By Michael J. McCulley, Esq.
New Jersey Courts are considering drastic changes to Court Rules for debt buyers. The changes would require debt buyers to produce an “unbroken chain of ownership” for each debt and even list the store or vendor associated with the card on the complaint. On October 20, 2011 a memo was issued to the Judicial Council of the New Jersey Courts by a special subcommittee charged specifically with the study of what proofs are adequate to support the entry of judgment by default in collection cases. The subcommittee was formed by the Special Civil Part Practice Committee in response to a request by the Judicial Counsel for proposed rule changes. During the course of the summer, the subcommittee met and deliberated on current practices in the debt collection industry nationally, and examined the practice in states surrounding New Jersey. The subcommittee found that Delaware, Maryland, North Carolina, Pennsylvania, Illinois, Michigan, and Massachusetts have taken steps to require some degree of proof regarding the ownership of claims acquired by assignment. Ultimately the committee decided to adopt Delaware’s model with some modifications. The subcommittee’s proposed changes drastically increase the requirements in Special Civil Part actions on consumer loans and credit card debt, for both captions and pleadings, as well as in the submission of proofs in motions for default judgment. If enacted, the rule amendments will significantly impact debt buyers and the collection industry in New Jersey.
Proposed Changes to Pleading Rules: The subcommittee recommends changing Rule 6:3-2 to add a paragraph (b) which would require “The caption in any action to collect a consumer loan or credit card debt shall name both the original creditor and the current assignee. The caption shall also include the name of the vendor, if any, that appears on the credit card.” The committee reasoned that many collection actions involve credit cards that are issued by banks through specific vendors (i.e. a specific department store, electronics store, etc.) and therefore debtors think of these cards as “my XYZ Electronics card.” As such, the committee recommended that if the vendor’s (i.e. store’s) name appears on the card, the rule should require it be included on the caption. Additionally the committee would add a paragraph (c) which would state “The complaint in actions to collect consumer loans or credit card debt shall set forth with specificity the name of the original creditor, the last four digits of the original account number of the debt, the current owner of the debt and the full chain of the assignment of the debt, if the action is not filed by the original creditor.” This is a significant change and a stringent increase in pleading requirements, as the current rules only require that the name of the original creditor be set forth in the affidavit of proof, which is filed when the defendant is defaulted.
Proposed Changes to Proofs for Entry of Default Judgment: The subcommittee recommends changing Rule 6:6-3 by adding a paragraph stating “In any action to collect a consumer loan or credit card debt a copy of the assignment or other documentary evidence establishing that the plaintiff/creditor is the owner of the debt shall be attached to the affidavit of proof. If the debt has been assigned more than once, then each assignment or other writing evidencing transfer of ownership must be attached to establish an unbroken chain of ownership. Each assignment or other writing evidencing transfer of ownership of the debt must clearly show the debtor’s name associated with the account.” This proposed change was recommended only by a narrow margin of 10 to 8 votes in the subcommittee and 11 to 7 in the main committee, with the opponents raising the obvious logistical concerns of compliance with such a stringent requirement. The resulting compromise was a recommendation that the change requiring the debtor’s name to be required in each of the assignments should not take effect until September 1, 2013.
The New Jersey Creditors Bar Association is planning to write a minority report opposing these measures, however the Supreme Court generally follows the recommendation of its committees, and therefore it’s very likely these changes will be enacted shortly, in whole or part. Our firm will continue to monitor the recommendations and will update you with any changes. For further information, please contact attorney Michael J. McCulley, who is an associate based in the Philadelphia office of Weltman, Weinberg & Reis Co., LPA. He can be reached at (215) 599-1502, or email at email@example.com.
Filed under: credit cards | Tags: andy sonderman, bmi credit union, client advisory, credit card default, debt elimination scheme, franklin county
By: Andrew J. Sonderman, Esq.
On June 30, the Court of Appeals for the Tenth District (Franklin County) affirmed a summary judgment for a credit union client of the Firm based on a credit card default (BMI Credit Union v. Timothy D. Burkitt, Case No. 09AP-1024) in an Appeal from the Franklin County Municipal Court. That much of the decision is unremarkable.
