PDF《BEYOND》

BAR-GILL FINAL READ 6/26/2012 11:24 AM

967 CREDIT CARD PRICING: THE CARD ACT AND BEYOND Oren Bar-Gill &

Ryan Bubb? We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of

2009 (the CARD Act) has been successful in addressing those concerns.

The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers'

credit risk, predicts that issuers will respond to the CARD Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated nonsalient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in nonsalient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the CARD Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. PostCCARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still have difficulty understanding the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework. We argue that improved disclosures that provide consumers with the aggregate cost of credit under the contract, based on information about the borrower'

s likely use of credit, would improve consumer outcomes. Furthermore, we suggest that regulators should not focus only on prices that are too high but should also consider limiting the ability of issuers to charge introductory teaser interest rates that are, in a sense, too low. INTRODUCTION.969 I. CREDIT CARD PRICING AND THE EFFECTS OF THE CARD ACT: ? New York University School of Law. We are grateful for the helpful comments provided by Joseph Farrell, Josh Frank, James Huizinga, Alex Kaufman, Ariel Porat, and participants at the Cornell Law Review and Clarke Business Law Institute Symposium: Financial Regulatory Reform in the Wake of the Dodd-Frank Act, the Conference on Contracts―Economic, Behavioral and Empirical Perspectives at the Hebrew University of Jerusalem, and the Research Seminar at the Consumer Financial Protection Bureau. The financial support of the Filomen D'

Agostino and Max E. Greenberg Research Fund at NYU School of Law is gratefully acknowledged. BAR-GILL FINAL READ 6/26/2012 11:24 AM

968 CORNELL LAW REVIEW [Vol.97:967 THEORY.973 A. A Rational Choice Theory: Risk-Based Pricing

973 1. Revealed Risk and Adjustable Prices.973 2. The CARD Act.974 B. A Behavioral Economics Theory: Salience-Based Pricing.975 1. Low Short-Term Prices and High Long-Term Prices.975 2. The CARD Act.977 3. A Simple Model.978 II. CREDIT CARD PRICING AND THE EFFECTS OF THE CARD ACT: EVIDENCE.983 A. Data

984 B. Contract Terms Directly Regulated by the CARD Act.....

986 1. Over-the-Limit Fees

986 2. Late Payment Fees

991 3. Double-Cycle Billing.992 C. Unregulated Up-Front Prices.992 1. Annual Fees.993 2. Purchase APRs.994 3. Introductory APRs.995 4. Balance-Transfer APRs and Fees.997 D. Unregulated Back-End Prices.997 1. Cash-Advance APRs and Fees.997 2. Default APRs.999 3. Foreign-Transaction Fees