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March 10, 2010
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AFSA Contacts NAAG, State Foreclosure Prevention Working Group to Explore Possible Joint Initiatives
AFSAEF Offers Tips for Consumers during National Consumer Protection Week
MoneySKILL Mania Tests Students’ Knowledge of Personal Finance Concepts
Q&A With Wells Fargo Dealer Services Execs
GMAC's Carpenter Hears Dealers' Concerns
A Guitar Maker Picks GE To Issue Its Store Cards
Bankruptcy Law Doesn't Restrict Free Speech, Supreme Court Says
More Consumers Pay Credit Card, but Not Mortgage
US Credit Card Defaults Surge 11 Percent, Delinquencies Fall Again
Fed Proposes New Rules on Credit Card Penalties
U.S. Consumer Credit Rises for First Time in Year
The Shoe That Refuses to Drop: Home Equity Losses
Repurchased Loans Putting Banks in Hole
Program to Pay Homeowners to Sell at Loss
Banks Pressed on Second Mortgages
FDIC Chief Urges Banks to Expand Small-Business Loans
Credit Checks May Spell End for 3,000 Japanese Consumer Lenders
Defaults on Student Loans Rise in Arizona
Deficit of Bank Accounts in the Bronx Spawns NYC SafeStart Program
Finance Execs Agree: 2010 is Hitting Stride
Bill to Rein in Car-title Lenders Clears House
The Verdict on TALF: It Worked
Higher Used-Car Prices Cut Loan-security Losses
AFSA Contacts NAAG, State Foreclosure Prevention Working Group to Explore Possible Joint Initiatives
Last week, AFSA reached out to the National Association of Attorneys General (NAAG) and State Foreclosure Prevention Working Group to identify ways to protect consumers from so-called debt settlement companies. The State Foreclosure Prevention Working Group is a task force compromised of state attorneys general and state banking regulators.
In its letter, AFSA proposed working together with the two groups on ways to report suspected unscrupulous debt settlement firms to attorneys general offices and communicate with distressed borrowers. To get started with this consumer outreach effort, AFSA requested to meet with the two groups to discuss AFSA's suggestions in greater detail.
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AFSAEF Offers Tips for Consumers during National Consumer Protection Week
In observation of National Consumer Protection Week, which runs March 7-13, the AFSA Education Foundation (AFSAEF) shared a number of tips to help consumers of all ages protect their credit. The foundation emphasized the importance of budgeting. “Those with a handle on their finances and discretionary income are less likely to end up in situations where they’ve taken on more debt than they can afford,” said Susie Irvine, AFSAEF’s president and chief executive officer.
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MoneySKILL Mania Tests Students’ Knowledge of Personal Finance Concepts
The third annual MoneySKILL Mania in Buffalo drew more than 80 contestants from 15 local high schools. Based on AFSAEF’s MoneySKILL® curriculum, MoneySKILL Mania tested the students’ knowledge of personal finance concepts on credit, investing, insurance and current events.
A trio of students from Clarence High School won the March 9th competition.
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Q&A With Wells Fargo Dealer Services Execs
F&I Magazine (03/05/10)
Later this month, Wachovia Dealer Services will change its name to Wells Fargo Dealer Services, as part of Wells Fargo's purchase of Wachovia in December 2008. Three top executives at the new Wells Fargo Dealer Services recently sat down with F&I Magazine’s Gregory Arroyo to talk about what the name change means. Wachovia's commercial book of business has also been combined with Wells Fargo's commercial book of business, and GE Warranty - Warranty Services was added and changed to Warranty Solutions. According to Chief Executive Tom Wolfe, Wells Fargo has been communicating with the dealer community to notify them of ongoing changes since this purchase. Wells Fargo, he noted, has grown in the indirect lending business because of changing customer trends, as people have become used to working with a debt structure that matches their current income. Experian Automotive listed Wells Fargo as the No. 1 subprime auto lender for 2009, to which Wolfe said, "The truth is we didn’t do anything different last year. We just stayed active." The business has their own method to analyze risk, Wolfe said, and does not depend solely on FICO scores. Wachovia Dealer Services has also worked with NADA to restore floorplan financing through the Small Business Administration.
