JEFFREY BROWN: And we turn once again to our series After the Fall, our look at what’s changed and what hasn’t since the financial meltdown of 2008.
In recent days, we have examined the housing market and risk and regulation on Wall Street. Our focus tonight: consumers and banks and attitudes toward credit and debt.
For that, we’re joined by Adam Levin, chairman and co-founder of Credit.com, a consumer education advocacy group. He’s former director of New Jersey’s Consumer Affairs Division, James Chessen, chief economist for the American Bankers Association, an industry trade group. And Kathy Kristof, she reports on personal finance for CBS “MoneyWatch” and Kiplinger’s Personal Finance.
Kathy Kristof, let’s start with consumers. Are people generally more willing to take on debt now? And, if so, who is doing it and what kind of debt?
KATHY KRISTOF, Kiplinger’s Personal Finance: Consumers are definitely taking on more debt, certainly on average.
What you see are two different groups of consumers. We have people who never really had a problem in the financial crisis. They didn’t lose their jobs. They never were overextended. They have never had difficulty in paying their bills, but they have been very cautious over the past couple of years. And right now, they’re in very good shape because actually the debt they have is at lower interest race.
Mortgage rates in particular have gone down. And for most families, that means that 50 percent — or — excuse me — 30 percent of your budget is actually at a lower price. So you’re in good shape. The other side of the coin are the consumers who did have real problems in the financial crisis. Some of them lost their homes.
A lot more declared bankruptcy. And, oddly enough, those consumers are also actually in a better spot right now because, while they lost assets, they also lost that debt. So, going forward, they’re better able to borrow. And now you have. . .
JEFFREY BROWN: Sorry.
KATHY KRISTOF: Go ahead.
JEFFREY BROWN: Let me just — let me just bring in Jim Chessen here.
Does that jibe with what you’re seeing, a two-tiered market?
JAMES CHESSEN, American Bankers Association: Well, I think that’s absolutely correct, Jeff.
What we’ve seen is, overall, debt levels are down. We’ve also seen that the amount of monthly income that people have, the amount that they devote to debt is at a 28-year low. So we’ve seen a significant reduction in the amount of debt held.
We have seen savings go up. So we have seen a very good improvement on consumer debt levels. Now, as Kathy said, we know there’s people that have had trouble, but the good thing now is they have an opportunity for a second chance, and in products that will help them rebuild the credit that they need to buy the kinds of product that they want, whether it’s a car or to build back up credit, so that they can buy a house.
JEFFREY BROWN: Adam Levin, what impact have regulatory changes had? I know you have looked at this push for more transparency in loans, in lending.
ADAM LEVIN, chairman, Credit.com: Well, there’s been a great deal more transparency.
There has been a great deal more restraint in certain areas of fees on the part of financial institutions. And consumers in general are in a position where more information is available to them, but it’s now their responsibility to be able to actually read that information, digest the information, and make intelligent decisions based upon that information.
Plus, we also have the Consumer Financial Protection Bureau. And we have more people actually looking at the problem, studying the problem, and trying to see if what we see today is a good omen or a warning sign and the headlamp of the oncoming locomotive, as opposed to the light at the end of the tunnel.
JEFFREY BROWN: Well, Adam, just to stay with you, what do you see in terms of consumers’ attitudes? Is there more a fear of taking on debt? Were there lessons learned after what happened four years ago?
ADAM LEVIN: Well, again, I think that some people may well be taking on more debt out of necessity because we have a stagnant economy.
And we also have a stubborn unemployment rate. Some people may in fact have a much healthier attitude about credit and debt than they have ever had before. But remember that while we’re looking at this particular kind of debt, there’s another horrifying debt that’s exploding right now that also impacts so many people. And that’s student debt, which has now eclipsed auto debt and credit card debt.
So this may also be part of an entire mosaic where consumers are looking at the entire picture and saying, I really have to be more responsible in this area, because I’m being eaten alive someplace else.
JEFFREY BROWN: Well, Kathy Kristof, fill in that picture a little bit more. You start talking about the riskiest borrowers. Do you see them getting into the market more, and do you see lenders, banks and credit card companies, reaching out to them once again, as they were earlier?
