Home Loans - Too Risky? Don't Ask, Don't Tell!

Should Banks be making mortgage loans? We take the answer for granted. Yet, I have been involved in an on-line discussion that started about gold’s value and price, that became about the wisdom of banks making loans for homes. And, if so, the circumstances under which loans are made. Financial and economic modeling does not take into account all of the variables, nor can any model accomplish that feat. My position is that, the contributors to the conversation should have the actual experience to deal with the issues, and even then they will end up with as many opinions as there are participants

The Philosophical debate of home ownership is one that has so many moving parts, IBM's “Jeopardy!” winning super-computer, WATSON, would have difficulty arriving at "an answer".Oh, and that assumes that we can identify all of those factors which should/must be considered. Part of the problem here is that lending for home purchase is tied to our (U.S.) culture and societal expectations. Further, politically, we have tied ourselves to a tax and income structure that counts on home ownership.

How to make successful loans? Easy - (1.) Take only Borrowers with perfect credit and lifetime employment with Life and Disability insurance naming the lender (2.) Variable rate (3.) changing DAILY (4.) at a rate fixed to the Fed Funds rate (5.) Plus whatever margin the institution needs to satisfy stockholders. (Oops! Nothing will satisfy stockholders so let's just call it a reasonable “ROI”-Return on Investment)

The issue is simply Home Ownership for the “99%” or Not! The mutual financial institutions, including credit uions, have an advantage, that they have squandered, as they have no stockholders and pay lower/no taxes. Mutual holding companies allow community banking to survive the onslaught of mega-banks. But as mutuality disappears, we will be left with the Savings & Loan “S&L” model. That worked real well. I ran several failed S&Ls for the State of MD with the FSLIC (now part of FDIC) right next to me. Commercial banks? How about Bank of New England - $32B "failure" in 1990 (translate that to 2012 dollars!). I know it well, because I "worked-out" a small part of the organization, me having moved from MD, where I was President of a new Federal Savings Bank, in January 1989 to run the Berkshire, MA region of BNE.

Lending is RISK. That is what banks are supposed to do: Take Risk! However, it is supposed to be managed. Shareholders, by demanding higher dividends and share prices, force unwarranted risk-taking. The two demands are somewhat diametrically opposed, yet sophisticated models will demonstrate that they follow one another, and lower the risk taking as the Board over-sees the "lending activities". GOOD LUCK!

Spend 10 or 20 years in banks and mortgage companies. thrifts and commercial banks. Then spend 10 years looking at changing regulations, but not just "real" banking, but so-called shadow-banking (Morgan Stanley, Goldman Sachs et al) as well. See what the SEC (Securities & Exchange Commission) has planned, versus what was on the books in 2006. Then look at enforcement or the lack thereof.

My long and drawn out point is that without field experience one cannot "model" the issue of "to lend or not to lend" and how much to charge if the decision is "YES". Then again, we are at the juncture of epistemology, philosophy, and economics. Answering the question of whether there is A God, many Gods, an Intelligent Designer" (ha ha - think about it), or just Chance, would be easier.

The price and value of gold - I guess that debate is over. It's worth something because we say so and because my grandson liked shiny stuff when he was little.

Author's Copyright by Richard I. Isacoff, Esq, September, 2012 rii@isacofflaw.com http://www.isacofflaw.com/

Bankruptcy: After Christmas?

It's the time of the year where many people start buying gifts for others for the holidays. That, of course, is in addition to buying food, heat, electricity, telephone(s), gasoline, auto insurance, cigarettes (bad for health - bad for pocketbook), cable, clothes (don't forget shoes, socks, and underwear), and paying rent or mortgage and the car payment. Oh, and remember to buy the medications the Doctor prescribed.

Quite a list! How To Pay For It? Many people use CREDIT CARDS. Then comes February 1st and the bills flood the mailbox overwhelming the Letter Carrier's ability to carry all of the Visa, Mastercard, Discover, JC Penny, Sears, BestBuy, Fingerhut, QVC, Amex, Capital One, Orchard Bank, Bank of America et al BILLS.

When asked how they expect to pay, many will say "Well, I HAD to get those presents. I mean, it was Christmas (or Chanukah or whatever other holiday "requires" gift giving)". Says the lawyer at the first consultation about debt relief, "Okay, but how did you expect to pay the bills?" - the classic answer "I didn't think about that. I figured I be able to pay a little on each card, I guess." This response is typical from clients with sufficient income to pay the bill with minimum payments over the next 20 years, and from those who HAVE TO GO WITHOUT FOOD AND HEAT TO MAKE ONE PAYMENT!!

