AFSA Newsbriefs

May 24, 2007

Fed Plans Credit-Card Changes
AmEx Plans Mortgage Rewards
Retailers Try to Play Their Cards Right

State Law Urged to Reduce Home Foreclosures
House Backs Fannie, Freddie Bill, But Obstacles Loom in Senate
Bad Seed
Fed Chairman Warns of More Foreclosures

California, Texas Mull Outreach to Unbanked
Study Now--and Pay and Pay and Pay Later
Bill Calls for Public Schools to Teach Personal Finance
Finance Firms Hope to Reach 'Unbanked' Masses

ILC Reg, Ownership Bill Passes
When a $38,000 Car Costs $44,000
Chrysler: No Plans to Merge Finance Arm With GMAC
States Move Warily on Real ID

GMAC Financial Services and Habitat for Humanity Join Forces to Provide Affordable Housing

ILC "Legislation in Search of a Problem" Passes House
New Senate Bill to Prevent Foreclosures Introduced
Democrats' Bill Would Prohibit Many Credit Card Practices
Regulation Z Amendments Now Open for Comment

Fed Plans Credit-Card Changes
Wall Street Journal (05/24/07) P. D6; Conkey, Christopher

The Federal Reserve yesterday proposed new rules that aim to improve the disclosure of credit-card terms to consumers. Under the new rules, credit-card solicitations would have to prominently display information about penalties and payment-allocation methods, information that credit-card issuers currently try to play down. In addition, periodic statements would be required to contain a warning on the consequences of paying only the minimum payment. Issuers would also be required to give cardholders 45 days' notice before increasing an interest rate because of a delinquency or default. Though industry and consumer groups both expressed general support for the new rules, both sides will try to make changes to the final rules during the 120-day comment period. The Fed is not expected to implement the new rules before next year.
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AmEx Plans Mortgage Rewards
Wall Street Journal (05/23/07) P. D4; Wei, Lingling

American Express Co., which already allows card clients to use their accounts to charge monthly rent or make down payments on upscale condominiums, is expanding its reach into the real estate market by giving consumers the option to also pay their mortgage via plastic. Enrollees in the program will incur a one-time fee of $395 from the participating mortgage lender to offset costs related to account management and processing, thus addressing one of the main issues that until now have made mortgage bills ineligible for rewards points. A cardholder paying a $2,500 house note each month would accumulate 30,000 card points per year to be redeemed for airline or hotel services, other perks, and even cash. American Home Mortgage Investment Corp. and IndyMac Bancorp Inc.--two of the nation's top 10 originators of residential loans--are the first two lenders to adopt the program, which American Express is targeting toward creditworthy borrowers carrying prime mortgages.
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Retailers Try to Play Their Cards Right
Financial Times (05/22/07) P. 12; Birchall, Jonathan

The U.S. prepaid gift card market after a decade of rapid growth has matured, and the evidence is that gift card issuers are starting to respond to competition by offering extras such as recorded audio messages embedded in the gift card. U.K. gift card maker Serious, which is working with Best Buy and Circuit City, makes gift cards that also function as DVDs with music, games, and video stored on them. The U.S. prepaid gift-card market totaled approximately $80 billion in 2006, of which roughly $29 billion was sold by U.S. retail stores and most of the rest sold by banks, gas stations, and restaurants, according to the Tower Group. Every major U.S. retailer has a gift card system. "Satisfaction levels are so high ... you walk in and it works," says Providence College marketing professor. "Once people receive one as a gift, they end up buying three next year." In contrast, the U.K. gift card market is slower, and U.K. retailer HMV still uses paper gift coupons. However, the U.K.'s market potential has fostered a "land grab" by U.S. firms that operate "gift card malls," display units that offer gift cards from a variety of firms. Meanwhile, the Tower Group says the unredeemed portion of gift cards, or "breakage," reached $8 billion last year. Last year Home Depot and Best Buy recorded revenue gains of $33 million and $27 million, respectively, from unredeemed gift cards, while gift cards that are sold but remain unused amount to interest-free loans to larger retailers until the amounts are redeemed.
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State Law Urged to Reduce Home Foreclosures
Times Union (05/24/07) Anderson, Eric

