Fed Sides With Banks on Small-Business Credit Reform

The Federal Reserve today recommended against extending to small businesses many of the credit-card reforms mandated for consumers this year.The Fed sided with banks and other credit issuers, who argue the higher risks associated with small business justifies higher charges.

“The marketplace for small business cards is different than for average consumers,” Peter Garuccio, vice president of public relations for the American Bankers Association, said last week. “It often involves much higher credit lines and the need for greater flexibility when it comes to repayment options. As such, small business cards involve more risk.”

Essentially, the Fed agreed, saying: “It is not apparent ... that the potential benefits of applying substantive restrictions similar to those [extended to consumers] to small business cards outweigh the potential risk of increased cost and reduced credit card availability for small businesses.”

But not everyone agrees.

"Everyone deserves fair credit card practices, in their personal life and in business," Kathleen Day, spokeswoman for the Center for Responsible Lending, said Friday. "Anything less is a waste of funds that could have been used, in the case of consumers, for productive goods and services and savings for college and retirement, and, in the case of business, to build companies and create jobs.”

Commercial credit cards, which make up about 15% of the market, were specifically excluded from reforms -- the most sweeping credit-card changes in nearly 30 years -- that took effect on Feb. 22. For consumers, Washington’s new regulations forbid issuers from raising interest rates on existing balances. They also offer relief from fees imposed for exceeding credit limits, and force issuers to apply payments to the portion of balances with the highest interest rates.

The so-called Credit Card Accountability, Responsibility & Disclosure -- or CARD -- Act directed the Federal Reserve to recommend to Congress any additional protections that should be extended to commercial cardholders by May 22. The Fed was a week late on the deadline.In its report, the Fed acknowledged that extending some of the provisions beyond just the consumer would protect small businesses from harmful practices. For example, the new requirement that cut-off times for payments be no earlier than 5 p.m. on an individual consumer’s payment due date would also assist small businesses in making timely payments and avoiding penalty fees. And new restrictions on applying increased rates to existing balances would help small businesses, too, by limiting or reducing interest charges.

But, the Fed noted several drawbacks, as well. It’s harder for card issuers to assess the creditworthiness of small businesses, especially new businesses, the Fed noted. With individual consumers, an issuer can more easily consult credit scores to assess financial stability.

“Overall, it is not clear whether the benefits of applying [individual consumers’] disclosure requirements to small business cards outweigh the costs,” the Fed’s report said.

Greater risk can justify higher interest rates. The Fed cited a recent report from the American Bankruptcy Institute, which noted business bankruptcy filings rose by 114% between 2007 and 2009, compared with a 70% rise in consumer filings.

The Fed conducted an extensive survey of card issuers and small businesses before issuing its recommendations. During the survey, several issuers said small business card loss rates typically are 20% to 30% greater than for consumer cards, justifying higher rates.

Congress will use the Federal Reserve study to decide if further legislation is needed. The small business community is expected to continue to lobby for changes.

“Although we are still combing through all the details of the report, we believe -- and our members have told us -- that infusing some kind of stability ala the protections passed by the Credit CARD Act will in fact help small businesses, not hurt them,” said Molly Brogan, vice president for public affairs for the national Small Business Association.