279 posts categorized "Credit & Debit Cards"

Many Young People Will Die in Debt, but Hopefully Not From Debt

posted by Nathalie Martin

I had a weird night’s sleep and then openned up my e-mail to find this headline from credit and collection news “Does The Consumer Bureau Harm Those It Claims to Protect? & Study Predicts Millions Will Die In Credit Card Red.” The immediate implication in my drowsy state was that the CFPB was somehow killing people. Wow. As it turns out, these were two headlines from two different stories, first one about how the CFPB was hurting Americans and the overall economy by constricting credit, according to a  Heritage Foundation paper by Diane Katz, available here

The second story was by Laura Rolland of the Huffington Post, and contained some grim news from a recent Ohio State Study published in the January issue of the Journal of Economic Recovery. It claims, consistent with informal data from my financial literacy class, that young people are up to their eyeballs in debt. According to Rowley, Millions of young Americans will die in debt to credit card companies. The study data show that people in their late 20s and early 30s (born 1980 to 1984) carry significantly higher credit card debt than older generations and pay it off more slowly, have about $5,700 more than people born 1950 to 1954, and $8,200 more than those born 1920 to 1924. The study even predicts that these young people will continue to charge well into their 70s.

Continue reading "Many Young People Will Die in Debt, but Hopefully Not From Debt" »

Small Bank Exemptions

posted by Adam Levitin

Community banks and credit unions are the darlings of Congress in the financial services industry. This is quite understandable--they play an important economic role in their communities and have a much greater civic presence than the big banks. The president of the local community bank is much more likely to be involved in major civic organizations than the Bank of America branch manager. As a result, a parallel regulatory system has developed for community banks and credit unions.  Small banks and CUs (net assets of less than $10 billion) are exempt from CFPB examination and from the Durbin Amendment's regulation of their interchange fees. They're subject to regular FDIC seizure, rather than OLA, and are not subject to SIFI regulation with higher capital requirements. And they would have been exempted from the proposed cramdown legislation.

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Gift Cards and Bankruptcy

posted by Adam Levitin

There's a linguistic irony that "gift" is the German word for poison. What, then, should we make of the "gift card"?  

Senator Richard Blumenthal's introduced new legislation, the Gift Card Consumer Protection Act (S.3636) that aims to close up the loopholes in existing gift card regulation and to protect consumers with gift cards when the retailer goes bankrupt. The legislation has a few moving parts:

  • It expands the definition of gift card to include loyalty, award, and promotional gift cards.
  • It would make the prohibition on dormancy, inactivity, and service fees absolute. Currently, the Electronic Funds Transfer Act permits inactivity, dormancy, and service fees for cards that have been inactive for a year, provided disclosure requirements have been met.  
  • It makes the ban on expiration dates on gift cards absolute.  Currently, the EFTA allows cards to expire after 5 years if the expiration date is properly disclosed. 
  • It makes it illegal for bankrupt firms to sell gift cards and for anyone to resell gift cards issued by firms that have been in bankruptcy for more than a week. 
  • The bill creates an automatic stay exception for presentation of gift cards and requires the trustee/debtor in possession to honor gift cards at full value the same as cash. 

It'll be interesting to see what the opposition ends up being to the bill. The bill is dealing with two separate, but related problems.  

Continue reading "Gift Cards and Bankruptcy" »

Interchange Preliminary Settlement

posted by Adam Levitin

Preliminary approval was granted for the interchange litigation settlement (MDL 1720) last Friday. Approval was widely expected, but I would also expect an appeal.  What the 2d Circuit will say is anyone's guess, and then there is still the question of final approval. Nonetheless, I think it's worth commenting on one aspect of the settlement that I haven't previously addressed, namely the incentives of the various named plaintiffs to support or oppose the settlement.  This is both a matter of law and a matter of optics. 

Continue reading "Interchange Preliminary Settlement" »


posted by Amy Schmitz
I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

When Squeaky Wheels Get Rusty

posted by Amy Schmitz

Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System.  The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.  

That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty.  Sure, the warranty covered replacement . . . but  not shipping (a la "fine print").  The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments.  Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.

Continue reading "When Squeaky Wheels Get Rusty" »

Zywicki's Interchange Settlement Balderdash

posted by Adam Levitin

I was really hoping that I would be able to go at least a year without having to call Todd Zywicki out for his comments on some consumer finance issue.  But it's not to be. Zywicki has weighed in on the interchange settlement, proclaiming it to be great thing for consumers.  Mission accomplished.  

How does Zywicki reach his conclusion?  By claiming that:

[the settlement] does affirm the core principle that interchange fees should be set by free markets and consumer choice rather than by judges or politicians, thereby preserving the engine behind one of the marvels of the modern age: the evolution of a 24-hour globally-connected system of instantaneous, secure, and ubiquitous payments system.

Let's put aside the fact that other countries have more advanced, more secure, faster, and more ubiquitous payment systems than the United States without oppressive card network rules and price-fixing.  Apparently this is an ideological matter. The settlement affirms the primacy of free markets and consumer choice, Zywicki claims. How? Zywicki isn't long on the details, but the answer would be that it preserves the current interchange fee system.  In short, the settlement is a victory for consumers because it accomplishes next to nothing.  

Continue reading "Zywicki's Interchange Settlement Balderdash" »

The Interchange Settlement

posted by Adam Levitin

Moved to top from 8/15.  