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GMAC's Carpenter Hears Dealers' Concerns
Automotive News (03/08/10) Harris, Donna
GMAC Financial Services' Michael Carpenter has been listening to dealers to tweak the company's business model. Carpenter is broadening access to capital to allow GMAC to offer competitive financial services to auto retailers, and is also looking to add dealers beyond the General Motors Co. and Chrysler Group networks by arranging to offer his retail finance programs to dealers of all makes through an alliance with the DealerTrack credit application network. "We need to be more effective on the leasing side," says Carpenter. He notes that when he became CEO in November, 2009, "we could not access capital markets, and the federal government believed we were still deficient in the amount of capital we needed. The first priority was to work out the final capital infusion into the company from the U.S. Treasury, and it had an extremely favorable impact." GMAC conducted a bond issue in February and raised $2 billion. Now that the company has access to capital markets, "we'll be doing a lot of that kind of financing over the next year or two. The objective is to broaden the sources of capital available to the company and reduce the cost of that capital to become investment grade again. It will allow us to be more competitive."
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A Guitar Maker Picks GE To Issue Its Store Cards
American Banker (03/09/10)
General Electric Co.'s GE Money has announced the debut of the GE Money Music credit card through a multi-year agreement with Fender Musical Instruments Corp., a maker of guitars, speakers, and other musical equipment. The credit card, which can be used at 3,500 Fender dealerships nationwide under the management of GE Money's Sales Finance unit, is a revolving program providing music enthusiasts with a flexible, convenient way to finance Fender instruments with affordable monthly payments and competitive interest rates. Brian Riley, the research director for bank cards at TowerGroup Inc., calls the announcement "refreshing," considering that private-label card issuance had "come to a halt in 2009."
"It is exciting to see that the Fender card is the first product launched since" the most important provisions of the Credit Card Accountability, Responsibility and Disclosure took effect last month, Riley says. "It is an indication that GE wants to be back in the card business."
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Bankruptcy Law Doesn't Restrict Free Speech, Supreme Court Says
Washington Post (03/09/10) P. A3; Barnes, Robert
Under Congress's 2005 bankruptcy overhaul law, attorneys may provide clients with any advice that does not lead to an abuse of the bankruptcy system, according to a Supreme Court opinion. A small law firm in Minnesota had challenged the law; its lawyer asserted that incurring more debt might be appropriate in some cases to help the individual and creditors. He added that the law potentially conflicts with the First Amendment and a lawyer's duty to give "unfettered, candid advice." The high court concluded there was no reason to make a constitutional case out of the argument. This is because the law could be interpreted narrowly, wrote Justice Sonia Sotomayor, who agreed that in some situations it could be practical to take on more debt. For example, she said in a footnote, "Advice to refinance a mortgage or purchase a reliable car prior to filing because doing so will reduce the debtor's interest rates or improve his ability to repay is not prohibited." In 2008, the U.S. Court of Appeals for the 8th Circuit in St. Louis ruled that a provision of the law is unconstitutional because it forbids attorneys from telling clients who are considering bankruptcy to take on more debt.
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More Consumers Pay Credit Card, but Not Mortgage
MarketWatch (03/08/10) Waters, Jennifer
U.S. consumers as a whole are trimming their credit-card debt, but a growing minority are paying credit-card bills at the expense of their mortgage payments. Ezra Becker, director of consulting and strategy at TransUnion, said this trend "really is a clear illustration of the impact this recession has had on consumer preferences and behavior." Overall consumer debt rose unexpectedly in January, but the Federal Reserve reported that credit-card debt fell by about $1.7 billion, making it the 16th straight month of lower credit-card debt. The percentage of consumers who were current on credit card payments but delinquent on their mortgages rose to 6.6 percent in the third quarter of 2009, and the percentage who fell behind on credit-card payments for the sake of their mortgage fell to 3.6 percent. This trend is most common among consumers with the lowest credit scores. The economic slump is largely to blame, as unemployment and tighter banking practices have made consumers more protective of their credit cards, and home values have fallen, leaving many owners underwater on home loans.
