Economists: New Credit Card Regulations Would Hurt Consumers, Economy

American Bankers Association Releases Credit Card Regulation Analysis

Oct 02, 2007, 01:00 ET from American Bankers Association

    WASHINGTON, Oct. 2 /PRNewswire-USNewswire/ -- A new study
 _rates92507.pdf) released today by noted economists Jonathan Orszag and
 Susan Manning concludes that placing further legislative restrictions on
 credit card interest rates and fees is likely to harm the vast majority of
 consumers, most of whom manage credit cards successfully. The study,
 sponsored by the American Bankers Association, reaches three primary
     1. Proposals for price controls on credit cards may help a small
 minority of borrowers, but only at the cost of harming the vast majority of
     2. Innovation and deregulation have allowed credit card prices to
 reflect borrower risk more precisely, which has benefited the vast majority
 of borrowers; and
     3. Effective alternatives exist to protect consumers from unfair or
 deceptive credit card practices without raising costs or limiting credit
 access for other borrowers.
     Orszag, senior managing director of economic consulting firm
 Competition Policy Associates, Inc. (COMPASS), and Manning, a managing
 director of COMPASS, point out that during the past 25 years credit cards
 have evolved from a limited-use product primarily for high-income
 individuals to a financial tool widely relied upon daily by the majority of
 American families.
     The study provides evidence that innovations in the credit card
 industry have benefited cardholders by making credit available to many more
 Americans at much lower prices than a generation ago. It also demonstrates
 that credit card interest rates and penalty fees reflect the risk of a
 borrower's failure to pay.
     Orszag and Manning argue that recent proposals to regulate the credit
 card industry by imposing caps or other constraints on fees and interest
 rates would yield far more harm than benefits -- a concern borne out by
 historical and international experience.
     "Imposing rate or fee regulations is the functional equivalent of
 squeezing a balloon," explained Orszag. "The air--that is, interest rates
 and fees--is just shifted from one side of the balloon to the other--that
 is, from higher risk card holders to lower risk ones." In addition, Orszag
 explained, "Legislative restrictions on the interest rates and fees that
 bank issuers can charge would reduce the availability of credit for many
 higher-risk and lower-income borrowers. Those borrowers with reduced access
 to credit would find it harder to deal with emergencies and might have to
 resort to higher-cost forms of borrowing, such as payday lending."
     The study argues that such restrictions also would harm the economy
 more broadly as a result of consumers' reduced ability to maintain
 consumption through periods of income disruptions or borrow against future
     "A better approach would be to help the minority without harming the
 majority through improved disclosure, increased consumer financial
 literacy, and consolidated regulatory oversight for unfair or deceptive
 practices," explained Orszag. "Any additional regulatory intervention is
 particularly unwarranted before the effects are known of the Federal
 Reserve Board's recent proposal to improve the effectiveness of credit card
 disclosures. The proposed changes are the result of exhaustive and
 comprehensive analysis and, more importantly, consumer testing to determine
 readability and clarity of disclosures."
     In addition to his position at COMPASS, Orszag is a Fellow at the
 University of Southern California's Center for Communication Law & Policy.
 Previously, Orszag served on President Clinton's National Economic Council
 and as the Assistant to the Secretary of Commerce and Director of the
 Office of Policy and Strategic Planning. Manning has more than 20 years of
 economic consulting experience, including extensive expertise in
 competition and regulatory policy analyses.
     A copy of the full report, An Economic Assessment of Regulating Credit
 Card Fees and Interest Rates, is available on the ABA's Web site at:

SOURCE American Bankers Association