Mr. Taiano: I think certainly in the credit card space, regulation has been an area of increasing focus. First, we had the issue with respect to the Credit CARD Act that was signed into law by the President in May. That is going to dramatically change the landscape for credit card issuers in the future. Second, there is regulation with respect to regulatory reform, the template of which was put out a few weeks back by the Obama Administration - and that's not only for credit card issuers, but for much larger financial institutions. That is going to play a role going forward as well. In addition to that, there are a few bills that have been introduced in Congress with respect to interchange that the credit card issuers charge to the retailers, about potentially increasing regulations there as well. So yes, regulatory issues have been an area of increasing focus and what's been talked about a lot over the last couple of months.
TWST: Let's start with the credit card regulation since it's in place. What does
it mean for the credit card industry?
Mr. Taiano: I think the general consensus at least from the credit card issuer
standpoint is that it's going to shrink the industry, meaning the actual loans
outstanding will come down. The primary reason for that is that the ability to
reprice existing balances for accounts is no longer allowed under the new law
except under limited circumstances. Previously you could originate an account
and a loan to a cardholder at a certain interest rate with the premise that if
the card issuer detected some form of activity that they viewed as an increasing
risk of default, they would have the right to reprice that account. They can
still reprice but they can only do it for new purchases and not existing
balances. For example, if the card issuer originated the existing balance at a
15% APR, the card issuer won't have the ability to reprice that up to 20% or 25%
if the card issuer believes there is an increased level of risk, which could be
detected in various ways by the card companies.
The second major change in the legislation is the way that payments are
allocated for customers that have multiple balances and this relates to balance
transfers, teaser offers, where you may be given a teaser offer at 0% for a
certain period of time. It may be an offer for six months or nine months. The
borrower may also have an existing balance that floats at some interest rate,
call it 10%-15%. In the past, the card companies would allocate the payments
they received to the 0% balance first and therefore, the other balance priced at
a higher rate would continue to grow. The new law requires the card issuers to
either allocate the payment proportionally to the two different balances or
entirely to the higher rate balance first. So that's essentially going to reduce
the amount of balance transfer activity and teaser offers that are in the
marketplace as well.
So I think the bottom line is that there is going to be more disclosure, there
are going to be more restrictions on penalty fees, over-limit fees in
particular. Now consumers will have to opt in, in order for the card issuers to
be able to assess them an over-limit fee. So in other words, the cardholder will
have to sign an agreement with their credit card company allowing the cardholder
to go over their credit limit, in which case they can charge you a fee. If the
cardholder does not opt in, the card company will not be allowed to let the
transaction go through if it pushes them over the credit limit. So a lot of
changes are forthcoming; there are changes related to marketing to college
students, as well as a number of other changes in the law that are going to
really change the way credit cards are marketed and the economics of the
business going forward.
Tickers included in this excerpt: SLM
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