The Credit CARD Act of 2009 and consumer finance company lending

The Credit Card Accountability and Disclosure Act (CARD Act) of 2009 restricted risk-based penalty re-pricing of existing credit card balances, fees for paying late or exceeding credit limits, and initial fees that left little available credit at account opening—practices that credit card issuers used to manage risk. These practices helped issuers make credit cards available to higher risk, nonprime consumers. Using a quasi-experimental design with credit bureau data on consumer lending, we examine changes in bank card credit and possible substitution of consumer finance company loans for bank card borrowing following passage of the act. Our evidence is consistent with the hypothesis that the act’s restrictions on risk management practices contributed to a large decline in bank card holding by higher risk, nonprime consumers, but had little effect on prime consumers. Looking at consumer finance loans, historically a source of credit for higher risk consumers, we find greater reliance on such loans by nonprime consumers in states with high consumer finance rate ceilings following the CARD Act than by nonprime consumers in states with low rate ceilings or by prime consumers. That nonprime consumers in states with high consumer finance rate ceilings relied more heavily on consumer finance loans suggests that consumer finance loans were a substitute for subprime credit cards for risky consumers when rate ceilings permit such loans to be profitable. Consumer finance loans would not be available to many higher-risk, nonprime consumers in low rate states because such loans would be unprofitable, and prime consumers would not need consumer finance loans because other, less expensive types of credit would generally be available to them. Substitution of consumer finance loans for bank card credit is not without cost, however. Consumer finance loans typically have higher interest rates than bank cards, especially in the high rate ceiling states where such credit is available to higher risk borrowers.