the card game
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The Changes Ahead for Consumer Lending

Martin Eakes CEO, Center for Responsible Lending

If this new law is as effective as we hope it will be, my prediction is that the fees that were being charged on credit cards, will be transferred to debit cards, so that you will see more and more hidden fees. ...

We will need, before the end of this year, to address the abuses of debit cards, because that one's still left completely wide open.

The credit card companies say -- the banks that own them -- that their default rate goes up as unemployment goes up. Are they really at risk?

Oh, I'm sure that losses on credit card debt ... will be at levels higher than any time in the last 25 years. So typically credit card losses equal about 4 percent of the outstanding balances on credit cards. So if you have a 19 percent credit card loan, 4 percent of that will go for losses, and then that leaves 15 percent to go for administrative costs and earnings for the lender.

I would bet ... the losses on credit cards will go to 10 or 11 percent. So it's a very high rate compared to historical norms because the economy is in such bad shape. …

So you're saying there will continue to be a credit card business, it just won't be as profitable. And they'll be more careful about who they give a credit card to.

That's right, ... the credit card industry will continue. It will do quite well. But they will do what most of us think is good common sense banking, which is to assess whether or not the borrower can pay the loan back, pay the credit card back. What's wrong with that?

Robert McKinley Founder, CardWeb.com

Robert McKinley

We're at 12, 13 percent unemployment. Losses on credit cards are above that. What's the effect on the economy? What could happen here?

It certainly would play a big role in eroding the economy. It would hamper any kind of recovery because credit cards are linked very closely to consumer spending. When you have consumers who have had credit limits and places to use their card and incentives to use their cards -- like collecting air miles and points and whatnot -- when you start taking that away, you're driving down consumer spending, which already is greatly hampered.

So ... all that can have a very big impact on the overall consumer spending, which is two-thirds of our economy.

The industry says that these restrictions that have already passed Congress -- and other possible restrictions like price caps and fee caps and so on -- is in itself restricting their lending. But you're saying that it's the economic conditions that are going on, the unemployment and the defaults --

Yeah, absolutely. The economy is the number one factor here why card issuers have to rein in credit lines, why they have to limit the amount of credit cards that they issue. If they see that a consumer already has two or three cards -- I mean there has to be a closer assessment of the overall creditworthiness of consumers before new credit is issued. That will happen, certainly. But the economy is the driving factor of that.

The industry is going through a fundamental change that is driven by the economy.

When the industry tells us that "Well, if you pass more restrictions, you put in more limits, not only are we going to restrict lending, but you're driving people to payday lenders. You're driving people to title lending on automobiles, when all we want to do is provide people with the lowest possible credit cost."

Yeah, and that's a tough one to answer because, in some cases, credit cards are actually more expensive than some of the payday lenders. Once you begin to get into compounding penalties and interest rates that are 30 percent and even higher -- we've seen interest rates 37 percent in the past year on some card products.

There is a fair price for a line of credit that you have this payment device attached to. They have to find out what that number is. Like I said, if you go back 20-some years ago, they had a number -- 19.8 percent interest with a $20 fee. They're going to have to come back to something like that.

I think, for example, we are going to see the resurrection of annual fees. It has to happen. There has to be some way that the card industry is going to be able to recover these bottom-line costs.

And then even with the reward programs, you're probably going to see fees being phased in. If you want the rewards program, it's going to be an extra $20 or $30 a year, that sort of thing. All of that is so they can find a price point. ...

What maybe the industry needs to come back to, perhaps, [is] still rewarding the affluent consumer with an attractive rate, but not gouging the lower income consumer or the financially challenged consumer with these horrendous interest rates. There has to be a coming together, perhaps more of this spreading the risk. …

The other thing that we're seeing in this current economic environment is a major migration to debit cards. Consumers are abandoning their credit products because of the uncertainty -- you don't know when you go in to the point of sale to buy something if your card is going to be accepted. Perhaps the credit limit was reduced. Or perhaps the account was closed. Or perhaps you just forgot about some payments and you're close to the credit limit.

With debit cards, of course, you're using your own money. … Debit cards right now are growing almost three times as fast as credit card usage in the United States.

And perhaps that will lead to the next area where legislators may get involved in reining in some of those practices. Debit cards can be, under certain circumstances, even more expensive than credit cards.

Sen. Chris Dodd (D-Conn.) Chair, Senate Banking Committee

[The banks] say, not publicly, that in fact they're not really that worried about your legislation, the one that passed, because they can game it. They can figure out ways around it. It's got loopholes.