I've held my tongue for a while on the proposed class settlement in the multidistrict credit card interchange fee litigation (MDL 1720).  I'm weighing in on it now.  I've written up an analysis of the proposed settlement.  It's available here.  [N.B.:  this is substantially expanded 8/21 revision of the original 8/15 analysis.]  It's worthwhile noting that the settlement is not a done deal yet--at this point it is a deal between lead counsel for the proposed plaintiff class and the defendants--the settlement must still be accepted by the named plaintiffs (or at least some of them) and approved by the court, and it appears that at least several of the named plaintiffs will reject the proposed settlement.   

The short version of my analysis is that the settlement is an exceedingly bad deal for merchants and not in the public interest.

Continue reading "The Interchange Settlement" »

Why So Few Mega-Credit Card Class Action Settlements?

posted by Adam Levitin

JPMorgan Chase and Class Counsel have received preliminary approval of a $100 million class settlement in In re Chase Bank USA, NA "Check Loan" Contract Litigation (MDL 2032), a case involving Chase's increases in minimum payment amounts on some Chase cardholders who had taken advantage of low-APR balance transfers.  If confirmed, the proposed settlement would be, as far as I can determine, the second largest private settlement (or judgment) in a consumer class action relating to credit cards.  In re Providian Credit Card cases settled for $105 million right at the end of 2000, and Rosted v. First USA Bank settled for $87 million in 2001.  There have been larger settlements between card issuers and regulators, such as the CFPB's recent settlement with Capital One for $210 million (approximately 2/3s of which is restitution to consumers), the FTC's $114 million settlement with CompuCredit in 2008, and the OCC's $300 million restitution order against Providian in 2000. 

Given the huge volume of consumer credit card complaints both before and after the CARD Act, it's interesting to note how rare 9-figure private settlements have been. Whether this is a reflection on the state of our class action litigation system or a reflection on the actionable strength of consumers' complaints is unclear, but I would have expected to see more large consumer credit card class actions settlements. I'd be curious to hear others' thoughts on whether I'm expecting too much or why there haven't been more such settlements (or if I've missed some big ones).

Credit Card Data

posted by Katie Porter

The CFPB released a beta version of its complaint database on June 19th. Right now, one can only search credit card complaints, which the CFPB began taking on the first birthday of its creation, July 21, 2011. My takeaway is that this is major step forward for the disclosure of complaint data but that the "beta" in the website is well-deserved. You can see some neat graphics and and best of all you can download the raw data. One problem is that this is SO apparently cutting-edge and sophisticated that I couldn't figure out how to use many of the features after a half-hour of poking around (and while some may disagree, I think it's safe to say I have more technology and statistical skills than the vast majority of U.S. consumers). Below was my effort to use the "embed" graphic feature that is touted as allowing one to "publish this dataset on the internet at large."


And yes, I know the graphic does not appear and the hyperlink does not work. If you cut and paste it into a window (old school), it does appear.

Location, location, location: ATM Fee Disclosure Edition

posted by Adam Levitin

The number one agenda item for small banks is to repeal the physical, on-machine disclosure requirement for ATMs.  Yes, I'm serious, that, that is the top agenda item for small banks. And they wonder why they're not doing so well...

Still, it's worth understanding why they're focused on this issue.  The Electronic Funds Transfer Act requires disclosure of ATM fees both physically on the machine, as well as on the screen. Failure to do so subjects the financial institution to liability, including actual damages (close to zero), statutory damages (up to $1000/violation but with a class action cap) and attorneys fees. As it happens a cottage industry has emerged bringing strike suits over missing ATM signs (query how signs just fall off ATMs...). I've blogged a bit about it here

This weekend I saw an ATM that shows why merely requiring physical disclosure doesn't accomplish much--the disclosures were perhaps a foot off the ground and the ATM was in a space where kneeling was impractical (unless you want to get hit on the head with a door). I'm not sure if that was the fee disclosure (which must be in a "prominent and conspicuous location") or some other disclosure, but it's pretty useless for anyone who isn't crawling.  Check it out after the break.

Continue reading "Location, location, location: ATM Fee Disclosure Edition" »

Affidavits Are Not a Substitute for Evidence of Debt Ownership

posted by Bob Lawless

The Tennessee Court of Appeals has issued a decision that highlights the problems facing credit card debt collectors in a post-robosigning world (see here and here). The decision reaffirms what should be a simple principle in a debt-collection lawsuit. The burden is on the debt collector to show it owns the debt and to show the consumer is liable for the amount the debt collector asserts. The debt collector's say-so is not enough.

In LVNV Funding, the consumer had opened a Sears Gold Mastercard account in 1985 and was being sued for a balance that was a little more than $15,000. He had not used the account since 2001 and thought it had been settled in 2005.

One might first think Sears was the plaintiff. It was not. Sears had sold the account to Citibank, but Citibank was not the plaintiff either as it had sold the account to Sherman Financial Group. The plaintiff was LVNV Funding, a subsidiary of Sherman Financial to which the account had been assigned.

Continue reading "Affidavits Are Not a Substitute for Evidence of Debt Ownership" »

Debit Interchange Post-Durbin: Some Early Numbers

posted by Adam Levitin

The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:

(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened.  This won't fix our too-big-to-fail problem, but it's a small move in that direction. 

(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys.  That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation). 

