Two reports to Congress from the Federal Reserve Board address whether credit card issuers use behavioral profiling tactics to adjust account terms and separately, if credit card rules similar to those under the Truth in Lending Act should extend to small business credit cards. Released late last month, these reports were required under provisions in the Credit Card Accountability, Responsibility and Disclosure Act, which became law on May 22, 2009.
The conclusions of these reports basically call for inaction.
Do credit card issuers profile?
The Board examined claims highlighted by the press that credit card issuers consider transaction behavior, such as the names or locations of stores shopped at, or the identity of the mortgage lender used by the customer, to set and adjust account terms.
Research included a survey of the 100 largest bank credit card issuers and 75 other financial institutions about their practices. The survey revealed that few issuers base change-in-terms decisions on transaction-specific information or the identity of the customer's mortgage lender. For the period between Nov. 30, 2006, and Nov. 30, 2009, just six issuers said they considered such information for credit limit changes, and of these six, two also raised interest rates and four closed accounts. During the month of November 2009, two issuers relied on this data to make credit limit adjustments, but less than 1,900 cardholders were actually impacted out of the 340,000 cardholders whose credit limits were slashed for any reason.
"To the extent that transaction-related information is currently used by issuers to reduce credit limits or raise interest rates, it tends to be general in nature and does not rely on the identity of the individual store or merchant, the types of items purchased in a transaction or the price of any given item," the report states. Card issuers tended to use purchase totals, as opposed to amounts paid for specific items, and merchant category codes such as "hardware store" rather than a name or location of a specific merchant.
The report concludes that prohibiting the use of transaction-specific information could be costly and could reduce the effectiveness of fraud detection systems that rely on such data to flag suspicious charges.
Should credit card restrictions apply to small-business cards?
The Truth in Lending Act, which the Credit CARD Act amended, affords many protections that apply to consumer credit cards, but not small-business credit cards. The Board examined whether similar protections should extend to small-business cards.
Business cards are a different breed than consumer cards. A written statement from Kenneth Clayton, senior vice president and general counsel for card policy at the American Bankers Association, summed up how the two card types contrast:
"As the Fed report makes clear, small business card limits and per card spending tend to be much higher, and small business cards 'require specialized management and underwriting techniques to help manage the particular risks that small businesses present.' The report also recognizes that issuing and servicing costs for small business cards are higher than those for consumer cards."
The Federal Reserve stated in its report that restricting issuers' ability to adjust interest rates may lead to higher interest rates and lower credit limits for small businesses that use credit cards. It concludes that "it is not apparent, for the reasons discussed above, that the potential benefits of applying substantive restrictions similar to those in TILA to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses."
Do you agree with the Fed's recommendations? Should Congress restrict the use of transaction-specific data for change-in-terms decisions or extend card protections to small-business credit cards?
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