Banking regulators in many countries approach consumer credit protections from different angles as they navigate through the broad impact of COVID-19. The spirit of these programs is to protect both the frontline consumer and the banking system itself.
Comparing the U.S. market to Canada is an interesting perspective because they are both progressive, yet Canada is approximately 10% of the size of the United States
Davis Wright Tremaine, a national law firm based in Seattle, presented an interesting view of how regulators reacted, with the same objective of protecting consumers and banks. The article describes the U.S. reaction as forbearance-based and the Canadian strategy as “prescriptive.”
Under the CARES Act and direction from both federal1 and state regulatory agencies, credit card issuers have been encouraged to provide consumer credit card affected by COVID-19 with forbearance options.
In general, issuer responses have involved the creation of temporary hardship programs allowing consumers to skip minimum payments for some specified period during the current economic uncertainty.
Although no formal rulemaking has outlined the required setup of temporary hardship programs, federal and state regulatory agencies have urged financial institutions to work quickly to establish forbearance options, and they will take a favorable view of actions that might otherwise call for more extensive regulatory reviews.
For the time being, federal and state authorities have focused on promoting accommodations broadly without requiring specific actions.
Concurrently Canadian direction also suggests interest reductions, which from our review of the market, drive the base interest rate to 10.99%.
In contrast to the generally open-ended guidance issued by U.S. regulators and their recommendation to start with forbearance programs, the Canadian government and Canadian banks have taken a more prescriptive approach for providing credit relief to their nation’s consumers.
Although many Canadian banks are providing forbearance options, the Canadian government has advocated for more specific relief in the form of reduced interest rates for consumer credit cards. A number of Canadian banks, including the country’s six largest lenders, have already heeded the call from Prime Minister Trudeau’s government and drastically reduced interest rates for consumers.
The article points to a critique of the CFPB by Sherrod Brown (D-OH), the ranking member of the U.S. Senate Committee on Banking, Housing, and Urban Affairs. At that link, Representative Brown suggests that CFPB has not lived up to its mission. That is a harsh view.
While we do not comment on political issues, we do think the CFPB has filled its role well. Regarding the difference between the Canadian market and the U.S. market, we believe there are distinct differences in the two, which center on interest rates.
- U.S. credit card rates float with the Prime Rate of Interest. Canadian Rates do not. Mercator’s previous review of Credit Card Agreements at the website indicated that less than 4% of credit cards in the U.S. carry fixed rate terms.
- Canadian credit card terms tend to be at fixed rates, as this term sheet from the Royal Bank of Canada indicates. Baseline interest rates range from 19.99% to 22.99%
- According to the Federal Reserve Bank of St. Louis, which tracks the average rate of credit card interest charged by U.S. commercial banks, the current rate of interest charged in the U.S. market, as of February 2020, is 15.09%.
With that in mind, perhaps the two markets are much more similar than the “prescriptive” strategy suggests. The U.S. design pegs to the prime, which is the historic low rate of 3.25% since March 16, 2020.
Something that we do agree on is that once we get beyond the issues of COVID-19, or until regulatory mandates expire, consumers will face standard credit card interest rates and minimum due payments, and that may lead to another shock as household budgets return to a new normal.
Overview provided by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group.
