How I became a rock star for a day

Last week, I was a rock star—and it felt great.  But I wasn’t on a big stage with a lead guitar, playing sick licks for a gigantic crowd.  No, not at all.  I simply asked a question that was on everyone’s mind at a recent conference.

During a packed, small business conference hosted by the mayor of Savannah, Georgia, I directed the following question to Terri Denison, District Director for the Georgia Office of the U.S. Small Business Administration (SBA):

“During last week’s hearing on small business lending hosted by the House Financial Services Committee in Washington, D.C., a small business owner testified that millions of small business owners are frustrated for two main reasons: 1) Banks, especially community banks, are not experienced enough to evaluate properly good business plans and ideas 2) Banks refuse to lend because regulators have implemented increasingly difficult standards such as higher capital reserves.  Why can’t the SBA lend directly to businesses to circumvent these obstacles?”

Ms. Denison, who is a good friend of mine, answered the question artfully, outlying several of the same points that appeared in an article published by The New York Times a few hours later. Her answer, which didn’t assuage business owners starved for capital, didn’t matter.  I was a rock star as soon as I finished my question. 

During the conference breaks, many small business owners thanked me for asking such a great question.  They also shared that they are doing everything possible to survive this economic maelstrom. The credit crush has only made things so much worse.  

So, in a nutshell, that’s how I became a rock star for a day, singing the blues of small business owners all across the country.

[ Read The New York Times article. ]

The U.S. is closer to losing its top credit rating

Last year in April, I wrote an article poking fun at the irony of Berkshire Hathaway, Warren Buffet’s company, losing its high credit rating.  (“Warren Buffet’s credit rating reduced”).  Fast forward almost one year from that date, and here I am, writing about the real possibility that the United States of America, the country whose government-issued securities are as good as cold cash, is facing the same situation. 

In today’s The New York Times, Moody’s Investors Service, a popular credit rating agency, delivered the bad news.  Ironically, Moody’s is one of the widely used credit agencies still under fire for erroneously rating many of those toxic assets that wreaked so much havoc on global economies. 

Why is the country’s rating in jeopardy?  This looming demotion is no different than a credit downgrade for a consumer whose debt-to-income ratio has gone through the roof. (Of course if he still has a roof). According to The New York Times, the soaring amount of U.S. debt is staggering:

“The administration of President Barack Obama estimates that the U.S. deficit will rise to 10.6 percent of gross domestic product in the current fiscal year, the highest since 1946, and federal debt will reach 64 percent of G.D.P. Government expenditures are expected to rise to a postwar high of 25.4 percent of G.D.P.”

However, there is hope. Mr. Cailleteau, managing director of sovereign risk at Moody’s, says:

“For now, the U.S. debt remains affordable, Moody’s said, as the ratio of interest payments to revenue fell to 8.7 percent in the current year, after peaking at 10 percent two years ago. If that trend were to reverse, the Moody’s analysts said, “there would at some point be downward pressure on the Aaa rating of the federal government.”

If the credit rating of the U.S. were downgraded, the country’s default risk would increase.  In other words, that would mean higher interest rates that the government would have to pay to borrow. Who would be paying for that increased risk, at least in part? You and I.

In short, the downgrade is highly unlikely. Just because we are “substantially closer” does not mean we are close.  But, it is always nice to know that consumers are not the only ones suffering with credit problems.  That feeling of empathy would be short-lived, I suppose, because we as tax payers would get the short end of the stick.

[ Read The New York Times article. ]

Significant credit card changes proposed by the Federal Reserve

Published courtesy of LowCards.com.

Today, the Federal Reserve proposed a rule amending Regulation Z (Truth in Lending) to protect credit card users from unreasonable late payment and other penalty fees, as well as requiring credit card issuers to reconsider increases in interest rates. This rule will go into effect on August 22, 2010.

"This proposal addresses two key costs of using a credit card--fees and interest rates," said Federal Reserve Governor Elizabeth A. Duke. "The rule would prevent credit card issuers from charging large penalty fees for small missteps by consumers and would require issuers to reevaluate rate increases imposed since the beginning of last year."

The proposed rule would:

* Ban inactivity fees. Some issuers have recently instituted an inactivity fee if there are no transactions on your credit card for a certain period of time.

* Force issuers to evaluate rate increases. At least every six months, credit card issuers must reevaluate annual percentage rates increased on or after January 1, 2009. and, if appropriate based on their review, reduce the annual percentage rate applicable to the account. This includes changes in the consumer's creditworthiness, and to increases in the rate due to changes in market conditions or the issuer's cost of funds. However, the statute also expressly provides that no specific amount of reduction in the rate is required.