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US Credit Card Defaults Surge 11 Percent, Delinquencies Fall Again
Risk Center (03/08/10) Scenga, Sandro
Fitch Rating's latest prime credit card chargeoff index increased by 112 basis points to 11.37 percent in January compared to the month before. The index rose its highest level since September 2009's record 11.52 percent, and 54 percent above year earlier levels. The increase was chiefly attributed to a payment holiday for Chase credit cardholders, shifting a higher number of chargeoffs into the current period. Delinquencies of more than 60 days fell slightly in January, down 4 bps to 4.50 percent, while the 30-day rate declined 6 bps to 5.72 percent. The 60-plus day delinquency index was 11 percent higher than in the February 2009 period. "Late-stage delinquencies are still trending in the 4 percent range industrywide, which is keeping chargeoff levels in the double-digits," said Managing Director Michael Dean. "Until we see some meaningful improvement for employment numbers, consumer delinquencies and defaults will remain elevated at or near these levels." Fitch expects ratings on senior credit card ABS tranches to remain steady based on available credit enhancement, loss coverage multiples, and the structural protections given to investors.
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Fed Proposes New Rules on Credit Card Penalties
Baltimore Sun (03/04/10) P. 14; Ambrose, Eileen
New rules on credit card penalties have been proposed by the U.S. Federal Reserve, which was obligated under the Credit Card Accountability, Responsibility, and Disclosure Act to ensure that such penalties are "reasonable and proportional." The rules impose a ban on inactivity fees and multiple penalties for single violations. Penalties cannot top the dollar amount involved, while card issuers would be required to explain the reason for a rate hike. In addition, issuers that bumped up rates since the beginning of 2009 would have to run evaluations to determine if a reduction in rates is warranted by a change in conditions. However, this provision does not mandate that issuers must lower rates. The inactivity fee ban would stop issuers from levying a fee for not using a card or for not charging enough during the year, according to Josh Frank with the Center for Responsible Lending. The Federal Reserve is accepting public comment on its proposals for 30 days, and the rules will take effect Aug. 22.
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U.S. Consumer Credit Rises for First Time in Year
MarketWatch (03/05/10) Robb, Greg
The Federal Reserve reported March 5 that consumers took on more debt in January, in what could be a sign that the economic recovery is gaining traction. According to the Fed, total seasonally adjusted consumer credit increased at a 2.4 percent annual rate in January to $2.46 trillion. The increase was the first increase in total seasonally adjusted consumer credit since January of last year. Much of the increase was powered by growth in non-revolving debt like student and auto loans, which rose by 5 percent, or $6.62 billion, in January. Credit-card debt, meanwhile, dropped for the 16th consecutive time in January, falling by 2.4 percent to $864.4 billion. Despite the overall positive numbers in January, consumer credit is still down 4.2 percent on a year-on-year basis.
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The Shoe That Refuses to Drop: Home Equity Losses
American Banker (03/10/10) P. 1; Berry, Kate
Borrowers are making payments on second mortgages while falling behind on first mortgages. Lender Processing Services reports that home equity loans 30 to 89 days delinquent came down from a peak of 1.78 percent at the end of 2008 to 1.32 percent on Dec. 31 while the rate for first mortgages declined less steeply to about 3 percent. With 95 out of 100 borrowers still keeping up with their second mortgages, according to Rochdale Securities analyst Richard Bove, the staggering losses predicted for the banking sector are unlikely to materialize.
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Repurchased Loans Putting Banks in Hole
Wall Street Journal (03/08/10) P. C5; Saha-Bubna, Aparajita
Lenders face demands in the coming months to buy back defectively underwritten mortgages. Barclays Capital reports that lenders repurchased approximately $20 billion of loans with flawed underwriting last year, nearly 50 percent of which were written off because the loans were delinquent. Most of the loans bouncing back to lenders are coming from Fannie Mae and Freddie Mac, which bought or guaranteed the mortgages but now claim they were improperly made.