(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened. (It's also possible to have two-tier pricing with interchange fees continuing to rise for small banks...)

(4) The small banks' debit card transaction market share grew slightly. It's not clear to me that this is a real trend, but it's possible that this is a side-effect of the big banks like BoA clumsily trying to recapture reduced debit interchange revenue with direct consumer fees. It seems that some consumers don't take well to hidden fees being replaced with direct fees. It's still not clear how many accounts were really moved to small banks/CUs in response to BoA and the like, but that could explain the growth in debit card market share for small banks.   In any case, merchants aren't steering away from small banks as we were told they might do. (It was never clear how they would steer anyhow).

(6) There may be other, harder to measure benefits for small banks from Durbin. To the extent that it makes their deposit account/debit product more competitive, this could have spillover benefits for their other products.  The deposit account (monetizable via debit or check) is the gateway relationship.  It enables the cross-selling of other products (loans, investments, insurance). So the benefits to small banks may be more than just on the debit revenue side. 

(5) The big issuers are paying lower network fees (4 cents lower for sig, 2 cents lower for PIN), which means that small issuers are really getting a 23 cent/transaction advantage of signature and 6 cents/transaction advantage on PIN.  It's not clear, however, what the network breakdown of small issuer transaction is.  

Again, it's still early in the game. There's still the merchants' litigation challenge to the Fed's Durbin Amendment rulemaking, and we could well see a bunch of market moves. Visa seems to be trying to go back to tying credit and debit products via its network fee, and there's always the possibility of either some innovation (think mobile), a new settlement network (PayPal?), or a new entrant buying an existing player and shaking things up (Google or Apple buying MC?). 

A final thought. The more distance we get from Durbin, the more I like the amendment. It's public utility regulation: rate regulation (section 920(a)) and open access (section 920(b)). That's not a totally new move in bank regulation (think Reg Q), but it really encourages thinking of at least some banking functions as being public utility functions. There might be something to that.  

FTC Mobile Payments Conference on April 26

posted by Adam Levitin

Here's a plug for a conference on mobile payments that the FTC is hosting next week.  It will be webcast live.  The agenda is here.  I'm one of the speakers.  

Despite my participation, it should be a really interesting conference.  Mobile brings together a range of new and existing consumer finance, privacy, IP, and antitrust issues:  mix together one part banks, one part telecoms, one part device manufacturers, one part OS manufacturers, and one part app designers and stir.  What's going to result from that mix isn't clear.  We're still in the early stages of mobile; it's clear that in 10 years, if not 5, mobile will be a major part of the US payment system, but it isn't clear yet what that will look like.  It could develop in a number of ways, with very different implications for the end-users (consumers and merchants) and the various intermediation participants (banks, telecoms, OS, hardware, and app makers).

There is a lot of potential benefit to consumers and merchants from marrying payments with all of the other consumer data that goes through mobile (e.g., location, contacts, interests), but also major privacy and competitive concerns. We don't have a clear framework for working through those issues at present. Mobile's cross-sector business complicates attempts to create such a framework. Mobile touches on the jurisdiction of the FTC, CFPB, FCC, and DOJ (antitrust), raising obvious coordination issues. Uncertainty over regulation isn't simply a concern for end-users; a clear regulatory framework is actually important for the development of mobile platforms, as regulatory uncertainty creates an investment risk. I'm really glad to see the FTC hosting this conference--it shows a regulatory awareness of the need to engage with the issues raised by mobile.  

Platform, Infrastructure, Utility?

posted by Bill Maurer & Stephen Rea

While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”

There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money--and a challenge for the Credit Slips community.

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Cash as Social Infrastructure

posted by Bill Maurer & Stephen Rea

Sticker in San Francisco: "Of course it's cash-only, it's the Mission."

Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)

The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

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Cash: Killing It, or Building Bridges to It?

posted by Bill Maurer & Stephen Rea

Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).

In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.

Continue reading "Cash: Killing It, or Building Bridges to It?" »

American Banker on Credit Card Debt Collections

posted by Bob Lawless

Jeff Horwitz at the American Banker has been doing some great reporting on abusive debt collection practices in the credit card industry. Joe Nocera's column took up the subject today. Robo-signing and other abuses have been a problem for a while with credit card debt collections, and Horwitz and Nocera do a public service by drawing attention to the problems. The situation cries out for congressional hearings and for regulatory investigation. It is great to see the Consumer Financial Protection Bureau make debt collection practices one of its top priorities.

Horwitz's articles at the American Banker include:

Maria Aspen at American Banker separately reported how the sloppy sales of delinquent credit card accounts and shoddy debt collection practices were a nightmare for one Maryland woman.

Toward Cashlessness?

posted by Bill Maurer & Stephen Rea

One of my students came across a humorous blog post from February, 2012. Titled, “What your payment method reveals about you,” the author listed a series of unlikely payment actions and a line on the presumed personal characteristics of the payer. The humor appeals to… well, us, anyway, and probably you, too.

Slinging your card down: You've definitely shoved a dog's face away from you because "move."
Slinging cash down: You've consumed alcohol that's involved whipped cream in the past week.
Using your Hello Kitty-themed card: You have many other credit cards.
Handing a bag of nickels and dimes, uncounted: You are nine.

