In a blog post released last week, the CFPB reported on research into various factors considered important in explaining current credit card interest rates. The CFPB reported that more than 175 million Americans have at least one credit card, half of which carry a balance that continues to rack up ever-higher interest rates. At a time when the Federal Reserve Bank has aggressively raised interest rates to fight inflation, Americans’ increasing reliance on credit cards to cover day-to-day expenses has sparked renewed interest in the practices of the credit card industry regarding interest rates and fees charged. .
Research gathered in the blog post shows that credit card interest rates rose after the Great Recession despite a number of industry indicators suggesting credit card lending risk fell to a low. record level. Factors presented include (1) record write-off rates (the measure of accounts deemed uncollectible after sustained default); (2) a stagnant percentage of subprime cardholders; and (3) historically low prime rates.
From these factors, the CFPB blog post posits that the recent increase in credit card interest rates relative to significantly lower risk could explain the historic profit numbers reported by credit card banks in 2021, a 7% annualized return on assets – the highest reported return in over twenty years. The blog however does not mention that the same Federal Reserve Bank Report to Congress noted profitability of only 2.4% in the previous year, nor that the same report attributes much of the increased profitability to changes in the provision for loan losses and not to increases in interest rates on credit card.
The blog post focusing on these factors indicates that the CFPB is set to increase its scrutiny of the credit card industry in the near future. It should be noted, however, that the CFPB is prohibited from imposing a usury cap under section 1027(o) of the Dodd-Frank Act. Despite the fact that the CFPB’s blog focuses on a subject (interest rates) on which it is powerless to act, and does not address credit card late fees, the CFPB recently announcement that it will review the maximum late fees allowed under the CARD Act.
Another disturbing statement in the CFPB blog is the observation that high interest rates may be the result of the dominance in the industry of “a few key players” and a symptom of anti-competitive practices. Whether this is true or not (and the CFPB has provided no data to support this assertion), the CFPB has no jurisdiction to enforce antitrust laws. That hasn’t stopped Director Chopra from repeatedly pointing to anti-competitive behavior as the root cause of many results he doesn’t like.