* Stop credit card issuers from charging penalty fees that exceed the dollar amount associated with the consumer's violation of the account terms. Card issuers would no longer be able to charge a $39 late fee for a $20 minimum payment. The fee could not exceed $20.

* Require credit card issuers to provide reasons for increases in rates.

* Prevent issuers from charging multiple penalty fees based on a single late payment or other violation of account terms.

Banning credit checks on job applicants the right thing to do

As more Americans suffer job losses and the inability to meet financial obligations, states are considering legislation that will prohibit employers from using credit checks to deny employment.  According to a recent report by the Associated Press, proponents of the idea argue that current restrictions make it increasingly difficult for qualified people to secure work. This year, 16 states from South Carolina to Oregon, have drafted legislation.

I support the move by many states to prohibit credit checks, especially during these difficult economic times.  With unemployment rates at record highs, the job market should be fair for everyone who is qualified to perform a job. And, it is no secret: Honest Americans find themselves in financial hardship not because of their own doing in many cases, but in part because of the credit card industry, which by lowering credit limits, has damaged millions of credit reports.  Denying people jobs because of poor credit is tantamount to kicking them while they are down.

Finally, the epidemic of bad credit is growing everyday as people make hard choices: Do I pay my credit card bills or feed my family? Do I restructure my mortgage and risk being denied the very job I need?  While the idea of what responsible means today has been redefined, the FICO score and credit rating standards have not.  (Read Fair Isaac Corporation (FICO) increasingly irrelevant.) Legislation to prohibit credit checks for employment is not only the right thing to do, but also a necessary action to curb soaring unemployment.

What related stories do you have? Have you been denied a job after a credit check?

Jon Stewart lampoons the Credit CARD Act

www.thedailyshow.com

Jon Stewart needs no introduction. Watch his hilarious parody of the new Credit CARD Act and Bank of America.

Citi adds $60 annual fee to more credit card accounts

 
Published courtesy of LowCards.com.

One week before the CARD Act goes into effect, Citi has added an annual fee to more accounts on many of its popular credit cards.

Many Citi cardholders are receiving letters about a $60 annual fee that is being added to their account effective April 1, 2010. If consumers make $2,400 in purchases during the year, then the annual fee will be credited back to their account.

It appears that Citi's test of adding an annual fee to a small percentage of their customers in August of 2009 proved successful for the issuer. At that time, Citi began charging some cardholders an annual fee of $30 to $90 unless they spent at least $2,400 per year. Now a far greater number of customers are receiving this notice.

Veteran bankers support strong regulation of banks, exhibit Frankenstein’s remorse

If you think the crusade for increased regulation of the financial industry is just populist fury—a battle between the haves and the have-nots—you are wrong. Contrarily, many of Wall Street’s veteran leaders are lobbying vociferously for more regulation of big banks, some of which they ran during their heyday. An article released today in The New York Times explores this irony.

Armed with what constitutes a compelling squadron of financial gurus, Paul A. Volcker, chairman of the Federal Reserve during the 80s, calls for very strong regulation.  Mr. Volcker believes that restricting proprietary trading of banks is the silver bullet.  In fact, some of Mr. Volcker‘s cohorts believe that this proposed solution to the financial crisis is shortsighted and that Congress should go as far as to reenact the Glass-Steagall Act.

Am I the only one that finds this odd?  What is the old guard’s motivation for supporting more regulation of an industry that in many ways, it helped to create?  Did it lose millions of dollars and therefore has become sour? I have no clear answer. 

But, I am reminded of Marry Shelly’s "Frankenstein".  Perhaps the old bankers feel responsible, at least in part, for helping to create a family of financial monsters, ugly giants composed of blended parts taken from different financial intermediaries—an investment bank here attached to a commercial bank there. In their quest to create the perfect, most profitable financial service corporation, everyone has suffered.  Like Frankenstein, they, too, have learned the price of pursing glory at all costs.

Banks get another reason to stop lending

Banks now have another reason to stop lending: The Federal Reserve will pay banks a higher interest rate on their “excess reserves” or any money over their required minimum savings.    

The Fed enforces capital reserve requirements for its member banks and depository institutions to ensure that they can absorb a reasonable amount of loss. In other words, the Fed holds money for its members and pays interest on the amount that exceeds the minimum requirement.  After all, it is called the Federal Reserve Bank.  Currently, that interest rate is 0.25%.  The minimum amount of money required is determined by the capital ratio, a percentage of a bank's capital to its risk-weighted assets.

The calculation of this capital ratio has been a hot issue lately.  Many of the large banks that failed were tremendously overleveraged; put another way, they borrowed way too much money.  Based on testimony by an analyst at a recent FCIC (Financial Crisis Inquiry Commission) hearing, some banks were leveraged as high as 95 times.  A normal ratio is closer to 10 times and is much less risky.  Some congressional leaders and bankers believe that part of the solution to preventing another financial crisis is requiring that banks have higher reserve requirements. 

