Compliance Blog

Posted by Anthony Demangone

For the past month, I've heard the following question quite a few times.

Following the Credit CARD Act, is risk-based lending dead for credit cards?

Let me give you a great attorney answer: it depends.

Before you chuckle too hard, that really is the best answer I can give.  Compliance gives few simple conclusions.  And as I like to point out, simple issues generate few questions.  Let me explain.

What do you mean by risk-based lending?  Terms are a funny thing.  If you ask 5 people what risk-based lending means, you'll get 6 different answers.  Does risk-based lending refer to the initial rate, or is it a process that reassesses the risk of the credit card borrower over time and adjusts the rate in relation to risk?  Or is it both?  The Credit CARD Act makes it much more difficult to reprice credit cards after they are issued.  That is true.  But can you use risk to price new credit cards?  You bet.  Knock yourself out. 

But what about after the card is issued?  There's nothing that prevents you from using risk to reprice your card portfolio after you issue the card.  But we're going to live in a different world after the Credit CARD Act is fully implemented.  After new cards are issued, you won't be able to change rates within the first year (with certain exceptions).  After that period, you'll have to give 45 days notice before you increase rates, and the member will have the right to reject the increase.  If you do manage to navigate a rate increase by the member rejection right, you'll have to revisit the rationale at least every six months to ensure that the basis for the increase still exists.  If it doesn't, you'll have to reduce the rate.

The dreaded right to cancel.  This new right does get your attention, doesn't it?  But I can't wait to see how it ultimately plays out.  How many folks will cancel their card following a notice of a rate increase?  Some will, for sure.  And for those folks, you're really no worse off than you were.  They'll have to repay your card (under a new set of rules) based on the initial rate.  But some will accept the new rate, because many folks will want to use the card.   (Keep in mind that the new, higher rate will not apply to existing, outstanding balances.)  In addition, I believe consumers will soon learn that the easy days of 0% balance transfer offers and easy to obtain teaser rates are behind us.  Consumers will learn that if you cancel a change in terms on a decent credit card, they'd better have something better in hand.  The devil you know, as they say. 

Conclusion.  These extra hurdles certainly make risk-based pricing adjustments more difficult for credit cards.  For some credit unions, the changes are enough to make risk-based adjustments out of the question.   I'm sure some credit union out there, though, will find a way to make it work.  So, is risk-based lending dead for credit cards?  It depends on how you look at it.  And now you know why.