Posted on 03/10/2009 8:25:10 PM PDT by rabscuttle385
Prominent banking analyst Meredith Whitney warned that "credit cards are the next credit crunch," as contracting credit lines will lower consumer spending and hurt the U.S. economy.
"Few doubt the importance of consumer spending to the U.S. economy and its multiplier effect on the global economy, but what is underappreciated is the role of credit-card availability in that spending," Whitney wrote in the Wall Street Journal.
She said though credit was extended "too freely over the past 15 years" and rationalization of lending is unavoidable, what needs to be avoided was "taking credit away from people who have the ability to pay their bills."
Whitney said available lines were reduced by nearly $500 billion in the fourth quarter of 2008 alone, and she estimates over $2 trillion of credit-card lines will be cut within 2009, and $2.7 trillion by the end of 2010.
"Inevitably, credit lines will continue to be reduced across the system, but the velocity at which it is already occurring and will continue to occur will result in unintended consequences for consumer confidence, spending and the overall economy," Whitney said.
Currently, there is roughly $5 trillion in credit-card lines outstanding in the U.S., and a little more than $800 billion is currently drawn upon, she said.
"Lenders, regulators and politicians need to show thoughtful leadership now on this issue in order to derail what I believe will be at least a 57 percent contraction in credit-card lines," she said.
(Excerpt) Read more at reuters.com ...
You know what’s REALLY funny? The first two stimulus packages could have paid off all the credit cards AND all the late mortgages. If we pass another one we could pay off all the auto loans.
I used my BofA card for a gun purchase 5 weeks ago and they dropped my score by 22 points. I don’t carry a balance.
That came to mind while reading this...
Dangerous cards that we should keep under lock and key 24/7.
Surprising how many people believed him, similar to today.
So, I should max out my credit cards … Obama will bail me out?
It was pretty interesting to hear her say that, for 45% of people, credit cards are part of their everyday spending. She said, for those 45%, the loss of a credit line “is a pay cut”.
Wow! 45% of people are living on credit cards. Brutal.
Debts is being destroyed so fast now it is incredible. This is good for the long term but is going to be quite painful in the short term. The depression countdown goes on and on...
Thank God I paid those nasty things off. I was in debt eight years ago but slowly paid them off happily. I think people are in big trouble with credit cards...not FREEPERS though. lol.
I think Drudge linked that 90% of the mortgages could have been paid. The bizarro world will end up killing me early.
Yep, sounds a bit paranoid until we actually get into that situation...
I handle some Chapter 11 bankruptcies which (occasionally) convert to Chapter 7, which brings you into contact with the typical debtor in bankruptcy. When you get to see what they are filing in terms of liquidating unsecured (credit card) debt, it is mind boggling to see the credit lines that were alloted to these folks. I think that there is an increased Federal regulatory role in this area to the extent of requiring credit card lenders to disclose how much unsecured debt they wrote off in a prior period (for a particular credit product). If the average credit card user realized how much of their APR was essentially compensating for these foolish losses, they’d look at the institutions (BOA,Chase, etc.) in an entirely different fashion.
Regulators Adopt New Credit Card Rules
Thursday, December 18, 2008
Adam Samson, FOXBusiness
A sweeping reform of credit card rules aimed at helping consumers hit by confusing, and sometimes deceptive, practices by creditors is on the path to regulator approval.
The Office of Thrift Supervision and The Federal Reserve said Thursday they approved of the new rules.
"The revised rules represent the most comprehensive and sweeping reforms ever adopted by the Board for credit card accounts," said Federal Reserve Chairman Ben S. Bernanke. "These protections will allow consumers to access credit on terms that are fair and more easily understood."
Creditors will have to disclose interest rates when accounts are opened, and will be prohibited from hiking rates unless they are "expressly permitted," according to a release by The Office of Thrift Supervision. They will, however, be allowed to adjust rates after the account has been open with 45-day notice.
Industry participants say the new regulations could dramatically alter the credit card market.
The new regulations "are unprecedented in their scope and signal the beginning of a new market structure for credit cards," said American Banker Association President Edward Yingling.
Yinging, however, notes these changes can potentially increase borrowing costs for consumers, and even cut credit availability.
Creditors are also permitted to charge introductory rates that change after a certain period provided such stipulations are disclosed when the account is opened. Interest rates can also be increased on accounts that are over 30 days delinquent, the release said. These new disclosure rules will give consumers "the ability to easily compare the terms of different credit cards and make more informed decisions about their personal finances," according to Yingling.
The rules, which are expected to go into effect on July 1, 2010, will also require customers to receive a “reasonable amount of time to make their credit card payments,” The Office of Thrift Supervision said. Although exact figures aren't provided, The Office of Thrift Supervision says 21-days would be considered a reasonable amount of time. Excessive lump-sum-fees on high-risk clients will also be curbed.
