by Norman I . Silber and Jeff Sovern
The American Prospect recently published a short essay we wrote suggesting that the federal government pick up the tab for part of consumers’ credit card interest rate payments while the coronavirus rages. Some very knowledgeable consumer law experts have generously taken the time to give us their reactions to our proposal. We're pasting in some of the comments below (anonymously) and afterwards a very brief response.
Commenter 1: This is an intriguing proposal and I think it has legs. . . . My concern of late has been what happens when the various CARE Act provisions cease. . . . You wrote that “credit card statements should make clear what consumers would still be on the hook for when the government’s largesse ends.” . . . [D]on’t we need some controls on what people have to pay at that point. . . Distress for many will continue long after the federal programs end. Even if credit card issuers apply the extant repayment rules, the 1% minimum payment rule will be too much for some consumers—especially those who are still unemployed.
At this point, the most important thing is to help people who are financially destitute. Later, we will want to focus on increasing demand. The former requires a targeted approach, and the latter a broad approach, like checks to almost everyone. I suggest that during this early stage, there should be eligibility requirements for the credit card program.
Commenter 2: {O]n a micro level, I think it has some merit, particularly easing the ability of financially-strapped households to use credit lines to survive recession (or worse). . . . In general, I favor targeting those in need, which would mean job programs, more expansive and lasting unemployment comp, easier and greater access to SNAP, etc. rather than subsidizing my use of credit. Yet we do know that those most heavily burdened by credit card debt, and probably suffering the most economically, are those in the second and third income quintiles.
Commenter 3: Your proposal is a novel way to get money into folks' hands quickly. It's ironic that this solution attempts to use debt to solve a crisis, when debt was the cause of the last financial crisis. . . . I worry, though, about what happens after the period during which the federal government foots most of the interest. The rules you propose to prevent abuse of borrowers are numerous, and I doubt that the now-toothless CFPB would police or enforce them. I can just imagine some of the shenanigans card lenders will try, such as new fees; misleading credit-card statements that make it hard to determine which debt is subject to which terms; and lender offers to consumers to consolidate their new "COVID debt," plus their old debt, onto new credit cards that provide less-favorable terms in the long run.
Also, how to address the most pressing concern for people who are out of work: paying the rent or mortgage? It's my understanding that mortgage debt can't be paid using other debt such as a credit card—unless it's through a high-interest-rate cash advance.
Commenter 4: Thanks for coming up with this innovative and compelling proposal. Let me point out a couple of potential sticking points, some of which can probably be worked out if there is the political will. But, first, the most obvious problem is reaching people who do not have credit cards. If, say, one quarter of the population does not currently have a credit card, that probably translates into something closer to half of the people in dire need of funds right now.
Leaving that problem aside, I think there is an important distinction from a POLITICAL point of view between credit card that was owed before the pandemic hit (say, as of March 1st) and since that time. Given that the costs of your proposal are going to be borne by more affluent households (and by future generations), these people are not likely to be sympathetic towards debt that was incurred in “normal” times. They are far more likely to be sympathetic to debt that was incurred due to unforeseen and uncontrollable circumstances. Thus, I think that it is important for your proposal to separate these two kinds of debt and apply only to the latter. (An alternative policy proposal could be offered to deal with pre-pandemic debt.) Another distinction that needs to be clearer in the proposal is between principal and interest payments. . . . . .By the way, I very much like the idea of splitting the responsibility for interest payments between the government (the majority of the payments) and consumers. This gives both parties skin in the game. The consumer is motivated to borrow only what is necessary since they are still paying at least some interest. Also, because many consumers may already be close to their credit limit and not have $10,000 in “borrowing space,” the fact that the government would be paying the majority of the interest for the next six months could serve as an incentive to banks to increase credit limits for those consumers who are already close to their limit.
Commenter 5: It seems to me that many households that anticipate a slower, less complete, and more uncertain recovery might favor an approach tilted toward longer-term relief. . . . A longer-term approach could possibly be accommodated in your proposal by varying the government contribution to interest payments so it increased with the duration of the crisis; also extending the moratorium on monthly card collections beyond your example of a 6 month period.
We are grateful for the thoughtfulness and constructiveness of these reactions. Here are some of our thoughts about refining the proposal in light of them.
What happens at the end of the relief effort? If minimum payments are excessive when the program ends, Congress might indeed have to take a look at minimum payment requirements.
Would it help those who don’t need help? The proposal incorporates indirect need-testing because consumers will still be on the hook for their portion of interest payments and because affluent consumers who pay their credit card bills each month will probably not want to incur even those charges. But if it seems to permit better-off consumers to take advantage of the program, income eligibility limits might be needed, just as they were for those who will receive stimulus checks under the CARES Act. And leaving open the option to raise or lower the percentage of relief is an excellent refinement.
Would credit card issuers raise rates and add new fees? Our proposal already would limit increases in interest rates; we agree it should also limit new fees. Abusers would also be cheating the government, which might give rise to prosecutions, qui tam actions, and bank regulator sanctions, not just actions by the CFPB.
Could you use credit cards to pay off mortgages? We want to think more about whether the proposal should apply to cash advances, which could be used to pay for items for which credit cards are not typically used, like mortgage payments and rent.
What if consumers are near their credit limits? Those who are already near their credit card limits would still benefit from the program because it would subsidize their interest payments on preexisting debt, but probably, being nearly without credit, they would be among those who need additional targeted aid.
Aren’t many of those in deepest need of help those without credit cards? We share the concern with helping those who lack credit cards. As we wrote in the essay, the principle embraced in our program—having government relieve a portion of the interest due-- can be extended to auto loans, payday loans and other forms of consumer finance. Even after doing so, however some needy consumers won’t have any installment debt and other means would be needed to help them, such as reloadable payment cards.