In a blog post that appeared last week, the CFPB reported on research into various factors considered significant in explaining current credit card interest rates. The CFPB reported that over 175 million Americans have at least one credit card, half of which carry a balance that continues to accrue increasingly high interest rates. In an era that has seen the Federal Reserve Bank aggressively raise interest rates to combat inflation, Americans’ increasing reliance upon credit cards to cover every day expenses has sparked renewed interest in the practices of the credit card industry with respect to interest rates and fees charged.
The research collected in the blog post shows credit card interest rates increased following the Great Recession despite a number of industry indicators suggesting the risk of credit card lending has fallen to an all-time low. The factors presented include (1) record low charge-off rates (the measure of accounts deemed uncollectable after sustained delinquency); (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 compared to significantly lower risk could account for historic profit numbers reported by credit card banks in 2021, 7% annualized return on assets – the largest reported return in over twenty years. The blog does not mention, however, that the same Federal Reserve Bank’s Report to Congress noted profitability of only 2.4% in the previous year, nor that the same Report ascribes much of the increased profitability to changes in provisioning for loan losses and not to increases in credit card interest rates.
The blog post focusing on these factors is an indication that the CFPB is poised to increase its scrutiny on the credit card industry in the near future. It is worth noting, however, that the CFPB is prohibited from imposing a usury ceiling under Section 1027(o) of the Dodd-Frank Act. Despite the fact that the CFPB blog focuses on a topic (interest rates) over which it is powerless to act, and it does not mention credit card late fees, the CFPB has recently announced that it will be reviewing the maximum permitted late charge under the CARD Act.
Another disquieting statement in the CFPB blog is the observation that the 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 that is true or not (and the CFPB has not provided any data to corroborate the statement), the CFPB does not have jurisdiction to enforce antitrust laws. This has not stopped Director Chopra from repeatedly evoking anti-competitive behavior as the root-cause for many results he does not like.