Billing regulations, such as banning so-called double-cycle billing and increased requirements clients' payment allocation will also initiated. ...more
http://www.foxbusiness.com/story/markets/economy/regulators-adopt-new-credit-card-rules/
Continued...
Highlights of Final Rules Regarding Credit Card Accounts
Regulation AA (Unfair Acts or Practices) Final Rule
The final rule amends Regulation AA to prohibit unfair or deceptive acts or practices by banks in connection with credit card accounts. The effective date for the Regulation AA amendments is July 1, 2010.
Time to Make Payments
The final rule prohibits banks from treating a payment as late for any purpose unless the bank provides a reasonable amount of time for the consumer to make that payment. The rule provides a safe harbor for banks that send periodic statements at least 21 days prior to the payment due date.
Allocation of Payments
When different annual percentage rates (APRs) apply to different balances on a credit card account (for example, purchases, balance transfers, cash advances), the final rule requires banks to allocate payments exceeding the minimum payment to the balance with the highest rate first or pro rata among all of the balances.
Increasing Interest Rates
The final rule requires banks to disclose at account opening all interest rates that will apply to the account and prohibits increases in those rates, except in certain circumstances. First, if a rate disclosed at account opening expires after a specified period of time, banks may apply an increased rate that was also disclosed at account opening. Second, banks may increase a rate due to the operation of an index (in other words, the rate is a variable rate). Third, after the first year, banks may increase a rate for new transactions only after complying with the 45-day advance notice requirement in Regulation Z. Fourth, banks may increase a rate if the minimum payment is received more than 30 days after the due date.
Two-Cycle Billing
The final rule prohibits banks from calculating interest using a method referred to as “two-cycle billing.” Under this method, when a consumer pays the entire account balance one month, but does not do so the following month, the bank calculates interest for the second month using the account balance for days in the previous billing cycle as well as the current cycle.
Financing of Security Deposits and Fees
The final rule addresses concerns regarding subprime credit cards with high fees and low credit limits. Banks would be prohibited from financing security deposits and fees for credit availability (such as account-opening fees or membership fees) if charges assessed during the first 12 months would exceed 50 percent of the initial credit limit. The rule also limits the security deposits and fees charged at account opening to 25 percent of the initial credit limit and requires any additional amounts (up to 50 percent) to be spread evenly over at least the next five billing cycles.
Regulation Z (Truth in Lending) Final Rule
The final rule amends Regulation Z to improve the effectiveness of the disclosures consumers receive in connection with credit card accounts and other revolving (non home-secured) credit plans. The effective date for the Regulation Z amendments is July 1, 2010.
Applications and solicitations
The final rule contains format and content changes to make the credit and charge card application and solicitation disclosures more meaningful and easier for consumers to use. These disclosures are provided in the form of a table that summarizes the key account terms.
The changes include:
Format Revisions
New format requirements for the summary table include rules regarding type size, the use of boldface type for certain key terms, and the placement of information.
Content Revisions
Creditors must disclose the duration that penalty rates may be in effect, simplify disclosures about variable rates and revise disclosures regarding when a grace period is offered on purchases or when no grace period is offered.
Account-opening disclosures
The final rule enhances the cost disclosures provided at account opening to make the information more conspicuous and easier to read. Certain key terms must be disclosed in a summary table at account opening, which is substantially similar to the table required for credit and charge card applications and solicitations.
Periodic statement disclosures
The final rule contains revisions to make disclosures on periodic statements more understandable, primarily by making changes to the format requirements, such as by grouping fees and interest charges together.
The changes include:
Interest Charges and Fees Interest charges and fees must be grouped separately, with a monthly total for each. Interest charges must be itemized according to the type of transaction (such as interest charged on purchases, and interest charged on cash advances). Separate year-to-date totals for fees and interest charges are also required.
Effective APR
The requirement to disclose an “effective annual percentage rate” is eliminated due to the lack of consumer understanding of this term. New requirements to disclose interest and fee totals for the month and year-to-date should more effectively inform consumers of the total cost of credit.
Minimum Payment Disclosure
The effect of making only the minimum required payment on the time to repay balances must be disclosed, as required by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.
Changes in consumer’s interest rate and other account terms
The final rule expands the circumstances under which consumers receive written notice of changes in the account terms (such as, an increase in the interest rate), and increases the amount of time these notices must be sent before the change becomes effective.
The changes include:
Increase in Advance Notice for Changes in Terms
The final rule increases the amount of advance notice before a changed term can be imposed from 15 to 45 days to better allow consumers to obtain alternative financing or change their account usage.
Requiring Prior Notice for Penalty Rate Increases
Creditors must provide 45 days’ prior notice before the creditor increases a rate due to the consumer’s delinquency or default or as a penalty.
Summary Table
When a change-in-terms or penalty-rate notice accompanies a periodic statement, the final rule requires creditors to provide a tabular disclosure on the front side of the periodic statement showing the key terms being changed.
