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March 22, 2007
Retailers, Credit Card Companies Quibble Over Footing the Bill
Taco Bell Joins Chains Trying 'Contactless' Payments
Coinstar Enters Financial Self-Service Market
Regulators Scrutinized in Mortgage Meltdown
Doubts Are Voiced on New Lending Law
Moody's to Change Sub-Prime Rating System
Lender Files for Bankruptcy
Bill for Mortgage Broker License Passes
Top Five Subprime Lenders Asked to Testify: Dodd
SEC Investigating Subprime Mortgage Companies
A Full-Court Press on Bad Loans, But Who Will Referee?
Banks Court a New Client: The Low-Income Earner
Senate OKs Restrictions on Title Loans
Borrowing From Home Equity to Buy a Car Can Be Costly
National Auto: GMAC's Non-GM Foot Soldier
The Washington Informer and the Data News Weekly Named 2007 DaimlerChrysler Financial Services/NNPA Foundation Entrepreneurial Award Winners
Congress Holds Hearings on Subprime Mortgage Foreclosures
AFSA Files Amicus Brief in NY Vehicle Leasing Suit
AFSA Conference Panel Shows Dealers Slow to Use Electronic Contracts
AFSA Submits "Consumer Reports" Comment Letter to FDIC
Retailers, Credit Card Companies Quibble Over Footing the Bill
Washington Post (03/20/07) P. A17; Birnbaum, Jeffrey H.
Lobbyists for retailers and credit card companies are arguing on Capitol Hill. Retailers are trying to persuade the federal government to force credit card companies to reduce the fees they charge merchants, but card issuers are accusing the merchants of seeking price controls. Steve Pfister of the National Retail Federation said card companies collect excessive hidden tax, and Rhonda Bentz of Visa USA responded by saying retailers want to shift the cost of doing business onto the consumer through price controls. Interchange fees, which average 1.9 percent of the purchase, have been the center of the debate, with merchants saying the high percentage all but erases their narrow profit margins. The argument on Capitol Hill seems largely for show as retailers have not yet proposed a specific bill to stop any unfair practices, and both sides have acknowledged they would prefer to reach an agreement through inter-corporate conversations rather than by legislation or regulation.
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Taco Bell Joins Chains Trying 'Contactless' Payments
Nation's Restaurant News (03/19/07)
One hundred Taco Bell restaurants will test contactless payment cards by the end of 2007. The move makes Taco Bell one of a growing number of quick-service brands to test or roll out the technology during the past two years. The test may lead to a rollout to about 1,300 company and franchised restaurants of the technology supporting MasterCard's PayPass cards and other devices, such as chip-embedded key-chain fobs. Church's Chicken recently ended a pilot test of contactless readers at three Texas restaurants because of "a lack of usage by our customer base," according to chief information officer Alan Stukalsky. Some officials of chains testing the payment technology have said it can increase throughput in drive-thrus and at front counters while generating the double-digit increase in average check often associated with consumers' switch from cash to credit or debit cards.
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Coinstar Enters Financial Self-Service Market
Self Service World (03/19/07) Lazaro, Marvin
Coinstar, the maker of kiosks that allow grocery store customers to trade in their coins for cash, is hoping to soon begin providing financial services to unbanked and underbanked consumers. The San Francisco-based company plans to roll out new kiosks that allow consumers to pay bills sometime in the middle of the year. In addition to providing bill pay services, the kiosks will be able to transmit and receive money transfers worldwide via Travelex Worldwide Money, a company that Coinstar acquired last May. Consumers will also be able to use the machines to reload Greendot prepaid MasterCards. The initial 200-unit rollout of the financial services kiosks is planned for locations similar to where the coin-counters are deployed, with no specific geographic placement in mind. However, if the test is successful, Coinstar plans to place the machines in shopping malls, specialty retail stores, transportation centers, and some financial institutions. Coinstar could also integrate the functions of the financial services kiosks with those of the coin-counting machines if the test goes well.
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Regulators Scrutinized in Mortgage Meltdown
Wall Street Journal (03/22/07) P. A1; Ip, Greg; Paletta, Damian
Federal banking regulators will be required to testify before the Senate Banking Committee today and before the House Financial Services Committee next week about how they may have played a role in the subprime mortgage market's recent downturn. Some observers believe federal regulators did not do enough to prevent lax underwriting that has sparked increases in subprime defaults; but others note that a majority of subprime loans are written by mortgage brokers and lenders governed by states, which some insist do not to have the financial resources for effective enforcement. Others, criticizing the fact that lenders must contend with varying federal and state laws, are pushing for a national lending standard for all mortgage lenders. However, the mortgage industry and the federal government caution against too much regulation, which they say could hamper the development of innovative mortgage products that help boost homeownership rates among lower-income households. According to one expert, "Market discipline in this industry is swift, can be severe and is more effective in changing lending practices than any potential changes in regulation."