Small business ideas for financing during a credit crunch

 

As a small business owner, I feel the pain of the credit crunch caused by the recession. Despite great credit, my company has lost financing options; they have either dried up or become much more expensive.  First, American Express decommissioned my company’s business line.  Second, Capitol One increased my company’s credit card interest rate by seven points. Third, Chase recently sent a letter notifying me that it, too, may decommission my company’s business line and raise minimum payments.  Considering these circumstances, it is increasingly challenging to operate a business, let alone grow. 

As a result of traditional banks refusing to lend, more small businesses are seeking alternative sources of funding.  Two reasonable options are accounts receivable financing and purchase-order financing. 

Dubious subprime credit company, CompuCredit, in financial trouble

The bad news for its employees came on Jan. 28: CompuCredit announced that it was closing several call and collection centers around the country in order to cut costs.  Due to the recession, Atlanta-based CompuCredit, which specializes in credit card and car loans for consumers with bad credit, decided to layoff about 740 employees.  However, it will continue to operate centers in Nevada, Florida, and Minnesota. 

In addition to laying off several employees, CompuCredit released on the same day a press release announcing the following: “CompuCredit Holdings Corporation Announces ‘Modified Dutch Auction’ Tender Offer to Purchase up to $160,000,000 Aggregate Principal Amount of Its Outstanding 3.625% Convertible Senior Notes Due 2025 and 5.875% Convertible Senior Notes Due 2035”.  That has to be the most convoluted title that I have ever read in my life.  You have to have a finance degree to even get an idea of what it means. In a nutshell and explained at the most rudimentary level, CompuCredit is buying back some of its long-term debt at a discounted, auctioned off rate from its debt holders because its financial welfare and future are shaky at best. In short, CompuCredit, like some of its subprime customers, is experiencing financial straits.

Normally, this news would not be material for this blog.  (I would much rather write about the total demise of the company.)  But CompuCredit is of special importance because it was investigated and censured by the FTC (Federal Trade Commission) in part for reducing customers’ credit limits based on where they shop.  As a result, CompuCredit settled for $116 million and agreed to pay a $2.4 million penalty to the U.S. treasury in December 2008.  Similarly, in January 2009, American Express engaged in and admitted to the same insidious practices in 2009. However, it has not had to face any penalties.  In fact, American Express’ actions are what prompted the creation of this blog.  Even with the tremendous media attention given to American Express’ obvious abuses, the company has managed to escape public and political outrage relatively unscathed. 

Great Scott! Massachusetts Senate upset could kill financial reform

Scott Brown’s astonishing upset in the Massachusetts Senate race has Democrats aghast, wondering how in the world did a Democratic bastion fall into the hands of the Republican Party. Now that the Democrats have lost their super majority in the Senate, several crucial bills are at stake.

As a result of the Democratic debacle, political pundits have focused on the likely and immediate demise of health care legislation, the controversial bill that pushed Brown to victory.  However, few pundits are discussing the possibility that financial reform could face a similar fate.  

AmEx debuts new feature: Use reward points to pay taxes

For those who remember the $3.39 billion of TARP money that American Express desperately requested and received about a year ago, the irony of this headline is  unbearable.  I am reminded of the popular saying: He could sell ice to an Eskimo! Only in this case, He is American Express; the ice is our tax dollars; and we are the Eskimo.

I can imagine American Express executives in the board room back in January 2009.

“This new reward feature that allows Cardmembers to use reward points to pay taxes is going to have to wait.  Populist uproar against Wall Street banks is still prevalent.  More importantly, we still owe the government $3.39 billion for the TARP program.  Let’s wait until we pay back the money and give it some time. Ideally, we release the new feature right when customers can appreciate it the most: next tax season. Then, the urgent need will somewhat placate their anger.”

Here is an excerpt from American Express’ Jan. 11 press release announcing the feature:

Barney Frank releases memo to dispel inaccuracies about CFPA exemptions

Washington, DC – Today, House Financial Services Committee Chairman Barney Frank (D-MA) released the following memo to members of the House Financial Services Committee: 

January 21, 2010

MEMORANDUM

TO: Members, Committee on Financial Services

FROM: Chairman Barney Frank

RE: Inaccuracies about CFPA Exemptions

Some inaccuracies have appeared in the press about institutions exempted from the reach of the Consumer Financial Protection Agency in the House-passed financial reform bill.  For instance, yesterday’s New York Times reported that it “exempted smaller community banks, credit unions, retail merchants …”.  Not true.  All of those institutions will be subject to all rules issued by the agency with respect to the extension of credit.  They also will be subject to agency enforcement.  The exemption for smaller financial institutions is only with respect to examination which will continue to be the responsibility of the institutions’ prudential regulators.  However, the CFPA will have back-up inspection authority and may independently take enforcement action.  And even this exemption is limited to institutions with less than 2% of bank assets.

