A recent analysis of the 2009 Credit CARD Act by researchers at the University of Chicago and New York University revealed that the legislation has cut overall borrowing costs to consumers by $20.8 billion per year.
The paper, which was prepared in advance of a CFPB field hearing on credit cards scheduled for Oct. 2, was authored by Neale Mahoney, an assistant professor of economics at UofC’s Booth School of Business; Johannes Stroebel, an assistant professor of finance at NYU Stern; Sumit Agarwal, an associate professor of economics, finance and real estate at the National University of Singapore; and Souphala Chomsisengphet, the OCC’s deputy director of credit risk analysis.
The researchers found that the legislation reduced costs to consumers by an annualized 2.8 percent of daily balances and by more than 10 percent for consumers with the lowest credit scores — primarily through the regulation of the frequency and size of over-limit and late fees.
Additionally, the researchers found no evidence that banks offset the savings by raising interest charges or reducing access to credit, an argument made by some groups that banks would find other ways to pass on the costs of credit card regulation to consumers.
The paper also pointed to a 0.5 percent increase in the number of individuals paying a monthly amount that would allow them to pay off their credit cards in 36 months, which could be the result of the law’s requirement to display the cost of balance repayment when only making minimum payments versus repaying the current balance over 36 months.
In providing guidance for future consumer finance regulations, the researchers suggested that greater transparency in borrowing costs can alter repayment behavior and help consumers to make better financial choices.
The CFPB field hearing scheduled for next month in Chicago will be open to members of the public and will include remarks from CFPB Director Richard Cordray, as well as testimony from a number of industry representatives and consumers groups.
Under the CARD Act, the CFPB is required to prepare a biannual study on the terms of credit card agreements and practices by issuers, the effectiveness of terms and fees, the adequacy of protections against abusive practices and whether or not the law has affected the cost and availability of credit.