Predatory Credit Card Lending - lending tree credit cards

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Predatory Credit Card Lending:
Unsafe, Unsound for Consumers and Companies
Joshua M. Frank, Senior Researcher
May 2012
www.responsiblelending.org
Table of Contents
Executive Summary . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2
Background . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Findings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Conclusion . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14
Appendix . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 17
Endnotes . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20
Center for Responsible Lending 1
EXECUTIVE SUMMARY
The Center for Responsible Lending (CRL) examined marketing and pricing practices prevalent in
the credit card industry before implementation of the Credit Card Accountability, Responsibility and
Disclosure Act (CARD Act) of 2009. CRL then examined the connection between these practices
and company performance during the recent economic downturn.
For the study, CRL examined 23 marketing and pricing practices that were common among the
top 100 credit card issuers during the summer of 2009, when the CARD Act outlawing or curbing
many of these practices was passed but not yet implemented. Common practices included imposing
high-cost penalty interest rates even when a consumer paid his card on time, using indexes to calcu-
late interest rates to the disadvantage of card holders, and assessing late fees that the Federal Reserve
recently ruled were unreasonably high. We then tracked credit losses for these companies from the
beginning of 2006 through 2010.
We found that before CARD Act reforms:
? A credit card issuer that engaged in one unfair, deceptive or abusive tactic tended to engage in
many. In general, smaller banks and credit unions had better practices.
? Bad practices were a good predictor of complaint levels.
Complaints to the Better Business Bureau correlated with
specific practices, regardless of an institution's type or size. A credit card issuer that
engaged in one unfair,
? The more obscure an issuer's pricing and the more aggressive deceptive or abusive tactic
its marketing, the more its losses jumped during the reces-
sion. In fact, credit card practices were the best predictor of tended to engage in many.
how quickly losses would mount compared to competitors--
better than a lender's location, type or size.
? Credit card issuers' claim that high-cost penalty fees and interest were risk-management tools
is false. Risk-management practices didn't explain the correlation between unfair, deceptive or
abusive practices and accompanying increases in losses. That's because these fees and rates didn't
mitigate risk, they were the risk.
The research shows that unfair, deceptive or abusive lending
practices were clustered within firms as part of an over-all strategy,
suggesting that credit card issuers either believed in pricing that High-cost penalty fees
was stated clearly up front and with an eye on long-term customer and interest didn't mitigate
relationships, or in pricing that was purposely complicated, hard risk, they were the risk.
to understand and intended to maximize short-term revenue.
Banks embracing the latter strategy also tended to be the most
aggressive marketers, using high-volume mailings to existing
customers to offer high-cost cash advances from a credit card
or check. And, the larger the financial institution was that
engaged in deceptive or misleading practices, the worse the
practices tended to be. In general, regional or smaller banks
or credit unions tended to have clearer, fairer pricing.
2 Predatory Credit Card Lending: Unsafe, Unsound for Consumers and Companies


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