Federal Reserve Discusses CARD Act, Credit Card Reform

Last year when congress passed the CARD act, they did not include small businesses in the regulations to protect consumers as they were unsure how the regulations would affect credit price and availability of credit to small businesses. Before they made a decision, they asked the Federal Reserve to analyze the issue. Their report came back this week. However, it was not very conclusive.

The CARD act protects consumers by requiring credit card issuers to adhere to stricter disclosure requirements about the terms of the account. It also places limitations on issuers' actual practices, what the Federal Reserve calls "substantive" protections, such as the ability to change interest rates. 

The Fed's response was mixed. Some commentators say the Fed found that if the protections are extended to small businesses it will raise prices and lessen the availability of credit, because it can affect the bank's ability to change rates. The flexibility to change rates is sometimes necessary because it is harder to estimate a business's credit worthiness than an individual's.

"Therefore, the willingness of issuers to extend the relatively large credit card lines that small businesses require may depend importantly on issuers' ability to adjust prices in the future, as they learn through experience about businesses' ability and willingness to pay," the Fed wrote. 

According to the Fed, if banks are prohibited from raising interest rates on some of their card holders, it might lead to higher rates for all of its borrowers, even those who wouldn't face a rate increase under the current rules. Banks contend that fees offset interest, and interest rates will go up if the fees are removed. The Fed did not offer a conclusion about the link between fees and interest rates.

It seems that the members of Congress opposed to the small business credit card reform will likely cite the Fed's report as evidence that their opinion is correct. Those looking for understanding about what to do next will have to look elsewhere.

Related Resources:

• The Fed Weighs In on Credit Card Reform (New York Times Your the Boss Blog)
• Fed: Credit companies admit profiling credit card users (Fox Business)
• Federal Reserve Board (FindLaw's LawBrain)