Archive for August, 2009

What to Expect As New Rules on Credit Cards Take Effect

Wednesday, August 19th, 2009

From the Wall Street Journal

By JANE J. KIM

Credit-card users get new protections this week, the first of a series of federal actions that constrain card issuers from changing terms on customers.

Starting Thursday, banks must comply with parts of the recently passed Credit Card Act of 2009 by mailing bills at least 21 days before their due dates and providing at least 45 days’ notice before making a significant change to their rates or fees. Currently, banks are generally required to mail billing statements at least 14 days in advance and provide a 15-day notice of altered fees or rates. The new rules also will bar banks from increasing fees and rates without warning when a consumer misses a payment or exceeds a credit limit.

Consumers also will be allowed to avoid future interest-rate increases and pay off any outstanding balance over time under the original rate terms. Currently, if a consumer gets hit with a penalty rate, for example, they aren’t given the option to reject the rates.

The bulk of the legislation’s key provisions will take effect in February 2010, including limits on interest-rate increases on existing balances. The following July will see the introduction of new disclosure rules, drafted and approved by the Federal Reserve Board and other banking regulators.

In anticipation of the legislation, major card issuers have been raising interest rates and fees, reducing credit lines and closing accounts. Banks say the changes also are being driven by the weak economy, which has resulted in higher losses and funding costs. Earlier this month, for example, American Express Co. notified its Blue, Optima and co-branded credit-card customers that it was raising interest rates by an average of two to four percentage points. Other changes to these cards, which take effect with customers’ October billing statements, include higher rates and fees for cash advances and late payments. American Express also eliminated fees for customers who exceed their credit limits, months before the legislation clamps down on a host of card fees.

Favoring Variable Rates

Other issuers, such as Bank of America Corp., J.P. Morgan Chase & Co.’s Chase Card Services and Discover Financial Services, recently converted customers’ fixed rates to variable ones. The changes will make it easier for issuers to bump up the rates they charge without notifying customers. By contrast, banks must currently notify fixed-rate card holders of any change in rates.

Banks are also paring back their rewards programs. Citigroup Inc., for example, has started adding annual fees to some of its rewards cards, such as the Citi Diamond Preferred Rewards card. Under the Discover More Card rewards program, customers can earn an additional 5% back on purchases in categories that rotate quarterly; for the third quarter, however, the cap on purchases that qualify for the cash-back bonus was lowered to $300 from $400. Meanwhile, Chase last fall scaled back the bonus opportunities on its no-fee Chase Freedom cards. For Chase Freedom card customers wanting to earn a fixed 3% bonus for spending in the grocery, gasoline and fast-food categories, Chase now levies a $30 annual fee.

While the new legislation will help eliminate sudden rate increases and force more disclosure, the banking industry has said the restrictions will reduce available credit. The cost of borrowing also will rise, companies say, since they will have to be more careful about giving credit. Average interest rates on credit cards rose slightly to 14.43% through May, according to the Federal Reserve, although rates are still below historical levels of 18% and 19% that were typical 20 years ago.

According to Consumer Action’s 2009 credit-card survey, which looked at 39 cards from 22 financial institutions, rates and fees began climbing this spring. The advocacy group said more credit cards now come with minimum cash-advance fees and higher balance-transfer and foreign-transaction fees.

“There’s no question that issuers are taking advantage of this window before it closes to make as many changes as freely as they’ve been accustomed to,” said Ruth Susswein, Consumer Action’s deputy director, national priorities.

Changes to card terms are causing some consumers to alter their spending patterns.

After Bank of America raised his 7.9% fixed rate to a 13.9% variable rate last spring, Mark Nilles paid off his remaining balance, shopped around for another card and canceled his BofA card. In the future, the Arvada, Colo., hydrologist said he plans to rely on savings or shorter-term, fixed-rate loans instead of credit cards to pay for one-time expenses.

“It made me reassess everything that I was doing credit-wise,” said Mr. Nilles.

More Fudge Room

For now, consumers should check their statement due dates to make sure they’re getting the required additional time to pay their bills. Some people may want to adjust any automatic debits coming out of their checking accounts to make sure they’re not paying their bills sooner than they need to, said John Ulzheimer of Credit.com, a consumer-education Web site. “This gives you a little more of a fudge period,” he said.

