by Nancy Osborne, COO of ERATE®
April 30, 2009 - Debt accumulated from credit card usage has increased by 25% over the past decade, totaling upwards of $950 billion by the first quarter of 2009. The average household balance currently carried on a revolving consumer credit card is slightly over $10,500. Credit card delinquencies are rising along with mortgage delinquencies at a pace of close to 8% and charge-offs by credit card companies are accelerating at a similar rate. Many of the failings of the mortgage securitization market can also be applied to the credit card industry, as the amount of card debt exploded when the securitization process shifted the focus away from analyzing risk and put the emphasis on generating volume. While the market for unsecured credit card debt is inherently risky and the potential for consumer default has always been high, the card issuers are even more likely now to be left carrying these loans on their books. Fed intervention aside, massive losses in credit card backed bonds has resulted in a rapid drop in investor demand for these now toxic assets.
In a familiar too much too late reaction from Washington, both the House and the Senate are promoting their own bills aimed at providing greater protection for consumers against the industry's high fees and predatory practices. Each of the proposed bills is designed to expand upon a new set of rules and industry guidelines which are set to go into effect in 2010. The government's objective now is to protect cash-strapped consumers at a time when the recession is widening and at the same time avoid forcing banks to become overly restrictive in their decision-making process in extending credit to consumers.
The additional rules go farther in protecting the consumer than the rules already issued by the Federal Reserve and on tap to go into effect in 2010. Effective legislation should enhance transparency, simplicity and accountability so the consumer has the information necessary to make smart credit decisions. Proposed changes include: reducing the card issuer's “penalty charges” for consumers who exceed their credit limit, halting the industry practice of applying a consumer's surplus payment to the balance carrying the lowest rate rather than the highest, thereby benefiting the card issuer rather than the consumer and requiring the card issuers to plainly state exactly how long it could take to pay off a card balance if only the minimum payment on the account is made each month. Extending longer terms for upfront teaser rates is also an objective of the added regulation as well as banning rate increases on existing balances.
The consequence of these newly designed government regulations meant to protect the consumer will likely result in making it more difficult for consumers to obtain credit. More regulation and restrictions will effectively reduce the profitability of the industry at a time when the demand for credit card-backed securities in the secondary market has effectively dried up. This will translate into a climate where lenders will become more risk averse and forced to extend credit only to those consumers who have the highest probability of making re-payment. It would have been be far more preferable to allow the industry to make prudent business decisions in their own best interest rather than forcing inflexible, heavy-handed restrictions on the lending community permanently. Unfortunately in this economic back drop where a total lack of self-imposed oversight along with a complete absence of sound judgment coming from corporate management has resulted in this global economic mess, the government now feels compelled to step in as regulator. As many credit card issuing lenders have taken part in the government's Troubled Asset Relief Program (TARP), the government is now in a position to dictate changes as taxpayer funds have been extended to bail out mismanaged institutions.
Nancy Osborne has had experience in the mortgage business for over 20 years and is a founder of both ERATE, where she is currently the COO and Progressive Capital Funding, where she served as President. She has held real estate licenses in several states and has received both the national Certified Mortgage Consultant and Certified Residential Mortgage Specialist designations. Ms. Osborne is also a primary contributing writer and content developer for ERATE.
"I am addicted to Bloomberg TV" says Nancy.