The Credit Card Accountability, Responsibility and Disclosure Act of 2009 was heralded by many student advocates for taking aim at marketing practices by companies (and colleges) that ostensibly put young adults with little to no credit at greater risk of incurring debt.
But a new study finds that in some respects, the legislation has not been as effective as some proponents might have hoped.
The CARD Act, which took effect in February 2010, is a massive piece of consumer protection legislation, but it includes several provisions designed specifically with students and young adults in mind. Among them: companies cannot give credit cards to minors unless they have a co-signer or can prove sufficient “ability to pay”; it restricts companies’ marketing practices and prohibits them from giving out free stuff on campuses; it bans credit bureaus from giving out young consumers’ addresses for mailing offers and other marketing; and it requires companies and colleges to publicly disclose any contracts or agreements regarding credit card marketing.
“I think the study casts a lot of doubt on the effectiveness of the way the act chose to regulate credit cards for students. It took a really indirect approach to a lot of the issues,” said Jim Hawkins, the University of Houston Law Center professor who conducted the study. “It let a lot of practices that people object to continue.”
In one example of that “indirect” approach, in an effort to reduce promotional mailings and credit card offers to students, the CARD Act mandated that no agreement between a college and company could require colleges to disclose students’ addresses. But 68 percent of students under 21 told Hawkins they had received an offer in the mail during the preceding year -- suggesting either that colleges are volunteering the addresses, or the companies are finding them elsewhere.
"If they wanted colleges to stop sending their students’ mailing addresses to companies, they should have just made that illegal,” Hawkins said.
Advocacy organizations like the United States Public Interest Research Group lobbied for the bill, and many praised it despite some shortcomings  -- that it doesn’t cap the interest rates companies can charge, for example.
Ed Mierzwinski, consumer program director at U.S. PIRG, acknowledged that from the beginning, his organization and others were dissatisfied with some of the “weak” CARD Act provisions -- particularly the marketing ones. But even those have made a difference, he said, and the legislation’s impact will only increase with time.
“We knew the law was not as good as we wanted it to be, but it was a step forward,” Mierzwinski said. “It restricted some egregious practices by banks that apply to all consumers, and it reduced the threat of young people being trapped in excessive credit card debt at a time when they need to get ahead.
“Did it reduce it as far as we’d have liked? Probably not.”
On three occasions from November 2010 through January 2012, Hawkins surveyed a total of 527 students at the University of Houston and Baylor University. He also analyzed 300 of the 1,044 now-public agreements colleges keep with credit card companies. His study will be published this fall in the Washington and Lee Law Review.
Hawkins’s findings regarding credit card marketing are significant in part because, as he notes in his paper, other research has found that financially at-risk students are more likely to get credit cards through mail applications, campus tables or other places where companies aggressively target young people.
Among its provisions, the CARD Act amended the Fair Credit Reporting Act to forbid credit bureaus from giving issuers credit reports for people under 21, unless those people consent. “The Act does not directly forbid sending credit card offers, but instead it attempts to stop the practice indirectly by choking off a source of information for credit card companies,” Hawkins writes in his paper.
The number of students receiving offers in the mail remains high, Hawkins says, but “it appears to have decreased” since the CARD Act became effective. Seventy-six percent of students under 21 received prescreened credit card offers in the mail in 2010, compared to 58 percent in 2011.
“I don’t think it was in line with what proponents of the Act had hoped, but it did show some improvement,” Hawkins said. As the author points out, this finding probably means that companies are obtaining students’ addresses from sources other than the colleges or credit bureaus.
The ability-to-pay rule, established to curtail student debt, also proved problematic to Hawkins.
Some had worried  that the provision would cut off funds for students who lacked credit and didn’t have a co-signer. But Hawkins found that “the CARD Act’s standards appear strict but actually allow many loopholes that students have discovered and exploited.”
For starters, the rule requires students to prove only that they could repay the minimum amount due each month, not the outstanding balance. It also leaves to the banks’ discretion how to define “ability to pay.”
Only 44 students in the study had applied for a credit card since the beginning of the school year, and three were omitted from the results because they didn’t provide enough detail in the survey. Of the remaining 41 students, 23, or 56 percent, applied on their own, while 18, or 44 percent, applied with a co-signer (94 percent used a parent).