Around the same time, the United States Agency for International Development launched an initiative to replace the use of cash in aid efforts with electronic forms of value transfer:

"If you care about reducing poverty, then you must also care about reducing the reliance on physical cash. We begin a movement to do just that.  USAID Administrator Rajiv Shah is announcing a broad set of reforms [in order to] reduce the development industry’s dependence on cash.  This includes integrating new language into USAID contracts and grants to encourage the use of electronic and mobile payments and launching new programs in 10 countries designed to catalyze the scale of innovative payments platforms."

The USAID “Better Than Cash” program was the culmination of at least a year’s discussion internally and with major donor agencies over the costs of cash for the poor--the heightened risk of theft associated with physical currency, the anonymity of cash, the difficulty in transporting and storing cash for those without access to formal financial institutions. Our own work has been enlisted in this effort, yet we are a bit more circumspect: although there are  very real problems associated with cash, there are also virtues. One of these virtues is that cash is publicly issued, not privately enclosed and tolled like most electronic forms of value transfer, and almost always accepted at par value. We’ll return to this topic as we examine some mobile phone-enabled money transfer and payment systems in the developing world, and regulatory responses to them, that might provide useful models. Over the course of the week, we will look closely at cash and how the debate over cashlessness—at times downright silly—is getting more serious, as at least some major actors shift from “the evils of cash” to “the benefits of an agnostic digital payment platform.” We think this is a consequential shift.

Continue reading "Toward Cashlessness?" »

Credit for Parenthood (in the Wall Street Journal)

posted by Melissa Jacoby

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here

Payment Protection Plans

posted by Bob Lawless

We have not talked a lot about payment protection plans, those great deals where the bank agrees to pay your credit card balance in the event of disability or death in exchange for premiums. They are great for the banks. In an article in the American Banker, Victoria Finkle and Jeff Horwitz reports that the banks only return to the consumer 21 cents of every dollar paid in premiums and earn profit margins of 50% or more on the plans. Finkle and Horwitz report that the FDIC and CFPB are looking into the plans, with a regulatory probe of Discover Financial Services already underway. The article is worth a read, especially for the surprisingly candid assessments of industry insiders.

These plans are another example of "gotcha capitalism"--a business model dependent on sustained miscalculations or mistakes by the other party to the transaction. For everyone but the consumer at death's door, the premiums are way too high to justify the expense.

UPDATE (2/8): More on the CFPB probe of Discovery from Donal Griffin and Carter Dougherty over at Bloomberg.

American Banker: Chase Has Halted Credit Card Collection Suits

posted by Bob Lawless

Yesterday, the American Banker reported that Chase has stopped filing lawsuits to collect consumer debtors. Moreover, they did it quietly and quickly. With concerns over sloppy procedures in debt collection, akin to the robo-signing problems in the mortgage industry, this news was quite interesting.

H/t to our reader who pointed me to the story.

What is the Relationship Between Credit Cards and Mortgage Delinquency?

posted by Melissa Jacoby

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

Continue reading "What is the Relationship Between Credit Cards and Mortgage Delinquency? " »

Change.org Petition Plays Part in BoA Debit Fee Reversal

posted by Nathalie Martin

In early October of 2011, Bank of America announced that it would begin charging its customers an additional $5 users fee for using its debit cards. In my financial literacy class the weekend after the announcement, some students were resigned to it, some furious, but we all vowed to switch banks if we banked at BofA. Yet we all also knew what would happen next, if history was any indication. Other banks would follow suit and eventually we’d all get charged the fee, which would just go up even more over time. It turns out, at least for now, the ending is happier. People mobilized around recent college grad Molly Katchpole’s online petition requesting a reversal of the fees.The petition was brilliant in its simplicity, stating simply this:

I'm writing to express my deep concern over Bank of America's decision to charge customers $5 a month to use their debit cards when making purchases.

The American people bailed out Bank of America during a financial crisis the banks helped create. You paid zero dollars in federal income tax last year. And now your banks profiting, raking in $2 billion in profits last quarter alone. How can you justify squeezing another $60 a year from your debit card customers? This is despicable.

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Consumer Credit Levels Reach Their Lowest Point in over a Year

posted by Nathalie Martin

According to a recent Reuters story, consumers are reluctant to hold debt due to the U.S. Credit rating downgrade and debt problems in Europe. The economy is shaky so people are apparently less willing to carry tons of debt. Consumer credit fell $9.50 billion in August after rising $11.92 billion in July, the report said, which is well below economists’ expectations of a $7.75 billion increase.

Revolving credit, which mostly measures credit card use, dropped $2.27 billion in August after falling $3.56 billion in July. Non-revolving credit, which includes mostly auto loans, fell $7.23 billion, the largest decline since August 2008, after rising $15.48 billion in July.
"Consumers are extraordinarily sensitive to economic conditions and as things started to look a bit more sour, they stopped using their credit card," said Steve Blitz, a senior economist with ITG Investment Research in New York. While this story paints this as a bad thing for the economy as a whole, it speaks well of consumers’ efforts to protect themselves in this economy.


Bully for BofA: New Debit Card Fees!

posted by Adam Levitin

Bully for you, Bank of America.  Bank of America's starting charging monthly fees for debit card usage to some customers. This is being taken as an "I told you so" by opponents of the Durbin Amendment, who argued that it would only result in higher costs for consumers. Actually, the BoA move is exactly what we might expect:  consumers are having to pay for their rewards. That's how it should be. They might be paying too much, but that's another matter.  So what does Bank of America's move tell us?

