New Article: “Credit Card Ills: Reducing Racial Disparities in Debt”

New Article: Andrea Freeman, Credit Card Ills: Reducing Racial Disparities in Debt, SSRN.  Abstract below:

Credit card debt, particularly in conjunction with the subprime lending crisis and severe economic recession, jeopardizes the ability of many African American and Latino households to maintain financial viability. The credit card industry’s business model relies on the payment of fees and high interest rates by the poorest consumers to generate profits and subsidize credit card use by the richest. Documented racial disparities in credit card debt represent and perpetuate structural inequities that require regulatory intervention. Both increased consumer protection and structural reform are necessary to reduce credit card debt disparities arising from present and past discrimination and subordination.

The evolution of credit cards into the primary conduit of consumer debt has dramatically reshaped the relationship between banks and consumers, creating the potential for large-scale exploitation along race and class lines by major financial institutions. This Article builds on legal scholarship on racial disparities by analyzing the problem in the context of credit card debt, explains why both law and economics and behavioral economics fail to account for these disparities, and applies a critical race and class analysis to develop proposals that would alleviate in part the structural inequities that lie at the core of the problem. The Article identifies two types of credit card consumers who carry balances, ‘subsistence users,’ who rely on credit to provide for their basic needs, and ‘lifestyle users,’ who maintain a lifestyle above their income through credit. To create transparency that will facilitate regulatory intervention, it calls for full disclosure of industry practices, including targeted marketing and solicitation, and racial discrimination. It then explores two regulatory options for ameliorating the conditions and changing the practices that lead to racial debt disparities: ‘subsistence amnesty,’ in the form of the temporary elimination of fees and interest rates on the subsistence purchases of consumers living under the poverty line, and the addition of substantive requirements to the Community Reinvestment Act that would compel credit card companies to help equalize the financial status of low-income communities of color through individual savings accounts, domestic micro-lending, and community-based financial counseling. This Article seeks primarily to contribute to a dialogue about racial debt disparities, in numbers and treatment, among politicians, activists, and economics theorists that will lead to creative strategies to reduce or eliminate these disparities.