There are several problems here, actually many more than several. The biggest, in a sense, is that with debt that has accumulated over the past 3, 5, or 10 years there is no way ANY PAYMENTS are affordable. Then comes "Can I file bankruptcy?" The real question is "Can I file bankruptcy and still get rid of my bills (a discharge) even though I was foolish...?" There is no easy answer.

In order to eliminate/discharge debt, the Bankruptcy has to be filed in good faith. You cannot intentionally incur debt that you know you cannot pay. At a minimum, that debt cannot be discharged (made to go away). But wait...There's more! When the gifts were being bought and the plastic nearly melting from over-use, did the purchaser intend to repay the credit card company? The easy answer is "Yes, I always pay my bills!" But, is that the honest answer.

Many people just do not think about or know how to think about budgeting. People of all ages get caught up in the "I have to buy a gift for..." mode. So, what can be done for the honest but horrid money manager/giver?

Rule 1. Know how much you take home every month and how much must be spent on essentials, like the list above

Rule 2. If there is any extra, before deducting current credit card payments, be certain that it is truly disposable income immediately. Do not count the money you will save when you stop smoking.

Rule 3. Add up all of your credit card and other unsecured debt (debt not attached to collateral, like a car loan)

Rule 4. Multiply the amount of debt by 3% or 0.03

Rule 5. If the result after following Rule 4 is more than your "extra" (your disposable income) you should not incur more debt.

Rule 6. To figure how much unsecured debt you can support reasonably, DIVIDE your extra/disposable income by .03. So, if you have $200/month truly extra, the Most unsecured debt you can have is $6,000. And, remember that "extra" is what's left after paying all of the expenses listed in the beginning of this posting and any other NECESSARY expenses you have.

Even at the level shown, paying will be a bit of a struggle - things happen that cost money and are unexpected. Missing one month of the payment on any unsecured debt will make everything fall apart and you might never catch up.

If you have done those calculations, and after being careful you find that 6 months (I just picked a number) into the new year that you cannot pay because "Life comes at you fast!", then yes, you can file a bankruptcy with a clear conscience and peace of mind.

Author's Copyright by Richard I. Isacoff, Esq, November, 2011

rii@isacofflaw.com
http://www.isacofflaw.com

We Got A Credit Line Increase

The Country is Saved. We Won't Default. We Won't Need the EU to Bail US Out! Hooray!!!

As I noted in a Tweet, if the U.S. defaulted and ended up in Bankruptcy, who would be the Trustee, the guardian of creditors like China? Luxembourg???

The entire situation is ridiculous. But, it wasn't so far-fetched (a default). Everyone was buying gold and platinum and silver and... As posted here earlier "How Many Grams of Fat Are There In An Ounce of Gold?", the idea being that gold is only worth what someone will trade for it. Well, we will not have to worry about that anymore. The Congress, meaning the Democrats, Republicans, and Tea Partyists, in both the House of Representatives and in the Senate, and the President have come up with the master-plan to avoid not being able to borrow. The amount the United States can borrow will be increased.

Foolish as it appeared (because of all of the 2012 election campaigning and "holier than thou" Tea Party drinkers; I mean why have a Tea Party and drink coffee? But they did forget the crumpets!), there was exposed a huge problem with our financial system.

Some basics and answers to questions:

1. How could we run out of money to pay bills? Well, we already have. We have used the equivalent of an home equity loan to get money for all of our annual needs. The difference is that we "sell" Treasury Bonds. That is a nice way of stating that we will agree to pay "X"% interest if someone/country lends us money. Granted the amounts are larger than you would need for siding on your house, but the concept is identical. The "Treasury Bonds" that you hear/read about are nothing more than IOUs given to whoever buys the bond.

2. What is the Debt Ceiling and how high is it. It is $14.7 trillion; that is $14,700,000,000,000. It is the amount the Country is allowed to "borrow" from other countries and "all of us". It is a constitutional matter. The Congress has to agree on the amount and then get the President's approval for the MAXIMUM amount of our loans. Congress is acting like a Bank's Loan Committee deciding whether the Bank's Customer (the Country) can repay it's loan.

