Experts Say New Credit Card Rules will Significantly Impact ARM Industry

New credit card rules — The Credit Card Accountability Responsibility and Disclosure Act of 2009, commonly known as the CARD Act — became effective in late February and will hurt collections in the short-term, but could have some positive effects in the long-term, according to industry experts.

The immediate impact will be very minimal due to tax season, said Tim Smith, senior vice president of collections for Firstsource Solutions, based in Mumbai, India, with U.S. collection headquarters in Amherst, N.Y.

During tax season consumers tend to use tax refunds to pay down card balances and to settle other debts, Smith explained. People expecting refunds tend to file early so that they can receive their refunds quickly.

Most of those refunds will be received and spent in the next 30 days, according to Smith.

So most of the impact on the accounts receivable management industry will focus on administrative functions going forward, such as credit card clients requiring Firstsource and other debt collection firms to provide more disclosure, provide notices of change of terms and other similar requirements.

As for the impact on issuers and cardholders, Smith expects that more fees – particularly annual fees – will be added to credit card accounts and rewards programs will be further curtailed as card issuers look to recover lost revenues. He pointed to a recent Citigroup regulatory filing saying that the firm projects a 2010 reduction in revenues of up to $600 million from the impact of credit card reform laws.

However, Smith says that the projections of revenue reductions are probably overdone.

He and others in the industry are in agreement that the biggest change will be card issuers continuing to cut credit lines.

“The DBA realizes that the more information given to consumers the more likely it is that the consumer will not dispute the balance and one would hope that the default rates would be lower,” said Barbara Sinsley, general counsel for debt buying trade group DBA International. “However, due to the restrictions on interest and fees, creditors may be extending less credit to those who have the greatest need for credit. While this may appear to be like a method to decrease defaults, the overall credit market along with the debt buying and debt collection markets will likely see a decline in recoveries.”

“There’s going to be an impact on the amount of debt,” said Valerie Hayes, general counsel for ACA International. “Consumers are going to be more aware of the impact of their debt.”