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Program to Pay Homeowners to Sell at Loss
New York Times (03/08/10) P. A1; Streitfeld, David
Beginning April 5, the Obama administration will encourage delinquent borrowers to avoid foreclosure and instead give up their homes in short sales by streamlining the process; offering a cash payment to the homeowner, as well as to the servicer and second-lien holder; and protecting borrowers from future lender lawsuits for the unpaid mortgage balance. To curtail fraud, lenders will have to consult realty agents to assess home value and minimum acceptable offer. They then must accept any offer that is equal to or higher than that.
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Banks Pressed on Second Mortgages
Wall Street Journal (03/08/10) P. A2; Hagerty, James R.
Rep. Barney Frank (D-Mass.) is pressing big U.S. banks to relax terms on second-lien mortgages for struggling homeowners. A letter from the House Financial Services Committee chair to Bank of America, Citigroup, JPMorgan Chase, and Wells Fargo warns that banks' failure to write down second mortgages is keeping many "underwater" borrowers from reducing the balance on their first-lien loans and is limiting the number of short sales. Meanwhile, the Obama administration soon will roll out an initiative allowing borrowers who lower payments on their first-lien mortgage through the Home Affordable Modification Program to automatically get a break on their second mortgage.
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FDIC Chief Urges Banks to Expand Small-Business Loans
Miami Herald (03/08/10) Hall, Kevin G.
On March 8, Federal Deposit Insurance Corp. (FDIC) Chairwoman Sheila Bair said borrowers need to identify and report banks that are not lending to consumers and small businesses. "A light needs to be shined on this, and explanations need to be made where credit is not being provided," said Bair to members of the National Association for Business Economics in Washington, D.C. The FDIC's recently unveiled bank industry data indicated there was a 7.4 percent decline in lending in 2009, the largest since 1942. However, Bair stopped short of calling for a government mandate to require banks to make a minimum amount of loans, saying that such efforts have been historically unsuccessful. David Wyss, the chief economist for the credit-rating agency Standard & Poor's, said regulators "want the banks to lend, but they don't want them to take any risks," adding that, "when you're looking at small business, you're looking at risk."
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Credit Checks May Spell End for 3,000 Japanese Consumer Lenders
Bloomberg (03/09/10) Flynn, Finbarr; Taniguchi, Takako
Nearly 3,000 Japanese consumer finance companies must register with Credit Information Center Corp. or Japan Credit Information Reference Center Corp., a process that can take months to complete, to comply with stricter rules set to take effect by June 18. Failure to do so could result in being shut out of the lending market by the end of June. “Unless they start making applications urgently now, many won't make it on time,” says Kenichi Sugasawara, a manager at the Research and Planning Department of Credit Information Center. “It will be illegal for companies that aren't registered to make new loans after the law takes effect.” The government is employing credit-checking firms to help ensure that borrowers can't use multiple lenders to rack up loans exceeding one-third of their annual income, as the government extends a crackdown on the industry that's contributed to the closure of almost 10,000 consumer finance companies since March 2006. The failure of so many small consumer lenders to register reflects doubts that they'll be able to weather stricter regulation, says Masayuki Hanabusa of the Japan Financial Services Association, which surveyed the industry last year.
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Defaults on Student Loans Rise in Arizona
Associated Press (03/07/10)
Statistics released by the U.S. Department of Education show that the default rate on federal student loans in Arizona stood at 9.8 percent in fiscal year 2007, which was the highest rate in the nation. The high default rate in Arizona in FY-'07, which was the most recent year for which statistics were available, was attributed to a number of factors, including generous lending practices, higher tuition, and lower paying jobs. In addition, some say that Arizona has higher default rates than other states because it has a larger share of students at community colleges and for-profit schools than the rest of the nation. Such students tend to have higher default rates than students in private nonprofit universities.
