Small-business credit card issuers may continue skirting provisions of the Credit Card Accountability, Responsibility and Disclosure Act that went into effect earlier this year if regulators take the conclusions of a new Federal Reserve report to heart.
In a 59-page report to Congress, the Fed late last month said users of small-business credit cards, which do not require certain disclosures and restrictions on raising cardholders’ interest rates, could be harmed if small-business cards were required to conform to the new consumer card rules.
No legislation is pending to add restrictions to small-business credit cards. But the Credit CARD Act, which Congress passed last year, mandated the report for further review of rules regarding such products.
For its report, the Fed gathered information from major issuers of small-business cards, small-business trade associations and two consumer credit-reporting agencies. It also reviewed a variety of pertinent surveys, studies, reports and research about small-business card use.
The research revealed that about 83% of small businesses use credit cards. Some 64% use small-business cards, and 41% also or instead rely on consumer credit cards.
Though most small businesses use credit cards, only 18% in 2009 borrowed on any of their cards by carrying a balance, the Fed found. (In a 2003 report, the Fed determined that 24% of small businesses revolved balances on credit cards.)
“In the aggregate, credit card debt represents a very small percentage of total debt held by small-business owners to finance their business operations,” the Fed said.
Twenty percent of small businesses applied for a credit card last year, and 75% received one. By comparison, about one-third of small businesses applied for lines of credit or bank loans last year, and only half were successful, the Fed said.
Congress long has excluded business credit card issuers from conforming to broad requirements consumer card issuers must follow. Therefore, business card issuers are technically exempt from providing many disclosures required of consumer card issuers. And while the Credit CARD Act prohibits issuers from adjusting consumers’ interest rates when their overall borrowing increases and their risks rise, small-business card issuers are not subject to those restrictions, the Fed wrote.
The Fed said its review showed that many issuers already provide small-business cardholders with “key disclosures similar to the disclosures” consumer cardholders receive, which it considers a benefit. Extending the Credit CARD Act’s rules restricting interest-rate increases on higher-risk borrowers to business credit cards could pose hazards for small-business borrowers and lenders, the Fed also said, noting issuers have more difficulty assessing the creditworthiness of small businesses than that of consumers.
Small businesses deemed most creditworthy tend to receive larger credit lines and lower interest rates, and research suggests the range of annual percentage rates is similar to that of consumer credit cards.
Many issuers claim issuing and servicing costs for small-business cards are higher than those for consumer cards, and default rates are roughly 20% to 30% higher than consumer cards, the Fed said.
Restricting issuers’ ability to adjust interest rates could lead to higher initial interest rates, which would harm firms that rely more heavily on small-business credit cards, the Fed concluded.
“It is not apparent that the potential benefit of applying substantive restrictions similar to those (in the Credit CARD Act) to small-business cards outweighs the potential risk of increased cost and reduced credit card availability for small businesses,” the Fed noted.
The American Bankers Association on June 1 lauded the Fed’s report, which the association says affirms its belief that applying substantive Credit CARD Act provisions to the small-business credit card would increase costs and reduce credit access for small-business cardholders.
“What is clear is that small businesses will lose access to small-business credit cards if lenders are restricted in their flexibility to manage risk,” Kenneth J. Clayton, the association’s general counsel, said in a statement, adding it would be “a terrible blow to small businesses nationwide as they seek to stabilize their operations.”
Congress “should proceed cautiously when considering anything that might impact the availability of credit for small businesses,” which are a “critical driver of economic growth,” Clayton said.
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