CAMBRIDGE, Mass.--(BUSINESS WIRE)--An over 250 percent surge in credit card-related regulatory restrictions by U.S. financial regulators since 2007 has contributed to a 50 percent drop in annual credit card originations to lower-risk-score Americans, according to a new study by a senior fellow and a research associate at the Harvard Kennedy School of Government’s Mossavar-Rahmani Center for Business and Government. The study examines recent trends in U.S. consumer credit levels, and how new credit card regulations, unpredictable regulatory enforcement action patterns, and other market factors help drive recent regressive trends in credit card access and use.
Federal regulatory actions – including bans on risk-based pricing stemming from the CARD Act (2009) and Fed 2008 credit card rulemakings – alongside the CFPB’s pursuit of ill-defined “unfair, deceptive, or abusive” activities, have reduced some card fees and achieved other intended policy goals. However, these actions have also likely resulted in the unintended consequences of fewer card originations and smaller credit lines extended to lower-score, lower-income Americans. Meanwhile, originations to high-score consumers edged 1.3 million accounts per year higher.
In the study, Marshall Lux, a senior fellow at the Harvard Kennedy School of Government's Mossavar-Rahmani Center and a senior advisor at The Boston Consulting Group, and Robert Greene, a research associate at the Center, argue that regressive trends in credit card access and usage is a problem because:
- Credit cards are essential for small business financing. Nearly 1 in 5 small businesses with one to nine employees report using revolving balances on personal credit cards to finance expenses.
- Americans unable to obtain a credit card will likely be pushed into more expensive and widely available forms of credit. Notably, there were more payday lenders than McDonald’s in the U.S. in 2012.
- The CFPB reports that nearly half of Americans in low-income neighborhoods have no credit score. Regressive credit card trends can worsen this, impeding economic mobility.
Despite the regulatory surge, the share of U.S. households dissatisfied with their credit cards remained low between 2001 and 2012 (6 percent vs. 8 percent, respectively). In fact, 73 percent report that cards make personal financial management easier. Lux and Greene find that mitigating regressive trends in credit card access and use would likely not contribute meaningfully to household debt levels, which have grown sharply in recent years due to an uptick in student loan debt. Instead, mitigating unintended regulatory impacts would improve economic mobility and growth.
Thus, the authors recommend that some bans on risk-based pricing be removed and that the CFPB should be transformed into a bipartisan FTC-like commission. The authors also call for a repeal of the Durbin Amendment, and for cost-benefit analysis at U.S. financial regulators to prevent regressive unintended consequences.
The full paper can be downloaded at http://www.hks.harvard.edu/centers/mrcbg/publications/awp/awp54.
Marshall Lux is a veteran financial consultant. He and his co-author Robert Greene are available for interviews on the findings. Please contact them at marshall_lux@hks.harvard.edu and robert_greene@hks16.harvard.edu.
About the Mossavar-Rahmani Center for Business and Government. The mission of the Mossavar-Rahmani Center for Business & Government is to advance the state of knowledge and policy analysis concerning some of society's most challenging problems at the interface of the public and private sectors. The scope of its work ranges from the local to the global. Drawing on the unparalleled intellectual resources of the Kennedy School and Harvard University, and bringing together thought leaders from both business and government, the Center conducts research, facilitates dialogue, and seeks answers that are at once intellectually rigorous and policy relevant. For more information, please visit www.hks.harvard.edu/centers/mrcbg