During the recent recession, millions of consumers fell hopelessly behind on their credit card payments and issuers suffered significant losses as a consequence. But a controversial law seems to have stabilized lending prospects for all involved.
Though many have criticized the federal government's Credit Card Accountability, Responsibility and Disclosure Act of 2009 as being overly regulatory, there are now some even within the lending industry who are seeing that it had its benefits as well, according to a report from Businessweek. There were many factors that contributed to a significant increase in credit card delinquency and default, but the legislation helped to refocus lenders' priorities and, in doing so, significantly lessened borrowers' risk.
During the recession, monthly credit card charge offs - that is, account balances so far behind on payments that lenders write them off as being altogether uncollectable - were astronomical, and at their peak cost issuers $821 million in August 2009, the report said. During that time, delinquency rates - accounts 30 days or more behind on payment not yet considered uncollectable, but viewed as an indicator of future charge offs - climbed to nearly 7 percent of all balances.
But the Credit CARD Act was passed in May 2009 and took effect in early 2010, and resulted in an almost immediate improvement in consumer credit quality, the report said. This was because the law prohibited certain lending practices that led consumers into more financial difficulties, such as changing the terms of lending agreements after enticing borrowers to sign up with favorable initial terms.
Prior to that, issuers had been giving cards to borrowers with all kinds of credit backgrounds, believing that they could cover many of the costs they faced as a result of lending to subprime borrowers, the report said. But the legislation forced lenders to significantly tighten the credit qualifications needed to open a new account.
"If there is a silver lining to the CARD Act - I'm not here to say the CARD Act was good for our business, so nobody misunderstand the comment - but if there were a silver lining to it, it forced rationality," Marc Graf, the chief financial officer for Discover Financial Services, one of the nation's largest lenders and payment processors, told attendees at a recent industry conference, according to the news service.
That trend has led delinquency rates to reach about 3 percent of all outstanding balances, down significantly from the height of the recession and well below historical averages, the report said.
However, lenders are also now broadening credit standards once again and offering millions of cards to subprime borrowers. As a result, many experts believe delinquency rates could tick up once again in the near future, and regress back toward all-time historical averages. However, others note these predictions have been coming for some time, and rates of late payments have still yet to fully hit bottom.