Archive for December, 2009
2008 and 2009 have been painful years for consumers with rising unemployment, high-levels of consumer debt and an increasing number of foreclosures, but the skies are clearing for consumers in 2010 as new financial protections go into effect allowing consumers easier access their credit reports and additional protections on their credit cards.
Although the year will be good for consumers, it probably won’t be a positive year in terms of revenue for some of the largest financial institutions which are heavily reliant on income from their credit card businesses, such as Bank of America (NYSE: BAC), Citigroup (NYSE: C) and JP Morgan Chase (NYSE: JPM). The new consumer protections going into effect will limit various fees that banks can charge and prevent banks from arbitrarily raising interest rates.
Of the coming changes, some of the most significant come from the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (commonly known as the Credit CARD Act). The legislation enacted wide reaching changes intended to reign in credit card fees and arbitrary interest rate increases. Credit card companies will be required to make additional disclosures and will be largely-prevented from nickel-and-diming customers on fees.
Many of the aspects of the legislation will come into effect on February 22nd, including regulations relating to interest rate increase, fees on over-the-limit transactions, and marketing practices related to college students. Credit card companies will no longer be able to raise interest rates on existing balances unless a cardholder is at least 60 days late and credit card companies will no longer be able to charge over-the-limit fees unless a customer has provided the company express permission to accept transactions over his or her credit limit.
Credit card companies will also be limited as to what payments can be considered late. If your payment is due on a weekend or holiday, issuers will no longer be able to penalize you if your payment comes the following business day. Payments received by 5:00 PM must now also be credited the same day.
Finally, if you are late on your credit card for more than 60 days and have your rate increased, your issuer will be required to revert you back to the original rate if you have had 6 or more months of on-time payments.
The same legislation will also provide consumers additional protections related to gift cards. Starting in July, new rules will limit the amount of fees that companies can charge you on gift cards and stored value cards.
Although these new regulations are a breath of fresh air for consumers, credit card companies will likely take a major hit in revenue. Bank of America, JP Morgan Chase, Citigroup and others depend heavily on the revenue they earn from late-fees, over-the-limit fees and balance transfer fees. The new legislation will significantly hamper the profitability of credit card business units.
As a result, consumers will likely see significant changes in their cardholder agreements and have fewer credit cards available to them as they will be generally less lucrative to the financial industry. Consumers will likely have to pay an increasing amount of annual fees as banks attempt to make up for the losses in revenue from fees. Other banks will try to push consumers to variable rate credit cards which are largely exempt from the interest rate limitations.
The passage and enactment of the Credit CARD Act will be largely beneficial for consumers at first, but banks will almost certainly adjust to the new regulation to minimize the amount of damage that it causes to their flow of revenue.
GMAC Getting Bailed Out (Again)
Posted by: | CommentsAs all the major national banks have repaid the TARP funds, it could be easy to assume that the financial crisis is over and we’re on the front porch of normalcy – but, don’t be so fast. The recession and financial crisis in general continues to effect financial institutions, including those on the periphery of banking.
This morning, the Wall Street Journal reported that GMAC Financial Services is close to getting about $3.5 billion in added aid from the U.S. government, on top of the $12.5 billion already received since December 2008. An announcement is expected within days, and will likely coincide with GMAC disclosing a plan to absorb losses related to its mortgage operations. Earlier this week we learned that Fannie Mae and Freddie Mac were receiving a virtual blank check for loan losses, so tying this together gives clear indication that the Treasury Department, and the Obama administration is acutely concerned regarding the state of mortgages.
The mortgage relief act has yet to provide much relief, and until that flow is stemmed, consumers will likely display less confidence and spending. Consumers and investors need to see positive results usually before a stable rebound, and today’s actions may help accomplish that goal. One person told the Journal that this measure has been developed to return the company to profitability in the first quarter of 2010, which could prove to be very important as we head into a mid term election.
This capital will likely allow GMAC to avert placing Residential Capital LLC, its ailing mortgage unit, into bankruptcy. GMAC spokeswoman Gina Proia commented “As we have previously stated, GMAC has been conducting a strategic review of its business and evaluating options to address the challenges at ResCap and the mortgage operations. Critical objectives in the process would be to take actions that position GMAC for improved financial performance and to repay the U.S. government.”
GMAC Financial Services is one of the largest mortgage lenders in the country, but also offers many other products and services. Unlike Countrywide, there is no bank waiting in the wings to buy them. In order to succeed at this stage, the firm needs to reverse the tides of loan losses and decrease delinquencies across its portfolios. This cash infusion may help to do just that, if it is used to write off or write down such loans, the remaining portfolio should be strong enough to return the firm to profitability.
Credit Cards Find New Ways to Gouge Customers
Posted by: | CommentsIt seems that the tale of their demise has been greatly exaggerated. The tale, of course, relates to predatory practices by credit card companies.
Many were hopeful that the Credit Card Act of 2009 would finally put an end to the abusive tactics of card issuers. Some methods used to garner fees seem down right criminal, and an Act of Congress was needed to stop them. But, like adage goes about plucking a grey hair, you take one out, and two more sprout back up in its place.
In the past year, card issues have created new ways to collect millions more in fees each year, many of which are hidden to consumers, unless you pore over your credit card statement.
Joshua M. Frank, a senior researcher with the Center for Responsible Lending commented “Credit card issuers are going to more than ever try to find ways to make extra profits. New charges and changes to the way fees are calculated are adding to the balances of a growing number of cardholders. While some of the practices were instituted after the Credit CARD Act was approved in May, others were quietly being put in place earlier as a result of the recession. The one thing they have in common is that none of them are explicitly prohibited by the Credit CARD Act.”
Under the Credit Card act, consumers with fixed rate credit cards will not have rates changed on current balances if they pay on time – but, the majority of cardholders carry variable rate cars, which could leave them exposed to risk of a rate increase. The rate on these cards is usually calculated by taking the prime rate, and then adding to it a risk spread. Historically, the prime rate used was the highest in the month. However, many issuers have amended their terms this year, so they can now select the highest prime rate in the previous 90 day cycle, which the Center estimates can cost consumers $720 million a year. Frank adds “It’s so hidden and obscure that it can’t be interpreted as anything other than a way to extract money from people in ways they don’t understand.”
In addition, although historically the rate on cards floated freely with the prime rate, many issuers have now set “floors”, to limit how low a cardholder’s variable rate can go. Ultimately, what we’re seeing here is that the legislation may have the best intentions of the consumers in mind, but it lacks the breadth necessary to offer any real protection. The major of customers are still exposed to unexplained rate increases, and fees that they just will not understand.