The Credit Crunch:

Please Consider the Unintended Consequences of S. 414

Dear Member of the U.S. Senate:

On behalf of the Small Business & Entrepreneurship Council (SBE Council), I urge you to consider the unintended consequences of S. 414, the Credit Card Accountability, Responsibility and Disclosure Act ("Credit CARD Act") before co-sponsoring or advancing this legislation.

Like most others assessing and experiencing these tough economic times, we at SBE Council are very concerned about credit issues, especially when it comes to access to credit for the entrepreneurs and small businesses that will ultimately lead our economy into recovery.

In recent months, of course, we've seen many steps taken by the federal government to ease credit problems. While one can debate the merits and impact of these steps, there is widespread agreement that keeping access to credit open is critical for our economy and U.S. entrepreneurs.

Unfortunately, certain steps taken by government are working against this goal.

For example, in December 2008, the Federal Reserve announced the approval of final rules pertaining to credit card accounts and other revolving credit plans. While many of these rules will aid consumers from an informational standpoint, there will be increased costs, including the potential for reduced access to credit.

The "Credit CARD Act" not only looks to accelerate the implementation of some things the Fed already has imposed, but seeks to add more regulations and rules. For example, the legislation would dictate how credit card issuers can price their services, effectively not allowing credit card companies to adjust interest rates and fees when risks change. This is not sound policy, nor the way that firms should responsibly run their businesses. The result simply will be a reduction in the availability of credit via credit cards.

In a March 10 Wall Street Journal op-ed, Meredith Whitney - CEO of Meredith Whitney Advisory Group, LLC - noted the following about the Fed's rulemaking steps and the risks of further involvement via Congress: "Specifically, the new UDAP [Unfair and Deceptive Acts or Practices] provisions would restrict repricing of risk, which could in turn restrict the availability of credit. If a lender cannot reprice for changing risk on an unsecured loan, the lender simply will not make the loan. This proposal is set to be effective by mid-2010, but talk now is of accelerating its adoption date. Politicians and regulators need to seriously consider what unintended consequences could occur from the implementation of this proposal in current form. Short of the U.S. government becoming a direct credit-card lender, invariably credit will come out of the system."

In effect, Congress is considering the imposition of price controls on credit card firms. We all know the effect of price controls, including diminished service, less investment and innovation, reduced competition, and cost shifting.

For good measure, the Credit CARD Act could lay the groundwork for still more price controls down the road by requiring the GAO, as noted in the legislative summary, "to study the impact of interchange fees on consumers and merchants, specifically their disclosure, pricing, fee and cost structure." Despite the payments industry being highly competitive, various special interests want the government to set interchange fees, that is, the fee a merchant pays to the credit card issuer when a customer uses a credit card to make a purchase. More price controls, again, will reduce service, and increase and/or shift costs.

Please keep in mind that credit cards have presented both consumers and businesses tremendous benefits. Government imposing more rules and regulations will only raise costs, diminish the quality of service, and reduce access to credit.

With these key points in mind, I urge your opposition to the Credit CARD Act.  Congress must focus on ways to restore and preserve access to credit for small businesses and consumers, not make matters far worse.

Thank you, in advance, for considering the views of small business. If you have any questions, or if we can be of assistance, please call SBE Council at 703-242-5840.

Sincerely,

Karen Kerrigan, President & CEO