Importantly, the new agency will also have authority with respect to the now lightly or unregulated institutions such as pay day lenders and check cashers firms which are especially important to lower income families.  It also will have authority over independent mortgage brokers and lenders that led the industry in issuing subprime and abusive option ARM mortgages.

Maximize relief dollars, remove transaction fees

It has been done before: credit card companies temporarily suspending transaction fees to maximize the dollar amount of donations going to help disaster relief and recovery efforts.  Given the catastrophic proportion and immediacy of Haiti’s need, it should be done now.

When disaster occurs and private donations abound, credit card companies reign in a considerable amount of money through transaction fees.  Companies such as Visa, which has come under fire for its high transaction fees, make about three cents of every dollar donated.  Visa and other companies will likely rake in millions of dollars of profit as a result of the donations made via credit card for the Haitian relief efforts.  

Instead of eagerly watching their bottom lines swell, credit card companies should cease this opportunity for humble leadership and partial redemption.  While the existence and convenience of their processing infrastructure is certainly valuable and has an associated nominal cost, the need for every penny of relief is most important.

Join me in demanding that credit card companies suspend their transaction fees to maximize relief efforts in Haiti. 

For more information about how much credit card companies will profit, read an article released today in the Huffington Post.

Credit unions no longer a safe haven

In this ever-changing and tumultuous world of consumer credit, no borrowers are completely safe from the whims of frantic lenders--even the so-called safe ones. Often considered the best option for consumer loans, credit unions are becoming more like their rogue cousins: commercial banks. 

Based on recent e-mails and comments sent to me from frustrated consumers, credit unions are beginning to adopt and to implement changes to their credit card accounts, including increased interest rates and stricter terms.  This comes as a surprise given that amid the widespread outrage against commercial banks, credit unions have been touted as the safe alternative.   

One such customer wrote me:

Senator Dodd’s legacy, a fighter for financial reform

I am almost embarrassed to admit it: The first time I heard of Senator Christopher Dodd (D-CT), I was watching “Late Night with Conan O’Brien” a few years ago.  In one of his reoccurring, comedic interludes, O’Brien compared Mr. Dodd’s headshot with that of an animated Simpsons character, I believe, saying that they looked just alike. Since then, I have forgotten who the “twin”, animated character was and learned much about Mr. Dodd.  (I will exchange my chagrin with pride now, realizing that my political IQ has increased tremendously at the expense of my knowledge of pop culture.)

Earlier this week, Mr. Dodd announced his plans to retire from the United States Senate where he has served for almost 28 consecutive years.  While his announcement (made amid a flurry of controversy regarding his diminishing popularity and ability to maintain his seat) was not shocking, it certainly was disappointing to learn that one of the most powerful fighters for consumer rights is leaving.  As chairman of the Senate Banking Committee, Mr. Dodd was especially vociferous about the need for change to the credit card industry. 

Mr. Dodd’s political legacy will be, in general, his passionate advocacy for financial regulation and, in particular, the passage of his Credit CARD Act of 2009. Furthermore, he will be remembered for standing up for and sticking with unpopular ideas like credit card reform decades before any significant legislative reform was enacted.  While the verdict is still out on the Credit CARD Act and considering that many believe the timidity of some of Mr. Dodd’s regulatory policies are self-defeating, this much is clear: Consumer advocates and financial reformists alike have lost significant ground in the fight to ensure equity in our financial system.  I doff my hat to Mr. Dodd.

In a statement distributed on Jan. 6 by House Financial Services Committee Chairman Barney Frank (D-MA), Mr. Dodd is lauded:

How a loan modification can damage your credit

An article released in The New York Times on Jan. 1 reports that economists and housing industry experts believe that President Obama’s plan to fight the foreclosure crisis is not working.  In fact, many believe that the President’s $75 billion plan, which compels banks to lower monthly mortgage payments, has backfired and prolonged the recovery process. 

The article mentions briefly an important and little-known consequence of the program: the fact that some borrowers who accept a loan modification receive adverse reporting on their credit reports.  Certain banks, such as Bank of America, have reported to credit rating agencies that homeowners are making only partial payments.  This occurred despite some borrowers being told by their mortgage companies that their credit would not be damaged. 

I am officially back and on the front lines

I have great news: I am back!

As mentioned in my last post about five months ago, I ran for state representative here in Atlanta, Georgia. The seat was vacated in April, so I felt like I had a good chance of winning. Thank you all so much for your patience and encouragement during the special election, which was a wonderful experience.