Were did all of the money go? No one knows for sure and no one, even the GAO (General Accounting Office) can trace it. But we know that we spent money on several wars (2 still on-going); we STOPPED a world-wide depression by enacting the "Stimulus" packages; our States, cities and towns had their tax revenue supplemented by some of that $14.7T for schools, bridges, roads, housing (especially for the elderly); the world wide stock and securities markets did not crash because we paid to offset losses -AIG, Lehman, Ford, Chrysler, GM et al.

IN REALITY, WE SPENT MORE THAN WE EARNED. Tax revenues were too low, the wars were/still are sooo expensive, and we have been spending like we could just print more money (oops, we can and did!)

3. What is the "Deficit" - over-simplified but not by much - just as in any household, or business, the deficit is the NEGATIVE difference between what we spend and what we earn. The trade deficit is a bit different - that is the NEGATIVE difference between what we sell to foreign countries and what we buy from them. For a long time we have bought more than we have sold. WE ARE A NATION OF CONSUMERS.

Coupled with our penchant for buying is the fact that our "DOLLAR" has been strong for a long time in comparison to other countries' money. Simpler - our dollar was based on a stronger economy; more output and capability of manufacturing, inventing, building more than nearly all other countries. We were perceived as having the ability to produce 10, 15, 20, 50% MORE IF WE WANTED TO, AT ANY TIME - like right after the start of WWII. Doesn't do much good if no one is buying!

4. Why did it take so long to set a new limit? POLITICS - RE-ELECTION in 2012. That simple? YES. That doesn't mean that some of the 535 people in Congress did not really believe that our "bill" to others will cause the ruination of the Country. It could, but most likely won't. As these things are measured, we have a bill that is 62% of our Annual GROSS DOMESTIC PRODUCT(GDP). That means that we OWE 2/3 of our county's TOTAL output of goods and services for a year.

Just think about paying 62% of your net/take home income for loans. That doesn't take into account food, utilities, cable, gasoline etc - all of the things that are monthly or annual expenses. For the Country, it's like only having 1/3 of the total amount the United States collects, for the payment of Medicaid, Food Stamps, Unemployment, Military pay, other government employees' pay, expenses for things like the Gulp/BP clean-up, and all other programs big and small.

Maybe now our elected officials can get back to business of running the Country - maybe they need a lesson in accounting - Remember Debits on the Left, Credits on the Right. Debits by the Window, Credits by the Door (from Accounting 101). OR we could buy 535 calculators and copies of Quicken

Author's Copyright by Richard I Isacoff, Esq, August 2011

rii@isacofflaw.com
http://www.isacofflaw.com

Economy Getting Better? What Do You Have In Your Wallet?

The latest news and business reports say that "the economy is improving. All economic indicators show..." If that is true, and not just hype, as the commercial for a credit card asks, "What do you have in your wallet?"

How can the jobless rate waiver between 9.8% and 9.5% and there be more than 450 unemployed persons (still receiving unemployment or registering at an unemployment office) for every job opening, if the economy is improving?

Well, WHAT IS THE ECONOMY? What does "THE ECONOMY" mean? The "hard and cold" definition is simply the management of resources of a community, region, country, etc. Put in other terms, it is a system of producing, distributing, and consuming wealth. Perhaps this definition would be better - "economy encompasses everything related to the production and consumption of goods and services in an area" (pick the size -city, state,country,world etc).

Economic purists would probably prefer "the system for the production (or acquisition), and allocation of limited resources". Put simply the Management of "SUPPLY AND DEMAND".

So, when you hear, "the economy is improving", all that means is that the system of managing goods and services, including such items as commodities (wheat, gold, orange crop (really)), "stuff" like cars and their production, houses both new and existing, is getting under control. Supply and demand for whatever is being managed better. There is no one person, nor any government agencies in charge of managing all of that. Entities like the Federal Reserve, the Treasury, Congress, and BUSINESS, each and all control parts of the management.

So, "THE ECONOMY IS IMPROVING" has little immediate change for individuals. "Things" are getting better (managed better) but that has no affect for you or me. Maybe in 5 or 10 or 20 years, but not NOW.

Oh, and "The ECONOMISTS SAY that ..." Who are the ECONOMISTS. They are people or groups of people who study ECONOMICS which is the study of the ECONOMY.