A coalition of community and civic groups in New York are mobilizing to propose legislation requiring lenders to fully assess the ability of borrowers to repay their mortgages. The move by New Yorkers for Responsible Lending comes as the state Assembly prepares to hold a series of hearings on the issue of reducing home foreclosures, with the first session scheduled for May 29. The group's proposal also would force mortgage brokers to act in the best interest of borrowers and would ban terms such as balloon payments, but some housing advocates also want a freeze on foreclosures. "We are seeing a range of abusive and fraudulent mortgage-lending practices, from rampant broker fraud to lenders making unaffordable, high-cost mortgages that virtually guarantee homeowners will lose their homes," says Meghan Faux, co-director of the Foreclosure Prevention Project at South Brooklyn Legal Services.
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House Backs Fannie, Freddie Bill, But Obstacles Loom in Senate
Wall Street Journal (05/23/07) P. A12; Paletta, Damian

The House of Representatives has passed a bill to toughen regulation of Fannie Mae and Freddie Mac by a 313-104 vote, but the Treasury Department has taken issue with an amendment that would limit the ability of the new regulator to control the size of the government-sponsored enterprises' holdings of mortgages and related securities. Reps. Melissa Bean (D-Ill.) and Randy Neugebauer (R-Texas), sponsors of the amendment, are more focused on having the new regulator oversee the safety and soundness of the mortgage holdings of Fannie Mae and Freddie Mac than the risks those assets may pose to the broader economy. Differences over how to regulate the companies remain a factor in the Senate, but Democrats and Republicans are committed to passing a bill this year on an issue that has been debated over the past four years. Implementation of the bill is a concern for Freddie Mac, though, with company spokesman Doug Duvall adding, "especially the possibility of capital requirements not tied to the actual risks of our assets, and business activity regulation that constrains our ability to respond quickly to a changing marketplace."
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Bad Seed
National Review (05/22/07)

A bill currently before the House Financial Services Committee includes a provision to create an "affordable-housing fund" to be financed by mortgage giants Fannie Mae and Freddie Mac. While the purpose of the provision is ostensibly to require more accountability of the mortgage companies by requiring them to help poorer potential homeowners, the fact that the measure would let the fund be administered by political groups such as the Association of Community Organizations for Reform Now, which has faced charges of voter-registration fraud and improper political activity with the use of outside funds, means that allowing the fund to be created will likely benefit only the groups themselves. Critics of the proposal say that enforcement efforts to ensure all the funds are used for their intended purpose and not for political goals would be difficult, if not impossible. A similar proposal passed the House in a 2005 bill, but was defeated in the Senate.
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Fed Chairman Warns of More Foreclosures
Washington Post (05/18/07) P. D2; Henderson, Nell

While rising adjustable-mortgage payments will further boost foreclosure rates this year, Federal Reserve Chairman Ben Bernanke does not expect the national economy to take a hit as a result. Bernanke said in a recent speech in Chicago that foreclosures presently are troubling primarily the subprime mortgage market, adding that most homeowners have built up plenty of equity over the last few years to provide a financial cushion; the healthy job market and income gains also have helped most borrowers make timely mortgage payments. Bernanke believes lessons learned from the subprime turmoil should be used by the central bank, other regulators, and federal lawmakers to possibly impose new regulations to curtail predatory lending. However, he insisted, "We do not want to curtail responsible subprime lending or close off refinancing options that would be beneficial to borrowers."
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California, Texas Mull Outreach to Unbanked
American Banker Online (05/24/07) Kuehner-Hebert, Katie

Legislators in California and Texas have proposed bills that would offer banks incentives to establish branches in low-income neighborhoods that lack banking services. Banks opening branches in these "bank development districts" would qualify to receive state and city deposits as well as credit from the federal Community Reinvestment Act. To be accepted into the program, California banks would have to prove that they would provide services such as financial literacy programs, microloans, and "second chance" checking accounts. The Texas bill is similar, though participating banks in Texas would also be eligible for property tax breaks. The program is modeled on a nine-year-old program in New York, which, after a slow start, took off once the state Banking Department selected and identified the development districts. In California, over a quarter of adults are "unbanked," according to Olivia Calderon, a New America Foundation policy representative, and those outside the "financial mainstream" need banks to help them keep their money safe.
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Study Now--and Pay and Pay and Pay Later
BusinessWeek (05/21/07) No. 4035, P. 66; Elgin, Ben