Consumers are likely to find better credit-card deals if they also have a checking account at the bank. Under Chase Card Services’ Chase Exclusives program, for example, Chase Freedom card holders who also have checking accounts at the bank can earn up to 10% more points on their spending.

The bank also rolled out a new credit card, “Slate From Chase,” that automatically refunds the 12th month’s interest charges each year if customers enroll in the bank’s AutoPay program from a Chase checking account.

Meanwhile, for a limited time, Citi is offering some customers an additional 2% cash-back bonus on qualified spending on Citi credit cards if customers also have a banking relationship at the company.

Write to Jane J. Kim at jane.kim@wsj.com

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‘Underwater’ Need Not Mean Foreclosure

Tuesday, August 18th, 2009

From the Wall Street Journal

Why Most People Who Owe More Than a Property’s Worth Will Still Keep Their Homes

By KAREN BLUMENTHAL

What does being “underwater” in your house really mean? Probably not that you’re drowning.

The number of underwater homeowners — those who owe more on their mortgages than their home is now worth — has been growing sharply since 2006 as real-estate prices have tumbled. By some estimates, between one in six and one in eight homeowners are in that position, most of them people who bought homes in the past few years or who put down small or no down payments.

This worries economists and policy makers, since owing more than your home is worth is the first step toward foreclosure. And it’s a concern to the rest of us because foreclosures are roiling the financial markets and, closer to home, they drag down our neighborhoods. (Most people who still have equity, by contrast, would rather sell their houses at a loss than lose what’s left of their investment.)

In response to concerns about rising foreclosure and delinquency rates, federal regulators are studying possible new programs aimed at needy homeowners. There are concerns that such programs could attract a flood of applications from those who don’t truly need assistance or encourage lenders to push homeowners into foreclosure. At the same time, lenders such as J.P. Morgan Chase and Bank of America have committed to working on new loan terms for the most-distressed homeowners.

But experts who have studied previous sharp housing downturns in Texas, California, New York and Massachusetts say that being underwater, while unpleasant, doesn’t lead huge numbers of homeowners to default on their mortgages and end up in foreclosure.

Christopher L. Foote, Kristopher Gerardi and Paul S. Willen of the Boston Federal Reserve Bank studied more than 100,000 homeowners who were underwater in Massachusetts in 1991 and found that just 6.4% of them lost their homes to foreclosure over the next three years, according to a paper published in the September Journal of Urban Economics. The vast majority of homeowners simply continued paying as usual because they focused on the affordability of their payments, not on what they owed, and they believed home values would eventually recover.

The economists found that homeowners typically lost their homes only after at least two things happened: Their home values dropped and they either couldn’t afford the payments or stopped making payments after losing hope that prices would eventually recover.

Homeowners in California also were more likely than expected to keep paying during the deep 1990s slump, says Richard Green, director of the Lusk Center for Real Estate at the University of Southern California. More people turned in their keys in Ohio and Michigan during the difficult 1980s downturn because they lost faith in an economic turnaround.

Typically, homeowners fall behind after a job loss, divorce or serious illness. In the current downturn, foreclosures are higher than in previous cycles because more homeowners reached beyond their means to buy their homes and simply can’t keep up the payments. As a result, the Boston economists project that up to 8% of underwater Massachusetts homeowners could lose their homes between now and 2010 — a significant amount, but still not catastrophic.

So what does this all mean for you?

If you have a low-interest fixed-rate loan, you have a valuable asset that might be hard to replace in the current market, no matter what your home’s value is. Keeping that mortgage current has some value, even if it means cutting other household expenses.

In addition, the penalties for defaulting are great. In most cases, walking away from a mortgage can knock a top credit score down to the cellar, says Ethan Dornhelm, a senior scientist at Fair Isaac Corp., which sells credit-scoring formulas to credit bureaus.

A person with a stellar credit score from the high 700s to the top score of 850 would see it drop more than 200 points. A person whose credit score is lower may see it fall by fewer points, but still end up with a score in the mid 500s. At that level, reasonably priced new debt, from credit cards to car loans, will be out of reach. In addition, a default could lead landlords and utilities to require more cash up front and even affect your job prospects.