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Doubts Are Voiced on New Lending Law
Chicago Tribune (03/22/07) Umberger, Mary; Long, Ray
The mortgage industry expressed opposition to a revised predatory lending law announced by Illinois Gov. Rod Blagojevich on Wednesday, saying it would affect thousands more home buyers than the initial law--including many who probably do not need financial counseling--and could force lenders to exit Cook County. "You're going to have doctors and lawyers who are going to be affected by it," warned Illinois Association of Mortgage Brokers President Bill McNamee. The proposed lending law would require first-time buyers and others in Cook County who take out certain mortgages, including interest-only and some adjustable-rate loans, to complete financial counseling. The earlier version of the law came under fire because it restricted the mandatory financial counseling to 10 predominantly minority neighborhoods in Chicago and because it was viewed as having a negative impact on the real estate market.
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Moody's to Change Sub-Prime Rating System
Los Angeles Times (03/22/07)
Moody's Investors Service has decided to alter the way it rates bonds backed by second-lien subprime mortgages, with details of the new method to be published by the end of this month. Second-lien home loans come behind initial mortgages in priority in the event of foreclosure, meaning that they carry more risk and are more closely linked to property values. After loose lending standards resulted in an increase in the number of bad loans, everyone from investors to ratings firms to elected officials started to look twice at the way mortgage-bond risk is calculated. "People are going to understand risk differently," noted Nomura Securities analyst Mark Adelson. "Opinions are influenced a lot by the current conditions."
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Lender Files for Bankruptcy
Orange County Register (CA) (03/21/07) Padilla, Mathew; Milbourn, Mary Ann
Irvine, Calif.-based subprime mortgage lender People's Choice Home Loan has filed for bankruptcy. The unit of People's Choice Financial Corp.--which has more than $100 million in both debt and assets, according to its filing--held $3.7 billion in loans as investments through last March and made $5.7 billion in loans in 2005. GMAC has a $17.4 million claim and Bear Stearns unit EMC Mortgage has a $15.3 million claim against People's Choice Home Loan, among other big lenders and investment banks. Meanwhile, ResMae Mortgage Corp.--a subprime mortgage lender in Brea that filed for bankruptcy in February--has announced that it has eliminated more than 100 positions.
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Bill for Mortgage Broker License Passes
Denver Post (03/20/07) Svaldi, Aldo
Legislators in Colorado, which has been plagued by homeowner foreclosures, on Monday pushed through a measure that would require mortgage brokers in the state to be licensed. The bill--backed by bankers, credit unions, title agents, and Realtors--was approved by the Senate's State, Veterans & Military Affairs Committee, which has forwarded it to the Senate Appropriations Committee for its consideration. The legislation also won the eventual support of Attorney General John Suthers, whom deputy AG Jan Zavislan says "is convinced there is a place in Colorado for the kind of education requirements, testing and minimum competency that this type of licensure will allow." The Colorado Mortgage Lenders Association, however, maintains that there is no evidence that licensing curtails fraud; moreover, it warns that requiring brokers to be licensed could make loans more difficult to obtain while giving banks and other financial institutions a competitive edge over independent lenders.
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Top Five Subprime Lenders Asked to Testify: Dodd
Canada.com (03/20/07) Poirier, John
Senate Banking Committee Chairman Christopher Dodd (D-Conn.) said executives from five subprime mortgage heavyweights--New Century Mortgage Corp., Countrywide Financial Corp., HSBC Holdings Plc, First Franklin Mortgage, and WMC Mortgage--have been invited to testify at a hearing on Capitol Hill this Thursday. The hearing, which will be followed by a second one by the House Financial Services Committee next week, affords an opportunity for subprime players to explain their lending practices. "At the very least," Dodd said, "homeowners facing foreclosure deserve to know what factors contributed to their dire financial straits, and what steps are needed to fix this pressing problem." Also asked to speak at this week's hearing were officials representing the Federal Reserve, the Federal Deposit Insurance Corp., the Office of the Comptroller, and the Conference of State Bank Supervisors.
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SEC Investigating Subprime Mortgage Companies
Northwest Indiana News (03/20/07) Gordon, Marcy
Securities and Exchange Commission enforcement director Linda Thomsen announced that the agency is undertaking a broad probe of subprime mortgage lenders, although she would not name any of the companies under investigation. "As with anything, we're going to look at all the actors and their roles," said Thomsen. However, it is public knowledge that the agency is involved in an accounting probe of the subprime lender New Century Financial. In related news, HUD Secretary Alphonso Jackson says his agency will take disciplinary action against subprime lenders found guilty of discrimination, but the names of these lenders have not been released.
