New Credit Card Regs Effective Today

(See entire posting on this issue at February 10, 2009)

New Credit CARD Act of 2009 rules went into effect TODAY, and the are actually some decent regulations

1. Card Issuers will have to check on the customers ability to repay before issuing cards. Sounds common sense doesn't it! It will be unreasonable, under the new regulation and always has been based on life, for a card issuer to give a card to someone without income or assets, and for a card issuer not to review such information.

2. Before you can be assessed an over-limit fee, you will have to AGREE to allow over your limit charges to be accepted. It is not like so many other programs where you have to say "no" or your in, here if you do not say "YES" you cannot be assessed a fee or penalized in any way if you are approved for an over-limit charge

3. If the Card Issuer is going to increase your rate, for any reason, you must receive at least 45 days notice, and then the increase can only apply to charges/cash advances AFTER the 45 day date. Old balances pay at the old rate of interest.

4. Your rate cannot be increased, in nearly all circumstances, for the first 12 months you have your card. The exceptions include if you get a variable rate card where the interest rate is supposed to go up and down; or if you are more than 60 days late in the first 12 months.

5. If you are under 21, you will have to show that you can afford the payments on your maximum credit limit, or have an over 21 co-signor.

6. Card issuers will not be able to make deals with colleges or high schools to come onto campus to offer cards if the card company offers the school an incentive to let it in.

7. Payment dates must be the same day (1st 4th 8th 27th etc) each month and if the payment date falls on a holiday or weekend, not late fee or penalty can be assessed

8. The new statements must contain information in bold type of the New Balance, Minimum Payment Due, and the Due Date. There must also be a warning of what will happen to the rate and when it will happen if a payment is late. The biggest change in statements is that each month it MUST show how long it will take to pay off the balance at the present interest rate if you make Only The Minimum Payment; AND HOW MUCH YOU WILL HAVE TO PAY, TO PAY OFF THE BALANCE IN 3 YEARS. It must also show how much in total you will pay in each case

9. Credit Card Issuers MUST post their agreements on their websites, have the agreements first approved by the Federal Reserve, and have the Federal Reserve Board post them on the Fed’s comprehensive and advertised Card Agreement Website. (WELCOME TO 2010!)

Note: The full 841 page bill with commentary before final adoption is available at the Federal Reserve’s website but a shortened version along with the long one is at: www.federalreserve.gov/consumerinfo/wyntk/creditcardrules.htm

Others At:

http://www.fdic.gov/regulations/laws/rules/6500-1400.html

http://abclocal.go.com/kgo/story?section=news/7_on_your_side&id=7252770

http://www.youtube.com/watch?v=EGY0jooXIsU&feature=player_embedded

Author's Copyright by Richard I. Isacoff, Esq, February 2010

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

Instant Transfers, Instant Profits (for Banks) - UPDATED

In the Banking sub-sector of Financial Services, there is a process in effect which will make the Banking business substantially more profitable, although at the risk of customer dissatisfaction. "Check21" is a 1year old law that allows banks and any other business to accept checks as EFT (Electronic Funds Transfer) debits to the customer (like a debit card- immediate withdrawal) , and EFT credits to the bank. This eliminates "float" for all practical purposes (the time people writing checks had from paying a bill or buying something and the time when it actually posts to the customers' account.) You won't have the 1 day's grace when you write a check until it clears.

When ATMs and POS (point-of-sale) terminals were first introduced in the early 1980s, there was an insufficient infra-structure to support the wide-spread use of them and to generate their true value. Many transactions were simply captured electronically and still processed in "batch". Checks were still checks with float. Now, with the Internet providing the connectivity needed, banks can move to eliminate checks as we know them. Even mail order/bill pay by check services are processing checks as EFT (instant debit to your account, instant credit to theirs) occurrences. With the first significant upward movement of interest rates, the issue will become moot. All transactions will be electronic; there will be no more checks

Checks in the clearing process take 1-2 days ("float") to be processed, or possibly longer if it is a "foreign" item. For every $100 million in float, and for each 1% increase in the rates being paid or earned by a bank, for each day of float the difference amounts to $1 million dollars annually. Assuming rates move back to 5% from the current 0.5% in 2-3 years, and a large bank has $1 billion in float for 1 day, there is $45 million per year in earnings, either gained/retained or lost. Further, the cost in manpower and technology to process the incoming & outgoing checks and other items is staggering.

