The new credit card regulations finalized last month have brought bankers an early, bracing blast of the frostier regulatory climate they are expecting with Democrats once again controlling the White House and holding majorities in both the House and Senate.
“It just shows how the world has changed,” Brian Gardner, an analyst with Keefe, Bruyette & Woods, said of the new regulations, issued jointly by the Federal Reserve, the Office of Thrift Supervision, and the National Credit Union Administration. “Eighteen months ago, the Fed was focused on disclosure and transparency,” Gardner told the Washington Post. “Now, they’re coming out with prescriptive, rules-based guidance. It’s a whole different world.”
Essentially unchanged from the proposal regulators issued for comment earlier last year, the new rules bar as “unsafe and deceptive” a number of common credit card practices. The key provisions, effective July 1, 2010:
- Prohibit “any-time-any reason” increases in card rates.
- Require lenders to give borrowers a “reasonable time” to pay before classifying a payment as late.
- Prohibit lenders from applying payments above the minimum to the lowest-rate balances first. (Lenders must either to allocate payments to the highest-interest balances first or to allocate them proportionately among all balances.)
- Bar double-cycle billing.
- Limit the fees on subprime credit cards.
While lenders continue to warn that the new rules reduce access to credit for many borrowers and increase credit costs for all, they are more concerned about the prospect that Congress will enact even more far-reaching credit card protections for consumers. Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, who tried unsuccessfully last year to advance a credit card bill with stricter requirements than the regulators have approved, has said credit card reform will b a priority for his committee this year. Rep. Carolyn Maloney (D-NY), whose “Credit Card Bill of Rights won House approval this year, has also indicated that she will back a similar measure in the next Congress. Her bill largely mirrors the new regulations, with a few additions, but, Maloney said, “We need to codify the rules in legislation to give the protections the permanence and force of law.”
Bankers, who began last year with some hope of watering down the rules the regulators were proposing, now find themselves urging lawmakers to give those rules a chance before pursuing additional legislative remedies. But it is clear that the regulatory tides no longer favor the industry – a point that Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, underscored recently, when asked about the prospects for legislative action on credit card protections. The odds are good, he told CongressDaily, adding, “I think the political climate is there to do these things.”
To Tap, Or Not To Tap
Will he or won’t he – the “he” being Treasury Secretary Henry Paulson, and the question being, whether he intends to ask Congress to release the second half of the $700 billion in the TARP (Troubled Asset Relief Program) fund.
Press reports at year-end were providing different answers. The American Banker said Paulson would not request the funds; The Wall Street Journal reported otherwise. Both publications cited the same comments from Paulson to support their contrary conclusions, but the Journal focused on the first half of Paulson’s statement: “It is clear that Congress will need to release the remainder of the TARP to support financial market stability, [and] I will discuss that process with the Congressional leadership and the President-elect’s transition team in the near future”; while American Banker focused on the phrase that followed: “In the very short term, the allocated but not Yet disbursed TARP balances, in conjunction with the powers of the Federal Reserve and the Federal Deposit Insurance Corporation (FDIC), give me confidence that we have the necessary resources to address a significant financial market event.”
If Paulson does seek authority to tap the remaining TARP funds, it is clear that Congressional approval will be neither automatic nor enthusiastic. Democrats and Republicans have blasted the Treasury Secretary, first for changing the focus of the program (from buying toxic assets to pumping capital directly into financial institutions), and then for failing to require institutions receiving TARP funds to use them to increase the supply of credit.
Congressional leaders – primarily Democrats – have also complained bitterly about Paulson’s continued refusal to use some of the TARP funding to finance foreclosure prevention efforts – a purpose specifically endorsed in the legislation authorizing the program. Rep. Barney Frank (D-MA), chairman of the House Financial Services Committee, announced at year-end that he plans to co-sponsor a bill with Sen. Christopher Dodd (D-CT), chairman of the Senate Banking Committee, authorizing release of the funds, with the requirement that Treasury allocate $24 billion for a loan modification program proposed by FDIC Chairman Sheila Bair.
“We should have an agreement among [President-elect] Obama, Secy. Paulson and the Congressional leadership to release the $350 billion, with conditions on how it is spent,” Frank told reporters. “We need the second $350 billion,” he agreed, “but it can only be done if there is an agreement on how to [allocate the funds].”
More To Come
The newly finalized credit card rules (see above) do not include controversial restrictions on overdraft protection fees that were included in the original proposal. Regulators decided to deal with that issue in a separate proposal, issued for a 60-day comment period. The proposed restrictions, now offered as amendments to Regulation E (covering electronic funds transfers) are the same as in the original credit card plan. Lenders would have to allow consumers either to opt-in (affirmatively choose the overdraft protection before lenders impose a fee for it) or notify consumers of their right to opt out. The opt-out notice would have to be given when an account is opened and in every statement cycle in which an overdraft fee is imposed. The proposal has a 60-day comment period.
In the meantime, regulators have approved new disclosure requirements for overdraft plans under Regulation DD (Truth-in-Savings). These rules require lenders to disclose on periodic statements the aggregate charges for overdraft and returned item fees, both for the statement period and the year-to-date. The rules also require institutions providing balance information through an automated system (ATMs, Internet banking or telephone response) to exclude from the balance quoted additional funds that would be provided to cover overdrafts. This would have the effect of alerting consumers that a planned transaction would result in an overdraft.