Although many low-income workers believe that going back to school can improve their earning potential, private student loans often make it the case that a better education simply traps them into a lifetime of debt. Such loans often come recommended by the schools students enroll in, although the schools say that they are not always aware of the exact terms of the loan. However, students often learn after they start paying the loans that interest rates are higher than expected, and that lenders obscure payment terms in the beginning of the loan process, with the terms only becoming clear after graduation or later. The problems can be compounded if the degree students earn does not give them as much of a boost in income as they had hoped. Lenders such as SLM Corp. (commonly known as Sallie Mae) say that students need to be careful to make sure that they understand the terms of the loan before they sign contracts.
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Bill Calls for Public Schools to Teach Personal Finance
Banker & Tradesman (05/21/07) Wyeth, Amy

Massachusetts state Rep. Stephen LeDuc (D-Marlborough) is sponsoring House Bill 498, An Act Establishing a Financial Literacy Curriculum, to help educate high-school and college students about piling up debt and hurting their credit. LeDuc's bill has acquired several supporters, as well as the backing of the Massachusetts Credit Union League, the Massachusetts Bankers Association, and the Massachusetts Mortgage Association. While the state Joint Committee on Education has not yet voted on the legislation, it appears supportive. Massachusetts currently provides financial literacy education to all public high school teachers who desire it, notes state Office of Consumer Affairs and Business Regulation director Dan Crane. Over 650 teachers representing 160 high schools have been instructed to teach the High School Financial Literacy program since it was initially offered in 2005, he added. Crane acknowledged that he is not happy that on a national financial awareness survey in 2006, high-school seniors in Massachusetts answered only 55 percent of the questions accurately. LeDuc stressed he is aware of the fact that schools have numerous curriculum mandates and it might be hard to include another. He recommended that personal finance be made a part of current math curricula rather than establishing a completely new class.
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Finance Firms Hope to Reach 'Unbanked' Masses
Delaware Online (05/20/07) Pappas, Leslie A.

According to the Federal Deposit Insurance Corp. (FDIC), roughly 28 million people in the United States do not have an account at an insured financial institution, and 44.7 million are not being served by the bank relationships they do have. Roughly 40 million households rely on check cashing centers, money wiring operations, and payday loan outlets to cash checks, pay bills, or borrow money. To help bring these consumers into the banking system, the FDIC has formed a national initiative called the Alliance for Economic Inclusion, which brings together financial and community organizations in nine markets across the country. However, convincing the unbanked to form relationships with financial institutions will not be an easy task, said Norman D. Griffiths, a city councilman for Wilmington, Del., one of the nine markets that the Alliance for Economic Inclusion will be working in. In addition, banks have struggled to find a way to build profitable relationships with the unbanked. "With the unbanked, you're talking about small amounts of money, and a high number of transactions," said banking consultant Steven I. Butler. "How do you make those relationships profitable and as risk-free as possible?"
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ILC Reg, Ownership Bill Passes
American Banker (05/23/07) Adler, Joe

Legislation co-sponsored by House Financial Services Chairman Barney Frank (D-Mass.) and Rep. Paul Gillmor (R-Ohio) that would forbid commercial ownership of industrial loan companies (ILCs) has cleared the House with a majority vote of 371 to 16. In addition to prohibiting companies that derive 15 percent or more of their profits from commercial activities from owning ILCs, the bill would require consolidated federal oversight of ILCs and endow the Federal Deposit Insurance Corp. with authority to preside over ILC parents that did not earlier have a consolidated supervisor. Though the measure does not provide an exemption for automakers, Frank and other lawmakers have indicated they are open to making an exception in the next draft.
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When a $38,000 Car Costs $44,000
Wall Street Journal (05/22/07) P. D1; Welsh, Jonathan

