The effect of BAPCPA on credit card industry profits and prices

American Bankruptcy Law Journal

Volumn 83, Issue 1, 2009, Pages 1-26

  Simkovic, Michael ^a  

^a NONE

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EID: 67649538499     PISSN: 00279048     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Article

References (66)

1. Pub. L. No. 109-8, 119 Stat. 23.
2. See Ronald J. Mann, Bankruptcy Reform and the "Sweat Box" of Credit Card Debt, 2007 U. ILL. L. REV. 375 (2007).
3. Chapter 7 is preferable to Chapter 13 for many financially distressed consumers because Chapter 7 results in a discharge of many debts, leaving future income relatively unencumbered, while Chapter 13 requires debtors to repay their debts from future income. Id. at 380.
4. Id. at 377.
5. Id. at 379-80.
6. Id. at 392-93.
7. Press Release, George W. Bush, President Signs Bankruptcy Abuse Prevention, Consumer Protection Act (April 20, 2005)(on file with author).
8. H.R. REP. No. 109-031, pt. 1 (2005).
9. Todd J. Zywicki, Statement to Senate Judiciary Committee (Feb. 10, 2005), 2005 W.L. 319924.
10. Elizabeth Warren, The Phantom $400, 13 J. BANKR. L. &Prac. 2, Art. 4 (2004). The $400 is an estimate of the cost of bankruptcy to each American family. According to Professor Warren, the $400 estimate was devised by lobbyists working for the credit industry using dubious analytical methods, then spread as a 'fact' through an aggressive, well-funded lobbying and public relations campaign. Id.
11. See id. at 87.
12. Mann, supra note 2, at 376.
13. See id.
14. Letter from 110 Law Professors to Hon. F.James Sensenbrenner and Hon. John Conyers.Jr. (March 11, 2005), reprinted at 151 CONG. REC. H1974-05.
15. This is because credit card lenders are unsecured creditors. See supn text accompanying note 5.
16. The average household carrying a credit card balance has been carrying it for over 3.5 years, and families with larger balances tend to carry their debt for longer than those with smaller balances. Center for Responsible Lending, The Plastic Safety 7v(et; The Reality behind Debt in America, 8 (2005), http://www.demos.org/pubs/PNS-low.pdf. This suggests that the average length of time it takes a borrower who carries a balance to repay credit card debt - or default on it through bankruptcy - is somewhat longer than 3.5 years. Results do not differ significantly with other reasonable risk free rates (i.e., the 10 year treasury).
17. The household DSR is an estimate of the ratio of debt payments to disposable personal income. Debt payments consist of the estimated required payments on outstanding mortgages and consumer debt. The DSR is available from the Federal Reserve at http://www.federalreserve.gov/releases/housedebt/default. htm.
18. The FOR is similar to the DSR, but adds automobile lease payments, rental payments on tenant- occupied property, homeowners' insurance, and property tax payments to the DSR. The FOR is also available from the Federal Reserve at http://www.federalreserve.gov/releases/housedebt/default.htm.
19. CardWeb is a provider of subscription based information services about the payment card industry. Its services include industry news (CardFlash), a library of marketing materials (CardWatch), biographies of industry executives (CardExecs) and detailed industry information (CardData). CardData is a comprehensive online database of payment card industry information. Data ranges from aggregate/individual market share, performance benchmarks to analysis of market segments. More information is available at http://www.cardweb.com/ carddata/.
20. FDIC QUARTERLY BANKING PROFILE, http://www4.fdic.gov/QBP/index.asp [hereinafter FDIC Quarterly Banking Profile].
21. Quarterly bankruptcy filing statistics (business and non-business) are available from the U.S. Courts system at http://www.uscourts.gov/bnkrpctystats/ bankruptcystats.htm. This article considers non-business bankruptcy filings.
22. Bloomberg Professional Service [hereinafter "Bloomberg"] is a subscription based real time and historical financial data and information service commonly used by finance professionals at investment institutions and banks, as well as by some government agencies, corporations and law firms. Bloomberg is ideally accessed through a specialized dual screen "Bloomberg Terminal" with a custom keyboard, but may be accessed through a standard computer with an internet connection via the "Bloomberg Anywhere" service. More information about Bloomberg's service is available at http://about.bloomberg.com/. Terminals are available at many business school libraries, or a subscription may be obtained by contacting Bloomberg at http://www.bloomberg.com/apps/fbk?site=sales.
