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Tuesday, May 31, 2011

Pew Urges Government Intrusion in Business Credit Cards

Apparently, the Pew Health Group wants to ride to the rescue of small business by urging Congress to expand the regulatory reach of the Credit CARD Act of 2009 to business credit cards. Is this a good idea?

On March 19, Pew released a brief on credit card offers to businesses. Nick Bourke, director of Pew's Safe Credit Cards Project, declared, "Every month more than 10 million business credit card offers are mailed to households at all income levels. The sheer number of offers that are sent to homes all across the nation represents a risk to millions of American families."

That's a strikingly odd statement. After all, are we really supposed to believe that more choices and competition somehow spell big trouble for business owners and households? Doesn't reality tell us the exact opposite?

Nonetheless, Bourke went on: "To better protect individuals, families and small business owners we urge that the safeguards found in the Credit CARD Act be extended to any card on which the cardholder is personally liable."

But this ignores the economic reality that when government steps in to regulate, there are always costs to be born in the private sector. In the case of credit card regulations, when banks are unable to price their services according to changes in risk in the economy and with particular customers, the result inevitably is reduced access to credit and increased costs of the credit available.

Just in case the Pew researchers don't understand, that's bad news for small business owners who face enormous obstacles in gaining the credit and/or capital needed to build their enterprises.

A May 19 BusinessWeek report pointed to a 2010 Federal Reserve study indicating that such an increase in regulation could spell trouble in terms of accessing credit. The Fed May 2010 report to Congress specifically observed the following regarding the Truth in Lending Act (TILA) as amended by the Credit CARD Act:

"However, if the Congress were to consider the application of TILA's substantive provisions to small business cards, it would be important to recognize the potential for adverse effects on the cost and availability of small business credit cards. For example, applying TILA's restrictions on the ability of creditors to adjust interest rates on small business credit cards could have negative consequences for small businesses. As noted earlier, credit card issuers have more difficulty assessing the creditworthiness of small businesses than consumers. Therefore, the willingness of issuers to extend the relatively large credit card lines that small businesses require may depend importantly on issuers' ability to adjust prices in the future, as they learn through experience about businesses' ability and willingness to pay. Restricting the ability of card issuers to adjust interest rates may lead to higher initial interest rates, which would harm those firms that borrow on small business credit cards. In addition, if credit card issuers were to reduce credit limits in response to the imposition of TILA's substantive requirements, even those businesses that use credit cards for transactions and cash management would be harmed."

In the end, small businesses should say "No thanks" to the Pew group's offer of more regulation, as it would only make credit tighter and more costly.


Raymond J. Keating is chief economist for the Small Business & Entrepreneurship Council.

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