In the mid 1980s I wrote a paper on this issue for a Mutual Savings Bank trade publication. Remember that those were the days of 10%-15% interest. Even a $2 million per day float cost $200,000-$300,000 a year. Seems small now but it was not then. The issue preventing the change to all electronics was the lack of the Internet. Every device had to be a direct connection; even the ATMs were on dedicated lines. That obstacle is gone. Add to the equation the fact that checks cannot be processed faster without them ending up shredded in the machines, and the machines need time to read the manually typed numbers that reside on the bottom of items showing the amount of the transaction.

Currently there is a debate in Congress about Banks' fee income - overdraft charges, ATM fees, etc. Fee income is the line item all Banks are trying to get; there is no risk like there is in loans. A move to all EFT debits and credits, such as checks, deposits and charges, will result in instant profits for Banks. But then again, so have 30% interest rate credit cards.

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/

Credit Card Rules - Explained (sort of). What to Do Until Then

On June 11, 2009, I wrote extensively about the new credit card laws - the ones that do us no good at the moment but might as the varied effective dates arrive.

Attached/Linked title of this posting, and again at the end of this entry, is a video that goes through the major points of the new rules.

None of the rules will erase any debt that has already been incurred, regardless of how unfair the borrower believes the debt to be. Interest rates jumping to 30% , late fees of $39 on a balance of $100 with a report of late payments (over 30 days) to the credit agencies, with, of course the accompanying rate increase, and perhaps the most difficult for regular card users, the arbitrary elimination of the available credit/decrease in credit line, without warning or apparent reason.

The 2 real banks, and the 1 "investment bank" (see last post for that definition) that had record profits, Bank of America, CitiBank/CitiGroup, and Goldman Sachs respectively, are the worst offenders. Yesterday, in the Sunday edition of the New York Times, there was a story by David Streitfeld dealing with Bank of America specifically, but the industry in general. In it he describes a woman who could not keep up with the higher and higher interest rates being charged. After pleading with Bank of America to lower the interest rate on her account without success, she just stopped paying her monthly bill. A wise decision? - probably not! - except in this case it was born out of desperation. The result: Bank of America called her with "deals" so she could afford her payments.

Look at the video - read the article in the Times and think about your position. Are you able to go without Credit Cards? Can you pay the minimum payments PLUS 1% of the balance owed to lower the principal and actually pay down the debt? If you can, then you may be able to get out of debt.

Factor in all of your debt - especially the credit cards. IMPORTANT!! - Put together an accurate list of your regular monthly living expenses. Include such things as cigarettes (if you smoke), a reasonable amount for food, eating out if it's unavoidable, enough for gasoline and a monthly budget for car repairs (during the entire year), all of your insurances, clothing (include shoes and underwear), income taxes expected to be paid over and above payroll deductions, student loans, cell phone, cable, Internet, utilities, rent/mortgage, and everything else that you really need to spend or save for each and every month. After all of that, can you pay the minimum PLUS at least 1% of the outstanding balance on all debts, whether each is a credit card, a personal loan from CitiFinancial/HFC,HSBC,Beneficial, or from anywhere else.

If after doing that budget exercise you can make the payments GREAT!! Do not be late on one payment or your plan might become dust in the wind. BUT try. If you cannot, seek financial counseling - not from a TV advertiser promising to reduce your debt to "pennies on the dollar" for a mere $XXXX.XX per month and a non-refundable processing fee of $XXX.XX

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

http://video.nytimes.com/video/2009/05/19/your-money/1194840368370/guide-to-new-credit-card-rules.html

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

Credit Cards Profit Margins Getting Larger

CREDIT CRISIS - BAILOUT - FINANCIAL MARKETS CRISIS - RECESSION

The Credit Card Crisis is getting closer and closer. Homeowners who mortgage payments got too high, have been using their credit cards to pay the bills. Additionally, it is the Christmas shopping season, when many shoppers use credit cards hoping to pay later for what they buy today. The Credit Card industry - BANKS - are raising their interest rates, at a time when they can borrow money from the Treasury for almost nothing, or possibly get part of the $700 billion TARP (bailout) handout.

