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May 28, 2009
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Keynote Address at AFSA Investors Conference Examines Root of Financial Crisis
Consumers Adequately Protected Against Post-Return Damage for Leases, Says AFSA
Gain Funding Insight from AFSA Webinar
GMAC Credit Cards Switching to B of A
Discover Chief: Slow Loan Growth Ahead
90 Percent of Chrysler Dealers Now With GMAC
HSBC May Rethink US Credit Card Business
Obama Signs Credit-Card Overhaul Legislation Into Law
Dodd Now Shooting for Cap On Credit Card Interest Rate, Merchant Fees
Card Firms' Loss Tally: Billions of Dollars in Fees
Modified-Mortgage Defaults Hit 75 Percent, Fitch Says
Borrowers Hate ARMs
TALF for Home-Loan Debt Poses Hurdles, Official Says
Panel Says Fed Should Monitor Systemic Risk
Rep. Dreier Promotes National Financial Literacy, Savings Recovery
The Rise of the Check Casher
Consumer Legislation Would Make Auto Finance Less Friendly
Manufacturer Incentives Limited Influence on New-Car Buyers
Manheim Calls Credit Markets Better, Not Normal
Keynote Address at AFSA Investors Conference Examines Root of Financial Crisis
Among the highlights of AFSA’s 19th Annual Finance Industry Conference for Fixed Income Investors was the keynote address by David Marshall, Senior Vice President, Federal Reserve Bank of Chicago on “The Financial Crisis of 2008: What Went Wrong?” According to Marshall, one of the key factors that contributed to the housing bubble was surplus capital from abroad increasing demand for U.S. securities. This increasing demand, coupled with a major public policy push to extend home-ownership to previously underserved households led to an explosion of sub-prime mortgage originations. Marshall concluded his address by looking forward. He predicted that economic growth will turn positive in the third quarter, but will remain weak through the end of the year.
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Consumers Adequately Protected Against Post-Return Damage for Leases, Says AFSA
New York Assembly member Audrey Pheffer’s staff recently contacted AFSA with specific questions relating to NYA 176-A, a bill that would require a lessee to be present at a visual inspection of the leased vehicle at the termination of a lease agreement. Specifically, Pheffer’s staff inquired how often consumers are held liable for leased vehicles that were damaged after they have been turned in by the lessee and who would be held liable for such damage.
AFSA addressed the assembly member’s questions and expressed concerns with the bill in a letter prepared with input from the Association of Consumer Vehicle Lessors. AFSA wrote that to the extent that damage is determined to have occurred while in possession of the dealership, customers are never held liable, and consumer complaints on these issues are so rare that they do not represent a problem in need of a solution or require legislative action. More importantly, consumers are adequately protected under existing law.
AFSA pointed out that the requirement for the lessee to be present during the visual inspection of the returned vehicle would be nearly impossible, because it would be difficult to get all interested parties present in the same place at the same time, particularly where a third party inspector is involved.
NYA 176-A was placed on hold earlier this year because Pheffer, the sponsor, is still discussing the bill with a number of groups. At the moment, the bill’s timetable remains uncertain.
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Gain Funding Insight from AFSA Webinar
AFSA is offering members a complimentary webinar for finance companies seeking funding from banks or the asset-backed securities market. Slated for Monday June 1 at 1:30 pm EDT, “Funding Your Finance Company in Uncertain Times” will address performance trends in the auto, card, mortgage and direct loan lines, and how they may affect investor “appetites.” The hour-long webinar will feature insight from moderator Terry Keating of Amherst Partners, LLC, and panelists David Fricke with Texas Capital Bank, Sharon Mancero with Wells Fargo Preferred Capital, and David Sherer of Capital One Bank.
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GMAC Credit Cards Switching to B of A
Charlotte Observer (NC) (05/27/09)
Instead of renewing a credit card processing agreement with Bank of America (BofA), GMAC Financial Services will transfer its credit card customers to BofA, GMAC spokesman Tony Sapienza says. The decision to make the transfer comes as GMAC chooses to focus on its Ally Bank brand and other banking products. GMAC may add its own card products at some point but has nothing to announce right now, Sapienza says.