If the borrower continues to pay other debts on time, the score will climb gradually, though it may take three to five years to return to “good” scores, from the mid-600s and up. Scores of 790 or more — which are rewarded with the lowest interest rates — won’t be attainable for at least seven years, when the default blemish finally disappears, Mr. Dornhelm says.

Fannie Mae requires borrowers who have lost their homes to foreclosure to wait five years before it will accept a loan from them, though borrowers who had extenuating circumstances, such as an illness or job loss, may requalify within three years.

What’s more, lenders in most states can go after homeowners for an unpaid balance on a mortgage. That’s a real risk, especially if you have other assets.

The longer you stay in your house, the better the chances of making it through this down cycle. Though a return to peak prices may take five or 10 years, some housing markets may start to bounce back once credit becomes more available. Meanwhile, you’ll be reducing your mortgage as you make your payments.

Lenders aren’t going to renegotiate just because prices have fallen, but if you truly can’t afford your payments, contact your mortgage servicer to see if you can rework your interest rate or work out new payment options. The federal Hope for Homeowners program, which began Oct. 1, is intended to provide some relief if lenders will agree to reduce the loan amount to 90% of the home’s current value.

If you can’t get help from your lender, try contacting a credit counselor certified by the Department of Housing and Urban Development. These counselors have direct access to lenders’ loss-mitigation departments, which consumers don’t, says Natalie Lohrenz, counseling administrator for Consumer Credit Counseling Service of Orange County, Calif. A list of HUD-certified counselors is available through Hope Now, a consortium of lenders and counselors. (Call 888-995-HOPE or go to www.hopenow.com.)

If you need to sell the property and can’t afford to cover the shortfall, your lender may agree to a “short sale,” in which you sell at a price below the mortgage amount. This is a much more complicated transaction to pull off than a regular home sale, though, and it may hurt your credit score if the lender reports that you failed to pay off the whole obligation.

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Cardholders Get Rude Surprise at the Register

Friday, August 14th, 2009

From the Wall Street Journal

Reassessing Risk, Issuers Quietly Cancel Accounts, And It’s Perfectly Legal

By MARY PILON

In March, Mary Horowitz was trying to pay for a birthday spa treatment when she learned that American Express had canceled her card.

The Durham, N.C., lawyer spent the afternoon on the phone with AmEx customer service. Representatives told her that her card was canceled and that a letter was on its way that would tell her more. Ms. Horowitz had received no advanced notification of the cancellation and had successfully used the card two weeks before.

“The spa was great,” she says, “but it was a pitiful day.”

A few days after the spa incident, she received a letter confirming that the issuer had cut her off because of information contained in her credit report. She checked her credit report, and it was clean except for a late car payment in December 2005, she says.

More and more consumers are getting to the cash register to find that their credit cards have been canceled without their knowledge. Consumers say that it is often embarrassing to have a card declined in front of friends and other customers, and that it is frustrating when customer service is able to confirm only that the card was canceled, but not why.

But while it may seem to be bad form, in some cases, it is legal for a credit-card issuer to close an active account, like Ms. Horowitz’s, and notify the cardholder, or send out a letter, after the fact. Even when closure notifications are received before a consumer experiences card denial at a register, letters can be lost in mailboxes, as consumers shuffle through piles of junk mail. Those who have recently changed addresses or are traveling are often left in the dust.

Although the law governing notification of account closures is nothing new, its effects are increasingly being felt by consumers as card issuers try to curb their own risk in an uncertain economy. It is unclear how many consumers have been hit by instant card cancellation, but cardholders at AmEx, Bank of America Corp., Citigroup Inc. J.P. Morgan Chase & Co. and HSBC Holdings PLC also say they have recently had their active cards canceled before they received notice.

When Lane Gold’s HSBC Cash or Fly Platinum MasterCard was turned away at a Hoboken, N.J., sushi restaurant in April, he feared the worst. “You start thinking of everything bad that could have happened,” Mr. Gold says. “Was the number stolen? Is it fraud?”

