In response to Professor Littwin’s article, Cathy Mansfield praises the article’s proposed borrower-driven protections.  But Mansfield argues that the article does not provide a solid basis for its conclusion that usury regulation would limit access to credit-card credit for low-income households and so is undesirable from both public-policy and low-income-household perspectives.  Mansfield concludes that Littwin’s proposals are groundbreaking but can only be enhanced by reasonable government rate regulation.

A Commentary on Beyond Usury 

Cathy Lesser Mansfield*

In her article, Beyond Usury: A Study of Credit-Card Use and Preference Among Low-Income Consumers,[1] Professor Angela Littwin:

1. recognizes the dire need for access to credit cards among low-income individuals and families and the financial dangers posed by access to credit cards;
2. assumes that government rate regulation will limit access to credit cards for low-income consumers and, thus, government rate regulation is not desirable;
3. indicates lack of support for government rate regulation among lower income credit-card users because these limitations would cut off access to credit for these individuals and families; and
4. proposes, instead of government rate regulation, the creation of new credit-card features that encourage borrowers to control their own spending and thereby protect credit-card borrowers from crushing credit-card-debt burdens.

The article is a fascinating study of credit-card use and attitudes among lower income households and the psychology behind credit-card spending as applied to those households and others.  The article also offers a series of innovative product suggestions that would aid low-income cardholders in curbing their own spending at critical times before the decision to make a purchase using a credit card.  But the article has very little to do with usury, a governmental control not on the use of a cardholder’s credit card but rather on the interest and fees that can be assessed by the card issuer.  Therefore, the article does not provide a solid basis for its conclusion that usury regula­tion would limit access to credit-card credit for low-income households and so is undesirable from both public-policy and low-income-household perspectives.

I.  Is It True that Governmental Limits on Credit-Card Charges Will Limit Access to Credit Cards for Low-Income Individuals and Families?

In her article Professor Littwin assumes that imposing limits on the charges that credit-card companies can assess against their cardholders would cause the credit-card companies to pick up their marbles and head out of low-income communities.  For example, she says, “While there is broad agree­ment that a return to usury restrictions on credit cards would make it more difficult for low-income families to obtain credit cards, there is substantial disagreement about how those restrictions would play out.”[3]

Because this assumed causal relationship between rate regulation and limitation of access is central to Professor Littwin’s argument that rate regu­lation is dangerous, it must be examined, particularly in light of certain realities of today’s credit market.

First, credit-card lending has been grossly profitable for banks.  In 2006 credit-card issuers earned $90.1 billion from interest charged to cardholders (up from $89.4 billion in 2005).  They earned $55.2 billion from fees (up from $54.8 billion in 2005).  The net pretax profit was $36.8 billion (up from $35.7 billion in 2005).[4]  Although there may be a downturn in this profitabil­ity in the wake of the recent subprime crisis,[5] whether this trend will continue is unclear.  What is clear is that until very recently at least credit-card holders generated a lot of profit for credit-card companies.[6]

Second, credit-card lenders make the most profit from those individuals who are least able to pay their credit-card bills because those individuals pay more charges, interest, and fees.[7]

Third, risk-based pricing is not an exact science, and may in fact be an excuse to charge more money to those who can least afford it.[8]

Because of these characteristics of the credit-card market, it is not clear that imposing limitations on the charges credit companies can assess would cause the companies to abandon the lower income credit-card market.  Rather, these characteristics of the market suggest that there is some regula­tory limit point between a completely unregulated and grossly profitable market and regulation so tight that credit-card providers abandon the market entirely and thereby limit access to credit.  In other words, even if forced to reduce charges by governmental limits, credit-card companies might find themselves able still to turn a respectable profit while being forced to provide consumer credit cards that carry lower charges associated with paying over time, such as interest and fees.  The public-policy answer, then, would be to set limits at or just above the level at which credit-card issuers are able to make an acceptable profit level, not to have no caps at all.

This thesis—that there is an acceptable level of rate limits that will serve to protect consumers and maintain the availability of credit—has been borne out by a number of studies in other areas of consumer financial services.

One such study was conducted in the wake of a North Carolina law[9] limiting certain terms and practices on high-cost home loans.[10]  The study, as summarized by the Center for Responsible Lending in North Carolina, found that:

The North Carolina Predatory Lending Law appears to be doing what it was intended to do—eliminate predatory loans without hurting the lowest-credit borrowers more than others and without causing a rise in interest rates.  After the law was enacted, there was a decrease in subprime refinancing loans, the overwhelming majority of which had such predatory features as lengthy prepayment penalties, balloon payments, and loan-to-value ratios of 110 percent or higher.  Subprime loans for home purchase were unaffected.[11]

In another, more recent study the Center for Responsible Lending in North Carolina found that “state laws enacted to prevent predatory mortgage lending work as intended to reduce abusive loan terms without impeding credit.”[12]

These studies support the conclusion that regulation of high-cost financial-services providers can have the effect of maintaining credit access while decreasing the cost for a borrower. 