23. The Nilson Report is a subscription based bi-monthly newsletter and provider of proprietary statistics about the payments industry (credit cards, debit cards, and electronic payment services). Its subscribers include payments industry professionals, analysts, and consultants to the payments industry. More information is available at http://www.nilsonreport.com. The Nilson Report may also be contacted at The Nilson Report, 1110 Eugenia Place, Suite 100, Carpinteria, CA 93013-9921, Phone: (805) 684-8800, Fax: (805) 684-8825.
24. Federal Reserve Statistical Release G.19, http://www.federalreserve.gov/ releases/gl9/ [hereinafter Federal Reserve G.19].
25. The Bureau of Economic Analysis [hereinafter "BEA"] is an agency of the U.S. Department of Commerce. Along with the Census Bureau and STAT-USA, BEA is part of the Department's Economics and Statistics Administration. The cornerstone of BEA's statistics is the national income and product accounts (NIPAs), which feature the estimates of gross domestic product (GDP) and related measures. BEA data is available at http://www.bea.gov/ national/index.htm.
26. The U.S. Bureau of Labor Statistics [hereinafter "BLS"] is the principal fact-finding agency for the Federal Government in the broad field of labor economics and statistics. The BLS is an independent national statistical agency that collects, processes, analyzes, and disseminates essential statistical data to the American public, the U.S. Congress, other Federal agencies, State and local governments, business, and labor. The BLS also serves as a statistical resource to the Department of Labor. BLS data on inflation and unemployment may be downloaded at http://www.bls.gov/data/.
27. The Economist Intelligence Unit is a subscription based provider of data, analysis and forecasts on countries, industries, and management strategies. Its subscribers include large international companies, financial institutions, universities and government agencies. Additional information is available at http://www.eiu.com/.
28. Moody's Economy.com is a division of Moody's analytics, a private provider of economic analysis, data, forecasting, and credit risk services. Its clients include financial institutions, large companies, and governments. More information is available at http://www.economy.com/home/products/data-services. asp.
29. CardData has another advantage over Federal Reserve G.19 data: CardData more accurately reflects the long term trend in interest rates. CardData excludes "teaser rates" (defined as temporary rates lasting 1 year or less). Teaser rates can introduce substantial variability in nominal interest rates without significantly reducing borrowers' actual cost of borrowing. The average household carrying a balance on its credit card has been carrying it for over 3.5 years, and families with larger balances tend to carry their debt for longer than those with smaller balances. Center for Responsible Lending, The Plastic Safety Net: The Reality behind Debt in America, 8 (2005), http://www.demos.org/pubs/PNS-low.pdf. Although families carry balances for significantly longer than the 3 to 12 month term of a teaser rate, they generally fail to switch to a lower interest card when the teaser rate expires. Haiyan, Shui &Lawrence M. Ausubel, Time Inconsistency in the Credit Market, 9 (May 3, 2004) (unpublished manuscript), available at http://ssrn.com/abstract=586622. This enables credit card companies to acquire customers who are likely to carry balances by offering a low introductory rate, and then profit by charging them a much higher rate for several years.
30. The bars represent quarterly personal bankruptcy filings, in thousands. The line represents credit card company charge-offs as a percent of average loans and leases. The chart appeared in the FDIC's Quarterly Banking Profile, but has been modified for this paper to indicate the timing of bankruptcy reform. The timing of bankruptcy reform is represented by the large grey vertical rectangle, pointed out by the large down arrow. BAPCPA was enacted at the left most portion of the rectangle, and its key provisions went into effect at the right most portion of the rectangle. This convention for representing the timing of BAPCPA is used for all charts in this paper. The data for this chart appears in the appendix, in Table 1. The FDIC calculates charge-offs based on regulatory filings know as Call Reports and Thrift Financial Reports. Every National Bank, State Member Bank and insured Nonmember Bank is required by the Federal Financial Institution Examination Council to file consolidated Reports of Condition and Income (Call Report) on a quarterly basis. Every federally insured savings institution regulated by the Office of Thrift Supervision (OTS) files a Thrift Financial Report (TFR) on a quarterly basis. More information on these filings is available at http://www2.fdic.gov/Call-TFR-Rpts/index.asp.