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Credit Card Securitization and Skin-in-the-Game

posted by Adam Levitin

I have a new paper on credit card securitization and what it teaches us about the likely effectiveness of the Dodd-Frank Act's skin-in-the-game risk retention requirements. Credit card securitization has long required 4%-7% credit risk retention (cf. 5% under Dodd-Frank).  

I argue that when combined with other features of credit card securitization it was actually counterproductive at aligning issuer/securitizer and investor incentives and likely contributed to rate-jacking. Instead, credit card securitization didn't go off the rails like mortgage securitization because of the existence of implied recourse, effectively 100% skin-in-the-game. This suggests that skin-in-the-game cannot be relied upon as a one-size-fits-all cure. Its effectiveness will instead depend on the other securitization features with which it is combined.  

If you're interested in going into the sausauge factory of credit card securitization, there's plenty of gore and detail here for you. If you're interested in the connections between credit card securitization and rate-jacking, there's something here for you. And if you're interested in whether Dodd-Frank's risk retention requirements will be effective, there's something here for you too.  

The (overly long) abstract is below the break:

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A Plea to Financial Reporters

posted by Adam Levitin
Why do financial reporters insist on reporting interest rates on complex consumer financial products as if they were meaningful in isolation? To wit, an otherwise good New York Times story reports an increase in credit card interest rates over last year. That figures doubly meaningless. First, interest rates are but one component among many of the cost ofusng a credit card. This is akin to reporting that because A increased, therefore the sum of A+B+C+D+E increased. Unless we know that other factors held constant (fees of various sorts, etc) it doesn't mean much to know what happened to interest rates. And second, interest rates only matter for revolvers (including sloppy payees). That's the majority of card accounts, but it means interest rates just are so important as to be reported in isolation as significant. So tomy financial reporter friends, please stop repeating this logic fallacy.

More on the Durbin Amendment Rulemaking

posted by Adam Levitin

I have an op-ed on the Durbin Amendment rulemaking in the American Banker.  

The Politics of the Durbin Rulemaking

posted by Adam Levitin

It goes without saying that I think the Fed did a real jerk move on the Durbin Amendment rulemaking. But the more interesting issue is why? 

The Fed didn't have any new data to work with after the proposed rulemaking in December. Sure, it had lots and lots of comments, and there was some a crazy amount of lobbying. But it's hard to see what that lobbying would have accomplished in the January-June window that it hadn't in the July-December window. 

Instead, I think that the volte-face was the result of bigger picture Federal Reserve Board politics. For the Fed, interchange is the regulatory issue that they have with merchants. The Fed doesn't have to handl-vandl with merchants on other regulations. But the same can't be said about the banks. The Fed has an on-going regulatory relationship with the banks that it has to manage.  And interchange just isn't a very important issue for the Fed. It's not a regulatory duty that they wanted in the least. So the Durbin Amendment rulemaking offered Bernanke (and the other Governors) a low-cost way a chance to throw the banks a bone and build up some goodwill before the gloves come off on the real fight about capital adequacy levels. 

If that's correct, I think it's a bad calculation by Bernanke et al.  The banks are going to fight on capital as ferociously as they can and $4B annually of goodwill payments aren't going to change that. And given the way the Fed did the rulemaking, I think there are a good grounds for a litigation challenge that would defeat Chevron deference. If that happens, there'll be a lot of egg on the Fed's face. 

The Fed Bails Out the Banks...Again

posted by Adam Levitin

[Updated 6.30.11]

If anyone doubted who set the marching tune for the Federal Reserve Board, it was sure clear today. The Fed announced its final rule under the Durbin Interchange Amendment, and it was quite the handout to the big banks.  

The Durbin Amendment instructed the Fed to pass rules that clarified its instruction that debit interchange fees must be reasonable and proportional to the incremental cost of authorizing, clearing, and settling an individual debit card transaction.  The Fed came out with a proposed rule last December that solicited comments on two alternative safe harbors.  One was for a flat fee of 7 cents per transaction, the other for 12 cents per transaction. The Fed also solicited comments on whether debit cards should have to be routable on 2 unaffiliated networks or on 2 unaffiliated PIN and 2 unaffiliated signature debit networks (4 networks total). 

Well, today the Fed came out with the final rule, and what a surprise.  

Continue reading "The Fed Bails Out the Banks...Again" »

Still Not Working Abroad

posted by Stephen Lubben

I've previously posted about my frustrations at being stranded abroad without a functioning credit card -- particularly at train stations -- and the refusal of American credit cards to adopt a technology that has been in my building laundry room for years.

So I was quite excited to read in this morning's Times that Chase has begun to offer "chip and pin" cards. As Katie has previously noted, I use a Chase British Airways Visa. So I called them up all excited, hoping to get a card before my summer family vacation, only to be told that only private banking clients were getting chip and pin cards.

The customer service agent seemed entirely perplexed when I said "your loss." The inability to get somebody to supply a product that consumers demand is almost enough to undermine my faith in the invisible hand.

Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback

posted by Adam Levitin

As early as this Tuesday we might find out who runs this country.  Is it Wall Street and the financial economy or the real economy of consumer citizens and retailers?  We will know the answer to this question based on what happens when the Senate votes on a bill to unwind a Dodd-Frank Act provision that would prevent banks from charging anticompetitive debit card swipe fees.