Thus, the phantom of limited access in response to moderate government rate regulation may be a fallacy.

II.  Do Low-Income Credit-Card Holders Really Want No Governmental Regulation of the Credit Cards They Carry?

It is admirable that Professor Littwin sought the opinions and advice of low-income consumers in the debate on credit-card regulation.  However, Professor Littwin’s conclusion that low-income credit-card holders do not support regulation of the credit-card industry is similarly based on the as­sumption that usury and other cost controls would cut off or limit access.  This assumption of a causal link between regulation and no access was passed along to interviewed borrowers before they were asked if they sup­ported regulation of the credit-card industry.  For example, Professor Littwin states:

Nearly 60% of participants originally stated that it should be easier for low-income people to obtain credit cards or that the current level of accessibility was appropriate.  But when I explained that maintaining or increasing access would preclude imposing usury caps low enough to affect credit cards—which many of these same participants had suggested—half of them modified their access preferences.  Conversely, 44% of the women proposed lowering credit-card interest and fees as legal changes they would like to see, but support for these measures waned when I explained that this would likely lead to a reduction in access to credit cards.[13]

The question that must be asked is whether low-income cardholders would feel the same about government rate regulation if it could be shown that the impact on credit availability would be negligible.  Indeed, that low-income cardholders expect some sort of governmental protection is evident from some of the survey recipients’ interview responses.  For example, one respondent suggested that credit-card issuers be prohibited from “charging interest and fees once a borrower has stopped charging on the credit card and is working to pay down her debt.”[14]  This reflects an expectation of govern­mental intervention.

Since time immemorial lenders have threatened to pick up their marbles and go home.  But the fact remains that credit-card lending to low-income consumers is quite profitable.  If low-income consumers were told that the government could limit the amount they pay for using a credit card while still permitting card-issuer profit and access to credit cards, my guess is that most low-income consumers would be grateful for that government protection.

III.  Should Rate Regulation Be Abandoned Even if It Is Possible to Find a Rate-Regulation Level that Limits but Allows for Profits for Credit-Card Issuers?  Is It Better to Merely Force Credit-Card Issuers to Offer Product Choices to Credit-Card Holders?

Professor Littwin proposes self-directed credit-card products that would be offered voluntarily, or through government compulsion, to credit-card borrowers.  These self-directed cards would limit the credit card at the option and direction of the borrower.  For example, Professor Littwin suggests credit-limit restrictions, such as credit limits set by consumers that are diffi­cult or impossible to reset, limits calibrated to income, consumer ability to reject issuer increases in credit limits, and a cooling-off period before a credit limit increase.[15]  Similarly, she suggests giving borrowers the ability to “black out” certain stores or certain types of stores—a device through which cardholders could preselect where they can and cannot use their credit card.  Other suggestions include offering products that treat credit-card purchases like closed-end loans with an installment pay down or a predisclosure of the ratio of usable credit to fees and interest.

Each of these ideas is groundbreaking and valuable, and as suggested by Professor Littwin, each deserves further attention to determine the viability of each proposal.  But each serves mostly to control the principal balance of a credit card.[16]  Furthermore, each proposal places on the cardholder the full burden of controlling the costs of credit, when in fact the cost of credit is not completely driven by cardholder-purchasing decisions.

In my estimation, controls on the other aspect of credit-card cost—those driven not by the cardholder but by the credit-card company—are not paternalistic,[17] but rather, the responsibility of government.

IV.  Should Rate Regulation Be Abandoned Even if It Does Limit Some Access to Credit Cards by Low-Income Consumers?

What if rate regulation does limit access to credit cards for some?  Does this mean that rate regulation should be rejected?  I would argue that rate regulation, combined with other public-policy initiatives and inventive prod­ucts like those suggested by Professor Littwin, would serve the interests of low-income consumers as identified by Professor Littwin better than allow­ing credit-card issuers to charge whatever the market will allow.

Government policy is riddled with prohibitions that restrict access to one thing or another.  Seat-belt and motorcycle-helmet rules restrict freedoms and cost drivers and bikers money—i.e., the increased cost of a car with seat belts and the cost of buying a helmet.  But we have long accepted that gov­ernment has the right to protect people in this fashion.  Thus, the debate about government regulation and access to credit has to be broadened to in­clude the core problem for low-income people—lack of money.  While there is clearly a tremendous need for credit cards, so well described by Professor Littwin in the first pages of her article, the answer has to be more complex than a determination that promoting access to any kind of credit is good and restricting access to credit is bad.  We have to at least entertain the notion that not all access to credit is good and that there are other public-policy pos­sibilities for addressing the underlying need for enough money to cover basic expenses.  The solution may involve alternative lenders, such as credit unions and Self-Help, as well as the alternative products explored by Professor Littwin.  It may involve constantly revisiting the minimum wage and public-benefits law.  But it should not stop with a determination that because poor people need money, we should permit lending of any kind, no matter how abusive and profitable.