ECONOMICS is a SOCIAL SCIENCE, (not science like chemistry, or physics, or biology) that studies the economy. Adam Smith in his 1776 publication "The Wealth of Nations" described the economy as a self regulating market system that adjusts to fulfill the needs of the populace - from his point of view, LAND, LABOR, and CAPITAL are the three factors/components contributing to a nation's wealth. Because of the competition to use the limited resources of a country/area/town , those with money will buy the resources and use them profitably which will result in a balance of all uses so the owner will get the biggest return. Smith's concept goes on to argue that it is in the owner of the capital to use it for the public good in order to get the best return.

Okay, so the Economy is getting better means that the government has a better understanding of what went wrong and an idea of how to fix it. Fixing it means that a balance will be reached between supply and demand. There will be no glut of houses for sale, nor high unemployment, because there will be a demand for goods and services, because people will be working to provide goods and services. Sounds like a circular argument. It is, but each time you go around, you move up just a little bit.

Look, in simple terms, the "economy" tanked when everyone realized that there was no true value in certain stocks and bonds - that they were being bought and sold based on assumptions that were wrong. In essence, the little boy cried out, "Mommy, the emperor has no clothes". The end of the world? NO! The end of what was thought to be a managed system of supply and demand? YES!

The economy is getting better - government is regaining control over the supply and demand and production and distribution of good and services. It will take time and no one knows how much time.

The question for PEOPLE is not about the economy, it is about "IS MY MONEY SITUATION GETTING BETTER OR WORSE?"

Author's Copyright by Richard I. Isacoff, Esq., January 2011

rii@isacofflaw.com

http://www.isacofflaw.com/

Interesting Interest Rates

30 Year Home Mortgage Rate Hits 17% Prime Rate at 16%+ Savings account interest reaches 12% Ancient post depression history NO - 1982

The graph above shows the history of the Prime Rate (interest rate charged to a bank's least risky and best customers) - compare those rates to what you pay for credit cards, auto loans, and mortgages, for a real eye-opener

Here is a little chart of the Fed Funds Rate (the interest rate the Federal Reserve Banks charge member Banks to borrow - single day loans), the 30 Year Mortgage Rate, the Daily Savings Account Rate, and the 1 Year CD Rate (all averaged for the respective year) :

1982: Fed Funds 12.25% Mortgage 17% Savings 12%

1989: Fed Funds 9.17% Mortgage 11% Savings 8.5%

1995: Fed Funds 5.9% Mortgage 7.9% Savings 4.75% 1 Year CD 7%

2000:Fed Funds 6.42% Mortgage 8.1% Savings 5.5% 1 Year CD 6.625%

2005:Fed Funds 3.33% Mortgage 5.9% Savings 2.35% 1 Year CD 3.25

2007:Fed Funds 5.04% Mortgage 6.3% Savings 4.25% 1 Year CD 4.9%

2008:Fed Funds 1.85% Mortgage 6% Savings 2.5% 1 Year CD 2.5%

2009:Fed Funds .25% Mortgage 5.1% Savings 0.5% 1 Year CD 2%

Why are all of the numbers important? They show the level of inflation, the cost to consumers for borrowing, and perhaps most significantly, the profit the banks are making on money. For example, in 1982, while mortgages were 17% plus points, banks were being charged 12.25% by the Fed and paying 12% to depositors. Keep in mind that a deposit in a bank is nothing more than a customers loan to the bank for the rate of interest being paid on the savings account or CD.

At that time, there was a 5% margin between the cost of money and the rate that could be charged to consumers for a mortgage. The MARGIN narrowed to 2%+/- for the next 27 years; then at the height of the crisis, the margin grew to 5% again. So, in inflation and in recession, the Banks made the same margin. Rates were so stable that savings bank bankers were called "3-6-3" bankers: take it in at 3% (savings deposits) lend it out at 6% (mortgage) and go home at 3 (afternoon) (That was the time before securitization of mortgages).

There are two lessons to be gleaned from the figures other than the fact that Banks make money: 1. When the Cost of Funds (to Banks) is low Banks charge what the market will bear. It is a "free market", unlike the regulated days of the 60s and 70s, and Banks can take advantage of this era. 2. The current interest rates are so low, that as to Banks, there is almost free money. This will not stay so cheap for Banks.

With the interest rates so low, and Banks making 5% on mortgages, and more than 3% on Prime Interest Rate loans (the rate charged to the best customers (those with no risk of default - like GM, right?) why are Banks charging 19%-30% for credit card debt? This is the primary debt for consumers beyond a mortgage. The Banks are making an obscene 15% to 25%+ on the average borrower's credit card balance!!