This provision, known as the Durbin Amendment is a bellwether for the state of political power and thus financial regulatory reform in the United States. Banks are working furiously to roll back the Durbin Amendment, and their success or failure at doing so is a measure of the political power of financial institutions. If the banks win, it will not just be the traditional story of the banks' routing the consumer groups. If the banks win, it will show that the financial services sector is more powerful than the largest retailers in the US.  (Heck, the US Chamber of Commerce is on the banks side on this, which might say something about the Chamber's funding. It's certainly not from all the small businesses over which they weep crocodile tears.) 

Continue reading "Dodd-Frank Gotterdämerung: The Durbin Amendment Rollback" »

The Three Consumer Banking Systems

posted by Adam Levitin

For the past couple of years we've heard a lot about shadow banking versus traditional banking. But this dichotomy treats the traditional banking system as a unitary whole. That's hardly the case for consumer banking. The United States currently has three consumer banking systems. They have somewhat separate regulation and market segments, but they are fundamentally in competition with each other. 

The first system is the too-big-to-fail commercial banks. They are almost all structured as national banks, regulated by the Office of the Comptroller of the Currency. The second system are the community banks and credit unions.  They tend to be regulated by the FDIC and NCUA, but also by the Fed or state banking supervisors.  And the third system are the nonbank finance companies (payday lenders, title lenders, even pawn, etc).

Despite the competition between these sectors, they have cooperated to a surprising degree recently, particularly community banks and credit unions with commercial banks. For example, on both bankrutpcy cramdown and the Durbin Amendment, there were carve-outs for small institutions (<$10B net assets), but the small banks still fought furiously despite being exempted. I'm frankly puzzled why they are willing to carry water for the big boys (do they want to be part of the club?). Maybe someone will explain in the comments. But below the break I'll lay out the case for why the smaller banks should actually be strongly supportive of recent consumer finance regulatory initiatives. 

Continue reading "The Three Consumer Banking Systems" »

Google Wallet-Regulatory Implications

posted by Adam Levitin

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

Continue reading "Google Wallet-Regulatory Implications" »

Interchange and Elections

posted by Adam Levitin

American Banker has a really interesting article about the way the interchange fight is affecting the reelection prospects of Sen. Jon Tester (D-MT), which could decide the control of the Senate in the next Congress.   (Also worth reading is this piece in The Hill that shows a pretty direct connection between Tester's advocacy of a bill to delay implementation of the Durbin Interchange Amendment and a surge in campaign contributions.)

I think many people have the plague o' both your houses reaction of the unnamed Senate aide who compared the interchange fight to the MLB labor relations:  millionaires vs. billionaires.  I think that's unfortunate because I think there's a real consumer welfare issue involved.  (Sort of like the fate of the fans and the game of baseball.) For me the interchange issue boils down to a pretty simple question: who do you think is more likely to be able to squeeze consumers harder, banks or merchants?

Both groups are profit-motivated actors, not eleemosynary institutions. But both also operate in a world where competitive forces place limits on their pricing. My sense is that these forces place much stronger limits on merchants than banks (indeed, we limit entry into the banking space), so merchants are more likely to pass thru savings to consumers than banks. Moreover, merchants are likely to pass-thru savings to all consumers, whereas banks are likely to pass-thru savings regressively to high-net-worth consumers. To be sure, there are plenty of other interesting issues involved with interchange regulation, but I think this is the essential question--are banks on average more competitive than merchants?

The Anti-Consumer Agenda

posted by Adam Levitin

I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon. 

But business and consumer interests often diverge. Now, it should hardly be controversial that there is an unequal playing field between businesses and consumers. Generally, businesses know more about their products than consumers and have more bargaining power than consumers. (Yes, there are information assymetries running the opposite way, which is a particularly salient problem for credit and insurance products.) For many businesses, it is important to maintain this assymetry of information and bargaining power, as there's profit in it.

In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges.

Instead of a laboratory of experiements to help level the b2c playing field, we see a different trend emerging:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues: 

  • AT&T v. Concepcion (waiver of class actions in arbitrations)
  • Attempts to bust up public employee unions (and attacks on unions in general, such as the failure of Card Check legislation)
  • Citizens United (corporate speech rights)
  • Attempts to retain the current corrupt swipe fee system (failure of antitrust)
  • Attacks on public health insurance (prohibition on Medicare bargaining over prescription drug prices and the death of the public option)
  • Attempts to first kill off and now to maim the Consumer Financial Protection Bureau

Continue reading "The Anti-Consumer Agenda" »

It Is All Clear Now

posted by Bob Lawless

Although I don't think today's Dilbert was about a particular industry, I do now understand a lot more about the problems with unauthorized and excessive fees in the consumer finance industry:


The Politics of Swipe Fees

posted by Adam Levitin

The HuffPo has a major piece on the debit card swipe fee legislative fight, which seems to be a stand-alone K-Street Full Employment Act. It's well worth the read. I'm proud to say that Credit Slips has probably had longer, more continuous, and more in-depth coverage of swipe fees than, well, anyone. Back to Sept. 21, 2007, to be precise. 

I'd add a few points to the HuffPo piece, however: the Booger Rule of Antitrust, the Small Banks and Small Businesses (with help from Wrestlemania III), and Consumer Advocates. 

