SFA Warns of Securitization Risks from Proposed Credit Card Rate Cap

The Structured Finance Association ("SFA") cautioned that a mandatory 10% ceiling on credit card interest rates would destabilize securitization markets and reduce credit access for consumers.

Based on an evaluation of the proposed interest rate limit, the SFA asserted that the cap would fundamentally alter how lending is funded within the securitization market. The Association explained that interest rates are structured to cover funding costs, fraud, and regulatory capital, creating a buffer known as "excess spread" that protects bondholders. The SFA warned that a 10% cap would drastically reduce this income, potentially triggering "early amortization" events where trusts are forced to repay investors sooner than planned because they can no longer cover losses and expenses.

The SFA highlighted that while prime portfolios might see yields cut in half, nonprime portfolios would face even direr consequences. The Association noted estimates suggesting that excess spread for nonprime credit card asset-backed securities would turn negative under the cap, meaning generated income would fail to cover losses. The SFA argued that while banks might temporarily support these transactions, such measures are not durable solutions for structurally constrained pricing.

The Association also claimed the proposal would negatively impact consumers through "non-price measures." Citing research from major banks, the SFA asserted that when lenders cannot adjust prices to match risk, they restrict lending by tightening underwriting standards and lowering credit limits. Consequently, the SFA observed that the borrowers most likely to lose access to credit are the younger and lower-income individuals the policy intends to assist.

Finally, the SFA questioned the legal and operational viability of the proposal, describing the current landscape as lacking clear legislative detail. The Association noted that without statutory authority, alternative methods like increased supervision are viewed merely as "signaling mechanisms" rather than durable policy.