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December 30, 2008
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Happy New Year!
After the New Year's holiday, Newsbriefs will resume its regular Thursday schedule. Look for the next issue on January 6.
AFSA Files Amicus Brief in Support of GMAC
Industry Resource Now Online
U.S. Agrees to a Stake in GMAC
CIT to Convert Into Bank Holding Company
Discover Wins Federal Reserve Approval to Become Bank
Credit Line Cuts Could Boomerang
Credit Card Users Expect to Charge Less
U.S. Will Press Lenders to Level Credit-Card Table
Oklahoma Bank to Offer Payroll Card to Clients
Trio Emerge as IndyMac Buyer
One Government Surplus- Financial Services Issues
Banks Told: Lend More, Save More
Homeowners Leery of Cashing Out Equity
Flexible Loans Loom As Foreclosure Threat
Mortgage Applications Surge on Falling Rates
People Pulling Up to Pawnshops Today Are Driving Cadillacs and BMWs
Student Loan Requests Rise
Switch to Put Midvale Bank in Line for Bailout
AFSA Files Amicus Brief in Support of GMAC
The Supreme Court of Ohio recently accepted jurisdiction in a case where the Ohio Attorney General (OAG) filed suit against GMAC as a result of an odometer fraud committed by an Ohio dealership. In July, AFSA and the Association of Consumer Vehicle Lessors (ACVL) filed a brief requesting that the Supreme Court of Ohio hear the case, State of Ohio v. Midway Motor Sales, Inc., et al.
With the case before the Supreme Court of Ohio, AFSA and the ACVL filed a joint amicus brief on Dec. 22. The dealership involved in the case “rolled back” the odometers on some GMAC-owned off-lease vehicles, without GMAC's knowledge, consent, or participation. Upon reselling these vehicles, GMAC completed odometer disclosure statements, which included the physical odometer readings appearing on the vehicles (which GMAC did not know had been altered) and stated that to the best of GMAC's knowledge, the readings were accurate. Later, GMAC uncovered the dealership’s fraud, reported it to the OAG, and provided the OAG with evidence to use against the dealership. Then, the OAG sued GMAC, alleging violations of Ohio's odometer disclosure statute.
The ruling against GMAC affects all vehicle owners that transfer their vehicles in Ohio, such as banks and finance companies, leasing companies, dealerships, manufacturers, and individual consumers. The ruling also would impose strict liability on a vehicle owner for providing a factually correct odometer disclosure statement required for transferring a vehicle. Ohio law provides no exception to this strict liability requirement for companies that lease vehicles to customers in their course of business and do not necessarily have possession of, or any control over, the vehicles.
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Industry Resource Now Online
For the convenience of its members, AFSA has posted the Consumer Finance Industry 2008-09 Buyers Guide to the association's Web site. The Buyers Guide is a handbook of vendors who offer products and services in 55 various categories to support the consumer finance industry. Each vendor is an AFSA associate member. For quick reference, the Buyers Guide lists AFSA’s upcoming meetings and staff contact information. As the Buyers Guide is continually updated, the online version may vary from the printed one.
Fore more information, contact Jenny Bengtson, Manager, Member Services, at jbengtson@afsamail.org or 202-776-7304.
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U.S. Agrees to a Stake in GMAC
New York Times (12/30/08) Andrews, Edmund L.; Vlasic, Bill
After GMAC received approval for its bank holding company application from the U.S. Federal Reserve, the company reached a $5 billion deal with the U.S. Treasury Department. The money will come from the Troubled Asset Relief Program (TARP) given that the Treasury has not allocated all of the initial funding ($350 billion) to banks. GMAC has struggled as the credit markets continues to freeze and losses related to its mortgage lending unit, Residential Capital, increase. To receive aid from the Treasury, GMAC had to convert to a bank holding company, and the Fed told the firm to increase its capital reserves and convince bondholders to convert their debt into equity before it could get its application approved. As part of its conversion to a bank holding company, GMAC will need to convert three-quarters of its $38 billion in debt into stock. Meanwhile, General Motors must reduce its stake in GMAC to 10 percent and Cerberus, which owns more than 50 percent of GMAC, must reduce its stake to 33 percent. The Treasury also will provide General Motors, which already struck a deal for $4 billion in aid along with its competitor Chrysler, with $1 billion to help the automaker purchase additional equity from GMAC.
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CIT to Convert Into Bank Holding Company
Wall Street Journal (12/22/08) Lynch, Sarah N.