31. Loan losses fell from 4.64% to 3.48%.
32. Loan losses fell from 4.64% to 3.95%.
33. The value can be estimated as follows: First calculate the total decrease in charge-offs by multiplying the average revolving credit balance for the year (which roughly approximates credit card debt, but also includes other forms of debt) by the decrease in loss rates between pre- and post-bankruptcy reform years. Then calculate the gain from the decrease in charge-offs by subtracting the price at which credit card companies can sell recently charged-off debt to collection agencies - typically 8 cents on the dollar. See Liz P. Weston, Zombie Debt is Hard to Kill, MSN MONEY, http://articles. moneycentral.msn.com/Savingand Debt/ManageDebt/ZombieDebtlsHardToKill.aspx. In 2006, revolving credit - mostly credit card debt - averaged roughly $850 billion (Federal Reserve G.19, at http://www.federalreserve.gov/releases/gl9/ hist/cc-hist-r.html) (monthly revolving credit figures averaged, then rounded to nearest $10 billion). Loss rates fell from roughly 4.6% in 2005 to roughly 3.5% in 2006 (FDIC Quarterly Banking Profile, at http://www4.fdic.gov/ QBP/grtable.asp?rptdate=2007dec&selgr==QNTCBKQB) (annual numbers calculated as average of quarterly figures, 2005 calculated excluding fourth quarter of 2005 but including fourth quarter of 2004; 2006 calculated as average of first three quarters of 2006). 4.6% - 3.5% = 1.1%. $850 billion x 1.1% = $9.35 billion. $9.35 billion - (8% x $9.35 billion) = $8.6 billion. In 2007, revolving credit averaged roughly $910 billion (Federal Reserve G.19, at http://www.federalreserve.gov/releases/gl9/ hist/cc-hist-r.html) (monthly revolving credit figures averaged, then rounded to nearest $10 billion). Loss rates fell from roughly 4.6% in 2005 to roughly 3.9% in 2007 (FDIC Quarterly Banking Profile, at http://www4.fdic.gov/ QBP/grtable.asp?rptdate=2007dec&selgr=QNTCBKQB) (2007 numbers calculated excluding fourth quarter of 2007 but including fourth quarter of 2006). 4-6% - 3.9% = 0.7%. $910 billion x 0.7% = $6.37 billion. $6.37 billion - (8% x $6.37 billion) = $5.9 billion.
34. There is no government statistic measuring only credit card debt. Adam J. Levitin, A Critique of the American Bankers Association's Study of Credit Card Regulation, 3 n. 2 (2008), available at http://papers.ssrn.com/sol 3/papers.cfm?abstract-id= 1029191.
35. In 2000, Professor Zywicki wrote that rather than increase interest rates, credit card companies instead increased late fees and over-limit fees, "so called 'hidden fees.'" Todd Zywicki, The Economics of Credit Cards, 3 CHAP. L. REV. 79, 103 (2000). According to the Government Accountability Office, many consumers do not fully appreciate these fees because of faulty disclosure by credit card companies. Furthermore, the portion of credit card company revenues attributable to penalty fees has been climbing. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, CREDIT CARDS: INCREASED COMPLEXITY IN RATES AND FEES HEIGHTENS NEED FOR MORE EFFECTIVE DISCLOSURES TO CONSUMERS 67 (2006), http://www.gao.gov/new.items/d06929.pdf (last visited February 6, 2009). At the same time, credit card companies reduced or eliminated more transparent annual fees because of "hostility of consumers ... evidenced by the fact that when annual fees were first imposed, consumers canceled over nine million bank cards in 1980, amounting to some 8% of the outstanding total." Todd Zywicki. The Economics of Credit Cards, 3 CHAP. L. REV. 79, 118 (2000). Average late fees among credit card companies with portfolios larger than $100 million climbed from under $13 in December 1994 to over $35 in December 2007 (CardWeb CardData). During the same period, over-limit fees climbed from less than $ 11 to more than $26 while annual fees on standard credit cards fell from $17 to $13 (CardWeb CardData).
36. CardWeb CardData. Fees are for portfolios greater than $100 million. Fees for portfolios less than $100 million showed a similar pattern. The Government Accountability Office estimates that 10% of credit card company revenues come from penalty fees. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, supra note 35, at 67.