It wasn’t fraud, he learned after calling customer service. He was told that the bank had canceled his card and that it was “reassessing risk,” he says. He has never missed a payment, monitors his credit score and doesn’t carry a balance on any of his credit cards, he says. He ended up paying with another credit card at the restaurant.

If an issuer cancels an account due to customer inactivity, default or delinquency, notification to the cardholder isn’t required, according to the Equal Credit Opportunity Act. However, an issuer is required to notify consumers about an account closure if the issuer terminates it based on other factors, such as information from a consumer’s credit report. In these cases, like Ms. Horowitz’s, written notification is provided within 30 days of—not necessarily prior to—the account’s being closed.

New regulations from the Federal Reserve, the first of which go into effect Aug. 20, and rules from Congress that unroll in February 2010 will still permit card issuers to cancel accounts without providing advance notice. The regulations will curb other controversial practices. They will prohibit card issuers from hitting borrowers with an additional fee if they go over the credit limit on their card. Cardholders will also receive 45 days notice in the change of terms, such as an interest rate increase or reduction in credit limit. But the 45 days’ notice won’t apply to account closures, regulators say.

In recent years, issuers have been closing inactive accounts, or accounts that haven’t been used in a year or more, to cut down on risk. If an account is closed because it is deemed “inactive,” many issuers, like Bank of America, won’t notify the cardholder at all, nor are they required to. BofA says open credit lines are a credit risk to the bank. Other large issuers, like Chase, are doing the same.

Chase says that it is managing potential exposure by evaluating active accounts and closing inactive accounts. “Inactive cards with large open credit lines present a real risk of fraudulent use and large potential liabilities for Chase,” the bank said in a statement.

There is new concern that active lines of credit, or lines that have been used within the past year, also pose potential risks to issuers, says John Ulzheimer, head of educational services for Credit.com, a credit-education Web site. Although cancellations aren’t directly affected by the new regulations, the reassessment of customers by issuers “is part of the pro-active housekeeping” before new regulations take effect, he says.

Mr. Ulzheimer says he thinks many card issuers are also worried about the unemployment rate, home values and overall tightening of consumer credit. “Issuers depended on these things going up, too,” he says.

Also troubling to issuers are rising delinquency rates on consumer credit cards. The credit-card delinquency rate, which measures the percentage of consumers who are 90 or more days delinquent on one or more credit cards, rose to 1.32% at the end of the first quarter of this year, according to credit reporting agency TransUnion, from 0.91% two years earlier.

The ultimate shakeout for consumers can be confusion.

Mallorie Schultz found out that both of her Chase credit cards had been canceled when she called to activate her new cards, bearing her new last name. (She was married in February.)

The accounting-firm office manager in San Diego, Calif., was shocked when Chase customer service told her the two cards, with limits of $1,000 and $2,500, would be closed. She carried a balance of $700 and $1,000 on the cards, respectively, and had used them regularly in the past year. She said she has never missed a payment on either of those cards, or any other. Ms. Schultz is one of 20 million former Washington Mutual credit-card holders who transitioned to Chase after WaMu was purchased last year. The letter she got from Chase listed reasons her account could have been canceled, she says. When she called customer service to find out which specific reason applied to her, she was referred to a credit-reporting agency, she says.

In addition to managing wedding expenses, Ms. Schultz says she has been helping her parents with their bills. Having her lines of credit gone has caused a financial scramble, she says.

American Express Co. doesn’t comment on specific cases but said it emails customers about credit-limit reductions. AmEx, Bank of America, Citigroup, J.P. Morgan Chase, HSBC all said that they are re-evaluating risk and comply with the current laws. They also said it is possible for consumers to have their cards canceled, and, consistent with the law, be notified within 30 days after cancellation.

“It’s extremely frustrating,” Ms. Schultz says. Chase “chopped me off when I was already down.”

Write to Mary Pilon at mary.pilon@wsj.com

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Banks Get Picky In Doling Out Credit Cards

Monday, August 10th, 2009

From the Wall Street Journal

By JANE J. KIM

When Edward Miller recently applied for a Charles Schwab Corp. credit card, a company representative asked him to fax in copies of his bank-account statements to verify his net worth.