Professor Littwin’s research demonstrates that credit cards fill a number of low-income consumer needs.  Low-income individuals and families bene­fit from easy, immediate, and private access to credit when facing a financial emergency—a need that is addressed more effectively by credit cards than by other sources of emergency funds, including private charities, government, and family and friends.  Credit cards can provide status and level the playing field when it comes to consumer purchases.  Credit cards provide access to some consumer items that would not otherwise be available, such as car and video rental.  And credit cards are safer and more practical than alternative financial products, such as cash, electronic-benefit cards, and check-cashing services for those without a bank account.  In some cases credit cards may be cheaper than these alternate products.  But the primary benefit of credit cards is that they are a money substitute to purchase necessities, which low-income credit-card users cannot otherwise afford.  The government should not stand by while this need is filled by issuers permitted to charge backbreaking fees and interest to the borrowers least able to afford those charges.

V.  Conclusion

Professor Littwin has proffered groundbreaking suggestions for products that would assist low-income consumers with curtailing credit-card spending and the burdens that come with that spending.  This idea can only be enhanced by reasonable government rate regulation that ensures continued access to beneficial credit while limiting the ability of card issuers to benefit from fees and interest assessed against low-income credit-card users.  Finally, any comprehensive approach to the problems of low-income consumers should address the most fundamental problem: lack of money.

*    Professor Cathy Lesser Mansfield is a professor of law at Drake University Law School in Des Moines, Iowa.  She specializes in consumer protection and lectures widely about the topic of consumer law.  She is the president of the Board of Directors of Americans for Fairness in Lending and has served on the Board of Directors of the National Association of Consumer Advocates. [return]

 [1] Angela Littwin, Beyond Usury: A Study of Credit-Card Use and Preference Among Low-Income Consumers, 86 Texas L. Rev. 451 (2008).Professor Littwin’s article also has a substantial and impressive discussion of the cognitive science behind credit cards and credit-card spending.  See id. at 467–78.  I do not address those issues in this Commentary because of my own lack of expertise in this regard. [return]

 [2] For example, she characterizes self-directed credit cards as tools to “help [consumers] control their credit-card borrowing.”  Id. at 499. [return]

 [3] Id. at 453–54.  In support of her statement that there is broad agreement that usury restrictions would limit access to credit cards for low-income families, she cites David A. Skeel, Jr., Bankruptcy’s Home Economics, 12 Am. Bankr. Inst. L. Rev. 43, 52 (2004). [return]

 [4] See Ellen Cannon, Credit Card Issuers’ Profits Grew, Bankrate.com, Jan. 9, 2008, http://www.bankrate.com/yho/story_content.asp?story_uid=20776&prodtype=cc (reporting on a study by R.K. Hammer, a California firm that evaluates credit-card portfolios). [return]

 [5] Profit Falls 42% at Capital One, N.Y. Times, Jan. 24, 2008, http://www.nytimes.com/2008/ 01/24/business/24capital.html (reporting on fourth-quarter profit declines at Capital One, the fourth largest issuer of Visa and MasterCard credit cards). [return]

 [6] For studies on credit cards, I recommend the works of organizations like Demos, National Consumer Law Center, Center for Responsible Lending, Consumer Federation of America, and Consumer Reports. [return]

 [7] Elizabeth Warren & Amelia Warren Tyagi, The Two-Income Trap: Why Middle-Class Mothers and Fathers Are Going Broke 138–39 (2005). [return]

 [8] See, e.g., Alan M. White, Risk-Based Mortgage Pricing: Present and Future Research, 15 Housing Pol’y Debate 503 (2004) (arguing that the subprime-mortgage market engaged in opportunity pricing—pricing in excess of risk-related cost rather than efficient pricing based directly on risk assessment). [return]

 [9] N.C. Gen. Stat. § 24-1.1E (1999). [return]

 [10] Robert G. Quercia, et al., Assessing the Impact of North Carolina’s Predatory Impact Law, 15 Housing Pol’y Debate 573 (2004).  But see Gregory Elliehausen & Michael E. Staten, Regulation of Subprime Mortgage Products: An Analysis of North Carolina’s Predatory Lending Law, 29 J. Real Est. Fin. & Econ. 411 (2004). [return]

 [11] Assessing the Impact of North Carolina’s Predatory Lending Law - Center for Responsible Lending, http://www.responsiblelending.org/issues/mortgage/research/page.jsp?itemID=28012286. [return]

 [12] The Best Value in the Subprime Market: State Predatory Lending Reforms - Center for Responsible Lending, http://www.responsiblelending.org/issues/mortgage/research/page.jsp?itemID =28546805. [return]

 [13] Littwin, supra note 1 ,at 454–55 (emphasis added). [return]

 [14] Id. at 495. [return]

 [15] She recognizes that in order to be effective, these would have to be hard limits, not just thresholds, which, if crossed by the cardholder, cause the cardholder to incur significant overlimit fees. [return]

 [16] Of course, the principal balance impacts the dollar value of interest and fees that will be paid by a cardholder, but the direct effect of these proposals is on principal balance. [return]

 [17] Littwin, supra note 1 ,at 501. [return]

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