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A Full-Court Press on Bad Loans, But Who Will Referee?
Washington Post (03/17/07) P. F1; Guttentag, Jack
Consumer groups favor a mortgage suitability standard that would hold lenders accountable for allowing borrowers to accept unsuitable mortgages. While a similar rule proved effective in the securities industry, the home mortgage market is more complex, with multiple problems in need of a variety of remedies. The home mortgage problem corresponding most closely to the securities market's scenario--brokers selling overly risky securities to naïve investors--involves bad mortgage selection. Option adjustable-rate mortgages (ARM) let the borrower choose the monthly payment amount, leading to increased debt and rising interest rates; option ARMs are typically targeted at borrowers who desire low payments, but who are often not prepared for the risk, according to Jack Guttentag, a professor of finance emeritus at the Wharton School. In the past two years, the number of such loans has grown astronomically. However, expecting loan providers to assess suitability is unreasonable, considering they are in the loan-selling business. Securities brokers need to maintain long-term customer satisfaction to retain clients; in contrast, home mortgage loan providers have a shorter-term relationship. In addition, the variety and intricacy of mortgage borrowers' objectives renders it very difficult to calculate risk.
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Banks Court a New Client: The Low-Income Earner
Wall Street Journal (03/16/07) P. A1; Carrns, Ann
Around 14 percent of American income earners, or 28 million individuals, do not have bank accounts. A large number of this demographic is made of up recent immigrants and people with low incomes. An additional 22 percent, or 45 million individuals, including people with bad credit history, only use banks occasionally. The unbanked and underbanked spend around $11 billion in fees for 324 million "alternative" economic transactions per year at check-cashing outlets, money-wire businesses, or other companies. Banks are interested in obtaining a piece of this market: Bank of America Corp. is advertising wire transfers to immigrants remitting money overseas, while JPMorgan Chase launched in 2006 a service permitting low-income tax filers to get tax refunds on a debit card. In addition, check cashing is a way banks are garnering new fees, with the objective of selling customers on checking accounts at a later date. California's Union Bank has provided check cashing for 10 years, and states between 25 percent and 30 percent of those customers eventually move to standard bank products. Meanwhile, KeyBank wants to broaden its check cashing program and generate $16 million in fees during the coming three years, and has started providing a direct-deposit account that permits customers to get their paycheck through a debit card.
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Senate OKs Restrictions on Title Loans
Marshalltown Times Republican (03/20/07)
The Iowa Senate has approved new limits on car title loans, a plan supporters claim could shield borrowers from steep interest rates and eventual automobile seizure. The initiative, which now proceeds to Gov. Chet Culver, would restrict yearly interest rates to 21 percent on car title loans, down from the present 300 percent. In passing the bill, the Iowa Senate rejected cautions from industry authorities that the limits would force the industry to leave Iowa. Sen. Joe Bolkcom (D-Iowa City) also disagreed with contentions that the bill would terminate the sole available credit alternative for the working poor. Sen. Matt McCoy (D-Des Moines) attempted to lessen the measure by permitting the steeper interest rates but mandating lenders post a notice informing borrowers about the risks. He told legislators that they would not be shutting down an industry, since car title loans can be obtained online.
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Borrowing From Home Equity to Buy a Car Can Be Costly
Hartford Courant (CT) (03/18/07) Singletary, Michelle
Nearly a quarter of homeowners used a home equity line of credit to purchase a vehicle last year, according to figures from Synergistics Research of Atlanta, while about 8 percent took a second mortgage out just to by a vehicle. The trend increased over the past 10 years due to a drop in interest rates and climbing property values. But whether the strategy is a sound financial decision is up for debate. "I issue a note of caution on this," says Don Taylor, a columnist for Bankrate.com. "If you don't have the discipline to do more than the minimum payments on these loans, then this is not a good idea." If the loan is not paid early, any savings on taxes would be erased by the interest due. Situations could even arise where payments on cars are being made well after the car is gotten rid of.
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National Auto: GMAC's Non-GM Foot Soldier
BankNet 360 (03/16/07)
National Auto Finance has a new purpose and a new place at the "big lender's table." Formerly a tool used by GMAC to appease General Motors dealerships, National Auto is now part of GMAC's plans to utilize its first-place market share standing, according to information from AutoCount USA. These operational changes stem from the purchase of GMAC's majority stake by a group of investors, rendering GMAC newly autonomous.