What is worse, in anticipation of the new laws which prohibit card issuers from arbitrarily raising interest rates because of a one time-one day late payment, or because a payment was a day late on A DIFFERENT CARD, Interest Rates on credit cards have jumped 10%-20% and credit limits have been reduced by 50%-75%.

The next post will deal with the profits being made by banks in real dollar terms. Why is any of this important? The so-called recovery is only in the financial markets. Unemployment is soaring, the dollar is weak (to be explained next post) and the average consumer has seen no relief. Oh, and in case anyone has missed the news, foreclosures are still going strong.

Author's Copyright by Richard I. Isacoff, Esq, November 2009

http://www.isacofflaw.com/

Credit Cards - Rep. Barney Frank's Frustration (Mine Also)

Rep. Barney Frank (D), Congressman from Western MA, wants to "push up" the effective date of the new Credit Card regulations. He is prompted by the frenzy of card issuers raising rates, cutting limits, changing terms, and adding fees, all to beat the starting date of the laws. The laws merely set limits on how and how often card companies can change the terms of the agreement you have with them, without prior notice.

The standard argument, that there is no contract unless both sides agree, is not able to be put forth, because in the agreement you signed originally you gave the company the right to make all of these changes, even to your detriment. Is it fair? NO!, Is it legal? Yes, but only until the first of the year.

Congressman Frank's frustration is understandable, especially if you have a card and have been "slammed" by the card company with rates and fees you never anticipated. That these same companies, CitiBank, Bank of America, Chase, all have Federal Money from the bailout is beside the point. As stated in an earlier post, this is how they were able to report record earnings last quarter.

Congress will not change the date to October as Congressman Frank wants, but at least the issue is again being discussed. Unfortunately, the Congressman may suffer a decline in his credibility with his colleagues, but he will have a boost from his constituents.

Right now, everyone should be examining his/her cards and statements to determine if the terms have suddenly changes, if rates are higher, credit limits lower. If you need a card try a local financial institution. If none issue cards, shop for a new one, if yours is not playing fair. Be certain that you read the "Agreement and Terms" disclosure that will be your contract, BEFORE you use the card. Do not hesitate to decline the card even after it is issued to you. Be certain however, that you follow the rules on terminating the relationship or you could find an open credit line, detracting from your credit score, all the while believing that the card account was closed.

To be safe about credit, whether it is cards, loans, mortgages, joint accounts, "authorized user" cards (where the credit is based on someone else who has given you a card to use), get at least one credit report every six months. They are free from http://www.annualcreditreport.com/ .

Check to be certain that only the cards you use are open. Close everything else. While there may be a slight drop in your credit score (see posts of 7/27/09 and 6/11/09), the risk is far less than if you have unused and unwanted open credit lines affecting your score and overall credit standing.

Author's Copyright by Richard I. Isacoff, Esq, September, 2009

rii@isacofflaw.com

http://www.isacofflaw.com/

Get Protection from Creditors - But Wait, There's More!

"Protection from creditors" - just a euphemism for Bankruptcy? No, it is what filing Bankruptcy is and does. There are no more Debtors' prisons and no one has to walk around with a big scarlet "B" on his/her chest. Fine!, but what really happens, and who can file for protection? Before going any further, filing Bankruptcy WILL NOT force you to lose your house or car. In fact, it may help you to keep them.

My post of Monday July 27th discussed the need for completing a full personal budget for you and your family (if there is one to consider). Again, make a list of ALL regular living expenses, including cigarettes, gasoline, socks...EVERYTHING EXCEPT UNSECURED DEBT like credit cards and personal loans (Beneficial, CitiFinancial, HFC/HSBC etc. Then figure out your regular monthly income, including OT you ALWAYS get, bonuses you ALWAYS get, child support/alimony, pension, steady part-time jobs etc. then deduct all payroll taxes and insurance costs to get a net income. Next, if you are paid every 2 weeks, multiply the NET INCOME by 26 and divide that result by 12 to get a net monthly income.

THE MOMENT OF TRUTH - deduct your regular monthly expenses from your regular monthly income.If you have money remaining, is it enough to pay all of the minimum payments PLUS 1% of the principal for each card/debt? If the answer is yes, start by making a real month by month budget and start paying down each debt every month. Be sure to be on time, and that means the payments have to be in the mail at least 7 days before they are due, or 10 days before the start of the next billing cycle.

