Posted by: John Tozzi on May 19, 2011
(Corrects an imprecise characterization of the Federal Reserve’s report in the
6th paragraph and a truncated quote in the 7th paragraph.)
Small business credit cards heavily marketed to U.S. households should be protected by the the CARD Act like consumer cards, the Pew Health Group argues in a new report released on May 18. At the very least, the consumer advocacy group says issuers should have to warn borrowers that their small business cards aren’t covered by the same rules that prevent retroactive rate hikes, over-limit fees, and other practices that can drive costs up unexpectedly.
Lawmakers left business cards out of credit card reform two years ago. The reasoning is that business-to-business transactions aren’t subject to consumer protections like the Truth In Lending Act, because regulators assume businesses are more sophisticated than consumers and better able to watch out for themselves.
Small business credit cards are personally guaranteed and often marketed to people who don’t own businesses, the Pew report says. Card issuers sent an average of 44 million business card offers each month to 12 million U.S. households — not commercial addresses — over the past five years. (At the end of 2010, banks mailed about 20 million business card offers each month to households.) While many of these are no doubt home-based businesses, Pew’s analysis of direct mail databases from Mintel shows that business card offers go to people of all age groups and income levels:
[E]very month millions of consumers are exposed to offers for less-regulated business card products that allow practices banned on consumer credit cards. Even the most vulnerable populations among low-income and elderly households are exposed to millions of solicitations for cards that operate outside of the Credit CARD Act protections. Yet marketing and application disclosures uniformly lack guidance to help individuals identify when a product does or does not include these important safeguards.
Pew found that most large banks — with the exception of Bank of America — still subject small business cards to practices banned by the CARD Act on consumer cards. That echoes a report by credit card comparison website CardHub from last month.
As the Pew report was released, John Hall, a spokesman for the American Bankers Association, emailed reporters to highlight the Federal Reserve’s study from last year that said further regulation may lead to tighter credit:
[I]t is not apparent that the potential benefits of applying substantive restrictions similar to those in [the Truth In Lending Act] to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.
Small business advocates like the National Small Business Association favor greater protections. Pew argues that because small business cardholders are personally liable, they are “exposed to risks that cards provided strictly for consumer purposes cannot legally contain.” A separate Pew report earlier this month found that late fees dropped and interest rates remained steady for consumer cards after the reforms took effect.