CIT Group's application to become a bank holding company was approved by the Federal Reserve Board, and this conversion is "intended to provide CIT with expanded opportunities for funding and greater access to capital," said the company in a Nov. 13 release. "They will permit CIT to continue its current business activities and increase its deposit-taking capabilities, which will provide further stability and diversity to CIT's long-term funding model." CIT Group subsidiary CIT Bank will be transformed into a state bank through the changeover. The Fed stated in its order to approve CIT's application that "In light of the unusual and exigent circumstances affecting the financial markets, and all other facts and circumstances, the Board has determined that emergency conditions exist that justify expeditious action on this proposal." The Fed estimates that CIT possesses consolidated assets worth around $80.8 billion, while CIT Bank has consolidated assets totaling $3.1 billion and controls deposits worth about $2.3 billion. CIT follows in the footsteps of American Express, Morgan Stanley, and Goldman Sachs in its approval to become a bank holding company in the wake of the financial crisis.
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Discover Wins Federal Reserve Approval to Become Bank
Bloomberg (12/19/08) Levy, Art; Mildenberg, David
Discover Financial Services, the fourth-biggest credit-card network, has received permission to become a bank holding firm, joining American Express Co. and other financial groups in a pursuit of government money and retail deposits. The Federal Reserve sanctioned Discover's conversion, according to a regulatory filing on Dec. 19. The change could make Discover eligible for money from the Treasury's rescue plan to help out financial groups. "The decision to opt-in for some of this cash will help [Discover] over the crunch, partially, and then open up some deposit account activity," explains Nilson Report publisher David Robertson. That will help "solidify revenues going forward with less volatility," he adds. Discover expects between $400 million and $1.2 billion in funds from the Treasury's Troubled Asset Relief Program (TARP) and is thinking about purchasing a bank to add to its $29 billion in deposits, CEO David Nelms stated on Dec. 18. He added that Discover would probably not become a bank. Discover has not been able to obtain credit-card loans, a market that Nelms noted may not be available through 2010.
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Credit Line Cuts Could Boomerang
American Banker (12/29/08) P. 1; Aspan, Maria
Current and former industry executives and observers are worried that customers of card issuers could be induced to ignore their obligations if risk management strategies the issuers are implementing backfire. Such tactics include reducing credit lines and repricing accounts, and retired Citigroup Inc. executive James L. Bailey warns that cardholders whose credit limits are slashed to their existing balances may elect to deprioritize the payment of their card bill "because that card has no utility for [them] anymore." There are indications that cards have risen in consumers' payment hierarchy in recent years, but Rick Wittwer, formerly with Washington Mutual Inc., says that reductions in credit lines and hikes in interest rates can have a deleterious impact on the behavior of customers who may be current on at least one card. Regulators have adopted rules that restrict issuers from increasing interest rates on existing accounts unless the customer is delinquent by at least 30 days, and most major issuers have been reducing some consumers' credit lines. Capital One Financial Corp. CEO Richard Fairbank told shareholders at a conference that cutting credit limits may estrange dependable cardholders. Consultant Brian Shniderman is projecting an increase of "individual bust-outs" rather than premeditated bust-outs by professional fraud organizations. Observers say issuers can curtail individual bust-outs by making a greater effort to maintain a dialogue with their customers as they revise their pricing or account terms.
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Credit Card Users Expect to Charge Less
Jacksonville Business Journal (FL) (12/22/08)
Thirty-two percent of cardholders surveyed by Bankrate said that they will likely charge less next year, while about 50 percent said they would not change their usage, 1 percent intend to charge more, and 15 percent said they are not planning to use credit cards at all. Six percent noted that their line of credit decreased, versus 41 percent whose line increased and 44 percent who observed no change. Forty percent of respondents cited greater convenience than using cash as the chief reason for using credit cards, while 19 percent said they use the cards to fund emergency expenses. Seventy-two percent strongly disagree that credit card companies should be entitled to revise the terms of an account at any time for any reason, and 71 percent support tighter regulation of such companies.
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U.S. Will Press Lenders to Level Credit-Card Table
Wall Street Journal (12/21/08) Holzer, Jessica
The Federal Reserve, the Office of Thrift Supervision (OTS), and the National Credit Union Administration have agreed to tighten rules related to credit card practices. As a result, banks will likely find it more difficult to raise interest rates on consumers. The amended rules prohibit credit card issuers from raising interest rates on current credit card balances if consumers are on-time with their payments. Credit card issuers are also required to give 45 days' warning prior to raising rates on new transactions. Furthermore, the rules call for issuers to give consumers a reasonable length of time to make payments. The federal bank regulators also approved measures to tighten disclosure for credit card accounts and make it mandatory for lenders to regularly publish the fees linked with overdrafts. The new rules are expected to become effective in July 2010, but the OTS said it intends to spur institutions to adhere to the rules as soon as they can.
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Oklahoma Bank to Offer Payroll Card to Clients
CardLine (12/26/08) P. 1
First United Bank of Durant, Okla., plans to offer a Visa-branded payroll card to commercial customers that employ unbanked and immigrant workers. Employers directly deposit funds into the card accounts using the automated clearinghouse system. First United is offering the card as part of an agreement it negotiated with Interactive Transaction Services, a card-processing subsidiary of Central National Bank of Enid, Okla.