If you cannot make the payments and meet your expenses, then consider a bankruptcy consultation with an experienced Bankruptcy Attorney. You can find one on the web by going to www.nacba.org , which is the site for the National Association of Consumer Bankruptcy Attorneys, or by e-mailing me and we will get you a referral.

Bankruptcy is a RIGHT, not a privilege. The laws and rules are "spelled out" in Title 11 of the U.S. Code. It states clearly in Congressional intent and is sen again and again in cases, that the purpose of the Bankruptcy laws is to give Debtors, who cannot repay their debts, a "FRESH START". It is not punitive - it is a RIGHT.

For consumers, there are 2 sections of the Code that apply: Chapter 13, which is a way for people who have some money left over at the end of the month to repay a percentage of what they owe, be it 5%, 10% or 100%. The repayment period is up to 5 years, and the 30% interest rates stop immediately; and Chapter 7, where the consumer/debtor cannot make ANY payments for a 36 month period, or the amount of the payments would be so insignificant that the consumer really should keep the funds for emergencies.

Most good Bankruptcy lawyers will not charge for the initial consultation which is where she/he will help you determine if a Bankruptcy is the correct financial decision for you. The rules for filing are not that difficult to understand and the next Post will go into the details.

Author's Copyright by Richard I. Isacoff, Esq., July 2009
www.isacofflaw.com
rii@isacofflaw.com

Credit Card Laws - Sweeping Changes

The predictions of a difficult passage for the new Credit Card Legislation proved to be wrong. Congress, both the House and the Senate, fought back attempts by the finance industry to kill the Bill that will vastly alter the landscape of Credit Card issuance and cost to borrowers/users.

The formal name of the new law is the "Credit Card Accountability Responsibility and Disclosure Act of 2009"or the "Credit CARD Act of 2009" (note - the capitalized "CARD" is part of the actual name) Perhaps another, equally appropriate name would be the "Consumers Attempt at Revenge by Dodd Act of 2009". (Senator Christopher Dodd (D. CT) was the Senate’s primary sponsor and "pusher" of the bill.)

The details of the new law, known as Public Law No. 111-24, are yet to be finalized, as regulations have to be promulgated by various Federal agencies, but the main provisions are truly sweeping. Before briefly discussing each change or addition to the existing laws/rules, it must be noted that the Credit Card industry won one major battle. The original bills in the Senate and the House set an interest rate cap of 15% on any credit card. That provision never made it to a final vote. The industry Lobby made it clear to Congress that it would not permit such a cap on interest rates. In a compromise to get the rest of the improvements in the law passed and signed by the President (which he did on May 22, 2009), Congress dropped a cap on rates altogether.

Here are the primary provisions of the CARD Act of 2009: (Most of the "new" law is a change to the Truth In Lending Act")

1. There cannot be any more interest increases because your payment is received a day or two after the due date. Further, the increase in rate can only apply to FUTURE uses of the card - new purchases, advances etc. The balance owed at the time of the increase in the rate can only be charged the rate in effect before the change.

2. If there will be an increase for being late, you must be 60 days late, unless there are other issues involved. (The law gives the credit card issuer the right to raise a rate for future use of the card because of factors such as increased risk etc.) Even here however, the change applies to new balances only and there must be the new notice given.

3. Rate increases, in general, must be preceded by a 45 day notice and can apply only to FUTURE balances. It is important to note that the non-retroactivity of increases in rates applies here also.

4. If there is going to be a rate change, other than a change due to your card having a variable interest rate that goes up or down based on an index like the prime interest rate, or the U.S. Treasury rate etc, you MUST receive at least 45 days notice.

5. One major change is that if you or the credit card issuer terminates the card account, you MUST be given an amortization period of at least five (5) year to pay the outstanding balance OR you cannot be charged more than twice the regular minimum monthly payment. You cannot be forced to pay off the balance in a lump sum.

6. Unless you get a low introductory rate (teaser rate), there can be no interest rate increase for the first year. The exception is if you pay more than 60 days late.

7. The monthly interest/finance charge can not be calculated using the prior month’s balance if there has been a payment on that balance before the new statement date. That is a major change as many companies computed interest against balances that had been paid-off during the month.

8. No fee can be charged for going over your credit limit unless you specifically, and in writing, permit the card company to allow charges over your limit. Further, if there is a fee, you can only be charged once in the current billing cycle. So, if you go over limit 4 times during the month, you can only be charged one over-limit penalty fee.