I don't know. We'll find out, obviously. I did as much as I could do on things like double-cycled billing and universal default and balances, and reaching back and raising rates. ...

And if the industry wants to play that way -- and I don't believe the responsible ones do -- there are the outliers basically who want to milk this system. Then we'll respond to it, either through the Federal Reserve in regulations or I'll do it legislatively. ...

[W]hy haven't we put [interest] rate caps in? Why haven't we had the fees under control?

... I want to be careful about predicting. But I think you may get to that because again, these are basically usurious rates -- literally what you could have been arrested for a few years ago.

And I think having some restraint on this -- and it needs to be done thoughtfully because obviously there are lenders that lend on a seven-day basis, on a yearly basis and so forth -- so it's fair.

Bill Strunk Banking consultant

… Is all this plastic money, these [debit] cards and the way they're handled going to have to change?

Probably. I think it's going to have to change, because you're talking about people's spending habits, and, just like credit cards, people just got carried away. I read stories where the average college graduate, I forget my numbers -- ... $13,000 in college debt loans and $7,000 in credit cards debt that he's piled up over the years.

They're going to have debt forever. So ... something is going to happen. Some things have gone out of kilter, but not necessarily just overdraft, it's all the spending side. The good news in the last year or two is that consumer savings is starting to grow for the first time in years and years.

Scott Talbott Vice president, Financial Services Roundtable

Scott Talbott

You believe the government should regulate some products, don't you?

I believe that the government should provide guidance and have some regulation of products. What we need now is not so much regulation of products, per se, but a modernization of the regulatory framework.

Two changes have to occur. One has been the management of risk, and … we're well down that path. The second change … is to modernize the regulatory structure, to close the gaps that allowed … this type of crisis to occur. …

I guess what's at stake in some ways is the issue of a free market and a fair market. And what the critics are saying is that we've lived with this ideology of a free market for at least the last three decades, and it resulted in this collapse. And now, we need to institute a fair market.

… I don't think it's free versus fair. It's free market versus government intervention, government control. That's really what we're talking about here.

And government control that you're talking about, for example, you object to this plain vanilla credit card or "plain vanilla" product that's being recommended in the legislation.

What we're objecting to is that you would set a plain vanilla product and dictate that companies must offer it. We think that will lead to an elimination of other products being offered because the lawyers will worry about lawsuits if we offer anything other than the plain vanilla product.

And so the companies will gravitate either toward the plain vanilla or go out of business altogether. … Also, … there's a requirement that says the CFPA [Consumer Financial Protection Agency] can require companies to offer a plain vanilla product. I can't think of any other industry where the government tells companies what products they have to sell.

The government tells companies all the time that they have to offer products that are safe, that won't explode, that won't poison you, that are good for you … from toasters to beef--

You're now shifting the government's role from setting out guidelines and principles to … dictating terms and products to consumers. I don't know if that's a world that we want to live in. There has to be a balance here. We understand that the regulation and protection of consumers is an important thing. We're all for it. … If we make a loan that doesn't get paid back, that hurts the institution. ...

But when the government starts dictating what products or the terms of those products have to be offered, then you've got a totally different government regime there. That's not a free market at all. That's not even fair market. What's fair for you might be different than what's fair for me. So how do you structure that concept down to the individual product level?

Rick Lake CEO, California Check Cashing

… Given the economic times, do we want to restrict consumer credit? That's already what you're seeing the credit card companies react to with a new set of rules going into effect in January. Consumers that I've talked to are having their credit lines cut and they're having their APRs increased. And this is what everyone predicted would happen.

When you limit the fees that can be charged everybody's going to pay more.

But has the decline in credit card lending resulted in an increase in your business?

We've not seen an increase in our business. And if you look to publicly traded companies in the industry, they haven't seen an increase, as a matter of fact, [they have seen] a decrease. I think it's really changed consumer behavior. I think consumers are looking at debt differently, given the collapse of everything around us, that they are less likely to be free with debt the way they used to be.

And I think it's really a change in consumer behavior that's affecting that as well as the unemployment levels in various states. With California at 11.6, that's impacted us a great deal. …

We're feeling the brunt just like every other retailer, when customers don't have paychecks to cash. It's going to impact us that way. Our payday loan business is basically flat as a result of the unemployment levels climbing.

Because you can't get a loan unless you've got a check, and you can't get a loan because you have to prove you have a paycheck coming in.

We need a source of income, correct. And, you know, people are falling off payrolls now. The other thing is it impacts our other businesses. I'm sure if you look at Western Union's financial reports you'll see that business in the Americas is hurting as a result of the economic downturn.

posted november 24, 2009

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