Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or perform any legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
From Anecdotes to Hard Evidence
Those who work in the bankruptcy world day in and day out have infinite anecdotal experience on the effects of BAPCPA on their clients, whether creditors or debtors. Especially for those who represent only creditors or only debtors, their one-sided experience may mostly just reinforce their preconceived opinions about the Act. Especially for them, but for everybody in this bankruptcy world, it is good to get out of their trenches, now nearly two years after BAPCPA's effective date, and look at a purportedly neutral analysis of the law's effects.
The Study
This summer Michael Simkovic, a recent Fellow in Law and Economics at Harvard Law School's John M. Olin Center for Law, Economics, and Business, published a study entitled "The Effect of 2005 Bankruptcy Reforms on Credit Card Industry Profits and Prices." It purported to be a non-partisan, objective study on whether one of the primary stated goals of BAPCPA was being met: the increased availability of credit to consumers as a result of a BAPCPA-induced reduction in bad-debt losses to creditors.
BAPCPA's Goals
This legislative goal was the consistent theme of BAPCPA's proponents, from experts testifying in favor of the legislation before Congress to President Bush, as exemplified in his most substantive sentence promoting the the law in his statement at the bill signing photo op: "This new law will help make credit more affordable, because when bankruptcy is less common, credit can be extended to more people at better rates."
BAPCPA's Methods for Limiting Discharge of Debts
1) Broadened categories of nondischargeable debts.
2) Used means test to dismiss Chapter 7's or turn them into Ch. 13's.
3) Increased costs of filing--filing fees, attorney fees, debt counseling and debtor education.
4) Lengthened time between bankruptcy filings.
Reductions in Losses to Credit Card Creditors
1) Credit card creditors' losses from bad debt went down from 4.64% in 2005, to 3.48% in 2006, to 3.95% in 2007.
2) Although these differences may seem relatively small, these loss reductions translate to as much as $8.6 billion for 2006 and $5.8 billion for 2007.
Credit Card Fees
1) From 4/05 to 12/07--before and after BAPCPA--over-limit fees increased by 17%, and late fees increased by 5%, both continuing prior trends.
2) Annual fees continued to fall, as the most visible of all credit card fees.
3) Late charges and over-limit fees effect a significant portion of credit card accounts, 35% and 13%, respectively, in 2005.
4) The length of grace periods fell by 1.5% from 2005 to 2007.
Interest
1) From 4/05 to 12/07, the average annual percentage rate on credit cards increased by 8%, going from 17.7% to 19.1%.
2) During the same period the "risk-free rate," the interest charged on 5-year Treasury bills, decreased by 12%, going from 3.9% to 3.5%.
3) During this period, the spread between these two sets of rates increased by 14%, from 13.8% to 15.7%.
Credit Card Creditors' Profits
After a small reduction in annual pre-tax profits from about $32 billion in 2004 to about $30 billion in 2005, these creditors' profits increased in 2006 and 2007 to about $38 billion and $40 billion, respectively.
Conclusion
Even though the credit card creditors realized billions of dollars in savings from reduced losses during 2006 and 2007, the cost of credit went up instead of down, contrary to the prior arguments of BAPCPA's proponents. The credit card companies benefited in higher profits and did not make credit more available through lower costs.
How Did This Occur?
Why didn't competition force credit card creditors to use its reduced-loss savings to lower its costs to compete for customers?
1) Industry consolidation: from 1995 to 2005, the top 10 credit card issuers went from having 56% of the market to 87%. In 2007 the percentage went up to nearly 94%. (And based on this week's financial news, that consolidation is increasing by the day.)
2) "Switching costs"--the economic cost of transferring from one creditor to another--are high for the highest profit, financially distressed customers, those who accrue more late-charges and over-limit fees; these debtors' current credit card creditors have substantial more information on their customers and so can determine whether and when they will default on their debts much better than their competitors, making their customers a relatively captive market.
3) The relatively complex and non-transparent multi-tiered pricing structure of credit cards makes comparison shopping very difficult, with large percentages of consumers making economically detrimental decisions based on teaser-interest rates and low annual fees accompanied by many potential hidden costs.
1) Broadened categories of nondischargeable debts.
2) Used means test to dismiss Chapter 7's or turn them into Ch. 13's.
3) Increased costs of filing--filing fees, attorney fees, debt counseling and debtor education.
4) Lengthened time between bankruptcy filings.
Reductions in Losses to Credit Card Creditors
1) Credit card creditors' losses from bad debt went down from 4.64% in 2005, to 3.48% in 2006, to 3.95% in 2007.
2) Although these differences may seem relatively small, these loss reductions translate to as much as $8.6 billion for 2006 and $5.8 billion for 2007.
Credit Card Fees
1) From 4/05 to 12/07--before and after BAPCPA--over-limit fees increased by 17%, and late fees increased by 5%, both continuing prior trends.
2) Annual fees continued to fall, as the most visible of all credit card fees.
3) Late charges and over-limit fees effect a significant portion of credit card accounts, 35% and 13%, respectively, in 2005.
4) The length of grace periods fell by 1.5% from 2005 to 2007.
Interest
1) From 4/05 to 12/07, the average annual percentage rate on credit cards increased by 8%, going from 17.7% to 19.1%.
2) During the same period the "risk-free rate," the interest charged on 5-year Treasury bills, decreased by 12%, going from 3.9% to 3.5%.
3) During this period, the spread between these two sets of rates increased by 14%, from 13.8% to 15.7%.
Credit Card Creditors' Profits
After a small reduction in annual pre-tax profits from about $32 billion in 2004 to about $30 billion in 2005, these creditors' profits increased in 2006 and 2007 to about $38 billion and $40 billion, respectively.
Conclusion
Even though the credit card creditors realized billions of dollars in savings from reduced losses during 2006 and 2007, the cost of credit went up instead of down, contrary to the prior arguments of BAPCPA's proponents. The credit card companies benefited in higher profits and did not make credit more available through lower costs.
How Did This Occur?
Why didn't competition force credit card creditors to use its reduced-loss savings to lower its costs to compete for customers?
1) Industry consolidation: from 1995 to 2005, the top 10 credit card issuers went from having 56% of the market to 87%. In 2007 the percentage went up to nearly 94%. (And based on this week's financial news, that consolidation is increasing by the day.)
2) "Switching costs"--the economic cost of transferring from one creditor to another--are high for the highest profit, financially distressed customers, those who accrue more late-charges and over-limit fees; these debtors' current credit card creditors have substantial more information on their customers and so can determine whether and when they will default on their debts much better than their competitors, making their customers a relatively captive market.
3) The relatively complex and non-transparent multi-tiered pricing structure of credit cards makes comparison shopping very difficult, with large percentages of consumers making economically detrimental decisions based on teaser-interest rates and low annual fees accompanied by many potential hidden costs.
by: Andrew Toth-Fejel
Bankruptcy Litigation Support for Attorneys
Andy@BLSforAttorneys.com
Please note that this writer is not licensed to practice law in Oregon. This means that he is not legally permitted to give any legal advice or provide and legal services. This Bulletin and the entire contents of this website is written only for attorneys. and is not intended for the public. If any non-attorney is reading this, you must consult an attorney about ANYTHING you read here. Nothing in this website is intended to be nor should be read as being legal advice to anyone.
© 2008 Bankruptcy Litigation Support for Attorneys
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