Continue reading "The Politics of Swipe Fees" »

Dora the Explorer on Debit Interchange: Swiper No Swiping!

posted by Adam Levitin

Nancy Reagan taught us to "Just Say No!"  Now Dora the Explorer tells us some words of wisdom about uncompetitive debit card swipe fees:  "Swiper No Swiping!"  Swiper is the incorrigibly rapacious fox who is always trying to steal stuff from Dora and her friends. I'll let the metaphor speak for itself. (And what could that crown represent, Simon Johnson?) Consider it a modern tale from Aesop.  


[Update:  This is too good to be true.]  

Less than family-friendly beneath the break...

Continue reading "Dora the Explorer on Debit Interchange: Swiper No Swiping!" »

Another Robo-Signing Problem

posted by Bob Lawless

The other shoe drops: allegations of robo-signing in credit card collections (courtesy of the AP and CNBC). If it is happening in assembly-line mortgage foreclosures, there is no reason to think it is not happening in other assembly-line debt collections.

The Solomonic Test of Swipe Fee Reform: Reverse Political Economy

posted by Adam Levitin

King Solomon's judgment regarding the two women claiming to be the mother of the same child is a familiar story--the King proposed chopping the baby in two and giving each mother half of the child. One mother consents, while the other says that she will forfeit the child. The one who prefers receiving 0 child to .5 child is then awarded the whole baby because the real mother would never consent to the child being harmed.  A market test of value. 

We can apply similar logic to the question of debit swipe fee or interchange reform.  A major question in swipe fee reform is the degree to which merchants' savings from reduced swipe fees will be passed through to consumers. If the savings would be pocketed by merchants, it would just be a redistribution from banks to merchants. That's the right result under antitrust law, but it doesn't make as compelling of a policy argument as protecting consumer surplus.  

So what does this have to do with King Solomon?  It means we should give the baby (swipe fee reform) to the party that values it least because that's the party that will pocket the smallest part of the consumer surplus.  

My sense is that the banks are vastly outspending the merchants on lobbying.  The merchants don't seem to have put in a lot of money.  They ran a cartoon strip in some Capitol Hill papers a couple of years back, but they certainly aren't putting in nearly as much money as the financial services industry. There are entire metro cars in DC plastered with (really ineffective) posters opposing swipe fee reform, and even anti-reform TV commercials (YouTube link anyone?).  

Banks are spending more money than merchants on the lobbying because they think that they'll keep more money if there is no reform than the merchants would make if there is reform. The reason the merchants don't think they'll make much money from reform--because they anticipate the savings flowing through to consumers.  So applying Solomonic wisdom, we should give swipe fee reform to the merchants because they value it less than the banks.  Going full speed ahead with swipe fee reform is the best route for consumers. 

How Credit Card Companies Get Around the Card Act

posted by Nathalie Martin

Want to do a riddle?  Try this.

Mrs. Marquez wrote herself a $5,000 check from her credit card company....you know, those ones that come in the mail with the bill? Her family makes just $40,000 a year, but the card company approved this loan, under an offer advertized as 0% interest for one full year, starting April 1, 2010, a transaction clearly covered by the Card Act. In July of 2010, Ms. Marquez needed another $5,000, so the company allowed her to take out another $5,000, same terms, with the 0% deal expiring on July 1, 2011. The fee was $150 per transaction, not bad in and of itself. The Marquez' diligently paid on the loan so that they'd pay the whole first $5,000, in full, by April 1, 2011. Now the credit card company says they owe interest at some huge amount, on an amount close to $5,000? Can the company do this? Hint:  The Card Act requires that payments be applied to the highest interest portion of the loan first (after the minimum payment), but both loans are allegedly interest only.

More Bogus Lobbying Numbers from the Banks: Debit Interchange Rates

posted by Adam Levitin

You gotta love the American Bankers Association. These guys just don't stop trying. They're the Hamburgler of the lobbying world. The ABA now has a little piece out now entitled "Merchant Interchange Rates are Steady—Transaction Volumes Are Rising". This piece is incredibly dishonest; they couldn't even get any academic or even hired-gun econosultant to sign on to it. All that's missing is a claim about death panels or al-Qaeda.  

Continue reading "More Bogus Lobbying Numbers from the Banks: Debit Interchange Rates" »

Allocating Scarce Dollars: Payment Hierachy

posted by Katie Porter

When Americans have fewer dollars, creditors need to position themselves at the top of the pile to get paid each month. This is called payment hierarchy, and traditionally mortgage creditors have been at the top and unsecured creditors, and perhaps ubiquitous credit card creditors, near the bottom. At the Consumer Financial Protection Bureau conference on the anniversary of the CARD Act, I learned that the payment hierarchy has been upended. In 2010, consumers are paying their credit cards ahead of their mortgages. (Click on CFPB conference link above, then click on "Credit Card Profitability" by Credit Suisse and go to slide 7 to see the full data). Two key explanations for this change: 1) people may be more willing to risk losing their home when its value is plummeting and they are not certain they can hang onto it, and 2) credit card companies reduced the amount of credit lines and closed old accounts, making people more concerned about "preserving" their good standing with their credit card company. Another way to think about this is that homes used to be families' piggy banks, tapped when it is time to send a child off to college or do a home renovation. With no equity, Americans need to rely more on the credit card as their safety net. Unemployment rates are high, the economy remains fragile, medical costs are uncertain. In this economy, it seems entirely rational and reasonable to me for families to highly prize access to unsecured credit from cards.