Additional protections
The final rule includes the following additional protections for consumers:
“Fixed” Rates
Advertisements may refer to a rate as “fixed” only if a time period is specified for which the rate is fixed and the rate will not increase for any reason during that time, or if a time period is not specified, if the rate will not increase for any reason while the plan is open.
Cut-off Times and Due Dates for Mailed Payments
Creditors must set reasonable cut-off hours for mailed payments to be considered timely on the due date. The final rule deems 5 p.m. to be a reasonable time. When mailed payments are not accepted on the due date, such as on weekends or holidays, creditors must consider a payment received on the next business day as timely.
Highlights of Rules Regarding Overdraft Services
Regulation DD (Truth in Savings) Final Rule
The final rule amends Regulation DD to address depository institutions’ disclosure practices related to overdrafts. The effective date for the Regulation DD amendments is January 1, 2010.
Disclosure of Aggregate Overdraft Fees
The final rule extends to all institutions the requirement to disclose on periodic statements the aggregate dollar amounts charged for overdraft fees and for returned item fees (for the statement period and the year-to-date). Currently, only institutions that promote or advertise the payment of overdrafts must disclose aggregate amounts.
Disclosure of Balance Information
The final rule requires institutions that provide account balance information through an automated system to provide a balance that does not include additional funds that may be made available to cover overdrafts.
Regulation E (Electronic Fund Transfers) Proposed Rule
The proposal amends Regulation E to provide consumers certain protections relating to the assessment of overdraft fees. The proposal replaces previously proposed amendments under Regulations AA and DD addressing overdraft services.
Consumer Choice Regarding Overdraft Services
The proposal solicits comment on two approaches to providing consumers a choice regarding the payment of ATM and one-time debit card overdrafts by their financial institution.
Opt-out
Under one approach, an institution would be prohibited from imposing an overdraft fee unless the consumer is given an initial notice and a reasonable opportunity to opt out of the institution’s overdraft service, and the consumer does not opt out.
Opt-in
The second approach would prohibit an institution from imposing an overdraft fee for paying such overdrafts unless the consumer affirmatively consents (or opts in) to the institution’s overdraft service.
Debit Holds
The proposal would prohibit institutions from imposing an overdraft fee when the account is overdrawn because of a hold placed on funds in the consumer’s account that exceeds the actual transaction amount. The proposed rule is limited to debit card transactions in which the actual transaction amount generally can be determined within a short period of time after the transaction is authorized (for example, transactions at gas stations and restaurants).
http://www.foxbusiness.com/story/markets/economy/regulators-adopt-new-credit-card-rules/
Anyone that carries a balance should have their card revoked!
I think that is part of this whole thing, the gas crunch made people really look at their position and they started staying home more, spending less and paying off debt.
They had to make choices and with many the choices they made will change their whole lifestyle.
A lot of those people with the cards all charged to the max had to cut back because there was no more room for debt, no matter how irresponible they were.
I concur.
Then the bubble to burst will be student loans. Plenty of grads won’t be able to find work in this economy when unemployment hits double-digits nationally. And, one can’t escape student loans via bankruptcy - even those who do find work may have their wages attached. And grads with parents who have lost jobs will not be able to depend on family. Meanwhile, Bambi is encouraging everyone to go to college.
I'm not sure the author got the story right, though (this usually happens as journalists are not business people and tend to have their heads stuffed full of liberal crap)
Anyway... the article says only $800 billion of credit is drawn upon. This means GDP was increased by an aggregate of $800 over some period of time. Its done. Over. The money was spent. The stimulus happened and has ended. So, if they cut the aggregate credit lines from $5 Trillion to $2.5 trillion, it can only affect future GDP if people spend above the current &800 billion level by adding new credit card debt. And, I suspect, that future spending is unlikely because people are tapped out at the $800 billion level.
Credit cards have been like a pay raise since the 1980s and people spent and held balances until the balances started to squeeze monthly household cash flow. A percent of many people's income is allocated to minimum monthly payments (not a good idea but, its reality). Once this threshold is reached (like now) credit card spending slows because people get scared as stop charging as much. This fall off in spending puts the breaks on GDP growth.
I postulate consumer spending is about maxed out, given flat pay increases, maximum credit card and consumer debt monthly payments and fear of unemployment. People are not going to be spending for a while and this will have a negative effect on GDP for a long time. So, we are entering an economy driven less by consumer binge spending and, therefore, a smaller economy.
Obama and the Democrats are trying to hold up GDP by replacing consumer spending with government spending. Any money taken from taxpayers will have a zero effect (from one pocket to the other). So, the only stimulus that will occur is the spending of borrowed money from foreigners. And, that, folks, is where it gets scary...
I can’t read DU. Seriously. I can’t. I am a gun owner. I have a very real expectation that if I spent an hour on DU I would find myself putting lip-lock on one of my pistols and pulling the trigger before I came to my senses that the entire world is neither that idiotic or that evil.
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