This decision is notable because the debtor attempted to employ a defense, and asserted a counterclaim, based on an internet debt elimination scheme employing sham pleadings disseminated through various websites. The debtor’s bizarre theory was that BMI Federal Credit Union (“BMI”) utilized his credit to obtain funding for his credit card transactions.
The debtor sought to support this claim by providing several documents as exhibits, including bogus form 1099’s for two years purporting to reflect non-existent loans by the debtor to BMI. The debtor also submitted an affidavit as an exhibit to his amended counterclaim labeled “DEMAND FOR DEBT VALIDATION”. This is a form he adapted from an Internet website. The Court noted that the “purported affidavit” set forth debtor’s personal lack of “record evidence” on 22 separate legal or factual points “ranging from the relatively straightforward…to the largely unintelligible” (1 see endnote). The purported affidavit required a sworn affidavit in response, and stated that failure to rebut each and every point in the “Demand” would be deemed admission of all points.
After holding that the affidavits and exhibits BMI submitted were sufficient to sustain its burden to demonstrate that no genuine issue of material fact existed and that BMI was entitled to judgment as a matter of law, the Court held that the “Demand” purported affidavit failed to demonstrate any genuine issue of material fact. First, the Court held that the “Demand” did not constitute denial of the documentary evidence BMI submitted. It noted the document instead sought to “raise legal arguments regarding appellant’s liability for the debt owed on the account” as follows:
These arguments have no support in the law or are irrelevant to the issue of appellant’s liability for debt owed on an account. Finally, there is no basis in the law for the process by which appellant claimed that the “DEMAND FOR DEBT VALIDATION” established his lack of liability for the debt owed.
Although the Court’s decision could have ended at that point with affirmance of the judgment below, fortunately it went on to deal with BMI’s motion to strike several sham pleadings filed by the debtor. These included a “CERTIFICATE OF FOREIGN JUDGMENT” attaching as an exhibit a “PRIVATE ADMINISTRATIVE DEFAULT JUDGMENT – DECISION”. This document purported to be a judgment in the amount of $1,800,000 against BMI and finding that the debtor owed nothing on the credit card, rendered by a panel of three notaries public acting as “private administrative judges”. That document also imposed a penalty of an additional $2,000,000 for any attempt to reverse the decision of the notary panel. Accompanying this “Certificate” were the affidavits of the three notaries repeating their conclusions that the debtor owed nothing on the card and that he was entitled to damages of $1,800,000.
The Court granted BMI’s motion to strike, finding:
[T]he documents have no basis in the law. Section 1, Article IV of the Ohio Constitution vests all judicial power in the state in “a supreme court, courts of appeals, courts of common pleas and divisions thereof, and such other courts inferior to the supreme court as may from time to time be established by law.” There is no provision in Ohio law allowing notaries public to constitute a court that may award judgments enforceable in the state. Although the “judgment” filed by appellant purports to be from outside the courts of Ohio and the United States, the authority of the members of the panel supposedly comes from their status as notaries public, a status that comes from their commission by the State of Ohio.
The Court also granted BMI’s motion to strike another debtor’s motion to vacate the municipal court’s judgment for lack of subject matter jurisdiction. This “ouster” of jurisdiction was also based on the purported preemptive effect of the “Private Administrative Judgment” of the notary panel. The Court also granted BMI’s motion for attorneys’ fees as sanctions under Appellate Rule 23. Finally the Court granted BMI’s motion to strike, and for attorneys fees as sanctions, as to another motion the debtor filed identified as “NOTICE OF UNCLEAN HANDS AND DEMAND THAT CASE BE DISMISSED”.
While the employment of these internet-based debt elimination scams has been proliferating, there have been few judicial precedents dealing with the invalidity of the tools. These schemes have routinely ascribed judicial powers to notaries public and claimed preemptive effect in their “judgments”. This decision provides some much-needed precedent in creditor efforts to meet and defeat such tactics.
(1) The Court quoted this example of the latter:
“TIMOTHY D. BURKITT has no record or evidence that, in part, TIMOTHY D. BURKITT’S remedy is not provided within the Supplemental Rules of Admiralty, wherein the Remedy to a hostile presentment, which is a criminal scienter act, is to file a Certificate of Exigency with the Clerk of Court (Warrant Officer), who is then [sic] accept, concur and agree to all statements and claims made herein by TIMOTHY D. BURKITT, by simply remaining silent pursuant to 5 U.S.C. 556(d)”.