Discover Financial’s credit rating reduced

In what seems like a cruel and ironic twist of fate, credit card companies are beginning to see their ratings decline. 

Discover Financial Services, purveyor of the Discover Card, is the most recent victim of the credit crunch.  Moody’s Investors Service, a corporate ratings agency, cut its senior unsecured debt rating for the ailing company.  Currently, the company’s rating is in non-investment grade territory. 

Representatives from Moody’s Investors Service cite Discover’s lack of product diversity and its dependence on the securitization market, which is virtually frozen. 

[ Read the Associated Press article. ]

AmEx sues rocker Courtney Love for unpaid bill

Average consumers get no mercy. Bankers get no mercy. And apparently, celebrities get no mercy either. 

AmEx has decided to sue infamous rocker Courtney Love for allegedly not paying $350,000 on her AmEx Gold charge card.  The company has suspended her account and will seek $352,059.67 for the unpaid balance, damages, attorney's fees and late charges. 

Political commentator says credit card bill is a fraud

Not everyone is rejoicing over President Obama signing the Credit CARD Act today.  Controversial author and political commentator, Jim Morris, is circulating his skeptical views in an article entitled “Obama’s Credit Card Reform is a Fraud”.

As suggested by its title, the article focuses on the president’s failure to “reform the most basic offense” of credit card companies: their usuary.  Morris calls for concrete restrictions in the form of interest rate caps that would prohibit extremely high interest rates and ridiculous, punitive rate hikes.  

Do you agree with Morris that President Obama and the Congress sold out to the powerful influence of credit card companies?  Does the legislation do enough?  

[ Read Dick Morris’ article. ]

Slash and burn to continue for cardholders

The results of the recent stress tests done on the 19 largest banks in the U.S. reveal more bad news: the credit crunch will continue, and credit cardholders will continue to see their credit lines slashed and their accounts canceled. 

Despite the relative good news circulating in the media about the stress tests, not much has been mentioned about the assumptions of the tests as they relate to credit card debt. For example, the tests assume that the rate of unemployment figures will not get worse.  Traditionally, credit card companies have used the unemployment rate as a gauge to see how much debt they will likely write off.  Also, the tests do not consider credit card loans that banks packaged into bonds.  Those could be worth as much as $82.4 billion. 

Duped investors fight for credit rating reform

Fair Isaac Corp. (FICO), the monopolistic, consumer credit rating firm, is not the only company feeling the heat of populous anger and demands of change to their credit rating methodology.  In a parallel struggle with the major corporate credit rating firms (Moody’s Investors Service, Standard & Poor’s, and Fitch Ratings), miffed investors are seeking reform of the industry to avoid being misled by exaggerated credit ratings. 

Bank of America gets a new chairman: my good friend

News just broke that Bank of America shareholders have stripped, Kenneth D. Lewis, of his role as chairman of the company but will allow him to remain president and chief executive.  Today was Bank of America’s annual shareholders meeting in Charlotte.  

Based on this news, it seems as if Bank of America is making much needed changes to improve its leadership. While I sometimes have harsh things to say about Bank of America, I have only good things to say today, especially since the new chairman, Walter E. Massey, is a good friend of mine.   

American Express profit drops 56%

American Express continues to struggle: its profits declined 56% for the first quarter of 2009.  The drop, however, was an improvement compared to the last quarter of 2008, which yielded a 79% decline. Percentages are based on performance during the same time a year ago. 

Despite the poor performance for the past two quarters, the company is profitable: net income for the first quarter of 2009 was $437 million and net income for the last quarter of 2008 was $172 million.

Credit Cardholders' Bill of Rights clears Financial Services Committee—and with our help

I am pleased to announce two pieces of good news concerning legislation that, if passed, will increase credit card regulation. 

First, the Credit Cardholders' Bill of Rights (H.R. 627) cleared the House Financial Services Committee today, making much needed credit card regulation a closer reality.   

Second, an amendment was added to the Bill that will require within 6 months of enactment that the Federal Reserve, Federal Trade Commission, and other federal banking agencies to report to the committee to what extent banks assess a customer’s credit worthiness based on where he or she shops.  The amendment was added by Rep. Maxine Waters (D-CA), whose congressional office consulted me on Mar. 31 about the issue.  Even though the amendment doesn’t prohibit the insidious practice, it is a step in the right direction. 

[ Read the entire press release. ]

British consumers enraged over interest rate hikes

As you may know, the credit crunch is reaping havoc on a global scale.  Other regions of the world, especially countries in Europe, are experiencing unprecedented gridlock where before there was an efficient flow of capital.  The United Kingdom, which has had its share of bank bailouts, is one such country.