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The Washington Informer and the Data News Weekly Named 2007 DaimlerChrysler Financial Services/NNPA Foundation Entrepreneurial Award Winners
DaimlerChrysler Financial Services Americas News Release (03/16/07)
A campaign to instruct and enable African Americans to oversee their economic future and the re-introduction of a publication almost destroyed by Hurricane Katrina received leading honors in this year's DaimlerChrysler Foundation Services/NNPA Foundation Entrepreneurial Award competition. The winners--The Washington Informer of Washington, D.C., and Data News Weekly of Atlanta--were announced on March 15 at the National Newspaper Publishers Foundation's yearly NewsMaker of the Year Dinner held in Washington. Currently in its third year, the award encourages Black Press of America members to see beyond typical revenue streams, such as advertising, and to devise innovative ways to prosper in the current media atmosphere. DaimlerChrysler Financial Services originally promised $30,000 over three years to create this award and raised its commitment to $35,000 in 2006 with the formation of an "honorable mention" award that offers a cash prize of $2,500. The Washington Informer received the grand prize for its yearly "Financial Literacy Supermarket" to inform its readers about ways to efficiently manage debt and money while helping them to make smart financial decisions which will benefit them all their lives. The Washington Informer's publisher, Denise Rolark Barnes, got a $10,000 cash award, and the use for one week of a Chrysler Group-brand vehicle. Data News Weekly publisher Terry B. Jones received an Honorable Mention, which consisted of a $2,500 cash prize and a plaque.
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Congress Holds Hearings on Subprime Mortgage Foreclosures
Congress jumped into the subprime mortgage fray with both feet this week, holding back-to-back hearings in the House and Senate. The hearings followed a steep drop in the stock market, said by some to be driven by the rise in subprime lending foreclosure rates and a proposal from federal banking regulators to tighten underwriting standards. In the House, Representative Dennis Kucinich (D-OH) held a hearing on the impact the rise in the subprime mortgages foreclosure rates is having on inner city neighborhoods. Meanwhile, Senator Chris Dodd (D-CN), Chair of the Senate Banking Committee, made good on his promise to bring federal regulators before his committee to explain why they haven't moved more aggressively to oversee subprime lenders. In addition, the committee heard from a panel of industry executives and community activists.
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AFSA Files Amicus Brief in NY Vehicle Leasing Suit
On March 9, AFSA filed an amicus brief on behalf of the defendants in the Graham v. Dunkley and NILT, INC. (Nissan) case. The suit is currently under appeal in the New York Supreme Court Appellate Division - Second Department. AFSA believes that the court should uphold the federal Transportation Equity Act of 2005, which intended to preempt vicarious liability for the negligent acts of the driver. Before that law, it was possible, under New York state law, for someone involved in an accident to sue not only the person who caused the accident, but also the rental car and/or the leasing company. The court is being asked to determine whether the federal law does preempt the state law. The brief is available to AFSA members online under the Legal > Litigation section at www.afsaonline.org.
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AFSA Conference Panel Shows Dealers Slow to Use Electronic Contracts
A panel discussion at the recent AFSA Vehicle Finance Conference showed that electronic contracting has not gained wide acceptance among auto dealerships, even though it could cut the time that dealers wait to get paid for sales.
However, financial institutions are moving toward e-contracting. "We believe it's going to be the future," said Gary Lorenz, president of Wells Fargo Auto Finance. Still, Tim Russi, president of Bank of America Dealer Financial Services asked, "When is it going to take off?" The biggest obstacles, according to the panel, include 1) dealers and employees slow to adopt new technology; 2) dealerships must conduct constant training because of high employee turnover; and 3) e-contracting programs are too spread out to make a difference in a region.
Other panel members included John Haines, CEO of HSBC Auto Finance; and Steve Lambert, CEO of Nissan Motor Acceptance Corporation.
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AFSA Submits "Consumer Reports" Comment Letter to FDIC
On March 8, AFSA submitted a comment letter to the Federal Trade Commission (FTC). It came in response to the FTC notice of a second pilot study to aid the FTC in conducting a study of the accuracy and completeness of consumer reports, pursuant to Section 319 of the Fair and Accurate Credit Transactions Act of 2003. The letter can be accessed online by AFSA members under the Legal > Regulatory section of the AFSA Web site, www.afsaonline.org.
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Abstract News © Copyright 2007 INFORMATION INC.
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In This Issue:
AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. For more information,
please contact newsbriefs@afsamail.org.
AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The Association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis. The American Financial Services Association has provided services to its members for over ninety years. The Association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.
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