If you have any questions, please contact Andrew J. Sonderman, Esq. Andrew is Of Counsel and concentrates his practice in the Litigation & Defense department of the Columbus office of Weltman, Weinberg & Reis Co., LPA. He can be reached at 614-857-4383 or via email at firstname.lastname@example.org.
On January 13, I had the pleasure of appearing on The Ray Lucia Radio Show. A friend of mine arranged this and I definitely enjoyed the experience. Of course, who wouldn’t enjoy the opportunity to talk about Regulation Z and the Credit CARD Act?! I can’t get enough of that. Moreover, with the Federal Reserve’s new Final Rule topping nearly 1200 pages, I have a lot of reading to do too. It’s like getting a free novel to read!
Mr. Lucia’s show addresses “Your Money, Your Business, Your Life.” He and his radio show team are consummate pros at putting on a successful broadcast. My experience with Internet radio is starkly different in terms of pacing, energy (and effort). When you do a podcast, you have time to edit and the recording part is kind of relaxed. Not so with live radio. You have to stand and deliver and there’s no retake and no editing. Mr. Lucia does a 3-hour show Monday through Friday. I can only imagine the amount of effort that goes into something like that. Moreover, like me, Mr. Lucia has a day job. He’s a certified financial planner with his own firm.
He’s also written a book on how to save money for retirement. He’s definitely one of those high achieving, high energy people who we can learn from in our own lives. Imagine a credit union putting forth that kind of effort in its own marketing.
Filed under: collections, credit cards, credit unions, interest rates, operations, repossession | Tags: banking operations, car loan, credit card debt, Cuyahoga County, debt collection, Eighth District Court of Appeals, Fifth District Court of appeals, interest, interest rate, Ohio courts, post-judgment, pre-judgment interest, purchased debt, repossessed, retail installment contract, Richland County, statutory interest
by Joseph D. DeGiorgio, Esq.
Throughout the first nine months of 2009, Ohio courts issued several decisions with a significant impact on the laws governing banking operations and debt collection. Courts in Ohio have decided cases involving issues such as what proof is required for a bank to recover pre-judgment interest, what party or parties may bring an action on a purchased debt, and what rate of interest should be applied to judgments rendered as a result of a default on a retail installment contract. Following is a general summary of two of the most noteworthy recent decisions in Ohio; WWR clients seeking a more detailed analysis of any of the following decisions or advice on future strategy changes as a result of these holdings should, as a general rule, contact a WWR attorney directly.
On June 1, 2009, the Fifth District Court of Appeals in Richland County, Ohio, decided the case of John Soliday Financial Group, LLC v. Jason Starcher. The Fifth District heard the case on appeal from a decision of the Common Pleas Court; the Common Pleas case, involving an automobile purchase, was filed by John Soliday Financial Group, LLC, and was based on a retail installment credit contract originally signed in 2004. After Starcher defaulted on the car loan, the car was repossessed and sold, leaving more than $3,000.00 owing under the terms of the contract. The Common Pleas court granted judgment for John Soliday Financial Group, LLC on the principal amount, along with accrued interest at the rate specified in the contract, but granted all post-judgment interest at the statutory rate in effect at the time, rather than the rate specified in the contract between the parties. The plaintiff appealed, arguing that it was entitled to the interest rate set forth in the contract, a rate higher than the statutory rate.
The Court of Appeals, citing Ohio Revised Code Section 1343.03, held that since, “[t]he contract set forth the annual percentage rate in bold-faced type and boxed in at 24.95% . . . [and because the defendant] agreed to an annual percentage rate of 24.95% . . . the trial court erred in not awarding [John Soliday] interest [of] 24.95% per the terms of the contract.” The Court’s decision, therefore, stated that when parties to a retail installment contract agree to a specific rate of interest – and the evidence before the court shows the existence of that agreement – then courts should not grant post-judgment interest at any rate other than that specified in the contract (assuming no issue as to usurious interest is at stake), including any statutory rate of interest set by state statute. The decision may seem obvious – that the rate of interest on a judgment will be the rate the parties agreed to – but the fact that the case had to be appealed shows that not all courts apply the law uniformly.