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Trio Emerge as IndyMac Buyer
Wall Street Journal (12/30/08) P. C3; Fitzpatrick, Dan; Paletta, Damian
IndyMac Bank, which was taken over by the U.S. government this summer, may have found a buyer willing to pay as much as $14 billion for the failed financial institution. Acting as limited partners in a new holding company, buyout investor J. Christopher Flowers, Dune Capital Management LP Chairman and co-chief executive Steve Mnuchin, and hedge-fund operator John Paulson hope to have a deal in place by Dec. 31, say insiders. Any possible agreement could include the transformation of IndyMac into a stock-held institution as well as a loss-sharing provision that would make the Federal Deposit Insurance Corp. responsible for losses on loans beyond a specified threshold. The FDIC has been scouting for a buyer for the mutual savings bank since seizing control of the operation in July.
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One Government Surplus- Financial Services Issues
American Banker (12/30/08) Kaper, Stacy
The main priority for legislators returning to their desks in January 2009 is hindering a new wave of home foreclosures, which could reach 10 million by 2014. President-elect Barack Obama and Democratic leaders in Congress are expected to hammer out a bill that would permit judges to change the terms of a mortgage agreement during a bankruptcy procedure. "That is high on my agenda and I think high on the agenda of a lot of legislators who are just caught without being able to help their constituents who are in these home foreclosure problems," stated Rep. Maxine Waters, who supports Obama's plans to modify loan processes. According to officials close to the president-elect, the Obama-Biden administration plans to give the Treasury and Housing and Urban Development departments more authority to drastically modify the terms of existing mortgage agreements. House Financial Services Committee Chairman Barney Frank, who has been highly critical of President Bush's failure to form a loan modification program, is writing a law that makes access to Troubled Asset Relief Program (TARP) funds contingent upon their function in loan restructuring. A systematic loan alteration plan endorsed by Federal Deposit Insurance Corp. (FDIC) Chairman Sheila Bair is garnering the praise of legislators and financial sector insiders. The plan provides a rubric for changing loan agreements and would include cash bonuses to servicers of $1,000 per mortgage, with loss guarantees after a short period of time. Rep. Waters says she plans to float a bill supporting the Bair plan once Congress resumes its next session.
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Banks Told: Lend More, Save More
Wall Street Journal (12/26/08) Paletta, Damian; Enrich, David
Banks accepting aid from the government are getting mixed signals from regulators who on the one hand want banks to build up their capital reserves to protect against loss and on the other hand want banks to increase lending. Under current regulations, banks hold about 6 percent of their assets as Tier 1 capital and 10 percent as core capital, but regulators are increasing those requirements, say industry insiders. U.S. Office of the Comptroller of the Currency former head Eugene Ludwig says that those thresholds are minimums and that each banks should hold capital according to its own risk profile. About 200 banks are near collapse, according to regulators, and 25 banks already have failed. Independent Community Bankers of America CEO Camden Fine says, "It's so incongruous when the four regulators publish a joint press release imploring banks to lend and saying they should do their duty under their charter, when at the same time the regulatory field forces are bludgeoning community banks to death." While the U.S. Treasury Department has indicated the $700 billion Troubled Asset Relief Fund (TARP) could be used to jump start lending, there has been little sign of that purpose and some lawmakers may withhold the next allocation of $350 billion until banks can prove they are using the capital or some of it for new loans.
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Homeowners Leery of Cashing Out Equity
Philadelphia Inquirer (12/24/08) Gelles, Jeff
Experts say many homeowners rushing to refinance as mortgage rates decline only want to lower their rates and monthly payments, rather than extract equity. Freddie Mac reports that home equity extractions totaled $99 billion from January through September, down 50 percent from the prior year. Homeowners have less equity to tap due to declining property values, and TD Bank N.A. chief economist Joel Naroff says many are recognizing that they need to lower their debt loads. Experts note that while cash-out refis bolstered consumer spending and the national economy in recent years, a shift in homeowners' perspectives now may be necessary to get the economy back on track.
