Thursday, June 3, 2010, 11:00pm CDT | Modified: June 7, 2010, 7:49 AM

Small biz credit card protections studied

by Kent Hoover

• Email
• Reprints
• RSS Feeds
• Share
• Comments

Applying the same consumer protections to small business credit cards that Congress has imposed on personal cards could make these cards more expensive and harder to get, the Federal Reserve has concluded.

These protections, such as restricting the ability of banks to raise interest rates on existing balances, were applied to personal credit cards in the Credit Card Act of 2009. Credit cards issued to small businesses, instead of individuals, were not covered by this law.

The National Small Business Association included this omission in its new “Squandered Opportunities and Misplaced Priorities” report, which details Washington’s failures in small business policy in recent years. Two-thirds of the association’s members reported that the rates and terms of their credit cards had deteriorated over the past five years, “making these protections a must for small business,” according to the association.

“Why Congress would willfully neglect such a huge swath of credit card consumers is unfathomable,” the association’s report concludes.

The Fed can fathom the reason, however. It costs credit card companies more to issue and service small business credit cards, which are issued to firms, not individuals. It’s harder to judge the creditworthiness of a small business than it is a consumer. Loss rates on small business credit cards historically have been 20 to 30 percent higher than on consumer cards, the Fed found.

Limiting the ability of a bank to raise interest rates on a small business credit card may lead to higher initial interest rates, the Fed concluded in a new report. Credit card companies also might reduce credit limits in response to such restrictions.

The benefits of applying consumer credit card restrictions to small business credit cards may not “outweigh the potential risk of increased cost and reduced credit card availability for small businesses,” the Fed concluded.

The American Bankers Association appreciated the Fed’s findings.

“Small businesses will lose access to small business credit cards if lenders are restricted in their flexibility to manage risk,” said Kenneth Clayton, a senior vice president at the bankers’ association.

“The ultimate takeaway from this report is that Congress should proceed cautiously when considering anything that might impact the availability of credit for small businesses,” he said.

The Fed found that 83 percent of small businesses used credit cards at the end of 2009. Small business cards, which are issued to the firms themselves, were used by 64 percent of small businesses.

Small businesses found that credit cards were much easier to get than bank loans last year. About 20 percent of small businesses applied for a new credit card last year, most of them business cards. Nearly three-fourths of these applicants were successful. By contrast, only one-third of small businesses were successful in getting lines of credit last year, and only one-half managed to get a bank loan, according to the Fed.

FTC delays ‘red flags rule’

The Federal Trade Commission has again agreed to delay enforcement of its “red flags rule,” which requires financial institutions and creditors to develop written plans

to detect warning signs of identify theft.

At the request of Congress, the FTC will delay enforcement through Dec. 31. Pending legislation would clarify that the law mandating this rule was not meant to apply to health care, accounting and legal practices with fewer than 20 employees. Other types of small businesses could apply for an exemption if they meet certain criteria.

“Congress needs to fix the unintended consequences of the legislation establishing the red flags rule, and to fix this problem quickly,” FTC Chairman Jon Leibowitz said. “As an agency, we’re charged with enforcing the law, and endless extensions delay enforcement.”

The rule went into effect in 2008, but its enforcement has been delayed several times because of concerns over its scope.

CBO: Stimulus added 2.8 million jobs

The economic stimulus package increased the number of Americans who were employed in the first quarter of 2010 by 1.2 million to to 2.8 million people, according to new estimates from the Congressional Budget Office.

The CBO also estimated the government spending and tax breaks in the stimulus bill reduced the unemployment rate 0.7 to 1.5 percentage points. The package raised gross domestic product by 1.7 percent to 4.2 percent, according to CBO.

CBO predicts the economic benefits of the stimulus package will increase further this year and then diminish in 2011. The nonpartisan office based its estimates on economic models and historical data.

Vice President Joe Biden said the CBO’s report “is important validation that the action we took to rescue the economy last year has not only pulled us back from the brink, but put us on a firm path toward economic recovery.”

Read more: Fed studies cost of protections on small business credit cards - Austin Business Journal