Revised Credit Card Rules

This article appeared in The Times Union today. It details important revisions to the laws governing credit cards. It's something we all should be aware of.

Regulators adopt new credit card rules
Consumers to be spared from higher rates on existing balances under new rules for credit cards

By MARCY GORDON, Associated Press Last updated: 9:25 a.m., Thursday, December 18, 2008

WASHINGTON -- Federal regulators on Thursday adopted sweeping new rules for the credit card industry that will shield consumers from increases in interest rates on existing account balances among other changes. rules, which take effect in July 2010, will allow credit card companies to raise interest rates only on new credit cards and future purchases or advances, rather than on current balances.
They were approved Thursday morning by the Office of Thrift Supervision, a Treasury Department division. The Federal Reserve and the National Credit Union Administration were expected to act on them later in the day. The changes mark the most sweeping clampdown on the credit card industry in decades and are aimed at protecting consumers from arbitrary hikes in interest rates or inadequate time provided to pay the bills.
John Reich, the thrift agency's director, said the rules "will enhance public confidence in financial institutions and establish a level playing field for institutions that want to do business fairly without suffering competitive disadvantages."
Most of the rules were first proposed in May and drew more than 65,000 public comments -- the highest number ever received by the Fed. They also restrict such lender practices as allocating all payments to balances with lower interest rates when a borrower has balances with different rates.
But the changes also could make it more difficult for millions of people with bad credit to get what is known as a subprime card carrying higher interest rates, some experts say.
In addition, consumers will have to be given 45 days notice before any changes are made to the terms of an account, including slapping on a higher penalty rate for missing payments or paying bills late. Under current rules, companies in most cases give 15 days notice before making certain changes to the terms of an account.
The changes could cost the banking industry more than $10 billion a year in interest payments, according to a study by the law firm Morrison & Foerster.
Roughly 16,000 companies in the U.S. issue credit cards. The biggest lenders include Discover Financial Services LLC, Bank of America Corp., Citigroup Inc., JPMorgan Chase & Co., Capital One Financial Corp., American Express Co. and HSBC Holdings.
The head of the American Bankers Association called the changes "strong new regulations ... (that are) unprecedented in their scope and signal the beginning of a new market structure for credit cards."
"While the new rules are designed to increase protections for consumers, the Fed itself has recognized that they may result in increased costs for most card users and reduced credit availability, particularly for consumers with lower credit scores or limited credit history," ABA President and Chief Executive Edward Yingling said in a statement. "With the uncertainty facing our financial system, it's absolutely vital for policymakers to understand the full impact of these regulations on consumers and the economy before judging their success or further restricting the marketplace."
The new rules prohibit:
--Placing unfair time constraints on payments. A payment could not be deemed late unless the borrower is given a reasonable period of time, such as 21 days, to pay.
--Placing too-high fees for exceeding the credit limit solely because of a hold placed on the account.
--Unfairly computing balances in a computing tactic known as double-cycle billing.
--Unfairly adding security deposits and fees for issuing credit or making it available.
--Making deceptive offers of credit.
Travis Plunkett, legislative director of the Consumer Federation of America, said customer frustrations run deep, as reflected in the comment letters submitted to the Fed.
Many of them "were spontaneous from consumers who feel they've been treated unfairly by their credit card companies and are literally begging the Fed for help," he said.
Many people acknowledged paying late, often mistakenly, and felt it was unreasonable for their card issuer to increase the interest rate on the balance, Plunkett said. Another common theme came from people who pay on time but are hit with a rate increase because the company needed to recoup losses from other cardholders, he added.
Under the new rules, credit card lenders will be required to apply any payment above the minimum to the part of the balance with the highest interest rate.
The so-called subprime cards for people with low credit scores typically have no more than a $500 credit limit but require a large upfront fee.
The rules cap that fee at 50 percent of the credit limit and allow the cardholder to pay off the initial balance over a year, not immediately.
The Consumer Federation estimates that credit card debt held by U.S. consumers is about $850 billion, some four times what it was in 1990.
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Associated Press writer Carson Walker in Sioux Falls, S.D., contributed to this report.

Where We're at Now

Let me take this opportunity to wish you and your family a Joyful Holiday Season and a Happy and Healthy New Year.

A lot has happened in the housing and finance markets over the past year. In addition to the chaos in the market the amount of conflicting information being distributed by the media is overwhelming. I want to give you a factual picture of the mortgage market as it currently exists. You will then be able to determine if there are opportunities that you should be taking advantage of.

The government intervention into the market is beginning to show progress in lowering mortgage rates. The standards being used to qualify for a mortgage are conservative and will continue to be so for the foreseeable future. Any applicant with less than sterling credit will see a pricing adjustment, increasing the financing costs. No longer will a lender extend credit to anyone who cannot document sufficient income or assets.

With the softening of housing prices, applicants are required to have a vested interest in the property they are looking to finance. This means that the maximum loan-to-values on all mortgages types have been reduced.