Twenty-seven percent of solo applicants under 21 listed loans as part of their qualifying income; add in those over 21 and the total rises to 31 percent. Thirty-five percent under 21 listed money they received from relatives as income. Sixty-eight percent of applicants said their income was below $10,000 a year, and 45 percent listed income as their sole means for obtaining a card. Only 52 percent said they used earned income at all to qualify for a credit card, Hawkins found, “with the remainder relying on other sources.”
“Over all,” Hawkins wrote, “these statistics paint a disturbing picture of the effectiveness of the ability-to-pay provision.”
While CARD amended the Truth in Lending Act to prohibit tangible gifts such as food or swag as incentive for students filling out an application on or within 1,000 feet of a campus, it does not restrict “non-physical inducements.” And physical inducements are allowed so long as they’re not restricted to students who apply for cards.
“So you hook them in with the pizza, and once they’re over at the table taking the pizza, you can offer them a special discount on the card,” or extra rewards or some other incentive, Mierzwinski said. “And that will reel them in even further.”
Four in 10 students overall reported seeing credit card companies giving gifts to students while the law was in effect.
Hawkins hypothesized that, if the act was effective, students who had been in school only while the legislation was in effect would report seeing substantially less marketing on campus than would those who had been enrolled for longer.
Of students who had been in college only while the act was in effect, 22 percent saw companies marketing on campus, 67 percent saw cards marketed to students off-campus, and 40 percent saw companies give gifts to students. Of those students who were in school for at least some time while the act was not in effect, 49 percent saw marketing on campus, 81 percent saw off-campus marketing, and 60 percent saw companies giving students gifts.
So the hypothesis did hold true, but, Hawkins said, discrepancies in the pattern of his findings from the first year to the second year suggested it was true only because a student who had been in school for four years was more likely to have seen marketers than was a student who had been there only for one.
Finally, Hawkins looked at how colleges’ contracts with companies changed -- or, in the majority of cases, didn’t -- after the CARD Act went into effect. Those agreements give companies access to prospective cardholders, and they create additional revenue for the colleges in the form of rewards or kickbacks when people use the cards, which are typically branded with the institution’s logo. The provision requiring contract disclosure applies not just to cards marketed toward students (though three-fourths of them are), but also toward alumni, faculty, staff and anyone else at the college.
Sixty-four percent of the agreements he examined went completely unchanged from 2009 to 2010.
“One of the things I think is most discouraging is, the requirement that colleges and credit card companies disclose those agreements, I think, has had virtually no effect,” he said, while noting that some institutions did indeed cut their contracts for alumni groups. “But, if you look at those terminations, they’re almost all of accounts that weren’t very big, and they look like they’re just in the ordinary course of business” -- in other words, the contract was set to expire anyway, or there had been some conflict in the agreement.
Another 21 percent expired or were terminated for other ordinary business reasons, and 4 percent were changed in administrative or neutral ways. Further, 2 percent were “changed in ways that contradict the CARD Act’s intent” (for example, volunteering students’ addresses). Only 1 percent changed their agreements in ways that reflected the act's intentions, Hawkins found.
Colleges know that even if they decide to do “the right thing” and end or reduce agreements aimed at students, Mierzwinski said, they can still profit substantially from the contracts that target all those other campus constituencies.
“Alumni is where the big money is in credit cards, because they use the card,” he said. “[Colleges] get a lot more money from an alum who’s buying big-ticket items than they do from a student buying pizza.”
And people likely haven’t seen the full effect of this provision yet, Mierzwinski said; other colleges may be planning to end their contracts once they expire.
There is some evidence that these agreements are on the decline, though the CARD Act’s influence on that trend is unclear. Payments to colleges by credit card companies dropped to $73.3 million in 2010, according to a Federal Reserve System report, down 13 percent from the $83.5 million reported in 2009 .
That report is mandated by the CARD Act, but its next installment, to be released this July, will be produced by the Consumer Financial Protection Bureau (itself a product of CARD), not the Fed. Mierzwinski expects that the shift in oversight will result in more progress on all fronts noted in the study.
“Some schools are getting rich from these agreements, but most aren’t,” Hawkins said. (His paper notes that more than 70 percent of the terminated contracts generated less than $5,000 for the college in 2009.) “If you’re not making a ton of money, but you’re creating a situation where students are getting a lot of credit cards in the mail, it might be time to rethink the value of that credit card agreement to your whole institution.”