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97 Cornell L. Rev. 967 (2011-2012)
Credit Card Pricing: The Card Act and Beyond

handle is hein.journals/clqv97 and id is 989 raw text is: CREDIT CARD PRICING: THE CARD ACT AND
Oren Bar-Gill & Ryan Bubbt
We take a fresh look at the concerns about credit card pricing and
empirically investigate whether the Credit CARD Act of 2009 (the CARD
Act) has been successful in addressing those concerns. The rational choice
theory of credit card pricing, which posits that issuers use back-end fees to
adjust the price of credit to reflect new information about borrowers' credit
risk, predicts that issuers will respond to the CARD Act by using
alternative ways to price risk. In contrast, the behavioral economics theory,
which posits that issuers use back-end fees because they are not salient to
consumers, predicts that issuers will respond by increasing unregulated
nonsalient prices. If the market is competitive, we argue that the CARD
Act should also result in increases in some salient, up-front prices. But we
show that if issuers have market power, reductions in nonsalient fees may
not result in concomitant increases in salient charges.   We test these
predictions using two datasets on credit card contract terms before and
after the CARD Act rules went into effect. We find that the rules have
substantially reduced the back-end fees directly regulated by the CARD Act,
including late fees and over-the-limit fees. However, unregulated contract
terms, such as annual fees and purchase interest rates, have changed little.
Post-CARD Act, consumers continue to face high long-term prices and low
short-term prices, and imperfectly rational consumers still have difficulty
understanding the cost of credit card borrowing.      We thus consider
potential improvements to the regulatory framework.      We argue that
improved disclosures that provide consumers with the aggregate cost of
credit under the contract, based on information about the borrower's likely
use of credit, would improve consumer outcomes. Furthermore, we suggest
that regulators should not focus only on prices that are too high but
should also consider limiting the ability of issuers to charge introductory
teaser interest rates that are, in a sense, too low.
INTRO  DU  CTIO N  .................................................................................... 969
t New York University School of Law. We are grateful for the helpful comments
provided by Joseph Farrell, Josh Frank, James Huizinga, Alex Kaufman, Ariel Porat, and
participants at the Cornell Law Review and Clarke Business Law Institute Symposium:
Financial Regulatory Reform in the Wake of the Dodd-Frank Act, the Conference on
Contracts-Economic, Behavioral and Empirical Perspectives at the Hebrew University of
Jerusalem, and the Research Seminar at the Consumer Financial Protection Bureau. The
financial support of the Filomen D'Agostino and Max E. Greenberg Research Fund at
NYU School of Law is gratefully acknowledged.

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