It was “a bit of a hassle,” says the 64-year-old retired economics and finance professor from Bethesda, Md. He complied and was eventually approved for the card—with a $5,000 limit.

After years of mailing cards out to just about anybody, banks are suddenly freezing out all but the most creditworthy customers. Those who do get cards have to jump through more hoops, such as sending in copies of their pay stubs. And they’re being hit with higher rates and fees.

Banks always tighten credit standards in an economic slowdown. But the recently passed Credit Card Act of 2009 is forcing the industry to rewrite the play book it has used for years. The new legislation aims to limit fluctuating interest rates, ban some controversial practices and arm consumers with more information on their debts.

Banks have until February 2010 to comply with the act’s key provisions, although some parts of the law have earlier deadlines. Beginning in August, for example, issuers have to mail bills at least 21 days before the due date and provide at least 45 days’ notice before changing any significant terms on a card.

The result: Many banks are tightening things up now before many of the restrictions go into effect.

For consumers, the tougher underwriting standards by banks may seem like a pendulum shift back to an earlier era when credit cards sported annual fees and double-digit interest rates.

In recent years, issuers cast as wide a net as possible by offering credit to millions of customers, knowing they could always raise rates on those who turned out to be bad bets. That pricing flexibility helped firms rapidly expand their operations, as those with less-than-stellar credit—many of whom carried a balance or paid late fees and penalty rates—generated millions of dollars in revenue.

Now, the industry is scrambling to figure out who its new profitable customer is. “Without the ability to reprice customers, raise fees or rates, the old profitability calculation won’t apply,” says Alan Mattei, managing director at Novantas LLC, a bank consulting firm.

In recent months, banks including Bank of America Corp., Citigroup Inc. and J.P. Morgan Chase & Co., have raised interest rates and fees, switched customers with fixed rates to variable ones, and dropped credit lines and closed accounts. Credit Suisse Group’s Moshe Orenbuch expects credit-card balances could shrink by 10% to 15% through 2012 as banks drop their teaser-rate offers and cut back on offering credit to riskier customers.

Charles Crawford of Grand Prairie, Texas, says that Bank of America raised the interest rate on his $19,000 balance to 23.2% from 12.2% starting with his June statement, citing his high balances. Mr. Crawford says the move nearly doubled his monthly finance charges to about $420 from about $220. “I feel so upset with them that I was thinking about not paying them,” says the 58-year-old engineer.

Repricing Accounts

Although Betty Riess , a spokeswoman for Bank of America, declined to comment on an individual account, she noted that the bank periodically reviews individual accounts and may reprice an account for risk, based on the individual’s performance and external credit-risk factors.

In April, Bank of America also notified some customers who had interest rates below 10% that their rates would increase starting with their June statements, reflecting current economic conditions and the cost of providing credit, says Ms. Riess. In both cases, individuals could call and opt out of the new rate, and pay off any outstanding balances under the old rate, as long as they stopped using the cards.

“Prior to the Card Act, we were able to charge people for the risk they posed and, as a result, also allowed others to pay lower rates,” says Kenneth Clayton, senior vice president of card policy at the American Bankers Association, a trade group in Washington.

Banks are also facing higher losses due to the economy and higher funding costs, all of which make it harder for them to lend, he says.

For consumers, this means that not only will it be harder and more expensive to get credit, but the average credit line that gets assigned up front will be less generous, says Rich Tambor of Novantas. That would have been true in any economic slowdown, but the legislative changes are exacerbating those trends. For example, the percentage of credit applications that are getting a “human look” is increasing, he says. Discover Financial Services, for one, says it has been doing more manual underwriting of new applications due to the economic environment.

In the short term, banks will focus on making up for lost revenue by getting existing customers to spend more—mainly by offering targeted reward programs, says Gene Truono, managing director at BDO Seidman LLP’s BDO Consulting.

He expects that annual fees, including fees to redeem rewards points, will go up. In the meantime, loyalty offers—such as bonus cash-back incentives—to existing customers are up through the second quarter, in contrast to overall offer mailings, which are down sharply, according to Mintel Comperemedia, a market-research firm.