In another important decision, the Eighth District Court of Appeals in Cuyahoga County, Ohio, decided the case of Capital One Bank vs. Linda D. Brown on June 25, 2009. At issue in the case was whether a party (here, Capital One Bank) was entitled to pre-judgment interest on a judgment that stemmed from a credit card debt. The Eighth District case was heard on appeal from a municipal court in Cuyahoga County; the municipal court’s decision granted default judgment in favor of Capital One, along with interest from the date of judgment, but did not grant Capital One the pre-judgment interest it requested in its Complaint. Capital One appealed the decision from the municipal court, arguing that it was entitled to judgment for the principal balance it was owed, interest from the date of judgment, and pre-judgment interest.
On appeal, the Eighth District partially agreed with Capital One, holding that, “when [a] credit card holder uses a card, he or she is then bound to the terms of the credit card agreement.” Therefore, the Court went on to state, since “[t]he agreement in the instant case set interest at 25 percent . . . the court erred in failing to award prejudgment interest at the contract rate.” The Court ultimately remanded the case back to the municipal court, ordering it to, “determine the date on which Brown’s debt became due and payable and . . . calculate and award prejudgment and post-judgment interest at the contract rate.” In sum, therefore, the Court of Appeals disagreed with and reversed the lower court’s decision to deny pre-judgment interest.
While the facts of any individual case may be different from any other, one thing is clear: not all Ohio courts agree on how to apply the laws regarding debt collection. All WWR clients should be aware that the state of the law – and the interpretation of the laws by various courts – are in constant flux, and all financial institutions and WWR clients should proceed with the understanding that a strategy for debt collection should evolve along with the laws.
Moreover, and this may be hard for a lender to imagine, despite these two very clear cases from the appeals courts, county and municipal courts may continue to award both pre- and post- judgment interest as they see fit instead of following precedence. In other words, if a municipal or county judge feels that a lender should not get the benefit of its bargain, precedence is not going to be a barrier to the judge to act according to his or her desire instead of adhering to the contract agreed to by the parties. The only remedy is to appeal and this costs money. Most lenders will find that it is cheaper to accept the lower interest rate and move on.
Joe DeGiorgio is an associate in the Collection Services department located in the Grove City, Ohio office. He can be reached directly at 614.801.2658 or via e-mail at email@example.com.
Filed under: Conference feedback, Credit CARD Act of 2009, credit cards, credit unions, marketing, opinion | Tags: Best Practices Conference, brand, branding, credit cards, Jim Perry, Market Insights, marketing, media, National Association of Realtors, public relations, REALTORS Federal Credit Union, Sarah Snell Cooke, The Credit CARD Act, The Credit Union Times, Timothy Kolk, Tom Glatt, TRK Advisors, virtual credit union
Day 2 started with a compelling speaker, Tom Glatt of REALTORS® Federal Credit Union (www.realtorsfcu.org). For those of you who have heard Tom speak before, you know he is full of provincial stories about growing up in Louisiana, complete with his Cajun accent. While I find his act to be a little over the top, you cannot dispute that Tom knows what he’s talking about and conveys his messages effectively. Tom has another feather to add to his cap—he started a new federal credit union (CU) in May 2009! What’s more is that this CU is completely virtual; they don’t have a single branch. Teaming up with the National Association of Realtors (NAR), Tom and his team have put together an impressive organization. Tom admits that their competitive advantage is their association with NAR. Another advantage this CU has is that since it is completely virtual, their cost of operation is low and will remain stagnant, with 31 vendors through whom they outsource everything (the CUs 20 some employees basically function as vendor management). Most CUs’ cost of operation will only continue to rise. The CU offers the complete suite of consumer products, except credit cards. The CU started with a $15M gift from NAR to get things rolling. Since opening four months ago, they have taken in $10M in deposits and made $6M in loans with 2400 members. They have a VERY aggressive growth plan (especially in this environment): By the end of their first year, he hopes to have 24,000 members and $100M in assets; by the end of their fifth year, he hopes for 100,000 members and $500M in assets. I wish Tom and his team luck!
