Consumers Saved $16 Billion In Credit Card Fees Thanks To Post-Recession Rules

Matt Rourke / AP

Credit card rules passed in the wake of the financial crisis have saved cardholders over $16 billion in fees, according to the federal agency tasked with enforcing them.

The Consumer Financial Protection Bureau said the CARD Act, passed in 2009 and enforced by the CFPB since 2011 has, by limiting the scope and size of fees issuers can charge cardholders, dramatically scaled back many common fees.

Late payment fees are one such category. The CFPB said before the CARD Act went into effect, late fees averaged around $35. They have now dropped to around $27, a CFPB report found.

The CARD Act also made it easier for consumers to pay on time — for instance, issuers couldn't require payments before 5 pm on due dates. Cardholders are now required to get billing statements three weeks before payments are due, and late fees must be "reasonable and proportional." Overall, the CFPB claims, the CARD Act saved cardholders $7 billion in late fees.

CFPB

Another big decline came from the near evaporation of "over-the-limit" fees, which averaged $35 and were charged when cardholders exceeded their credit limit. The CARD Act put some restrictions on how these fees could be charged — companies needed to get explicit customer agreement and they had to be "reasonable and proportional."

The CFPB said the new rules "were enough to severely restrict the practice of charging over-the-limit fees." Had these fees been charged at the same rate as they were before the CARD Act from 2011 through 2014 they would have cost consumers $9 billion.

Another practice the CARD Act has regulated nearly out of existence is credit card issuers increasing the interest rates on cards, including on existing balances, "independent of any particular triggering action by the consumer," the CFPB says.

Such moves could take place across entire segments of a bank's credit card portfolio, but the law limited these interest rate hikes and set out more specifics on when they could happen. By 2012, only 1.5% of accounts saw upward rate hikes.

"The repricing rate remains very significantly below any pre-CARD Act baseline we have been able to establish, which suggests—while not conclusively proving—that the Act’s restrictions continue to discourage repricing activity," the CFPB report says.

CFPB

The credit card industry has certainly noticed the changes. Mark Graf, the chief financial officer of Discover Financial Services, said at a 2012 conference that the "one silver lining to the cloud that was the CARD Act," was its restrictions on hiking interest rates. The ability to "reprice your customers at will," Graf explained "precipitated a lot of very aggressive behavior on the part of competitors basically participating in a race to the bottom."

One persistent criticism of new rules from the financial industry — which was voiced long before they went into effect — was they would limit the availability of consumer credit.

In a 2011 earnings call, then-Visa CEO Joe Saunders said the market is "seeing a lot more activity wind up in prepaid cards" thanks to the new rules. In 2013, Home Depot chief financial officer Carol Tomé noted that approval rates for its branded cards "just sort of flattened" out at a lower level. "It's really the result of the CARD Act. Thinking it would be helpful to consumers, it's actually limiting credit."

The CFPB report said that credit availability had tightened in 2013, but that "the reductions largely preceded enactment of the CARD Act." In some cases, "a number of CARD Act provisions were intended to limit the availability of credit in specific circumstances," the regulator said, pointing specifically to strict restrictions on marketing cards to young people and college students.

Via CFPB

Since then, the CFPB said that credit availability "has continued to improve." Big credit card providers have seen originations of accounts surpass their 2007 level (they fell off dramatically during the financial crisis).

"The total cost of credit is about 2 percentage points lower than before the CARD Act," according to prepared remarks scheduled to be delivered by CFPB chief Richard Cordray on Thursday. Accounts have been growing by about 3% in the past two years.

"We are warned that consumers will be priced out of the market. And we routinely hear that the cost of protecting consumers will be to constrict the availability of credit and even to drive some financial service providers out of business altogether," the remarks continue.

"We found that credit is now cheaper and more available and the credit card business has remained an attractive, profitable business for banks, with default rates that are now at historic lows."

Credit card issuers say that the CARD Act along with other post-financial crisis regulations like limitations on fees they charge to merchants has hurt their revenue and forced them to change the kind of credit cards they offer to customers.

In a presentation to investors last year, Gordon Smith, who runs JPMorgan Chase's consumer banking business, said that before the CARD Act, the credit card business was "much more focused on balance transfers and other things." The new rules "repositioned the business around the right products for the right markets and the right segments," including throwing out some products altogether.

Overall, the CFPB report says that the credit card market has shifted to earning revenue from obvious charges like interest and annual fees "and less from back-end fees and repricing."

And the credit card industry, in its own way, agrees — although sometimes begrudgingly.

"I've said before that CARD Act was not a good thing for this industry and it wasn't," Graf of Discover said at a conference in December, 2013. "But if there was a silver lining to that cloud, it's the fact that it brought real discipline into the marketplace."

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