The Credit Card Act and Consumer Finance Company Lending

32 Pages Posted: 4 Jul 2017

See all articles by Gregory Elliehausen

Gregory Elliehausen

Federal Reserve Board

Simona Hannon

Board of Governors of the Federal Reserve System

Date Written: 2017-06-29

Abstract

The Credit Card Accountability and Disclosure Act (CARD Act) of 2009 restricted several risk management practices of credit card issuers. Using a quasi-experimental design with credit bureau data on consumer lending, we find evidence consistent with the hypothesis that the act's restrictions on risk management practices contributed to a large decline in bank card holding by higher risk, nonprime consumers but had little effect on prime consumers. Looking at consumer finance loans, historically a source of credit for higher risk consumers, we find greater reliance on such loans by nonprime consumers in states with high consumer finance rate ceilings following the CARD Act than by nonprime consumers in states with low rate ceilings or by prime consumers. That nonprime consumers in states with high consumer finance rate ceilings relied more heavily on consumer finance loans suggests that consumer finance loans were a substitute for subprime credit cards for risky consumers when rate ceilings permit such loans to be profitable. Consumer finance loans would not be available to many higher risk, nonprime consumers in low rate states because such loans would be unprofitable, and prime consumers would not need consumer finance loans because other, less expensive types of credit would generally be available to them.

Keywords: CARD Act, Consumer credit, Credit cards, Credit supply, Household finance, Personal loans, Subprime credit

JEL Classification: G21, G23, G28

Suggested Citation

Elliehausen, Gregory and Hannon, Simona, The Credit Card Act and Consumer Finance Company Lending (2017-06-29). FEDS Working Paper No. 2017-072. Available at SSRN: https://ssrn.com/abstract=2996085 or http://dx.doi.org/10.17016/FEDS.2017.072

Gregory Elliehausen (Contact Author)

Federal Reserve Board ( email )

20th and C Streets, NW
Washington, DC 20551
United States
202-452-2326 (Phone)

Simona Hannon

Board of Governors of the Federal Reserve System

20th Street and Constitution Avenue NW
Washington, DC 20551
United States

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