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Monday, March 1, 2010


Regulatory Issues

February 23, 2010

The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009 goes into effect this week. While the law, passed last May, is being hailed as a boon for consumers, it's already causing a slew of unintended consequences, says John Berlau, Director, Center for Investors and Entrepreneurs at the Competitive Enterprise Institute.

Congress should carefully consider how the CARD Act will harm consumers and entrepreneurs and revise the law's flawed provisions. Furthermore, Congress should resist populist proposals that would further distort the credit card market, such as interest rate caps or price controls on payment card interchange fees, says Berlau.

The CARD Act will make it harder for consumers to get credit just as policymakers are trying to get credit flowing, says Berlau:

* Ironically, the bill will result in higher interest rates for many cardholders, because it limits the ability of banks to properly price the risks associated with cardholders who make late payments.
* Even responsible credit cardholders who pay off their bills at the end of each month may suffer as banks increase annual fees and cut back on rewards programs to make up for lost revenue stemming from the law.
* The New York Times speculated last May that the law might create "a penalty for thrift."
* CARD Act proponents claim the bill will make credit card marketing more transparent to consumers.
* Unfortunately, however, the so-called "Credit Card Holder Bill of Rights" goes beyond disclosure rules and imposes paternalistic rules that limit consumer choice and undermine sound risk-based pricing practices that have long been relied upon by credit card-issuing banks and credit unions.

Stifling the payment card industry with federal regulation won't just hurt consumers, it will also stifle entrepreneurship, says Berlau:

* Start-ups often have limited collateral, making credit cards one of the only sources of financing for getting off the ground.
* The Kauffman Foundation has found that almost half of all small businesses rely on personal credit cards for financing.
* One such entrepreneur is Sergey Brin, who used his personal credit cards as a college student in the 1990s to start the company that today is known as Google.

Source: John Berlau, "Credit CARD Act Penalizes Thrift and Entrepreneurship; Interchange Fee Controls Would Compound Harm," Competitive Enterprise Institute,
February 22, 2010.

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