As outraged as consumers are in the United States, the Brits are balking at increased interest rates on credit cards. In an article that came out in the Telegraph, a British publication, consumer advocate, Martyn Hocking, stated, “At a time when we’re all feeling the pinch, it’s hugely disappointing that credit card companies are choosing to put the squeeze on borrowers more than ever. With interest rates so low, it is time for credit card providers to enter the real world.  They need to make credit cheaper and their charges more transparent and fair, rather than making it harder than ever for people to make ends meet and pay back their debts.” 

Obama vows support of credit card reform

The White House has its focus on increased regulation for abusive credit card companies.  

Larry Summers, director of the National Economic Council and a top presidential aid, said on NBC’s “Meet the Press” that President Obama will support the House and Senate’s efforts for credit card reform.   Currently, the House and Senate are considering the Credit Cardholder’s Bill of Rights Act, a bill that passed the House in September but has yet to pass the Senate. 

MasterCard and Visa to reduce transaction fees in Europe

Continuing its immense pressure on credit card companies, the European Commission recently sent a formal statement of objections to Visa Europe on Apr. 3, declaring its intention to bring an antitrust case against the firm for its high multilateral interchange fees (MIF).  The Commission has been aggressive in ensuring that interchange fees charged by credit card companies directly support “technical and economic progress and benefit consumers”.  Companies such as Visa and MasterCard have been unsuccessful in convincing the Commission that their current fees comply with its demands. 

Warren Buffet’s credit rating reduced

Even the great oracle of investing, Warren Buffet, has been negatively affected by the current economic slump: Buffet’s firm, Berkshire Hathaway, was downgraded two notches this month from a triple-A credit rating by Moody’s Investors Service.  The firm’s current rating is Aa2. 

Despite Berkshire’s impressive history of prolonged success, it hasn’t been immune to the economic downturn.  The company reported a 62 percent drop in net income for 2008. 

Bank failures lead to more aggressive debt collectors

While I was a guest on a radio show a month ago, a distressed listener called and asked me: “If my bank fails or is seized by the federal government, do I still have to pay my credit card debt?”  My answer disappointed him.  I told him yes, and that his debt would likely be sold to another bank.  What I didn’t tell him was that sometimes the debts are sold to junk-loan buyers who have bought millions of dollars worth of debt for as low as 35 cents on the dollar. 

Given the large increase in bank failures during the last 15 months, sales of debts by the Federal Deposit Insurance Corporation (F.D.I.C.) have also increased.  At auctions conducted by the F.D.I.C. (the government agency that takes over failed banks), companies and wealthy individuals buy the debts of failed banks.  According to an extensive New York Times article, which takes a look at the auctions and their consequences, “Nationwide, the F.D.I.C. has seized 58 banks over the last 15 months and through loan auctions has sold about $2.2 billion worth of loans.  The $1.2 billion generated for the government has gone into the fund to insure deposits at other banks.”

TARP money collecting dust and interest

The Wall Street Journal released an article today with a headline that made me laugh: “TARP Banks Cut Overall Lending”.  After getting a kick out of the headline, I said out loud sarcastically, “No way! You must be kidding me!” Those of you who often read my blog may have reacted the same way. 

Despite its ancient headline, the article does provide some detailed numbers reported by the Treasury Department concerning just how much TARP recipients have cut their overall lending.  As stated in the article, “In a monthly snapshot of lending by the 21 largest banks receiving Troubled Asset Relief Program funds, the Treasury said credit being offered fell 2.2% across all commercial-lending and consumer-lending categories in February, compared with the prior month.” 

Senate kills bill to prevent credit card redlining in Maryland

I have bad news: despite its overwhelming support and passage in the House, House Bill 1292, which prevents banks and credit card companies from assessing a customer’s creditworthiness based on where he or she shops, was killed by the Senate Finance Committee.  The committee, which during its hearing on Apr. 2 was critical of the bill’s practicality, refused to vote on the bill, and therefore killed it by inaction.  Now, the only option is to introduce the legislation during next year’s session.   

Bank of America to raise interest rates on cardholders who carry a balance

The latest bank to raise interest rates on customers is Bank of America.  The rate increase will affect less than 10% of its customers and will target cardholders who carry a balance on their cards. 

Bank of America is following in the footsteps of other banks that have boldly changed their terms during difficult, financial times. These banks include Citigroup Inc., J.P. Morgan Chase & Co., and American Express Co.  Consumer advocates argue that major banks are making such untimely decisions because the Federal Reserve’s new rules go into effect in July 2011.  These new rules will restrict the banks' ability to suddenly raise rates and change other terms. 