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Discover Chief: Slow Loan Growth Ahead
Reuters (05/27/09)
Discover Financial Services CEO David Nelms says he anticipates an increase in credit defaults in the second quarter, and loan growth is likely to slow in the second half of 2009. Furthermore, he says, the company's charge-off rate, on a managed basis, is expected to be approximately 8 percent in the second quarter. Nelms notes that the company will continue to set aside funds to cover bad loans.
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90 Percent of Chrysler Dealers Now With GMAC
SubPrime Auto Finance News (05/26/2009) Reed, Jennifer
Jim Press, Chrysler Group vice chairman, announced that about 90 percent of Chrysler dealers are now activated to conduct retail business through GMAC Financial Services. Last week, GMAC announced several actions to improve the company's capital position, including a $7.5 billion capital investment from the Treasury Department, and approval by the Federal Deposit Insurance Corp. to participate in the Temporary Liquidity Guarantee Program. GMAC has also reconstituted its board of directors, naming two appointees from the Treasury, and three independent directors to be named by the board soon. The investment from the Treasury is in the form of mandatorily convertible preferred membership interests and warrants. GMAC said that it intends to submit a Capital Plan to the Federal Reserve Bank of Chicago by June 8, consistent with the requirements of the S-CAP program.
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HSBC May Rethink US Credit Card Business
Irish Times (Ireland) (05/22/09)
The tightening regulatory environment and financial pressures on the credit card industry may prompt HSBC to rethink its U.S. presence in the market, according to CEO Michael Geoghegan, speaking at the bank’s annual shareholders meeting. Currently he believes “the assets in this business can ride out the storm,” but that if things deteriorate much more, the bank “may have to rethink it.” When asked if the bank should walk away from the U.S. business, he said the suggestion is “irresponsible, I might even say dangerous,” and not in the interests of shareholders. The bank reported earlier this month that first-quarter pre-tax profit is “well ahead” of last year, and Chairman Stephen Green said its focus on taking deposits ahead of lending, giving it an 82 percent deposit ratio, has buffered it from the current financial crisis.
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Obama Signs Credit-Card Overhaul Legislation Into Law
Wall Street Journal (05/22/09) Pulizzi, Henry J.
President Obama signed into law May 22 a bill that limits credit card companies' ability to increase interest rates and fees. The bill forbids certain practices such as retroactive rate increases and restricts companies' marketing to teenagers and college students. Credit card companies are also now required to post agreements online, mail statements 21 days before payment is due, and end the practice of shifting payment dates. Obama said, however, that the law does not condone reckless borrowers' behavior.
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Dodd Now Shooting for Cap On Credit Card Interest Rate, Merchant Fees
Courant.com (05/23/09) Gosselin, Kenneth R.
A week after Congress approved sweeping reforms in the way the credit card industry does business, Sen. Christopher Dodd (D-CT) is hinting that he may pursue broader reforms. Though caps on charges and practices some people describe as abusive were part of the reform package Congress recently approved, Dodd still wants to put a cap on interest rates and fees that merchants pay when a customer pays for a purchase with a credit card. He believes the issues, which were part of the debate on reforms ultimately signed into law by President Obama but which were left out of the final Senate bill, are important because existing laws still allow credit card companies to charge more than 30 percent interest on purchases. A proposal that sought to cap interest rates at 15 percent was turned back by the Senate amid lobbying by the banking industry and concerns by some lawmakers that the restriction would prevent the broader credit card overhaul package from clearing the Senate. So committed to the caps is Dodd that he has requested the Federal Reserve conduct a study on how Congress might curtail interest rates.
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Card Firms' Loss Tally: Billions of Dollars in Fees
Wall Street Journal (05/25/09) Seidel, Robin
Credit card issuers are preparing to see some of their revenue disappear because of the new federal law that would restrict some fees, limit rate increases, and require more disclosures to customers. Companies hardest hit will be those that focus on subprime borrowers and those that specialize in cards for retail stores. It is difficult to calculate exactly how issuers will be affected because they do not offer information on how much they profit from fees, penalties, and raising interest rates, but consultant Robert Hammer estimates that the industry overall will lose $10 billion in revenue. Experts say the bill will likely restrict credit access for consumers, and that issuers will likely add more fees to the front end of an account rather than waiting until the borrower is delinquent.
