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“RAIL, RAIL AGAINST THE DYING OF THE LIGHT”

It appears that financial institutions are not “going gentle” into the night.  They are railing big time against the darkness descending on the industry in the form of new regulations that threaten to slash the income from credit cards and overdraft fees. 

Key provisions of the Credit Card Accountability Responsibility and Disclosure Act, now in effect, restrict the ability of credit card issuers to change rates and terms and impose penalties for late payments.  New restrictions on overdraft programs, which take effect this summer, will prohibit lenders from charging fees for overdraft protection unless consumers affirmatively “opt in” to that service.

On the credit card side, press reports indicate that banks are coping with the new rules, in part, by aggressively courting affluent card holders while limiting credit for lower-income consumers.  Nearly one-third of mail solicitations from card issuers last year went to consumers with incomes of more than $100,000 compared with only 18 percent in 2007, according to Mintel Compermedia, a Chicago-based company that tracks marketing trends. 

Subprime consumers, who used to be prime targets of aggressive solicitations, are less appealing now that it will be harder for banks to assess the penalty fees that made this market segment so lucrative.  The Federal Reserve’s survey of loan officers in November found that 58 percent planned to reduce credit for borrowers with lower credit scores and 53 percent were increasing the minimum credit scores required to qualify for cards. 

A separate study by the Pew Health Group found that banks increased credit card interest rates by an average of 2 percentage points between December 2008 and July of 2009, in anticipation of the new rules limiting the circumstances under which rates can rise and requiring more advance notice of changes in card rates and payment terms. 

But predictions that lenders would penalize higher-income consumers by eliminating expensive rewards programs to compensate for the loss of income from penalty fees (paid mainly by lower-income consumers) haven’t materialized.  In fact, one survey found that 9/10 credit card direct mail solicitations last year promoted reward programs aimed at affluent consumers; only about 11 percent promoted “no-frills” cards, without rewards.  Issuers are increasingly linking their reward programs to cards with annual fees, however, with some charging as much as $350 annually for their premium rewards programs.  Industry analysts say issuers are trying to thread a marketing needle, balancing the need to make their card programs profitable without alienating the high-income consumers they want to retain. 

The new overdraft rules pose a different challenge – persuading consumers to request a service that financial institutions have been providing automatically – a service that generated $20 billion in overdraft fees on debit card purchases and ATM transactions last year, according to industry estimates. 

“Banks are preparing full-court marketing blitz, which is likely to include filling mail boxes with various aggressive and persuasive letters , calling account holders directly, and sending a steady stream of e-mail to urge consumers to keep their overdraft service turned on,” a New York Times article predicted. 

Industry consultants are advising banks to target the small percentage of consumers responsible for the lion’s share of overdrafts, with campaigns ranging from the soft sell (“Say Yes to Overdraft Protection”) to alarmist warnings that cancellation of overdraft protection could leave consumers without the ability to use their debit card in an emergency.

Further restrictions on both overdraft programs and credit cards are in the offing.  Lawmakers are considering legislation that would limit the number of overdrafts lenders can charge each month and annually.  The Federal Reserve, meanwhile is, is developing regulations defining “reasonable and proportional” penalty fees and interest rates – one of the requirements of the new credit card law. 

A recent report by the Pew Health Group urges the Fed to establish “common sense” limits on those charges.  Excessive penalties, the report notes, “can cause significant harm” to consumers.  The report urges the Fed to:

·         Limit penalties in relation to the amount past due;

·         Cap penalty rates and limit the time they can apply;

·         Prohibit “hair trigger” late fees and ban over limit fees entirely. 

Industry executives, meanwhile, appear to be adjusting to the new regulations after fighting tooth and nail against them.   While the compliance costs have been estimated in the hundreds of millions of dollars, “the requirements are what they are,” Ric Struthers, president of global card services for Bank of America, told American Banker.  “We could go back and wish they were something different…but you move forward, you make changes, you do the best thing for your customers.”

Andy Navarrete, senior vice president at Capital One, was also philosophical, telling the publication that the credit card act “was a comprehensive, sweeping piece of legislation, and I do think it addressed a number of industry practices at a detailed level.  Issuers will have to think about the spirit [ad the] letter of the law,” he added, noting, “Regulators have a renewed focus on consumer protection issues, and so does the industry.” 

IT’S THE CUSTOMERS, STUPID!

The Obama Administration has been exhorting financial institutions to increase their lending to small businesses, and credit unions have been offering to do that, if Congress will increase the cap on their member business lending authority.  But some business executives say it’s not the lack of credit but the lack of customers that is impeding their ability to grow, hire more workers and stimulate the economy. 

More than half of the small business owners responding to a recent survey by the National Federation of Independent Businesses (NFIB) identified sluggish sales as their biggest problem; only 8 percent cited the lack of credit.   The Administration’s proposed fixes – a tax credit for businesses that hire new workers and $30 billion in aid to community banks, to encourage them to provide small business loans --won’t have much impact, NFIB officials say. But they also admit that they don’t have any better ideas for helping small businesses.  “We’re really in a quandary right now,” William Dennis, Jr. senior research fellow for the organization, who oversaw the recent survey, told the Washington Post. 

Lack of credit may not be the most pressing problem for small businesses, but there is no question that lending to that sector has declined — by nearly $16 billion between September, 2008 and September, 2009, according to federal data. Bank lending overall declined more steeply last year than at any time since 1942, the Federal Deposit Insurance Corporation (FDIC) reported recently. 