The mortgage rate reductions that we’re seeing are applicable to conforming loan amounts, that is mortgages that are less than the Fannie Mae limit of $417,000 for a one-family home. Mortgages greater than $417,000 but less than $625,500 are currently being priced 0.375% higher with even more restrictive underwriting standards. Mortgages above $625,500 are more expensive now than they have ever been.

If you’re interested in exploring what options you have available today, give me a call @ (516) 627-0800 or write an e-mail to Don@Shelter-Rock.com. We’ll discuss how the current market conditions can be used to your benefit. Have a recent mortgage statement available when you contact me. I’ll need information from that statement to accurately calculate any potential savings.

Prudent Refinancing in Today’s Market

Mortgage rates are finally beginning to drop. Lenders of all sizes are firing up their marketing divisions and reaching out to homeowners to solicit business. Before jumping in and refinancing your mortgage you need to make sure what your saving really will be. Is it worthwhile to refinance your current mortgage if you can get a rate that’s 0.5% lower than you’re paying? Do you need a 1.0% drop for it to make sense? The answer is, “it depends.”

The size of your mortgage, the number of years left on your mortgage, the value of your home today and the total cost of refinancing are just some of the things that need to be considered in making your decision. In most cases you will not be presented a detailed analysis by the originator you’re talking to. In many cases you are speaking to a customer service person that is doing nothing more than reading a script to you.

If you don’t have the time or expertise to do you own analysis then you have to go to a professional and have it done for you. A good place to start is to read this article, http://www.shelter-rock.com/Refinancing.htm. It will give you an understanding of what you will need to consider.

Clients contact me regularly to discuss the refinance option. Sometimes this is their first call, other times they are seeking information after another company has contacted them and they want to confirm what they’ve been told. Here are three e-mail threads that will illustrate what you need to be aware of.

This first client was approached by his current bank. They presented him with an offer to reduce his monthly payments. He wanted to confirm he was making the right decision.

Hi Don

This is [name deleted], you did my mortgage about 2 years ago for [address deleted], at one time you had called and said that if we noticed that the rate have fallen more than 1 point we should consider refinancing. I have been talking to the Chase people since they have our mortgage already and this is what they are offering.

Loan Amount: $457,000.00
Product Type: FHLMC Only 30yr
Assumed Interest Rate: 5.250
Assumed Discount Points 1.875

My outstanding balances are:

Mortgage Loan: 406,262.01 at 6.375%

Line of Credit: 27,339.59 at 4.625%

So my question is can you do better or should I even do the refinancing at this time?

Thank You

[name deleted],

It’s good to hear from you, I hope all is well with you and the family.

Dealing with the customer service people at any lender yields incomplete information at best and a sales pitch at worse. Let me give you a brief update on what’s going on. After you read this e-mail, give me a call and I’ll get more specific.

To begin with getting a drop in interest rate of 1 percent by paying points isn’t a drop of 1 percent. 5.25% with 1.875 points is the same as 5.75% with 0 points. Interest rates and points are tied together. Simply put, you can pay the bank now (points) or later (interest).

It still may make sense to refinance, but we need to take a closer look at things .To begin with, under the current pricing structure there is a 0.25% increase in rate when you move the mortgage amount from $417,000 to $417,001. I would like to avoid having you pay an extra ¼ of a percent on the entire mortgage balance. Your combined mortgages add up to approximately $433,600. Closing costs will only add $4,500 so you only need a mortgage of say $438,000 not $457,000.

If we refinance for $417,000 we need to make up $21,000 somewhere. If you have $21,000 available in cash, this wouldn’t be a bad investment. If this is an option you are considering, I’ll work out the actual return on your investment. Assuming this isn’t the preferred path, we have another alternative. We can ask Chase to subordinate your existing Line of Credit to a new first mortgage of $417,000. They could even lower the limit of the line to $25,000 and this approach will still work. In a normal market this happens regularly, today we will have to do a detail request for it with no guarantee of success.

Today you can get 5.5% with 0 points for $417,000 making it worthwhile to consider.

Unfortunately customer service personnel aren’t given sufficient training to address to specific attributes of every person they talk to. It’s an ongoing flaw in the industry. Of course, this flaw is good for my business so I’m not complaining!

Give me a call when you’re free and I’ll give you a more complete picture of what I talking about.

Don

We did have a telephone conversation at this point. I did a rough calculation to compare his current mortgage payments to what the payments would be if he went through with the proposal that was given to him by the Chase customer service person. It worked out that it would take 105 payments before he made back the money he invested is doing the refinance. I told him I didn’t think that was a sound financial decision.

The next morning he e-mailed me again.

Hi Don

I was talking to the Misses last night and we might be able to come up with the 21000 in cash, if that makes the most sense, can you please run the numbers just so we can see how it will work out.

Thank You

[name deleted],

The first thing I want you to address is the impact to your cash position in the event you pay down your mortgage by the $21,000. I don’t know the current amount of liquid assets you have on hand but I want to make sure you consider the impact to your personal financial position after you make this investment. Cash reserves are important and in the current financial market reserves are of utmost importance. I want to make sure you address the big picture and not just today’s mortgage payment.

