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Hawkins on CARD Act’s effectiveness

Jim HawkinsTwo years after the Credit Card Accountability, Responsibility, and Disclosure (“CARD”) Act took effect, a new study by University of Houston Law Center Professor Jim Hawkins finds college students continue to receive prescreened mail offers and tangible gifts from credit card companies and young consumers are still qualifying for credit cards without demonstrating they have enough earned income to pay off the debt. The CARD Act aimed to curtail such practices, but it appears to have had little effect, Hawkins said.

An expert in consumer credit, Hawkins surveyed more than 500 students and examined 300 agreements between issuers and colleges and alumni associations over the past two years. Offering the first empirical assessment of the CARD Act’s effectiveness, the study will be published in the Washington and Lee Law Review in fall 2012.

Hawkins discussed the results of his research, the effectiveness of the CARD Act and credit card marketing to college students.

Q: According to your findings, what effects has the CARD Act had on college students?

The Act definitely hasn’t ended the marketing activities its advocates appear to have intended to stop. For instance, 68.92% of students under 21 reported receiving credit card offers in the mail during the preceding year, a practice the Act’s sponsors hoped to curtail.  Also, 40.33% of students reported seeing credit card companies giving gifts to students while the Act was in effect. Most troubling, students are still qualifying for credit cards without demonstrating an ability to repay the debt. My study found that that 27.27% of students under 21 who were applying by themselves for credit cards listed loans as part of their income to qualify for the card. 

But, despite these numbers, there is evidence the Act may be working gradually. I did the same survey in the two different years during which the Act has been in effect, and I found that the number of students reporting offers being mailed to them did decrease between 2010 and 2011.  76.13% of students under 21 reported having received an offer in 2010 but only 57.69% indicated they had received offers in 2011. Similarly, 19% of freshman in the first year I conducted the survey had seen credit card companies marketing on campus, while only 12.20% of freshman in the second year observed that marketing. The number of freshman reporting off campus marketing dropped from 73.29% in the first year to 62.60% in the second year. Finally, the number of freshman reporting companies handing out gifts decreased from 47.26% in the first year to 32.52% in the second year.


Q: The CARD Act requires the disclosure of agreements between issuers and college-related entities. What effect has this had?

The Act’s sponsors had hoped that requiring universities and credit card companies to disclose their marketing agreements would, in the words of one Senator, “act as a deterrent to deals with highly unfavorable terms for students.” It turns out that this has not happened. 

The majority of agreements did not change at all between 2009 and 2010, despite the fact the CARD Act was passed on 2009 and went into effect in February 2010. 64.33% (n=193) of the 300 agreements I studied remained exactly the same in 2010 as they were in 2009, and for many agreements, the same as they had been for years before that. 

Some agreements were terminated, but almost all of them appear to have been terminated in the ordinary course of business. In only two cases in all of the 300 agreements that I reviewed did I observe any mention of regulation as influencing the decision to end the arrangement. 

Like the number of terminations, changes to the agreements demonstrate little positive effect from the CARD Act’s disclosure requirement. Twenty of the 300 agreements were amended in 2010.  Of those twenty amendments, half were ministerial or added provisions that likely have little effect on students’ experiences with the agreements, such as establishing a web portal to access accounts. For 30% of the amendments, the changes were in line with the hopes of the CARD Act’s sponsors, such as omitting students from the mailing lists the college-related entity was obligated to provide the issuer. For the other 20% of the amendments, however, provisions were added that contradict the statute’s intent.  Several agreements, for example, added an obligation that the college-related entity advertise for the issuer on its website, and others added students to those persons covered by the agreements. Overall, the changes appear insignificant so far. 

Q: How will the results of your research be significant to policymakers going forward?

I hope that policymakers will use this research to refine the CARD Act’s approach to regulating this important market. Much of the CARD Act’s strategy for preventing marketing to young consumers is indirect. The Act does not explicitly ban sending people under 21 credit card offers in the mail; it just makes it more difficult to get their addresses. The Act does not ban credit card marketing on colleges; it just prevents one narrow type of advertising. These indirect solutions have been proven ineffective in a variety of consumer credit markets, now including this one, and I hope my research draws the Consumer Financial Protection Bureau and Congress’ attention back to more direct approaches to regulation.