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Flexible Loans Loom As Foreclosure Threat
Investor's Business Daily (12/19/08) P. A6; Doler, Kathleen
Analysts warn that the next wave of foreclosures to squeeze home values in many parts of the country will be due to re-setting interest on "pay option" adjustable-rate mortgages, which were issued during the housing boom and gave borrowers the option of making low minimum monthly payments. Under such financing, when the borrower pays less than 100 percent of the interest due each month, the difference gets added to the loan's principal; and the loan resets to require full interest-plus-principal payments once it reaches 110 percent to 125 percent of the original principal. Moe Bedard--president of Loan Safe Solutions, a mortgage consulting firm in Corona, Calif.--says 99 percent of the 600 option-ARM borrowers his company has spoken with "claim they had no idea that the loan would recast early if only the minimum payment was made." Loan documents do reveal that mortgages will adjust early if the full interest is not paid each month, but those details tend to get buried in densely worded disclosures. While the product is designed in part to offer flexibility to borrowers with seasonal, commission-based, or irregular income, most borrowers have not exercised that flexibility. In the last two years, more than 65 percent of option-ARM borrowers have paid only the minimum monthly payment. Doing so only fuels the foreclosure fire, according to First American CoreLogic chief economist Mark Fleming. Borrowers are "leveraging up to the negative-equity cap in a market with strong house-price declines," he said. "And now unemployment rates (are) rising." While some option-ARM loans have already begun to reset, Fitch Ratings reports approximately $29 billion will do so by the end of 2009 and $67 billion the following year. Moreover, notes Inside Mortgage Finance publisher Guy Cecala, option-ARMs already are prone to delinquency--even before the rates adjust.
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Mortgage Applications Surge on Falling Rates
Wall Street Journal (12/22/08) P. C1; Fitzpatrick, Dan
Mortgage lenders are seeing a deluge of applications for refinancings as borrowing costs decline due to a recent cut in the federal funds rate by the Federal Reserve, and many are hiring temporary workers or reassigning employees to handle the swelling volume. Some experts believe the jump in refis could signal a turning point in the market and reduce pressure on banks by the U.S. government to bolster lending following the distribution of millions of dollars in assistance. However, it remains uncertain how many borrowers will qualify for loans, how long it will take to process loans under new documentation and credit standards, and whether borrowers will back down in hopes that mortgage rates will fall further.
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People Pulling Up to Pawnshops Today Are Driving Cadillacs and BMWs
Wall Street Journal (12/30/08) P. A1; Fields, Gary
While the National Pawnbrokers Association pegs the household income of most customers at about $29,000, operators across the country--especially in areas where foreclosures and unemployment are high--report being approached by more and more middle- and upper-class clients. Luxury vehicles fill the parking lots of pawnshops as their drivers offer to leave expensive jewelry, furs, and other high-end possessions as collateral for loans. Many are dealing with eroded stock portfolios or job layoffs; and others are business customers who need an alternative source of funding as bank credit remains elusive. "The banking industry is not giving out any money right now," notes Maine pawnshop owner Rick LaChappelle. "So people are relying on second-tier lending institutions." Borrowing costs vary across state lines, but the typical interest on a $75 loan is roughly $15 per month, with fees tending to accumulate over several months. Operators contend that even those rates can be less than what banks or high-interest credit cards charge. However, pawnshop customers who do not repay their loans or pick up their merchandise in a timely manner give operators the right to sell the products.
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Student Loan Requests Rise
Tulsa World (OK) (12/24/08) P. A1; Lindley, Tom
The Oklahoma Student Loan Authority (OSLA), a leading source for student loans in that state, has witnessed a 34 percent increase in applications since July. The authority processed 55,973 loan applications between July and mid-December, versus 41,698 during the same period in the prior fiscal year. Established as a public trust by the Oklahoma Legislature in 1972, OSLA is among the oldest student-loan organizations in the country, and does not get any state-appropriated funds. It offers loan-application processing for participating lenders and functions as a secondary market to present funds to students or their parents for post-secondary education under the protected Federal Family Education Loan Program. As of Nov. 30, OSLA was assisting 97,600 borrowers in its loan-servicing systems. During fiscal year 2008, which concluded on June 30, OSLA and its lenders initiated $262.5 million in student loans, mostly for Oklahoma citizens. Of that amount, $34.3 million was given to the University of Oklahoma, $12.9 million to Northeastern State University, and $9.5 million to the University of Tulsa. OSLA president James Farha notes the authority will continue to provide student loans in spite of the withdrawal of numerous banks from the lending program and the instability of the credit market. While Farha points out that Congress recently promised that there will be access to funds until 2010 to continue to help college students, he says an earlier federal rule restricting a bank's profitability has pushed several banks out of the program.
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Switch to Put Midvale Bank in Line for Bailout
Salt Lake Tribune (UT) (12/26/08) Oberbeck, Steven
Capmark Bank, a subsidiary of the Capmark Financial Group, has followed the likes of numerous industrial banks, converting to a commercial banking company in hopes that it may receive federal bailout money. "We've already applied to participate in the U.S. Treasury's Capital Purchase Program," said bank spokesperson Joyce Patterson. The conversion of Capmark to a commercial bank marks the seventh such move amid Utah's 30 industrial loan corporations.
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Abstract News © Copyright 2008 INFORMATION INC.
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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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