Our next presenter was Jim Perry of Market Insights, who effectively conveyed to us that every CU has a brand. The question is, what are CUs doing with their brands (if anything) and are they exploiting their brands to their advantage? According to Jim, brands are 100% perception and everyone (your staff) and everything (your staff does) contributes to this brand, positively or negatively. It’s important for CUs to realize this and take conscious steps toward shaping their brand into something that not only attracts new members, but keeps them once they’ve come in the door. CUs spend a lot of time on marketing pieces and coming up with promotions to bring in new members and increase business from existing member, but I doubt many CUs spend a lot of time molding their brand. I think what Jim had to say is essential to CUs emerging from this financial crisis stronger, as they work toward differentiating themselves from banks and this includes everything from the smell of the CU branch, to the music playing in the lobby, to the appearance of the staff and the way the staff interacts with its members.
I think one of the most practical presentations of the conference was by Timothy Kolk, of TRK Advisors, LLC (www.trkadvisors.com). His presentation focused on the things CUs need to do in response to The Credit CARD Act to minimize losses in the short run and maximize profits in the long run. His thesis was that we will never return to “normal.” With fewer consumers qualifying for credit cards with other lenders there will be an increased demand placed on CUs to provide this service. Timothy cautioned CUs not to be too excited about this market share opportunity because CUs are going to be stuck with a bunch of members who cannot afford to pay their bills on time. Timothy also encouraged CUs to make changes to their credit card programs now, such as increasing APRs, moving from fixed plans to variable, and increasing fees across the board. From a marketing perspective, it can be tough to sell this to your existing members; it’s hard to tell members that while you are now charging fees that you didn’t charge before, at least they’re not as bad as other lenders’ fees. However, Timothy warned, if these changes aren’t made, it will be nearly impossible for CUs to have profitable credit card programs.
The conference concluded with a cogent presentation by the Editor-in-Chief of The Credit Union Times (www.cutimes.com), Sarah Snell Cooke. Sarah discussed with us the power of public relations, both as a way to bring free publicity to your CU, but also to establish yourself as an expert in the industry. She gave us the following do’s (and don’ts) when interacting with members of the media and to increase your likelihood of being successful with your PR efforts:
- Always be honest
- Know and honor deadlines
- Call back members of the media when they call you
- Never say “no comment”
- Pitch good stories
- Know your relevant media outlets, know their audiences, and know their reporters
- Be of interest
- Send all press releases via e-mail with a clear, accurate subject. Include press release as an attachment as well as photos. Get to the point in the press release.
- Don’t rely on press releases too heavily (too many, too often, OLD, and poorly written)
- Don’t list somebody as the media contact on a press release who is going on vacation, out on maternity leave, etc.
- Don’t combine PR with marketing (also suggests not using an outside firm)
- Don’t be a pest
I think using the media to get your message out to your potential members is an excellent (and did I mention FREE) approach. Along the way, you will be able to establish yourself as an expert in the field which will increase your clout among your peers and with your members. Just be careful that you don’t turn into a media fiend like Donald Trump!
Overall, this was a worthwhile conference. The topics were relevant, the speakers were qualified and some were even engaging. The facilities were nice and the entire conference was well organized. My hat goes off to Sarah and her team at The Credit Union Times for a job well done.
John B. C. Porter, Esq.
Filed under: Conference feedback, credit cards, credit unions | Tags: Bluepoint Solutions, Christopher Joy, conference, Credit Union Times Best Practices Conference, credit unions, economic downturn, Eric J. Lucas, Hal Tilbury, Jim Blaine, NACUSO, Peter Duffy, PSCU Financial Services, Sandler O'Neill & Partner, State Employees' Credit Union, Thomas Davis, Tom Chandler
Let’s get the superficial stuff out of the way: The hotel (The Westgate Hotel www.westgatehotel.com) is lavishly appointed with brass fixtures and marble counters, spacious rooms, soft sheets and large windows. The food is perfectly prepared and served in bounty. The staff was courteous and proficient.
This all provides the prefect setting to be told the cold, hard reality: We’re facing unchartered, tough economic times. Some Credit Unions (CUs) won’t survive and those that do will face an economic and regulatory climate very different from the environment in which CUs operated before the economic downturn of 2008. So what do we do with that information? What can CUs do today, to position themselves most successfully to emerge from these challenging times? I guess it depends on who you ask.