Now, for a bit of background. To a Bank, a deposit account of any kind is a liability - it is actually borrowing money from depositors. At the same time, a loan it makes to a Borrower, with depositors money, is an asset. Traditionally, banks have based their profit margins on a 3%-5% spread or margin between deposits and loans. In fact, going back a number of years, a Savings Banker was known as a 3-6-3 Banker. Take it in at 3% (deposits) Lend it out at 6% (loans) and go home at 3 (pm). Strange, but we had gotten back to that formula, at least for mortgages made by Banks.

Banks got larger and felt that they could exploit the revolving credit market - Credit Cards. Here, the Bank (card issuer) give a credit limit that a card holder (borrower) can use and pay, use and pay etc. Because the amounts started out to be small and the debts were unsecured (no collateral), in comparison to a car loan or home mortgage, Banks charged a higher interest rate for Credit Card interest. But the spread began to increase so that Banks had gross margins (before losses and costs) of 8%-10%.

As the traffic would bear, the rates increased so that before the current crisis, it was not unusual to have a Credit Card Issuer (Bank) paying 2%-4% for deposits and charging 14%+/- for interest to average card holders. Sure, there were the promotions for 0% interest, but the majority of those "come-ons" ended with the Cardholder paying one day late, or the Credit Card issuer (Bank) holding a payment for a few extra days, so the Cardholder was charged a late fee of $39 AND HAD THE INTEREST RATE JUMP TO 19.99%-30.99%.

Now, Banks are trying to make up for bad loans in mortgages, in commercial loans, in investments for the Banks portfolio (Mortgage-Backed Securities come to mind), and financial uncertainty. So now even "good" customers are getting charged higher interest rates for keeping a balance on the Credit Card. CitiBank has just sent notices to the bulk of its Cardholders notifying them of a change in the rate. Regardless of the prior rate, the new rate is now the Prime Interest Rate (rates that the best borrowers pay to Banks) plus 8.99% WITH A MINIMUM OF 14.99%. Cardholders can opt-out of the change so long as they pay-off the card balance by the time the card renewal dates comes around. If one opts-out, at the renewal date, Citi will close the account and either demand payment in full or force the Borrower to pay the ten current rate on any balance.

Citi is not alone. If you pay regularly, but have a balance for more than 2 years, JP Morgan Chase will charge a monthly fee, and increase the minimum monthly payment from 2% of the balance to as much as 5% of that balance. The list of card issuers (Banks) goes on but the basic theme is the same: Borrow money from the Treasury or Federal Reserve Bank, paying .5%(1/2% ), or from depositors paying about the same rate, maybe .5% higher, AND LEND IT OUT TO CREDIT CARDHOLDERS FOR 15%-25%, while making the minimum payments twice what they have been. The Consumer portion of the Credit Market is going to pay for the commercial losses and bad investments - Main Street is paying for Wall Street. And do not forget about the Universal Default Rate - be late on one card, and the rest of the Cards can move your interest rate to its default rate.

This explanation is a bit over-simplified, but not much. Margins in the Credit Card business are at all-time highs. What will happen in February when all of the Christmas gift generated Credit Card bills come in? Who will be able to afford them? And, if the credit lines get closed by the Banks, how will the homeowner/credit card holders pay to live in the house?

This formula spells disaster for Cardholders (consumer and small business borrowers) and as a result will probably lead to a new round of mortgage defaults and foreclosures, and certainly a spike in Bankruptcy filings as more and more Cardholders find that a 5% minimum payment is so far out of reach that it makes no sense to even try. A good portion of my practice is in the fields of Bankruptcy and Debtor workouts, but I shudder when I think of the disruptions to families, losses of homes, the payment defaults will bring.

Congress could act to stop the gouging by Credit Card issuers (Banks), regulate the issuers which are not Banks, and provide the needed Mortgage Relief that would eliminate some of the need to use the Cards.

I encourage every Credit Cardholder to read carefully all of the information she/he receives to be certain the change, if there will be one, can be at least anticipated and plans made to deal with the "financial dislocations" (unpaid bills and blown budgets) which result.

Please feel free to e-mail through the website link at the bottom of this post if you need a calculation or advice. The service is free and the margin is less than 0% (My contribution to the cause)

Author's Copyright by Richard I. Isacoff, Esq - November 2008

http://www.isacofflaw.com/