Two Flavors

Eventually, issuers’ products could boil down to two main flavors: no-fee, no-frills cards that can be offered to a broader group of customers, and “premium” rewards cards with annual fees, says Megan Bramlette of Auriemma Consulting Group.

Chase’s new rewards program, for example, features two cards: the Chase Freedom card, a no-fee card that earns 1% cash back on all purchases (with quarterly bonus opportunities), and a Sapphire Preferred card with enhanced rewards benefits for a $95 annual fee.

The Chase Freedom card also comes with an upgraded feature that lets customers earn a fixed 3% bonus for spending in grocery, gas and fast-food categories for a $30 annual fee.

Write to Jane J. Kim at jane.kim@wsj.com

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Holders of delinquent loans under fire

Wednesday, August 5th, 2009

From the Boston Globe

Bank of America Corp. and Wells Fargo Home Mortgage, two of the nation’s largest owners of delinquent mortgages, have reduced mortgage payments for only a small number of homeowners under the Obama administration’s plan to stem the foreclosure crisis, well below the performance of other banks.

The Treasury Department yesterday released its first monthly report card on the government program to help distressed homeowners reduce their mortgage payments. The report analyzed, lender by lender, the percentage of 2.7 million mortgage loans that have been renegotiated nationwide.

Bank of America, which holds nearly 800,000 of the loans, restructured only 4 percent of its share. Wells Fargo, with 330,000 such loans, has modified 6 percent of its loans.

Several big banks did better, according to the Treasury report.

JPMorgan Chase & Co. modified 20 percent of its share of the loans, and Citigroup Inc. modified 15 percent.

Other lenders approved payment reductions on up to 25 percent of their loans.

In March, the government launched the $50 billion program to help up to 4 million financially troubled borrowers, those who can’t afford to pay their mortgages because their interest rates spiked or they have lost income. The Treasury’s report card analyzed eligible loans that were delinquent for at least 60 days. It showed that only 235,247 of those borrowers, or 9 percent of the total, have been given a three-month trial modification, which becomes permanent if the borrower pays on time.

Boston-area housing advocates were not surprised by the government’s findings.

Bill Minkle, executive director of the nonprofit Ecumenical Social Action Committee in Jamaica Plain, said his counselors have had to send and resend documentation to lenders, and then wait a long time for a response. If loan modifications are approved, the new agreements often come with large balloon payments added to the end of the loan term.

Minkle said Bank of America and Wells Fargo – which have received billions in federal bailout money – have been especially difficult. “They look for reasons to not do modifications,’’ Minkle said. “There is no consistency.’’

Eloise Lawrence, a staff attorney at Greater Boston Legal Services, wondered whether government incentives are enough to get lenders to help struggling borrowers. She said Bank of America has been one of the most difficult when it comes to helping her clients avoid foreclosure. In one case, she’s been negotiating for more than a year, without a resolution.

“I can’t get an answer to basic questions in letters I’ve sent,’’ she said. “It’s so far from acceptable, it’s incredible.’’

Bank of America officials could not be reached for comment. Wells Fargo said it is helping distressed borrowers through other programs, and is accelerating its use of the Obama plan.

The government yesterday detailed big disparities among the 38 companies that have signed up for the program. According to the report, Saxon Mortgage Services Inc. had the best results among the large lenders, with one in four of its eligible borrowers getting a new deal. Aurora Loan Services LLC, GMAC Mortgage Inc., and JPMorgan Chase all had one in five qualified borrowers in a trial loan.

“We think they could have ramped up better, faster, more consistently, and done a better job serving borrowers and bringing stabilization to the broader mortgage markets and economy,’’ said Michael Barr, a Treasury Department assistant secretary. “We expect them to do more.’’

Meanwhile, several smaller companies – including PNC Financial Services Group Inc. in Pittsburgh – have yet to modify a single loan. PNC, which owns National City, was up and running in early July.

“National City is working with qualified customers to make mortgage modifications available. There are loan modifications in the process,’’ said PNC spokesman Fred Soloman.

Material from Globe wire services was used in this report. Jenifer B. McKim can be reached at jmckim@globe.com.

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