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Deficit of Bank Accounts in the Bronx Spawns NYC SafeStart Program
New York Daily News (03/02/10) Beekman, Daniel
A recent study by the New York City Department of Consumer Affairs has found that 29 percent of all Bronx residents do not have bank accounts. In an effort to bring some of these consumers into the banking system, the city has partnered with local banks to launch the NYC SafeStart program, which makes bank accounts available to all city residents. Consumers who open an account with one of the 10 participating banks, including Amalgamated, Capital One, and Checkspring, do not have to pay any monthly fees on the account for two years so long as they maintain a modest minimum balance, usually just $25. The accounts also come with ATM, but not debit, cards. The program has been praised by Jose Rodriguez, the district manager of the Bronx's Community Board 4, who said it was a "step in the right direction" towards offering banking services to residents of the Bronx. However, the program may be a hard sell to many Bronx residents, who generally do not trust banks and tend to prefer the instant access to money that they get from check-cashing stores. Nevertheless, the program could soon be expanded to neighborhoods in Brooklyn that also have high concentrations of unbanked residents.
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Finance Execs Agree: 2010 is Hitting Stride
Automotive News (03/08/10) Henry, Jim
Major auto lenders on a CEO panel at the American Financial Services Association Vehicle Finance Conference & Exposition said they are having an easier time raising funds, despite fragile consumer confidence, lukewarm demand, and rising interest rates. Executives for two captive finance companies, Ford Motor Credit Co. and Nissan Motor Acceptance Corp., plus one bank-based auto lender, Wachovia Dealer Services, expressed cautious optimism about 2010, and generally agreed that last year appears to have been the bottom of the current business cycle. John Noone, Ford Credit
president for global marketing and sales, noted the asset-backed securities market has begun to thaw, restoring a major source of funding for auto lenders. The asset-backed market essentially shut down during the credit crisis as asset values dropped, first for housing and then for used cars, but the
U.S. government's Term Asset-Backed Securities Loan Facility helped get that part of the credit market going again. "Securitization essentially collapsed in late 2007," Noone said. "The TALF program was very helpful, [but] we've been moving away from the TALF program, and now we have completed private transactions." Ford Credit's funding plan is "far more robust and assured" for 2010, according to Noone.
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Bill to Rein in Car-title Lenders Clears House
Examiner (DC) (03/09/10) Flook, William C.
Virginia's House on March 8 passed a bill by a vote of 96-2 to regulate high-interest auto title lending in the state by creating limits on loan terms and interest rates. The measure, which originated in the Senate and advanced through the chamber in February, was modeled after similar legislation in Tennessee. It restricts title loans to a year's length, shrinks the pool of eligible borrowers, limits loan amounts to 50 percent of the vehicle's value, and prevents new interest from being added to a loan once a vehicle is repossessed. The bill also establishes tiers for interest rates ranging from 22 percent per month for loans smaller than $700 to 15 percent per month for loans above $1,400. The bill received support from industry groups and consumer advocates, but both said they were unhappy with individual provisions. Del. Terry Kilgore (R-Gate City) called it "a carefully crafted compromise."
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The Verdict on TALF: It Worked
Wall Street Journal (NY) (03/05/10) P. C8; Shrivastava, Anusha; Zeng, Min
Federal Reserve Bank of New York President William Dudley says the component of the Term Asset-Backed Securities Loan Facility (TALF) that supported securities backed by consumer loans, which ended on March 4, will turn a profit. The program facilitated $100 billion in bonds backed by auto, student, and equipment loans and credit-card debt. As a result, risk premiums have tightened -- in some cases a full percentage point -- and investor confidence has improved, enabling bond issuers to sell securities without federal backing. Dudley said the success of TALF is related to the restriction to only triple-A rated securities and requiring borrowers to put up some of their own capital.
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Higher Used-Car Prices Cut Loan-security Losses
Associated Press (03/05/10)
Fitch Ratings reports that higher prices for used vehicles and improved buyer credit are helping mitigate losses on prime auto loan asset-backed securities. Losses on securities backed by the highest-rated loans ticked upward in January because of seasonal weakness, according to Fitch, but losses were still more than 20 percent lower on an annual basis for the third straight month. Fitch says stronger used-vehicle prices are resulting in higher recovery rates for repossessed vehicles. Used-car prices have been rising as new car sales have fallen and financially stressed buyers are moving into the used-car market. Fitch's prime 60-day delinquency index rose 8.5 percent over December, and net losses for January on an annualized basis were 1.61 percent.
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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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