Wells Fargo reports first-quarter earnings of $3 billion

During times of economic tumult, investors often turn to buying gold to secure their assets.  Last week, we realized that not too much has changed:  Wells Fargo, a California-based bank founded on the promises of the gold rush in the 1850s, offered the financial markets golden news, reporting that it expects first-quarter earnings of $3 billion.  And we all bought it, feeling hopeful that amid this gloomy cloud of a deep recession, there exists a silver lining—or should I say a golden lining.    

However, sometimes even the most trained metallurgist can mistake a cheap alloy for real gold.  Considering the Federal Accounting Standards Advisory Board’s decision to loosen restrictions on mark-to-market accounting, which now allows banks to artificially inflate depressed assets; considering Wells Fargo’s acquisition of Wachovia; and considering that the market has not yet bottomed out, we must be careful to take the good news in stride. 

Credit ratings of major cities to be slashed

First, consumers were chopped; next, small businesses were slashed; now, local governments face the guillotine of credit demotion.  The only rating left to cut is that of the federal government—and with China and the world growing more dubious about their U.S. Treasury bonds, such a move is more a possibility than an impossibility.  I don’t think this is what President Obama meant when he said, “Change comes from the bottom up.” 

On Apr. 8, Moody’s Investors Service, a standard credit rating agency, announced that its credit ratings for local governments across the nation will be downgraded despite no certainty or track record of municipalities defaulting on a widespread basis. Moody’s argues that the deep recession indicates that all local government bonds will be an increased risk for default due to low tax revenues and the fact that many municipalities have their bonds tied to high risk derivatives.  This is the first time that Moody’s has ever made such a broad and grim forecast, much to the dismay of politicians who feel that Moody’s ill-considered decision adds unnecessary insult to injury. 

New credit score challenges FICO, uses GPA and SAT scores to grant credit

These days, the FICO model of assessing a consumer’s creditworthiness is becoming increasingly irrelevant and undependable.  As a result, several projects with the goal of creating a more stable algorithm, especially during economic instability, have launched, the most recent of which is the next generation of the Human Capital Score. 

As reported on Apr. 7, People Capital, developer of an innovative peer-to-peer student loan platform, announced the launch of the next generation of its Human Capital Score, a model that claims to provide a more appropriate measure of the creditworthiness of a student.  Developed at the Wharton School of the University of Pennsylvania Insurance Department, the Human Capital Score uses academic merit data such as GPA, standardized test scores, college and major, along with traditional demographics data and normative metrics, to give insight into each borrower’s future earnings potential.

New BMW card offers no annual fee, no late fee, and no over-the-limit fee

PartnersFirst Affinity Services, a subsidiary of Torrey Pines Bank, recently announced the launch of the BMW Car Club of America Rewards Visa Credit Card. 

Apparently, it pays to be a member of the BMW Car Club of America (BMW CCA), a national organization with almost 75,000 members.  BMW CCA is the official BMW car club devoted to supporting BMW automobile fans and enthusiasts with a wide range of social, technical, and driving events, discounts, gear and a monthly publication, called Roundel. 

Small businesses devastated by the credit crunch

Yesterday, I received a call from a good friend of mine who is president of a chamber of commerce.  Also on the call was a successful, small business owner who I have never met.  (Let’s name him Chris for convenience.)  They called to inform me of yet another horror story that involved American Express, but this story was a little different because I normally hear about consumer credit horror stories, not business horror stories.

In a nutshell, Chris, whose company is doing well and was offered the American Express Black Card at one point, had his credit line reduced tremendously.  Unfortunately, there was no warning.  He found out while on a business trip in Germany when his card was declined.    I listened to his story, told him what I know about the changing industry, and gave him some advice.

Recently, an article appeared in The Wall Street Journal detailing similar stories.  The credit crunch is hitting small businesses the hardest, causing the rate of business bankruptcy filings to outpace consumer bankruptcy filings over the past 12 to 15 months. 

Suze Orman reads my blog and changes her mind

During her latest visit to "The Oprah Show”, personal finance guru, Suze Orman, acknowledged that some of the advice she gave just a few months ago is now irrelevant.  In fact, she has done a complete 180 degree turn.  On the show, she stated with a newfound resolve and enthusiasm, “…I need you to listen up.  My advice has changed.” 

What exactly has changed?  In brief, Suze urges consumers to pay the minimum balance on their credit cards and start saving for emergency situations like job loss.  To support her new advice she stated, “The sad reality is that the credit card industry is taking actions to protect themselves with no regard to your needs or how good you have been in paying your bills on time.” 

Chase to refund illegal fees charged to its customers

A little over a month ago, I wrote about JPMorgan Chase raising interest rates and charging certain customers an annual fee.  For many customers, the unilateral change in terms was a direct violation of promises made to customers by the bank.  Well, as of last week, Chase had a change of heart at the legal urging of New York Attorney General, Andrew Cuomo.  