The morning started off with Jim Blaine, CEO of State Employees’ Credit Union (www.ncsecu.org), sharing with us how he grew this CU into the second largest CU in the country (assets of $19B). Interestingly, this is a SEG based CU, the same SEG the CU started with in 1937 (state employees, teachers, and their families). He had a lot of interesting information to share with us. One thing I found striking was that he stated that his CU does no marketing and doesn’t believe in it. I think this works for them because they are SEG based and have 1.5 million members throughout the state. They don’t need to market; even if they did, it would probably be a waste of money. Jim’s justification was that this freed up money to return to the membership, but I don’t think for most CUs, especially those that are community chartered, they can survive without marketing. Specifically, Paul J. Lucas (www.pauljlucas.com), who has developed a niche in assisting CUs with their branding/marketing strategies, stated in his presentation that CUs need to spend (at a minimum) 0.25% of their assets (annually) on marketing.
Jim did cite studies that, time after time, rank members’ preferences when it comes to CUs and what members want: 45% stated that convenience was their top priority; 25% stated that consistency was their top priority; 15% cited price and the same percentage stated service! Jim poignantly stated that Wal-Mart was no accident! Jim wasn’t the only presenter who referenced Wal-Mart. Thomas Davis, of NACUSO (www.nacuso.org) used Wal-Mart as an example of how organizations need to undercut their competitors in providing a lower-quality service at a lower price (as compared to Sears and K-Mart). His thesis was that consumers’ needs plateau, and most service providers’ products surpass the needs of their consumers.
We then heard form Peter Duffy of Sandler, O’Neill & Partner (www.sandleroneill.com), who was a nice counter-point to Mr. Blaine. While I felt that a lot of what Peter had to say was rather abstract, much of his commentary was on point. It is fair to say that Peter is a capitalist. In fact, on more than one occasion, Peter stated that CUs need to be “ravenous pigs” when it comes to profit. Of course, we all know that CUs are not for profit, but I think Peter’s point was well taken: CUs need to survive to serve their members; CUs pass their profit on to their members through increased services, lower rates on loans, or increased dividends on deposits. While I think Peter’s phraseology was a little crude, no one can accuse me of being subtle, so I probably shouldn’t throw stones. Peter also pointed out that once you get past the “factory floors”, CUs realize that communities are not their supporters—a nice contrast to Jim’s success as a SEG based CU. Overall, I felt like Peter’s message was a little too much, “Chicken Little the sky is falling” for me. He posited that CUs are at a regulatory disadvantage to their “similarly situated” community banks. For that reason alone, he felt CUs faced large obstacles when it came to successfully exiting the economic crisis facing this nation. I was hoping for a little more optimism from Peter. Specifically, I was looking for encouraging signs, or a roadmap out of this quagmire. Unfortunately, Peter failed to deliver. Maybe it is hopeless, but I, for one, refuse to accept defeat in this era of challenge and ingenuity!
One thing that surprised me from both of these presenters, and after speaking to many of the attendees of the conference, was the sheer hostility toward courtesy pay and indirect lending. The presenters stated that both features separated CUs from their membership and would ultimately be eradicated by regulation. While I’ve never endorsed courtesy pay as a practice, I was slightly surprised by the number of attendees who do not offer this feature to their members. Needless to say, the opinion of both presenters was that by the end of the year, courtesy pay will be a relic of our past.
Reward programs for credit and debit cards was also a hot-button issue at the conference. Jim was of the opinion that reward features of a credit/debit card program was a race to the bottom (obviously, his CU doesn’t offer reward points), while Peter was of the opinion that CUs need to respond to the demands of the marketplace. Good or bad, your members want reward features…so you better provide them if you wish to remain viable. I have to admit that I side with Peter on this one.