Some small business executives contend that they are in a position to grow, but can’t get the financing they need for their expansion plans.  The Washington Post article noted the experience of Jim Henderson, owner of a small construction supply company in St. Louis, who wanted to hire more sales people and expand his inventory, but was unable to persuade the bank with which he’d done business for 20 years to increase his line of credit.  “I want to move forward and take those risks and bet on the future,” Henderson told the paper, “but no one is really giving us a hand to do that.” 

Bankers acknowledge that they have tightened their credit standards in response to loan losses and weak balance sheets, but they also insist that they are not getting many applications from credit-worthy borrowers. 

“Lending has been weak and spending by business and consumers has also been weak,” Richard Brown, the FDIC’s chief economist, acknowledged in an interview with the Wall Street Journal. 

Federal regulators, for their part, are trying to strike a balance between demanding that banks bolster their capital positions and exhorting them to provide the credit needed to sustain the economic recovery.  Regulators addressed that concern in a recent interagency statement on lending to “creditworthy small business borrowers.”  The statement acknowledges that while some caution is “prudent” given current economic conditions and the problems of some institutions, “experience suggests that financial institutions may at times react to a significant economic downturn by becoming overly cautious with respect to small business lending.  Regulators are mindful of the harmful economic effects of an excessive tightening of credit availability in a downturn,” the statement continues, “and [we] are working through outreach and communication with the industry and supervisory staff to ensure that supervisory policies and actions do not inadvertently curtail the availability of credit to sound small business borrowers.”  The statement concludes by assuring industry executives that engage in “prudent” small business lending “after performing a comprehensive review of a borrower’s financial condition, will not be subject to criticism for loans made on that basis.” 

SHH!

The best way to ensure a housing recovery may be to stop talking about it.  Every time analysts start to suggest that the downturn has ended, a new report on one segment of the market or another suggests otherwise.  This time, it’s new home sales, which fell to a record low in January, according to a Commerce Department Report.  The 11.2 percent decline – the steepest on record – surprised economists, who had been predicting an increase of at least 5 percent over December’s disappointing pace.  Instead, January brought the third consecutive monthly decline and triggered a new round of concerns about the fragility of a housing recovery that hasn’t been able to gain sustainable traction. 

A separate report, indicating that nearly 25 percent of all mortgage borrowers are now under water on their loans, didn’t provide any counterweight to the gloomy home sales figures.  Negative equity has been and remains a drag on the housing recovery, according to Mark Fleming, chief economist with First American CoreLogic, which tracks home equity trends.  “It [negative equity] is driving foreclosures and decreasing mobility for millions of homeowners,” Fleming told CNN-Money.  “Since we expect home prices to increase [only slightly this year],” he added, “negative equity will remain the dominant issue in the housing and mortgage markets for some time to come.”   � 

PROGRESS -- OR NOT

Efforts to craft a bipartisan regulatory reform bill in the Senate are making progress -- or not.  Recent press reports pointed to both conclusions, indicating, variously, that Sen. Richard Shelby (R-AL), ranking member on the Senate Banking Committee, is drafting his own bill, and that Rep. Bob Corker (R-TN), is continuing to work with the Committee’s Chairman, Sen. Christopher Dodd (D-CT), on a bipartisan compromise. 

Reporting progress on those negotiations, Washington Post columnist Steven Pearlstein said a “breakthrough” on the committee’s logjam is near, predicting that Corker and Dodd are poised to announce “a creative bipartisan proposal that will hit all the right notes in terms of both policy and politics and will have the best shot at Senate passage.” 

Their proposal, reportedly, will call for a single regulator for the banking industry with two divisions, one focusing on safety and soundness and the other on consumer protection.  That approach addresses objections to the independent Consumer Financial Protection Agency (CFPA) the Obama Administration has proposed.  Bankers would likely applaud the compromise; consumer advocates will almost certainly oppose it. 

Administration officials have said they remain committed to an independent CFPA and to restrictions on “proprietary trading” by banks – the so-called “Volcker Rule,” which is also encountering stiff resistance from legislators and bank lobbyists. The proposal, advanced by Former Federal Reserve Chairman Paul Volcker, is designed to reduce the risks taken by federally insured depository institutions. 

“We’re as committed to [that idea] now as we were on the day [Volcker] proposed it,” Robert Gibbs, the White House Press Secretary, told reporters recently.  “We’re not walking away from what the president outlined on the Volcker rule,” he added.

But the New York Times reported that Dodd and other Senate leaders have decided to scrap the proposal, substituting for the outright trading ban Volcker has suggested language that would direct regulators to focus on proprietary trading, giving them discretion to limit those activities or ban them on a case-by-case basis, if they pose a systemic risk to the financial system.  That language is similar to the language included in the regulatory reform bill the House has already passed.

The Volcker proposal has gotten some support from five former Treasury Secretaries who signed a letter to the editor published in the Wall Street Journal.  “The principle can be simply stated,” the former cabinet members – W. Michael Blumenthal, Nicholas Brady, Paul O’Neill, George Shultz, and John Snow, wrote.  “Banks benefiting from public support by means of access to the Federal Reserve and FDIC insurance should not engage in essentially speculative activity unrelated to essential bank services….We fully understand that the restriction of proprietary activity by banks is only one element in comprehensive financial reform,” the former Treasury officials, who served in both Republican and Democratic Administrations, said.  “It is, however a key element in protecting our financial system and will assure that banks will give priority to their essential lending and depository responsibilities.”  �                                                                                               
ON THEIR OWN