9. If you pay by telephone or over the internet, you cannot be charged a service fee unless the company expedites the payment for you. So, if the payment is normally credited the next day if received after 2pm, but if you pay by a check by phone at 4pm and get the payment credited to your account that day, you can be charged a reasonable service fee.

10. When you make a payment more than the minimum amount due, all amounts over the minimum must be applied to the highest interest rate items in your balance. A simple example: you owe $1,500 for purchases which has an interest rate of 10%, and you owe $1,000 for a cash advance with an interest rate of 15%. You have a minimum payment due of $50, but you pay $200. After applying the $50 minimum payment amount in whatever way the company and you "agreed to" in the "contract", the rest of the payment, the remaining $150, goes to pay down the cash advance because the interest rate being charged is higher than for the purchases.

11 Your statements will be different. Every statement must show the current balance and the interest rate being charged for each type of card use (cash advance, purchase etc). Further an most important, the statement must illustrate how long it will take to payoff your actual balance assuming you make only the minimum payments and what the total cost in interest will be. The same document only also show how much interest you would pay in total if you pay off the card in 36 months (both assume no further card use)

12. Any one under age 21 must have a parent, guardian etc co-sign for him/her unless the under-age person can demonstrate with proper financial disclosures, that he/she has the ability to pay the debt that may be incurred by him/her-self.

As with all laws, the devil is in the details. Here, the details will be set by the Federal Reserve Board which will enact regulations to "fill in the holes", provide definitions like what is the proper financial statements for under 21 borrowers, and what the new statement should look like, and what rules have to be in place for the "reasonableness" of all fees etc.

Finally, certain provisions take effect on 90 days, some in 9 months and some 9 months after the rules are made which has to be done within 15 months. In general ALL of the provisions requiring new notices become effective at the end of August 2009. The others ... hopefully we will have firm dates in the near future.

Author's Copyright by Richard I. Isacoff, Esq., June, 2009

http://www.isacofflaw.com/

rii@isacofflaw.com

Credit Cards and Credit Crunch - the Other Monster Under the Bed

It is official - credit card default rates are higher, as much as 30% higher than last year, and higher than the experts thought they would be. Okay, how much of an expert did you have to be to know that. All you need to have, to know the defaults are getting worse, is a CREDIT CARD, or two or three or four or...

What are the reasons? That may require an expert. Could it be the loss of 4 million jobs, or the increase in interest rates even when the Banks are paying next to nothing for the money they are lending, or people using credit cards just to buy food and pay for heat until the cards max out, or homeowners making the last few mortgage payments they will be able to make with the credit cards, or is it just cardholders being irresponsible and using the cards to pay for filing bankruptcy?

It has been reported that the total outstanding amount of credit outstanding for credit cards, used or unused credit, will decrease by 50% or $2 trillion by 2011. Card companies are cancelling cards, jumping up rates (see earlier post), and telling card holders that the cards will not be renewed. Okay, let's just fold up our tents and go home. These are the same financial institutions that got bailed out again, today, by the Treasury. The thanks?

Advice for those of us who will need or think we will need to use revolving credit (credit cards) goes something like this.

1 Pay down or even off the cards that are charging you the highest rate.

2. DO NOT be late on any card payment - the issuer can cancel your card or increase the rate.

3. Do not apply for any new cards - the applications you make will not only affect your credit score but existing card issuers might look at this act as a need for more credit, and they are afraid you will not be able to pay

4. Review your credit reports carefully to be certain only real credit is reported, that only your debts are shown, and that closed accounts are reported properly. Go to the web site http://www.annualcreditreport.com/ and order one report from each of the 3 bureaus - Experian, Equifax, Transunion. Be sure you do not ask for your score - it will cost you to get that,while the report itself is free. Do get fooled by other sites like freecreditreport.com as you will probably end up paying for something

5. Decide if you really need credit cards, beyond a small limit card for emergencies. Try living without them now because you might not have them later anyway.

6. DO NOT TAKE A HOME EQUITY LOAN TO PAY OFF CREDIT CARDS. You are changing unsecured debt into secured debt, and the security is your home.

7. See a credit counseling service or a good debt counselor to help you determine the amount of credit you will need month to month. Even if the lesson costs $250, it is far less than the interest on even a modest balance when the rate is 30%.

Is there an end in sight to the craziness? No! Maybe a halfway point? Yes

Author's Copyright by Richard I. Isacoff, Esq., March 2009

http://www.isacofflaw.com/
rii@isacofflaw.com