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A Regulatory Crackdown That Worked

The government’s overreaction to the 2008 financial crisis reached into seemingly every corner of our economic landscape.

I have written many times in the past seven years about the results. They have ranged from misguided efforts to jail bankers, and to extract massive penalties from the banks that employ them, to capital requirements that continue to choke off lending to small businesses. Even when regulations have not done active harm to our banking system, they are more often pointless or baffling than helpful.

But however unwise and counterproductive the new regime may be, it did not spring fully formed out of nowhere. Banks worked hard to earn the public’s disdain in the years leading up to the crash. Their hard work paid off in a public ready to watch lawmakers blame bankers for anything it was politically expedient to blame on someone, resulting in our lingering national game of pin-the-blame-on-the-scapegoat.

On an individual level, perhaps nothing made people detest banks more than the games they played to drive up credit card bills. Young adults may be lucky enough not to remember a time when issuing banks could ratchet up a credit card’s interest rate for no reason and without real warning. Or when cards would regularly allow customers to exceed their credit limits, then promptly charge “over-the-limit” fees. Or when companies would play three-card monte with due dates, changing them from month to month or setting a deadline to fall in the middle of a work day so that a payment could be received on the due date and still be “late.” Yet all of these were common practices not very long ago.

The Credit Card Accountability Responsibility and Disclosure Act of 2009, more often known as the CARD Act, curtailed all of these shenanigans. And according to a recent report by the Consumer Financial Protection Bureau, in this particular instance, the crackdown actually did some real good.

The report offers a new picture of the credit card industry in the years following the enactment of the CARD Act. Consumers saved more than $7 billion in late fees between 2011 and 2014, and paid $16 billion less in overall fees in the same period than they would have if conditions prior to the law had remained steady. The average late fee has dropped 20 percent since the rules took effect, and over-the-limit fees have more or less vanished because customers now must opt in to such arrangements. (Not surprisingly, almost nobody does.)

Yet the credit card industry seems to be adjusting to the changes. The CFPB report found that the total cost of credit is roughly 2 percent lower overall now compared to the period before the CARD Act was passed, though this may be mainly a function of extremely depressed interest rates. Available credit has increased by 10 percent since 2012; consumers had access to nearly $3.5 trillion in credit overall as of early 2015. The least creditworthy borrowers may be less likely to get a card today than, say, a decade ago, but most customers are seeing little difficulty.

Of course, credit card companies still have a variety of means at their disposal to keep this business profitable. Some formerly fee-free cards added “member fees” or other annual charges. Certain companies have taken arguably extreme steps to make their customers’ debt more attractive to third-party debt collectors. And the CFPB expressed ongoing concern about several common credit card company practices, including deferred-interest promotions and obscure terms and conditions for rewards programs.

Yet overall, the CARD Act seems to have done consumers good without torpedoing the very product it was designed to reform. One reason was that card issuers knew their competitors were bound by the new rules too. Mark Graf, the chief financial officer of Discover Financial Services, observed back in 2012 that the CARD Act’s restrictions on hiking interest rates put a stop to “a lot of very aggressive behavior on the part of competitors basically participating in a race to the bottom.” “Everyone does it” no longer served as an excuse for abusive practices.

Much more importantly, the CARD Act effectively targeted tricks that banks should not have adopted in the first place, even if they were legal at the time. Treating cardholders like marks to be fooled rather than customers to be served created a large number of people willing to condone harsh treatment of bankers by lawmakers and regulators. For that, banks have themselves to blame.

Larry M. Elkin is the founder and president of Palisades Hudson, and is based out of Palisades Hudson’s Fort Lauderdale, Florida headquarters. He wrote several of the chapters in the firm’s book, Looking Ahead: Life, Family, Wealth and Business After 55. His contributions include Chapter 1, “Looking Ahead When Youth Is Behind Us” and Chapter 4, “The Family Business."

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