When there are too many unsecured creditors to go around, however, how do consumers chose who gets their scarce dollars? A new research paper, Winning the Battle but Losing the War: The Psychology of Debt Management, uses a series of experiments to explore this question. The authors find that consumers focus on making payments that reduce the number of open accounts, which the researchers call "debt account aversion," rather than solely on paying off the debt with the highest cost interest rate. The latter would ultimately reduce the total cost of credit, an approach that the researchers term "perfectly rational."  In a series of stylized debt games played by students, not even one student consistently repaid in multiple rounds of the game all of their available cash to the open debt account with the highest interest rate. The pattern of debt account aversion--using some cash to pay off small accounts--held across a variety of conditions, although the researchers find some interventions that reduce the practice, such as prominently highlighting the amount of interest accumulated on each debt between rounds. But is debt account aversion really a "mistake"? Should policymakers be discouraging this behavioral trait?

Continue reading "Allocating Scarce Dollars: Payment Hierachy" »

Teachers and the Durbin Interchange Amendment

posted by Adam Levitin

The National Education Association, the largest teachers' union, has come out in opposition to the Durbin Interchange Amendment.

It's unusual to see labor siding with financial institutions, but the lines are often blurrier than one might recognize. There are no less than 151 credit unions with "teacher" in their name (see it for yourself here). In addition, some of the myriad municipal and county employee credit unions are in part teachers' credit unions. I am left wondering if this is the NEA representing teachers or representing teachers' credit unions.

Small Banks and Debit Interchange Reform: Winners or Losers?

posted by Adam Levitin

The banking industry is making a full court press to get the Durbin Interchange Amendent implementation delayed. Given that a year of delay is worth about $15-16 billion in swipe fees, the banks are quite motivated, and they've managed to get legislation introduced to delay the rule-making so the Fed can study the issue further.  

A potent force in attempts to delay the Durbin Amendment's implementation are community banks and credit unions. While most debit swipe fees go to a handful of very large banks, small banks have been quite concerned about the impact of the Durbin Amendment. And community banks and credit unions carry outsized political influence because of their presence and standing in every community. The local Chambers of Commerce and Rotary Clubs, etc. are filled with the CEOs of community banks and credit unions, not the local branch managers of Bank of America or Citibank.  

But are the small banks right to be so worried about the Durbin Amendment? It's not so clear, and a recent American Banker reader poll indicated that a majority of readers thought that small banks would actually benefit from the Durbin Amendment (I've made a similar argument about credit unions benefitting from the CARD Act.) The Machiavelli of the card industry himself, Andrew Kahr, even opined in the American Banker that small banks would benefit from Durbin. In his words, the claim that Durbin hurts small issuers is "Poppycock." It's pretty hard to argue with Kahr's math, when it observes that it can only help small banks if they get 100bps vs. 30bps for the big banks. So what gives?

Continue reading "Small Banks and Debit Interchange Reform: Winners or Losers? " »

Now Back to Our Regularly Scheduled Programming (i.e., Interchange!)

posted by Adam Levitin

It's been a while since I've blogged about interchange.  But I've been meaning to share a personal story about how weak signature debit fraud protection is.  Recently Mallory Duncan, the General Counsel at the National Retail Federation was kind enough to speak to my Consumer Finance class about interchange regulation. I took Mallory out for coffee at Starbuck's afterward. I treated. But I asked Mallory if he would do the transaction, with my Visa signature debit card. I stood off to the side while Mallory purchased the coffee with my card.  

It turned out to be a signatureless transaction, so Mallory didn't sign anything. And my card has my photograph on the front. You be the judge of whether anyone is likely to confuse me and Mallory based on physical appearance. Pictures after the break. 

Continue reading "Now Back to Our Regularly Scheduled Programming (i.e., Interchange!)" »

Visa's Identity Theft (I Mean Superbowl) for Life Promotion

posted by Adam Levitin

In the midst of the Bears' ignominious defeat at the hands of the Packers, I saw a commercial advertising Visa's Superbowl for Life promotion.  It's a sweepstakes.  Users of Visa's signature debit and credit products are automatically entered with every purchase, but you can also enter by writing in.  If you use a Visa PIN debit product (Interlink), however, you do not get a shot at the tickets. 

The estimated odds of winning:   1 in 9,685,871,298.  Compare that with the odds of having your identity stolen by using a signature debit product.  

Continue reading "Visa's Identity Theft (I Mean Superbowl) for Life Promotion" »

CARD Act Compliance Costs Outweigh Fee Benefits?

posted by Adam Levitin

The American Banker has an interesting piece on the impact of the Credit CARD Act.  It's behind a paywall, but here's the key insight: 

Credit card issuers were expected to raise fees and cut rewards to compensate for lost revenue from new regulations. But some have done the opposite, eliminating fees they are still permitted to charge. Most banks have increased certain costs, such as purchase annual percentage rates, and added annual fees for some cardholders in response to the Credit Card Accountability, Responsibility, and Disclosure Act's new restrictions on rate increases, penalty fees and other terms. The ones that have also eliminated fees — including Bank of America Corp. and Wells Fargo & Co. — claim they did so as part of an effort to be more transparent. Some experts offer another explanation: it may simply be cheaper for issuers to drop these fees rather than bring them into compliance.

At the very least, this indicates that the impact of the Credit CARD Act is more complex than its critics would have it.   


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