Another presenter, Hal Tilbury of Bluepoint Solutions (www.bluepointsolutions.com), addressed attendees about the importance and efficiency of document management. His main complaint was that most CUs look to their data processors for document management. The downfall, in his opinion, is the dysfunctional document management system: they don’t save money, they don’t save time and they don’t function the way a document management system should. He provided us with his “10 Commandments” of document management—although he acknowledged he wasn’t Jesus, he suggested he might be Moses. Essentially, the 10 Commandments outlined what a document management system should result in: substantial cost reduction, improved employee productivity, and enhanced member service. He presented a compelling case of capturing electronic images at the time of presentment and the savings in cost. According to Hal, having his software, a scanner, and a shredder at every employees’ station only costs $0.15 per hour/per employee over a seven year period. You do the math
We also heard from Tom Chandler and Christopher Joy of PSCU Financial Services (www.pscufs.com) regarding the all-relevant Credit CARD Act of 2009. Through their analysis, this Act will cost CUs a net loss of 1.56% on their credit card portfolio. If you consider that, at best, CUs realized a 4% Return on Assets (ROA) on their credit card portfolios in 2008, which means that in 2010, CUs will realize, at best, a 2% ROA. They also provided several appropriate ways in which CUs can respond to this new regulation:
- Increase APR on entire portfolio
- Re-price high risk accounts
- Increase margin on variable rate products
- Convert fixed APR portfolios to variable rate
- Risk-base price new accounts
- Consider different rates for purchases and cash-advances
- Eliminate life-of-balance promotions (lower rate gets paid last)
- Run fixed duration promotions
- Prepare to set penalty/default pricing for existing balances at 3 cycles (60 days) with 45 day notification—squeeze out the revenue
- Lock-in low cost funding
- Increase late fee and trigger at cycle-end
- Consider adding cash advance fees and foreign transaction fees
- Review and reset balance transfer rates, fees and criteria
- Review returned check fees, minimum finance charges and other incidental fees
- Hold off instituting new annual fees—may be last line of defense against any modification to interchange fees pending in legislation
By implementing all of their strategies (all of which are not outlined above), Tom and Christopher submitted that CUs could reduce their net loss to less than 0.50% on their credit card portfolios.
Overall, I found the first day of this conference to be informative and instructive. I look forward to what tomorrow has in store…
John B. C. Porter, Esq.
The following is an article reprinted with permission from the upcoming Spring 2009 edition of The WWR Letter:
By: Robert Rutkowski, Partner
The economy being what it is, any changes lenders try to make in the way they do business get magnified. Some lenders have been increasing their late fees and penalty rates. Now, penalty rates are nothing new: some financial institutions have had penalty rates for decades on credit cards. I’ll never forget the time, years ago, when I was in law school and I forgot to mail in my credit card payment one month. Accordingly, the payment was a little late. Back then, like many students, I had at least three credit cards and I used them to make ends meet while I was in school. At that time, I did not belong to four credit unions like I do now. I only belonged to one. Of course I had a credit card issued by that credit union, but that wasn’t the payment I was late on.
Imagine my surprise when the interest rate on my tardy card went to 22%. I was furious. I knew that the card company had every right to do it, but it still made me mad. It also motivated me to get out from under it. As soon as I could, I refinanced out of it and closed the account. It took months, however, to do that, and every month I had to pay the higher interest rate made me angry. I never did business with that financial institution again. Penalty rates may generate high revenue, but they also generate enmity.
Many people have experienced this scenario. Or, people have experienced some sort of other unexpected rate change on a card and have had trouble refinancing out of it. The Federal Reserve Board addressed this issue recently through the new Unfair or Deceptive Acts or Practices (“UDAP”) rule. However, there is an exception for delinquencies more than 30 days past due (there are also other exceptions and some complicated notice requirements). The UDAP rule creates a “protected balance” on which the old rate must stay in place. The financial institution can amortize this balance over (no less than) five years and it can increase the minimum payment (up to double), but it cannot raise the rate. This new rule does not go into effect until July 1, 2010.
Meanwhile, back on Capitol Hill, Congress feels that UDAP is too little too late. The New York Times has reported that some have argued for a “Credit Cardholders’ Bill of Rights” (http://www.nytimes.com/2009/05/10/opinion/10sun2.html?ref=opinion). In any event, it is clear that Congress wants to restrict the ways in which financial institutions can raise rates on existing credit card balances and it wants to put this into place sooner than the time UDAP is to take effect. (Edit: and in fact President Obama has signed such a bill into law).
Of course, few credit unions charge penalty rates and Federal Credit Unions (“FCU”) are capped at an 18% interest rate anyway. So even if an FCU charged such a rate, it would not go past 18%. For credit unions interested in marketing their credit card portfolios, this is good news. A credit union can extol its low rates and lack of penalty rates to gain market share. The big changes happening in the credit card industry might actually be a boon to credit unions that want credit card business.
Robert Rutkowski is the Managing Partner of WWR’s Credit Union department. He can be reached at (216) 739-5004 or firstname.lastname@example.org.