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Modified-Mortgage Defaults Hit 75 Percent, Fitch Says
Bloomberg (05/27/09) Shenn, Jody
Fitch Ratings has released a report showing that 65 percent to 75 percent of modified loans may default again after a year. Fitch's prediction is based partially on "shrinking disposable income, escalating job losses, and possibly some deceptive practices on the part of the borrowers themselves," the company stated. According to Hope Now, more than 1.6 million mortgages have been modified over the last two years.
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Borrowers Hate ARMs
National Mortgage News (05/25/09) Vol. 33, No. 34, P. 14; Sinnock, Bonnie
Freddie Mac's first-quarter product transition report shows that more than 99 percent of prime borrowers with conforming ARMs refinanced into a conforming fixed-rate mortgage, and nearly 100 percent of those with fixed-rate loans chose the same type of mortgage when they refinanced. Freddie Mac chief economist Frank Nothaft notes, "The lowest fixed mortgage rates in 50 years are attractive by themselves, and when we look at average ARM interest rates that are nearly the same as the fixed rates, it is easy to see why borrowers are making the choice for fixed-rate mortgages."
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TALF for Home-Loan Debt Poses Hurdles, Official Says
Bloomberg (05/22/09) Shenn, Jody
The Federal Reserve is facing some challenges as it expands the Term Asset-Backed Securities Lending Facility (TALF) to residential mortgage-backed securities. One hurdle is conducting the proper credit analysis of any risks that the Fed might become exposed to, according to an official. The Fed will also be challenged to protect itself from losses on home-loan bonds because they are heterogeneous in nature, but the bank will hire collateral managers to analyze the debt and determine how much capital investors should put up for a loan. Expanding TALF to include home-loan bonds could also require further concessions on the length of the loans by the Fed. So far, however, the Fed considers TALF a success because it has increased creation of already eligible asset-backed securities, and drove down yields relative to benchmarks on securitized debt.
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Panel Says Fed Should Monitor Systemic Risk
CongressDaily (05/26/09) Swindell, Bill
The authority of the Federal Reserve should be expanded to enable the central bank to monitor systemic risk across the financial services industry, according to the Committee on Capital Markets Regulation. The independent panel prefers giving the Fed regulatory duties over a proposal that would establish a council of different federal regulators. The committee is concerned that the council approach would make the regulatory structure indecisive and limit its effectiveness. "If everybody is responsible, then nobody is responsible," says Hal Scott, a Harvard University law professor who served as committee director. "We feel that is just continuing the problems of the past." However, the recommendation might not generate much support from lawmakers, including liberals who say the Fed has not protected borrowers from predatory lenders in the past, and conservatives who maintain the central bank should continue to focus on monetary policy. The panel has some influence in that its members come from the business, academic, and regulatory communities, such as Glenn Hubbard, chairman of the Council of Economic Advisers under former President George W. Bush; John Thornton, chairman of Brooking; and Wilbur L. Ross Jr., chairman of WL Ross & Co.
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Rep. Dreier Promotes National Financial Literacy, Savings Recovery
US Fed News (05/26/09)
Rep. David T. Dreier (R-CA) is calling on Congress to help families struggling to stay afloat in the economic downturn by passing the Savings Recovery Act, a piece of legislation that he is co-sponsoring. Under the bill, limitations on catch-up contributions to retirement accounts would be reduced, while the amount of tax-free contributions that can be made for college savings would be expanded. In addition, the bill would temporarily suspend capital gains taxes, increase the amount of capital losses that can be deducted, and reduce cuts some senior citizens see in their Social Security benefits when they start working again. Dreier says he believes the legislation will help families start to rebuild their depleted savings and will help lay the groundwork for an economic recovery. Dreier has also announced that he voted in favor of a congressional resolution that supports the goals and ideals of Financial Literacy Month. Dreier noted that it is important to educate consumers about personal finance so that the nation can avoid another recession like the current economic downturn, which is believed to have been caused in part by the effects poor consumer decisions had on the nation's financial markets.
