Wednesday 19th of December 2018

Regulation of the Credit Industry?

Consumer advocacy groups have long said that regulation of the credit industry has largely been ineffective. Now with the onslaught of the credit crisis, consumers are struggling with bigger balances, higher fees, and rising interest rates. Cardholders’ pleas for relief to legislators will likely mean significant regulation for the industry by the beginning of next year. In this post, we’ll explain the impetus for this regulation and discuss what it would mean for the industry and cardholders alike.

The Background

In the throes of the mortgage crisis, regulators are conceding that they are partially to blame because they did not act quickly enough. As a result, people are losing their homes because banks were unfair to them. Legislators fear that the credit card industry is the next disaster waiting to happen. Some argue that unless lawmakers do something, many consumers could stay mired in debt for the rest of their lives. Most consumer advocates and lawmakers agree that new regulation is imminent; it’s just a question of how powerful the legislation will be.

What’s in Store

Currently, credit card companies are required to disclose their terms to cardholders, but consumer advocates say this is not enough. They want stricter federal control over the credit card industry; specifically, regulating the circumstances in which creditors can raise and calculate interest rates and assess fees. Most proposed legislation would require lenders to apply payments to the highest-interest debt. All suggested legislation would prohibit double-cycle billing, a system in which interest is charged on debt that has already been repaid. Additionally, the new laws would extend the required time between when a statement is mailed and the payment is due. One proposed bill would bar lenders from raising interest rates on existing debt unless the cardholder is more than 30 days late on the payment. Finally, the legislation would also severely restrict the marketing and offers of credit cards to those under the age of 21.

The Opposition

The credit industry continues to take a strong stand against increased regulation. Creditors warn that such legislation can have unintended consequences. For example, more regulation might lead to higher prices for prime borrowers and reductions in the offers of popular low-interest balance transfers. Reducing balance transfers might thwart job creation because many entrepreneurs use low-interest balance transfers as a way to borrow money at a minimal cost. Proponents of the regulation dismiss these arguments as overblown, saying the new laws will not make the credit card industry unprofitable. In reality, they claim, the new laws might help creditors increase their repayment rates by lowering the incidence of bankruptcy.

Additional Resources