As consumers stretch out financing on their auto loans for longer periods, industry watchers say many are paying more over the life of their loans than their vehicles are worth. The trend comes at a time when rising gasoline prices and monthly expenses for daily living such as cell phones and cable-television bills are forcing auto buyers to refinance. But researchers find that extending the repayment period on a car loan from three years to five years will add more than $2,000 in interest to the loan. Not only do longer-term loans generate more interest, but they also carry a higher interest rate. Banks and car dealers say the people who engage in this practice are "upside down," that is to say that they have negative equity. Researchers say the percentage of car buyers with negative equity is rising, with the average buyer with negative equity who traded in their vehicle in 2006 owing $3,062 on their loans, compared with $1,726 in 2000 and $617 in 1990. Adding to the sticker shock is the fact that automakers are rolling out more expensive vehicles loaded with the latest technology, which makes current models without the same features seem dated.
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Chrysler: No Plans to Merge Finance Arm With GMAC
MarketWatch (05/21/07) Stoll, John D.

Chrysler Financial Services says it does not plan to combine with GMAC Financial Services. In a statement, a spokesperson laid to rest rumors of a possible merger between the two auto-lending companies, despite heavy speculation that a union was inevitable after Cerberus Capital Management purchased a majority stake in Chrysler Group. GM CEO Rick Wagoner said he does not rule out working closely with Chrysler at some juncture, but stopped short of saying how closely that would be, because neither GM nor Cerberus has worked out the details of a collaboration.
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States Move Warily on Real ID
Federal Computer Week (05/21/07) McAdams, Jennifer

States are growing increasingly resigned to complying with the Real ID Act, and many are preparing for the new requirements despite the fact that the Department of Homeland Security has yet to issue final technical standards for the new driver's licenses. DHS says it expects to issue final directives soon, and when it does the department needs to make sure they support standard data models that will across disparate state computer systems, says Erin Kenneally, a member of NASCIO's Read ID Working Group. States want to be able to collect and share using a federated model for data exchange that maintains the independence of state computer systems, Kenneally says. Privacy and the use of driver's license data for other purposes are also key concerns for states, she says. "Because of the advantages Real ID cards might have over current driver's licenses and ID cards, it is likely that Real ID will be used beyond its original purpose," Kenneally says. Meanwhile, states are moving to upgrade DMV computer systems and databases, many of which are 20 to 30 years old and not able to support Real ID's requirements. Instead of waiting for Homeland Security to release a final version of Real ID standards, many states have already begun preparing for the new requirements and are hiring systems integrators. For example, the Nevada Department of Motor Vehicles is looking into using facial recognition and other methods for sharing driver's license information with other states and the federal government. However, it can only do so much in the absence of more detailed guidelines from DHS, says Tom Jacobs, public information officer at Nevada's DMV. But the biggest concern on the minds of state officials is funding, says consultant Janice Kephart. She estimates that the cost of a Real ID driver's license will be about $20 per person in the next 10 years, and that states will also have to pay other significant expenditures in the short term.
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GMAC Financial Services and Habitat for Humanity Join Forces to Provide Affordable Housing
GMAC Financial Services News Release (05/17/07)

Habitat for Humanity members throughout the nation and globally are teaming with GMAC Financial Services in an attempt to establish home ownership opportunities for families in need by building 19 new houses this year. GMAC Financial Services and GMAC ResCap, its real estate financial unit, will offer financing and over 1,000 volunteers to help construct 16 habitat houses in the United States and other houses in Canada, Australia, and Mexico. The Habitat building project started in March and will continue through the rest of this year. GMAC supports programs that fortify and give back to people, especially those having to do with housing, financial education, human services, and youth. Full-home sponsorships have been granted to Habitat members in Charlotte, N.C.; Denver; Duquesne, Pa.; Minneapolis; Sacramento; Salt Lake City; and Mexico City. Additional financing and GMAC volunteer assistance will be provided by GMAC ResCap to numerous Habitat members, including in Bethesda, Md.; Burbank, Universal City, and Orange County, Calif.; Charlotte; Dallas; Philadelphia; Toronto; and Sydney, Australia. For over a decade, the economic and volunteer aid provided by GMAC has enabled Habitat to construct and refurbish hundreds of houses.
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ILC "Legislation in Search of a Problem" Passes House