37. As early as 2000, Professor Zywicki reported "the virtual elimination of annual fees" and that remaining annual fees were generally tied to particular services, such as frequent flyer miles, not plain vanilla cards offering only payment and credit services. Todd Zywicki. The Economics of Credit Cards, 3 CHAP. L. REV. 79, 118 (2000).
38. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, supra note 35, at 5.
39. CardWeb CardData.
40. APRs increased from 17.7% to 19-1%. The 8% increase refers to the percent increase above the 17-7% APR in April 2005 (19.195/17.7% - 1).
41. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, supra note 35, at 67.
42. Bloomberg, supra note 22.
43. The spread increased from 13.8% to 15.7%.
44. From 1996 through the first quarter of 2005, unemployment and charge-offs were positively correlated at about 0.58. Unemployment and bankruptcy rates were correlated at 0.47- FORs and charge-offs were positively correlated at 0.5. FORs and bankruptcy were positively correlated at 0.59. GDP growth and charge-offs were negatively correlated at -0.13. GDP growth and bankruptcy were slightly negatively correlated at -0.07.
45. See supra Section 3A.
46. Nominal prices increased, except for annual fees, which were in decline long before bankruptcy re form. See supra Section 3A. Controlling for inflation and other factors, as described in supra Section 3D, and excluding annual fees, real prices increased between 1% and 1396.
47. Nilson Report, supra note 23.
48. It also has become easier for credit card companies to organize and coordinate mutually beneficial activity, such as lobbying Congress to change the bankruptcy laws.
49. Ronald J. Mann, Bankruptcy Reform and the "Sweat Box" of Credit Card Debt, 2007 U. Ill. L. REV. 375, 388-89; Paul S. Calem et al., Switching Costs and Adverse Selection in the Market for Credit Cards: New Evidence, 30 JOURNAL OF BANKING AND FINANCE 1653 (2006).
50. Levitin, supra note 34, at 18.
51. U.S. GOVERNMENT ACCOUNTABILITY OFFICE, supra note 35, at 67. Professor Elizabeth Warren recently testified before the Senate about several techniques used by credit card companies that make credit card agreements and prices difficult to understand. Credit Card Practices: Hearing Before the Senate Committee on Banking, Housing and Urban Affairs, 110th Cong. (2007), 2007 WL 184875 (F.D.C.H.)(statement of Elizabeth Warren). According to Professor Warren, these "tricks" reduce transparency and contribute to a market that is not price-competitive.
52. Levitin, supra note 34, at 24-25.
53. Haiyan, Shui &Lawrence M. Ausubel, Time Inconsistency in the Credit Market, 9 (May 3, 2004) (unpublished manuscript), available at http://ssrn.com/abstract=586622.
54. U.S. GOVERNMENT. ACCOUNTABILITY OFFICE, supra note 35, at 77-79. See also Credit Card Practices, supra note 52.
55. Sumit Agarwal, John C. Driscoll, Xavier Gavaix &David Laibson, Learning in the Credit Card Market (Feb. 8, 2008)(unpublished manuscript), available at http://ssrn.com/abstract=1091623.
56. Sumit Agarwal, Chomsisengphet Souphala, Chunlin Liu &Nicholas S. Souleles, Do Consumers Choose the Right Credit Contracts, FEDERAL RESERVE BANK OF CHICAGO WORKING PAPERS SERIES 4 (2006).
57. Todd Zywicki, The Economics of Credit Cards, 3 CHAP. L. REV. 79, 111 (2000).
58. Id. at 103.
59. W. at 104
60. (CardWeb CardData). Bank credit card annual pre-tax profits, excluding debit cards and private label credit cards, were $30.6 billion in 2005, $37.5billion in 2006, and $40.3 billion in 2007. ($40-30) + ($37-30) = $17.
61. The bill. S.256, was voted on along party lines. Every Republican in the Senate voted for the bill, as did all but three Republicans in the House of Representatives (the three other Republicans abstained). A majority of Democrats in both the House and Senate voted against the bill. Even so, a significant minority of Democrats (roughly one third of Democratic House members and 40% of Democratic Senators) voted in favor of the bill. A roll call for the Senate is available at 151 CONG. REC. S2474. A roll call for the House is available at 151 CONG. REC. H2076 - H2077.
62. Todd J. Zywicki, Statement to Senate Judiciary Committee (Feb. 10, 2005), 2005 W.L. 319924.
63. Indeed, the credit industry essentially claimed as much with its advertisements of the $400 bankruptcy tax.
64. Todd Zywicki. The Economics of Credit Cards, 3 CHAP. L. REV. 79, 112 (2000).
65. See LAWRENCE M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM. BANKR. L.J. 249, 263 (1997).
66. Todd Zywicki. The Economics of Credit Cards, 3 CHAP. L. REV. 79, 129 (2000).