Two credit unions seized by the government

Credit unions are great alternatives to banks; however, they are not immune to the toxic mortgage-backed securities that are making life miserable these days.

On Mar. 21, The Washington Post released an article about the recent seizure of two large companies that provide critical banking services to the credit union industry and function as central banks for the credit union system.  These two companies, U.S. Central Corporate Federal Credit Union, based in Lenexa, Kan., and Western Corporate Federal Credit Union, based in San Dimas, Calif., invested funds for thousands of small credit unions.  A large portion of these investments were in mortgage-backed securities, which have since threatened the solvency of the two seized companies. Projected losses may exceed their available capital. 

Woman denied credit due to blacklisted mortgage company: Bank of America

There have been literally hundreds of stories in the media locally and nationally about the current credit crunch and how everyday consumers are coping.  Many of these stories have focused on American Express, perhaps the most ruthless of credit card companies when it comes to the reasons it denies credit to good customers. 

Yesterday evening, a story concerning American Express denying credit based on a customer’s mortgage company aired on San Diego’s ABC affiliate, Channel 10 News. The story focuses on Debbie Berger, a resident of El Cajon, California. 

Business accounts not included in Fed’s new rules

In December of last year, Federal Reserve Chairman Ben Bernanke announced sweeping changes to credit card regulation that will take place in July 2010.  The rules will benefit card holders in several ways.  However, the rules do not apply to everyone, and certain groups will not reap the benefits.  Two groups that lose out are businesses and business owners. 

AP report: Jobless hit with bank fees on benefits

Given that most consumers cannot understand their credit card terms, I am not surprised that many states would agree to contracts that allow banks to charge excessive fees on prepaid cards for the unemployed. Likewise, I wouldn’t be shocked to learn that the lure of money in the form of tremendous savings, kickbacks, or even campaign contributions helped to persuade decision-makers to side with the banks at the expense of citizens. It seems like trickery, get-rich schemes, and insensitivity are especially rampant these days. In my opinion, this is exactly what happened in the latest story of shameless artifice perpetrated by major banks. 

Merchants: Profiling bad for business, but higher merchant fees worse

I was very busy on Capitol Hill today.  Once I figured out my way around Washington, D.C. using the Metro, which is great by the way, I met with important people and organizations that can help increase regulation for credit card companies. 

For this post, I focus on my first meeting with a merchant organization.  The organization, which has members like Walmart and other major retailers, is large and has considerable influence on affecting national policy. 

Read my testimony for today's Maryland bill hearing

As I mentioned yesterday, I am in Maryland to testify for a bill that will prohibit blacklisting in Maryland.  During my stay in the Washington, D.C. area, I will also meet with federal government agencies and trade organizations that are working hard to increase regulation for credit card companies. 

A young Maryland delegate, Saqib Ali, invited me to testify in support of his bill and represent customers affected by blacklisting.  He boldly proposed legislation in February that will stop the discriminatory data-mining practices by companies like American Express in Maryland. He is the first person in the country to propose this much needed legislation.  My hope is that the bill will pass and set an example for the rest of the country.  Moreover, I hope it will gain the attention of the federal government to pass  similar legislation.  

You can read the text of my testimony below. I will have video of the hearing soon.

AmEx holding accounts and requesting tax returns for review in India

No.  Really!  This is not an article from The Onion.  The headline is true and wonderful in its ridiculosity. 

Just when I thought the stories about American Express couldn’t get any more foreign (pun intended), I got an e-mail telling me to check out the latest story published by MSNBC. 

As suggested by the intentionally convoluted title of this post, American Express has become even more aggressive, or should I say desperate, in qualifying customers’ ability to pay their bills. 

How risk management is changing

While doing some research a few weeks ago, I came across this brief interview put together by Fair Isaac Corporation, the company that created the FICO score.

In a nutshell, Chief Research Officer for Fair Isaac, Andrew Jennings, talks about how risk management is changing as a result of the deep recession. 

Jennings, a former risk manager, posits three important trends that will have a major effect on risk management. 

Customers accuse companies of lying about reasons for adverse account changes

More and more often, I receive detailed e-mails from customers upset about credit card companies that cite bogus reasons for adverse changes to accounts. In fact, I received one an hour ago.  This common story has reached a point of frequency that leads me to believe this deception is widespread. 

In the most recent e-mail, a woman (let’s call her Tracy) from Chicago claims that after her credit line was reduced from $18,000 to $500 two days ago, American Express told her that it did so because she has too many delinquent accounts.  Tracy obtained her credit report and everything was perfect as she believed–no delinquent accounts.  Furthermore, American Express told her that her credit score was good –in the mid 700s--but she continued to get the same story about too many delinquencies.