Congress approved the CARD Act in 2009, which mandated a broad range of credit-card protections for consumers. Amid calls for similar protections for small businesses that use credit cards, Capitol Hill asked the Federal Reserve to investigate extending the CARD Act to companies and entrepreneurs. The Fed’s report on the matter came out this week.
Let’s cut to the bottom line of the 55-page report (“Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses”): It was inconclusive and generally not encouraging about giving business owners and their companies the same sorts of protections against hikes in rates and fees that Congress had mandated for Joe and Jane Doe. There were some encouraging words about pushing banks to make more disclosures to business customers.
Why not better protections against rate hikes and fees? The Fed generally found that if the protections were extended to small businesses, the move would raise rates overall and lessen the availability of credit to businesses. The report noted that banks need flexibility to change rates and fees for business credit-card customers because it’s harder to estimate a business’s credit worthiness than an individual’s. If banks were prohibited from raising interest rates on some of their business card holders, it might also lead to higher rates for all borrowers, even those who wouldn’t face a rate increase under the current rules. Banks contend that fees offset interest, and interest rates will go up if the fees are removed.
That’s the story on rates and fees. New disclosure rules may be another matter, as the Fed seemed to favor applying those rules to small-business card holders. To quote the report: “Standardizing and improving disclosures for small-business credit cards would promote the informed use of credit by enhancing small businesses’ ability to compare the cost of the credit card plans available to them.”
Where Congress goes with the report is anyone’s guess.
Note: Any changes in the rules likely would apply only to companies with 50 or fewer employees.
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Tags: CARD Act, credit card, Federal Reserve, Report to the Congress on the Use of Credit Cards by Small Businesses and the Credit Card Market for Small Businesses
June 17th, 2010 at 2:48 pm
I am a small business owner and former banker. The reasons that the banks are giving for the new credit card rules not applying to business are totally incorrect. An example would be a situation that happened to myself personally in regards to a corporate credit card that I had for my business from Bank of America. In 2008, as I fell behind on my credit card payments (for the first time) due to lack of work coming in. BOA completely emptied by personal deposit accounts to pay my corporate credit card thus almost causing the loss of my home since the mortgage money was in one account. The other account that they withdrew all the funds from was my grandson’s savings account that was intended for college and was not my money. I explained this to them but was told that although it is a business account, you personally guarantee the monies. The business is a corporation and I thought I was protected personally from these types of things happening. They don’t asses risk on the business but the individual instead. The banks are just trying to get away with even more!!