or 12-month promotional period. Building on existing regulation governing the marketing and disclosure of these programs, many issuers have engaged in independent efforts to further enhance transparency. These efforts include clearly communicating program terms in marketing collateral and proactively notifying customers of promotion end dates in the customer’s preferred channels.

The CARD Act requires the CFPB to review the credit card market and the impact of the law’s rules every two years. In March, the CFPB issued a public request for information in connection with its third market review.

For more information, contact Louis Buccheri at 212-323-7000.