KATHY KRISTOF: You are seeing them cautiously getting back into the market where they can.
But there are some people who are not borrowing because they don’t have the opportunity. Their credit got so trashed in the financial crisis that they will not be allowed to borrow for a little while. There are tentative feelers out to get some of these people and certainly to get people with thin credit files, as opposed to bad credit files.
So college students, for instance, are being segregated from the bad credit risk to the new credit risk. And those people are being offered credit. And they’re taking it. And, you know, again, consumers are in a better position to handle the credit they’re getting. And so I don’t see this as a worrisome trend.
JEFFREY BROWN: Jim Chessen, are banks or some banks getting back into this business of lending to risky borrowers again, one of the big problems, of course, from four years — from the bubble?
JAMES CHESSEN: Well, of course, there’s a whole range of risk, right, from the best credit to the people that, as Kathy said, really have very poor credit.
JEFFREY BROWN: Right.
JAMES CHESSEN: Banks are treading cautiously. I agree with Kathy on that. They want to make loans. And they know now, with the economy improving and jobs and income improving, that the risk of lending is now much lower than it was before.
So they want to look at those consumers that really have the ability to repay that debt. It doesn’t do banks or customers any good to put hands, put credit in their hands if they can’t repay it. We don’t want to repeat the lessons that we have had before. So both banks and consumers, I think, are being much more prudent, much more cautious. And I think that’s appropriate.
JEFFREY BROWN: Of course, some of the regulations took some of the ability of banks to make money off of — to charge some of the fees that they did in the past.
JAMES CHESSEN: Right.
JEFFREY BROWN: What kind of impact does that have?
JAMES CHESSEN: Well, banks are in the business of making loans, right? That’s what they do. That’s their bread and butter. And they want to make loans. They want to reach out to their customers.
It may shock some people that two out of every three banks, FDIC-insured banks, have been in business for more than 50 years. You don’t stay in business unless you treat your customers right, make sure they have the credit that they need and that they can repay it. And that’s what banks want to do now.
The risky lenders are out of business now. The banks that have survived today are the healthy ones that are going to be here for the next 50 or 100 years. And they want to get credit in the hands of their customers that can handle it.
JEFFREY BROWN: Well, Adam Levin, what do you see in terms of the — on the side of the banks responding to the various regulations that were put in place over the last few years?
ADAM LEVIN: Well, the banks are — they find themselves in a bind. They’re looking for alternate revenue generation sources.
They feel that — a lot of the bankers I have talked to say, look, we — we have to find ways to increase our footprint with our existing customers and make a compelling case with other customers because, frankly, there was a period of time when the bigger banks were getting hammered by credit unions and smaller banks as consumers were expressing and manifesting their anger.
So, you know, there is the continuing search for fees. And if — they will shift from one to another and they will go with it. For instance, consumers, the question is, has consumer credit card limits, have they increased because consumers are moving away from debit cards that they had been moved into because, once the swipe law went into effect and limited fees on swipe that — and rewards were taken away from debit, and fees were raised on debit, the consumers then were migrating back to credit cards, and there was also a greater demand for credit cards.
And banks are going with the flow on that, too. So, is it because the boat is rocking or because there really is a new attitude about things? This is a work in progress.
JEFFREY BROWN: Okay.
Kathy Kristof, a last word from you. What — what — is it a work in progress and which direction is it going?
KATHY KRISTOF: You know, credit is always a work in progress. Like everything else, there are business cycles.
And you’re seeing we have left the cycle or the point in the cycle when nobody is lending and nobody can get credit unless they don’t need any money. And we’re going into the — credit is easing and people — but people are still cautious. Banks are still cautious. And then we will go to the point where they’re not cautious and people overspend and banks lend too much money to them, until everybody hangs themselves and we start all over again.
It’s kind of the nature of the beast. But, at the moment, I think we’re still in a position where people are borrowing in a judicious way, and banks are lending in a reasonable way. And so, at the moment, there’s nothing to worry about.
JEFFREY BROWN: All right. We will stop there then.
Kathy Kristof, Adam Levin, and Jim Chessen, thank you, all three, very much.