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07-07-2006, 08:20 AM
Federal Reserve Board Drops the Ball in Consumer Credit Study
07 | 6 | 2006
Posted By Kevin Chern Esq.
Congress—no friend to the debtor in the 2005 bankruptcy reform—was nonetheless compelled to acknowledge some apparent culpability on the part of credit-issuing banks. Section 1229 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) says, in part:
SEC. 1229. ENCOURAGING CREDITWORTHINESS
(A) SENSE OF THE CONGRESS.—It is the sense of the Congress that—
(1) certain lenders may sometimes offer credit to consumers indiscriminately, without taking steps to ensure that consumers are capable of repaying the resulting debt, and in a manner which may encourage certain consumers to accumulate additional debt; and
(2) resulting consumer debt may increasingly be a major contributing factor to consumer insolvency.
In short, Congress suggested, right in the bankruptcy statute, that credit issuers might be at least partially to blame for the increase in bankruptcy filings. Congress went on to order the Board of Governors of the Federal Reserve to conduct a study of such practices and their impact on consumer debt and insolvency.
Indiscriminately, without taking steps to ensure that consumers are capable of repaying
On the first two issues—whether lenders were issuing credit “indiscriminately” or “without taking steps to ensure that consumers are capable of repaying the resulting debt”, the Board summarily concluded that they were not. Citing the two-step process in which most consumers are “pre-qualified” before receiving credit offers and then individually screened upon application, the Board determined that “lenders analyze consumer financial behavior carefully before offering credit, and they consider consumers’ ability and willingness to pay in making decisions about extensions of credit.”
Unfortunately, the report fails to take into account a number of critical facts. For instance, those pre-screening processes are just as easily used to target consumers who are in desperate straits and likely to accept egregious credit terms. Many credit card lenders make their fortunes on annual fees, “start-up” fees, and high interest rates that would never be accepted by the truly credit worthy. In fact, the Board’s concluding paragraph points out that “risk segmentation enables providers to price for risk…”.
Likewise, a lender’s assessment is based on profitability of the account, and with fees, high interest rates, late charges, and over-the-limit charges, delinquent accounts can be quite lucrative for credit card issuers. In fact, the borrower who pays at or near his minimum payment level, carries a high balance, and makes occasional late payments is a much bigger moneymaker for the lender than a responsible borrower who pays off his balance in full each month.
In a manner which may encourage certain consumers to accumulate additional debt
The Board dodged the issue of lenders encouraging consumers to accumulate additional debt, concluding that, “the aggregate growth of consumer debt has not entailed a threat to the household sector of the economy.” We could argue that the statement itself is inaccurate, but that’s hardly relevant here, since Congress didn’t ask whether the aggregate growth of consumer debt entailed a threat to anyone—Congress asked whether credit card company practices encouraged consumers to take on additional debt.
In an effort to provide support for the idea that the leap in credit card debt and usage was attributable to other factors, the Board largely contradicted its first two findings, pointing out that “credit cards have become more widely available to all groups, including lower-income consumers and to populations with a wider range of credit risks.” Translation: people who are less likely to be able to repay can now obtain credit cards more easily. This statement, at least, is supported by data. Consumers with incomes below the 40th percentile are carrying 21% of the total outstanding credit card balances, and more than 60% of those in that income category who use credit cards are carrying balances from month to month.
The biggest evasion on this issue comes in a single sentence relating to concerns about whether consumers have enough information to make good decisions and avoid unexpected costs: “These concerns are beyond the scope of this report.” It’s difficult to understand how the Board might have considered understandable disclosures to consumers “beyond the scope” of whether or not credit card issuers encouraged consumers to accumulate additional debt.
Consumer debt as a contributing factor to insolvency
The Board cites a 2002 study to support the startling notion that the best predictor of whether or not a household will file for bankruptcy protection is the financial benefit of doing so. The connection between the financial benefit of bankruptcy and the level of unsecured consumer debt relative to income and assets is glossed over. The Board does concede that consumer debt is one of many factors that may play into insolvency, but concludes, “the decision to file for bankruptcy is complex and tends to be driven by household distress arising from unforeseen adverse events such as job loss, divorce, and uninsured illness.”