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The Rise of the Check Casher
Worcester Business Journal (05/25/09) Gershon, Livia
Banking industry executives are at a loss as to why some consumers would opt to cash checks at check-cashing businesses instead of depositing their checks into a bank account. Among the executives unable to explain the popularity of check-cashing businesses is JoAnn Morency, the senior vice president at Commerce Bank & Trust in Worcester, MA. Morency noted that while some consumers may be using check-cashing services because they dislike some of the new fees some banks are charging, including fees for having a checking account with a balance of less than $100, other banks--including Commerce--do not charge such fees. She also noted that Commerce is able to clear checks from the Northeast and the Mid-Atlantic regions in a day, while checks from other parts of the country take about two days to clear. In addition, Morency noted that when account holders have their paychecks direct deposited to their account, they can access their money before their employer even hands out paychecks. Although the banking industry feels it can offer consumers better services than the check-cashing industry, banks and credit unions are continuing to think of new ways they can make themselves attractive to the underbanked consumers who frequent check-cashing business. The Alliance for Economic Inclusion, a group of financial institutions organized by the Federal Deposit Insurance Corp. (FDIC), meets regularly in Worcester to discuss ways to target these consumers. According to Kip Child, a community affairs specialist with the FDIC in Braintree, Mass., who helps run the Alliance, progress is being made on efforts to target underbanked consumers, albeit slowly. He added that while banks have a lot of money now that they have pulled out of their riskier investments, those funds will inevitably dry up, which in turn will force them to try to get deposits from underbanked consumers. "There's a lot of good avenues out there in the underserved markets," Child said.
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Consumer Legislation Would Make Auto Finance Less Friendly
Dow Jones Newswires (05/21/09) Saha-Bubna, Aparajita
Auto lenders are concerned that the Consumer Credit Fairness Act, which is currently pending in the Senate Judiciary Committee, will hurt their business and make it harder for consumers to buy cars. The bill would void contracts for high-interest debt if a consumer files for bankruptcy and strip lenders of the ability to repossess vehicles. Lawmakers say the bill will rein in unfair lending practices and help pull consumers out of debt, but lenders such as GMAC and Ford Motor Credit would be hit hard after a year of plummeting sales and soaring auto loan delinquencies. “As a lender, not only do I lose my claim against the borrower, I can't repossess the vehicle,” says Bill Himpler, executive vice president of federal affairs for the American Financial Services Association. The bill would void contracts for debt with rates above 15 percent plus the yield on the 30-year Treasury bond, which is the range for most subprime loans. Critics say the bill will further restrict credit during a credit crisis and that lenders need to use the higher rates to protect themselves when working with risky borrowers. Further, it would cut car sales at a time when the car industry is already in crisis; General Motors, for example, says nearly 75 percent of its customers have a credit score of below 700. Others say it rewards consumers who file for bankruptcy with a free car.
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Manufacturer Incentives Limited Influence on New-Car Buyers
F&I Magazine (05/26/09)
Automaker incentives had little effect on new-car buyer purchases in the month of April, according to CNW Market Research, reporting in its May newsletter. About 57 percent of new-car buyers said that incentives did not change their purchase plans at all. The other 43 percent said that incentives caused purchases to be made earlier, entry into the market when no intention of buying a new car existed, or switching brands while shopping.
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Manheim Calls Credit Markets Better, Not Normal
SubPrime Auto Finance News (05/26/2009) Reed, Jennifer
Lending and credit markets have improved, but many consumers still feel unable to get loans, according to an analysis report from Manheim Consulting. Rates are low and the yield curve is steep in the financial markets, which can lead to better credit flows. The Federal Reserve Board's survey of lending officers, however, shows that auto loans are still experiencing a tightening, though this is less dramatic than in recent, past quarters. Subprime lenders are also still shrinking their loan portfolios.
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Abstract News © Copyright 2009 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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