Home

Posts Tagged ‘subprime lending’

Thursday, April 15th, 2010

SEC Proposes Tighter Regulation of Asset-Backed Securities

The Securities and Exchange Commission (SEC) announced that it has proposed new rules to govern the field of bonds backed by consumer loans, perhaps best known in its incarnation of mortgage-backed securities sold during the subprime housing boom.

Background: What They Are, How They Work

So, what might this mean for borrowers and investors? Here’s a little background on asset-backed securities and what they do.

  • Consumer loans: When you and other ordinary Americans take out mortgages and other loans, you go through a bank or other lender. When the loan is originated, that lender "holds your debt."
  • Loan bundling: It has become common practice to "bundle" consumer loans (especially mortgages), which means to lump them together to sell off to investors. But, rather than selling off easy-to-trace sections of the bundle, many banks sell off sections composed of various loans. These sections are the securities.
  • Asset backed securities: Because the securities theoretically earn money when consumers make payments on their loans, they’re known as "asset-backed securities."
  • Bond ratings: During the subprime boom, credit agencies gave various asset-backed securities risk evaluations to help guide investors: high-risk securities had the potential to yield more money, but with a greater risk of consumers not paying. Lower-risk securities offered a lower earning potential, but with more security for investors.

Naturally, the system works well assuming everyone does what they’re supposed to: banks issue loans consumers can afford, credit agencies give honest ratings, consumers make regular payments, etc.

But, as we know from the collapse of the subprime market, that’s not necessarily how the system works in practice. That collapse has had wide-spread effects, from bankruptcy filings to unemployment.

The Proposed Rules

The SEC’s proposed changes would essentially take out the role of the credit agencies. Rather than have credit agencies rate loans, bond issuers themselves would be required to:

  • Keep larger portions of loans on their books, thus giving them an increased stake
  • Provide regular reports on the exact loans that compose a bond
  • Guarantee the risk level of their products

If these changes pass, it’s expected that they’ll help prevent a repeat of many of the problems that caused the subprime bubble to expand and burst.

Tags: , , ,
Posted in Your Credit Score | No Comments »

Sunday, December 27th, 2009

Eighty Percent Interest on a Credit Card

The Credit Card Accountability Responsibility and Disclosure (Credit CARD) Act of 2009, which will take full effect in February, limits many practices now common in the credit card industry. Some, however—like issuing a card with an interest rate near 80 percent—will still be permissible under the new law.

Subprime Credit: Still a Bad Idea

The subprime lending boom and the “unconventional” lending techniques that accompanied it were major factors in the housing market’s explosion and collapse, and thus the current recession.

But just because people have grown more wary about some types of subprime lending doesn’t mean it’s disappeared entirely. In fact, according to an MSNBC article, some of the worst credit cards on the market are still as costly as ever.

The First Premier credit card reportedly provides a source of credit for people with limited or shaky credit histories – that is, the so-called subprime borrowers. But, because of the potentially high risks associated with having a blemished credit history, this card comes with some shockingly expensive terms:

  • Initial limit of $300: Users of the First Premier card will have access to only $300 in credit when they open their accounts, an increase from the card’s former limit of $250. But that’s not even as much as it seems.
  • Maximum permissible fees: The Credit CARD Act prohibits issuers from charging fees that total more than 25 percent of a card’s limit, and the First Premier charges exactly that: $75 in fees each year. Formerly, the first year’s fees totaled $256 – on a $250 limit.
  • Astronomical interest rate: Presumably to make up funds lost from the limited fees, the First Premier issuers jacked up the interest rate on their card to a whopping 79.9 percent. The new law sets no limit on credit card interest rates, so while shockingly high, this limit is legal.

Avoid the Trap: Wait It Out

Naturally, getting tangled up with a card that carries a nearly 80 percent interest rate is not a good idea, no matter how badly you want to start rebuilding your credit after a bankruptcy filing or other financial stumbling block.

If you currently have a rough or limited credit history and don’t think you’ll qualify for a credit card with more favorable terms, your best bet may be to simply wait a while. With a few months or years of responsible and timely bill paying, you may qualify for much better credit products.

Tags: , ,
Posted in Your Credit Score | 1 Comment »

Monday, April 13th, 2009

Action on the Credit Card Bill of Rights

A subcommittee of the House Financial Services Committee voted last week to approve a bill called “The Credit Cardholders’ Bill of Rights”.

If the bill succeeds in the rest of the House and the Senate, good news could be in store for borrowers.

Unfair and Deceptive Practices

Since the current recession was so heavily fueled by subprime lending and similar questionable practices, lawmakers’ attention has been drawn to the rules governing lending in the U.S. Of chief concern to many consumer rights activists:

Universal Default: If you default – that is, fail to make timely payments – on one account, other creditors can penalize you with higher interest rates or monthly payments.

Transparency & Disclosure: Explaining all the terms of use of credit cards – like interest rates, late fees, penalties, etc. – is already required by law. But some activists worry that the presentation of credit card agreements (pages and pages of fine-print) allows many companies to hide unpleasant features.

Introductory & “Teaser” Rates: Often, credit card issuers advertise low initial interest rates boldly, and only mention in small type that these rates are only valid for a limited time.

Fees for Phone & Online Payment: Some cards charge service fees to consumers who choose to pay their bills by phone or on the Internet, a practice that has been cited as problematic by members of the Financial Services Committee.

The Opposition

If the Credit Cardholders’ Bill of Rights becomes law, some of these issues may be addressed, which is good news for consumers.

Banks and other card issuers, on the other hand, are reportedly less than thrilled with the idea of new restrictions on their lending.

At a time when banks are struggling to build capital and pull themselves out from the weight of bad investment decisions, revenue from credit card fees and high interest rates could provide a substantial source of income – as it does now.

Just the Beginning?

Some analysts suggest that credit card legislation could be the beginning of new regulations for the banking and lending industry.

While legislative restrictions to market and lending action may be unwelcome by some players, many democrats see the lack of regulation as a key factor that contributed to the nation’s current financial stress.

If successful, the bill will likely offer card issuers around one year to adopt new policies.

Are you knee-deep in debt? Consider filing bankruptcy.

Tags: , , ,
Posted in Your Credit Score | No Comments »