It’s too bad Congress didn’t ask this question before making those sweeping changes to the Bankruptcy Code to root out the “deadbeats”.
http://blog.startfreshtoday.com/
07 | 6 | 2006
Posted By Kevin Chern Esq.
Congress—no friend to the debtor in the 2005 bankruptcy reform—was nonetheless compelled to acknowledge some apparent culpability on the part of credit-issuing banks. Section 1229 of the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) says, in part:
SEC. 1229. ENCOURAGING CREDITWORTHINESS
(A) SENSE OF THE CONGRESS.—It is the sense of the Congress that—
(1) certain lenders may sometimes offer credit to consumers indiscriminately, without taking steps to ensure that consumers are capable of repaying the resulting debt, and in a manner which may encourage certain consumers to accumulate additional debt; and
(2) resulting consumer debt may increasingly be a major contributing factor to consumer insolvency.
In short, Congress suggested, right in the bankruptcy statute, that credit issuers might be at least partially to blame for the increase in bankruptcy filings. Congress went on to order the Board of Governors of the Federal Reserve to conduct a study of such practices and their impact on consumer debt and insolvency.
Indiscriminately, without taking steps to ensure that consumers are capable of repaying
On the first two issues—whether lenders were issuing credit “indiscriminately” or “without taking steps to ensure that consumers are capable of repaying the resulting debt”, the Board summarily concluded that they were not. Citing the two-step process in which most consumers are “pre-qualified” before receiving credit offers and then individually screened upon application, the Board determined that “lenders analyze consumer financial behavior carefully before offering credit, and they consider consumers’ ability and willingness to pay in making decisions about extensions of credit.”
Unfortunately, the report fails to take into account a number of critical facts. For instance, those pre-screening processes are just as easily used to target consumers who are in desperate straits and likely to accept egregious credit terms. Many credit card lenders make their fortunes on annual fees, “start-up” fees, and high interest rates that would never be accepted by the truly credit worthy. In fact, the Board’s concluding paragraph points out that “risk segmentation enables providers to price for risk…”.
Likewise, a lender’s assessment is based on profitability of the account, and with fees, high interest rates, late charges, and over-the-limit charges, delinquent accounts can be quite lucrative for credit card issuers. In fact, the borrower who pays at or near his minimum payment level, carries a high balance, and makes occasional late payments is a much bigger moneymaker for the lender than a responsible borrower who pays off his balance in full each month.
In a manner which may encourage certain consumers to accumulate additional debt
The Board dodged the issue of lenders encouraging consumers to accumulate additional debt, concluding that, “the aggregate growth of consumer debt has not entailed a threat to the household sector of the economy.” We could argue that the statement itself is inaccurate, but that’s hardly relevant here, since Congress didn’t ask whether the aggregate growth of consumer debt entailed a threat to anyone—Congress asked whether credit card company practices encouraged consumers to take on additional debt.
In an effort to provide support for the idea that the leap in credit card debt and usage was attributable to other factors, the Board largely contradicted its first two findings, pointing out that “credit cards have become more widely available to all groups, including lower-income consumers and to populations with a wider range of credit risks.” Translation: people who are less likely to be able to repay can now obtain credit cards more easily. This statement, at least, is supported by data. Consumers with incomes below the 40th percentile are carrying 21% of the total outstanding credit card balances, and more than 60% of those in that income category who use credit cards are carrying balances from month to month.
The biggest evasion on this issue comes in a single sentence relating to concerns about whether consumers have enough information to make good decisions and avoid unexpected costs: “These concerns are beyond the scope of this report.” It’s difficult to understand how the Board might have considered understandable disclosures to consumers “beyond the scope” of whether or not credit card issuers encouraged consumers to accumulate additional debt.
Consumer debt as a contributing factor to insolvency
The Board cites a 2002 study to support the startling notion that the best predictor of whether or not a household will file for bankruptcy protection is the financial benefit of doing so. The connection between the financial benefit of bankruptcy and the level of unsecured consumer debt relative to income and assets is glossed over. The Board does concede that consumer debt is one of many factors that may play into insolvency, but concludes, “the decision to file for bankruptcy is complex and tends to be driven by household distress arising from unforeseen adverse events such as job loss, divorce, and uninsured illness.”
It’s too bad Congress didn’t ask this question before making those sweeping changes to the Bankruptcy Code to root out the “deadbeats”.
http://blog.startfreshtoday.com/