Regulators have also approved new disclosure requirements for credit cards and other non-revolving credit plans, under a final rule revising the Regulation Z (Truth-in-Lending) requirements. These new rules generally require issuers to include with all credit card applications disclosures highlighting the fees charged and explaining the circumstances under which penalty rates might apply. The rules also include the provision noted earlier -- 45 days’ advance notice of any changes in credit card terms, including the imposition of a penalty rate increase. The Regulation DD changes take effect January 1, 2010; the Reg Z changes take effect a few months later – July 1, 2010, simultaneously with the broader credit card regulations.
Blocking In Action
Although the housing market remains mired firmly in the post subprime financial muck, the push to clean up mortgage lending abuses is accelerating, along with efforts to blunt at least some of those initiatives. In the latest development in the emerging regulatory battlefront, the National Association of Mortgage Brokers (NAMB) has announced its intention to file suit against the Department of Housing and Urban Development (HUD) to block implementation of the agency’s newly finalized revisions in the Real Estate Settlement Procedures Act (RESPA) regulations.
The new rules, aimed at improving lender disclosures to borrowers, are not authorized by the underlying statute, will have “a detrimental impact” on small businesses, and create a competitive disadvantage for mortgage brokers, NAMB contends in its suit, which seeks a temporary injunction to prevent the rules from taking effect later this year.
HUD finalized the RESPA reforms – the first significant changes in the rules in more than 30 years – in November of last year, after a prolonged and fractious drafting process, marked by stiff and sometimes overwhelming opposition from financial industry trade groups and lawmakers. Revised somewhat from the original proposal, the rules require lenders to use a new, three-page Good Faith Estimate, disclosing more clearly the loan costs and terms. The revised rules also limit the amount by which final closing costs can differ from the initial estimate.
The proposed changes attracted more than 12,000 comments, with NAMB emerging as one of the most outspoken and determined critics, because of what the organization views as an unjustified targeting of mortgage brokers. The focus of the industry’s concern is a provision requiring that lenders clearly disclose the yield spread premiums they pay to brokers for originating loans at above the lender’s “par” interest rate. Requiring compensation disclosure only for mortgage brokers “places them at a permanent disadvantage in the marketplace,” NAMB President Marc Savitt said in a press statement announcing the suit against HUD. In adopting the revised RESPA rules, he added, HUD has “disregarded numerous federal and private sector studies providing evidence that [providing different disclosures for different origination channels] confuses consumers and will often cause them to choose a more expensive mortgage product.”
HUD officials have estimated that the improved RESPA disclosures will save consumers $700 per loan and will eliminate the abuses that contributed to the subprime implosion. “In this housing market, the nation is crying out for reasonable regulation to help families shop for and save money on the largest purchase of their lives,” HUD said in a statement. The new RESPA rules “represent that reasonable regulation and [will] help consumers avoid getting into trouble in the first place. It is mystifying why anyone would stand in the way of the kind of transparency this rule brings to the marketplace.”
Credit Scores Revisited
The Federal Trade Commission (FTC) has its sights on credit-based insurance pricing —again. The commission studied the issue last year, concluding that credit scores were a reliable indicator of risk in the pricing of automobile insurance. Now, the FTC is looking at the pricing of home owners’ insurance, seeking detailed information about policy premiums, coverage, and renewal rates from nine major insurers, controlling approximately 60 percent of the homeowners’ insurance market: Allstate Corp. and Travelers Cos. Inc., Chubb Corp., State Farm Mutual Automobile Insurance Co., Fire Insurance Exchange, Nationwide Mutual Insurance Co., United Services Automobile Association, Liberty Mutual Holding Co. Inc. and American Family Mutual Insurance Co.
The American Insurance Association, an industry trade group, has objected to the information request, complaining that the study is “unnecessary and costly” and that the detailed personal information sought threatens consumer privacy.
“We are disappointed the FTC chose this route, despite the industry's good faith efforts to work cooperatively to find a sensible, secure, and cost effective alternative to provide the data the FTC says it needs to conduct its study," David Snyder, the AIA’s vice president and assistant general counsel, said in a press statement. "Consumers should be very concerned that the FTC has ordered companies to hand over such a vast amount of data, including items like a policyholders social security number and mortgage information, with few assurances as to how that data will be analyzed, handled, stored and used,” he added.
Congress directed the FTC to study credit-based insurance scores in the Fair and Accurate Credit Transactions Act (FACTA) of 2003. The commission conducted its 2007 study of auto insurance rates based on information submitted voluntarily by insurers; the information the agency is demanding for the homeowners’ insurance study “goes far beyond what is needed [and includes some data] insurers do not even collect,” Snyder complained. He predicted that the new study of homeowners insurance will reach the same conclusion as the earlier study of auto insurance: “That the use of credit-based insurance scores benefits a vast majority of consumers and is one of the tools that enable insurers to provide sound pricing models.”
Consumer advocacy groups condemned the auto insurance study as flawed and skewed improperly in favor of the insurers. The biggest problem with the study, the Consumer Federation of America, the National Consumer Law Center, the Center for Economic Justice, and the National Fair Housing Alliance, said, was its reliance on information selected by the insurance industry, an approach akin to “the federal government trying to do a study on the health impacts of tobacco use with data selected by tobacco companies for the study,” a spokesman for the consumer coalition said at the time.
“Despite finding no explanation for the alleged connection between insurance scores and losses,” the groups said, “the FTC report somehow concludes credit scoring is valid and good for consumers. This is not an impartial analysis,” the groups contended, ‘but simply advocacy for insurers.”