On Monday, the House of Representatives passed H.R. 698, "The Industrial Bank Holding Company Act of 2007," which would prohibit most commercial firms from chartering or acquiring industrial loan companies (ILCs). AFSA has consistently opposed this legislation and its passage prompted a "disappointing news" statement from AFSA President and CEO, Chris Stinebert. The statement can be viewed at:
www.afsaonline.org/sitepages/docs/IndustrialBankStatementMay20071.pdf

The legislation, sponsored by Barney Frank (D-MA) and Paul Gillmor (R-OH), requires that a company generate at least 85 percent of its revenues from financial activities in order to own an industrial bank; however, current ILCs would be not be affected by the bill.

Proponents of industrial banks say they increase competition, lower prices and offer better products for consumers. Some lawmakers argue, however, that the banks are an unwise mixing of commerce and banking, with little federal oversight. Representative Jim Matheson (D-UT) defended the ILC industry during Monday's debate, stating "This is legislation that is in search of a problem. We already have a number of banks that have been chartered with commercial parents and we have a...stellar track record." Senate Banking Chairman Christopher Dodd (D-CT) pledged to work with ranking minority member Richard Shelby (R-AL) on the Senate version of the bill.
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New Senate Bill to Prevent Foreclosures Introduced

Senator Jack Reed (D-RI) introduced legislation last week to expand access to foreclosure prevention services to homeowners who are experiencing financial hardship.
"The Homeownership Protection and Enhancement (HOPE) Act of 2007" is a $615 million initiative aimed at preventing homeowners from losing their homes due to foreclosure.

The bill would appropriate:

$50 million for the creation and operation of State Homeownership Protection Centers;
$260 million in federal funding to states that offer one-time grants or subsidized loans to qualified families through the State Homeownership Protection Centers;
$300 million to increase funding for effective HUD-approved counseling agencies; and
$5 million for the creation of a federal database on defaults and foreclosures to improve oversight.

AFSA will continue to monitor this particular bill and keep members informed of its status.
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Democrats' Bill Would Prohibit Many Credit Card Practices

Senators Carl Levin (D-MI) and Claire McCaskill (D-MO) introduced legislation on May 15 that would prohibit many billing practices employed by some of the nation's largest credit card issuers. AFSA is watching this bill to see how it moves through the legislative process and will keep members informed. Among the key provisions of S. 1395, "The Stop Unfair Practices in Credit Cards Act" are the following:

No Interest on Debt Paid on Time.
Limits on Penalty Interest. It limits penalty interest rate hikes to no more than a seven percent increase.
No Interest on Fees. Prohibit the charging of interest on credit card transaction fees, such as late fees and over-the-limit fees.
Restrictions on Over-Limit Fees.
No Pay-to-Pay Fees. Prohibit charging a fee to allow a credit card holder to make a payment on a credit card debt--whether by mail, telephone, electronic transfer, or otherwise.
Prime Rate Reference. Require interest rates linked to a "prime rate," using the rate published by the Federal Reserve Board.

Regulation Z Amendments Now Open for Comment

On May 23, AFSA staff attended the Board of Governors of the Federal Reserve meeting on the proposed amendments to Open-End Credit Provisions in Regulation Z (which implemented the Truth in Lending Act). The goal of the proposed amendments is to improve the effectiveness of the disclosures that creditors provide to consumers at application and throughout the life of an open-ended account. One major change is the proposal to increase 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.

After a short discussion, the Board unanimously voted to publish the proposed amendments for public comment. The comment period ends 120 days after publication of the proposal in the Federal Register, which is expected shortly. Federal Reserve staff is currently working on amending the other sections of Regulation Z, including the regulations governing mortgage disclosures.

To read the press release issued by the board, click here: www.federalreserve.gov/BoardDocs/Press/bcreg/2007/20070523/default.htm
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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.