Friday, August 3, 2012

Regulation of Credit Card Companies Results in Lowest Delinquency Rate Ever

Saving Consumers and an Industry – What Proper Regulation Can Do

If one listens to Republicans and Wall Street and Bankers any laws which rein in the operations of the financial industry are totally destructive.  But unfortunately, the financial industry is comprised of a people who have a fatal combination of stupidity and greed, and so they must be protected from their own folly, lest their folly become our folly.

So when three years ago the CARD act eliminated some of the more egregious practices of the credit card industry, the credit card industry was not happy.

Responding to an outcry from consumers, in 2009 Congress overhauled the rules for credit-card companies. The bipartisan CARD Act ended some questionable—and lucrative—bank practices, like charging hidden fees and offering low introductory interest rates only to jack them up suddenly. The industry hated the reforms and issued dire predictions that they’d mean the end of plastic.

Hm, let’s look in the wallet everybody, and see if there are still any credit cards left.  Wow, there are.  Looks like the fears of the industry were misplaced.  Well actually not only misplaced but it turns out the credit card industry has benefited greatly from what they did not want.

For Credit-Card Issuers, a Silver Lining in the CARD Act

Three years later, card companies are sheepishly, if quietly, admitting that they’re seeing a surprising benefit from the conservative lending the law was designed to promote. “If there is a silver lining to the CARD Act—I’m not here to say the CARD Act was good for our business, so nobody misunderstand the comment—but if there were a silver lining to it, it forced rationality,” said Mark Graf, chief financial officer of Discover Financial Services (DFS), at an industry conference in May. Rationality means not giving credit cards to just anybody—especially those who’ve shown they’re at high risk of falling behind on their payments or defaulting. That seems obvious enough, yet it wasn’t the case when, as Graf put it, the credit industry was engaged in a “silly race to the bottom.”

In this case, rationality means a terrific fall in delinquency, that is, people who take out credit cards these days are actually paying the bills.

That’s helped reduce late payments to the lowest level on record. And so-called charge-offs, the debts lenders deem uncollectible, are at their lowest since the end of 2006. In May the industry identified $276 million in charges they assume won’t be paid, down from a peak of $821 million in August 2009.

Let’s see, do the math and you get about $550 million less charge-offs.  Or for those greedy and stupid members of the financial services industries, $550 million in higher profits.  No wonder Wall Street is upset and is voting Republican.

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