Assuming you want to continue with the refinance, here’s some numbers. I’m giving you various interest rate with 0 points because the mortgage rates are bouncing day-to-day. Where yesterday I could get you locked in at 5.50% today it would be 5.75%. I suspect we will see rates below 5.5% by the end of the year or early next year. If you decide to move forward I wouldn’t lock-in until we see an attractive rate. I would however get the commitment and title done so we are in a position to lock and set a closing date at the same time. This way we can take the shortest lock period available and therefore the best pricing. It also gives us the opportunity to take advantage of any drop in the conforming/jumbo adjustment. If in fact the government decides to waive the adjustment, even temporarily we can take advantage of that and not invest your cash.

$417,000 @ 5.75% yields a monthly payment of $2,433.50
$417,000 @ 5.50% yields a monthly payment of $2,376.68
$417,000 @ 5.25% yields a monthly payment of $2,302.69
$417,000 @ 5.00% yields a monthly payment of $2,238.55

You need to add your escrow payment to these numbers to get your new mortgage payment. The escrow payment calculated at the time of closing may be different than you are currently paying but that will be reflective of updated property tax figures and/or insurance payments.

Don

I sent that e-mail yesterday afternoon and I haven’t gotten a response as yet. The important thing here is now this client is thinking about a refinance with enough facts to make an informed decision.

This client heard the good news regarding mortgage rates and wanted to check things out.

hey don..

how are you ? how was thanksgiving ?

i noticed some 30yr fixed rates as low as 5.375% for a high balance..

i have enough cash to get our current balance down to $625k (i believe the upper limit for a high balance loan).

if we could get that rate - it would knock approx $500 /mth off our repayments.

seeing as our money is not making anything at the moment in terms of interest.. do you think it is worthwhile looking into this ?

i guess the risk is that they value our property significantly lower.. (i presume it would need to be revalued ?) &/or i no longer qualify for a loan (even tho i already have one!!).

great to hear your thoughts.

regards,

[name deleted]

This was my response. You do need some background information. My client closed on this purchase 10 months ago with a piggyback mortgage. That is, we used 2 mortgages instead of one to avoid paying a substantially higher interest rate. At the time this purchase was being done, the mortgage rates for mortgages over $417,000 were nearly 2.0% higher that what a borrower would pay for $417,000. We used a 3/1 ARM (the mortgage rate would be fixed for 3 years and then become a 1 year adjustable) on both mortgages.

[name deleted],

It’s good to hear from you. All is fine except it would be nice to see business get back to normal. These are certainly interesting times! And we’re nowhere near the end. I wouldn’t refinance right now for $625,000. Let me give you my thoughts and we’ll take it from there.

First, in order to get the 5.375% rate you will need to pay 2 points today. So you’re really paying closer to 5.75% then 5.375%. Currently there is a 1 point or 0.25% rate increase to the pricing for mortgages over $417,000. There is a very good chance that this will change, eliminating the adjustment. This is one good reason to wait.

There also is a good possibility that we will see an additional drop in mortgage rates before they begin to increase again. The Federal Government is focusing a lot of attention and tons of cash to make that happen. There is a good probability that we will see some drop in rates in the next couple of months.

Refinancing will require you not only to pay down the mortgage but also pay for the closing costs. In addition to the $40,000 you will be investing to pay down the mortgage you will need an additional $6,000 in transaction costs.

In today’s economy liquidity is king. Keeping the cash on hand, instead of tying it up in the condo might be a more prudent course of action. When the financial markets settle down might be a better time to commit your cash into the apartment.

The bulk of your mortgage is at 5.0% and will stay there for the next 2 years before there is any possibility of a rate change. 5% is less than 5.375%, I wouldn’t’ be so quick to increase the cost of borrowing the $417,000 right now. You will be increasing the cost of financing the $417,000 by $96.55 for the next 2 years.

You are rightfully concerned about the current market value of the apartment. We would need it to appraise out for $781,300 in today’s market. You’re in a better position than I am to make that initial evaluation. We know your financial strength will be more than adequate it’s only an issue of the current market value of the condo.

I know you want to pay off the mortgage as quickly as possible and with the lowest cost of financing. Assuming you’re ready to commit $45,000 of cash to the condo. I would just prepay the second mortgage. That will bring your balance down to $200,000. Your mortgage payment will stay the same but the mortgage will be paid off in 204 months instead of the remaining 350. You are effectively getting a rate of return of 7.625% on the money you are investing. This has no effect on your ability to refinance when it makes economic sense.

Don

This is his response:

yes it is a bloody mess right now!!! i too hope things get back to normal - but i agree - it's probably a way off..

thx for the great advice as always - sounds good..

i understand your logic re putting it into the 2nd - however - based on everything else you have said - i'd probably just as soon sit tight and have the benefit of the cash on hand so i can quickly react if things do become more favorable..

best regards,

[name deleted]

Finally, we have a client who also wanted to see if he could save some money by doing a refinance.

Hi Don,

I want to see the possibility of refinancing with minimum cost. Pls refer to attd statement and advice what you think. Tks.

Rgds/[name deleted]

[name deleted],

It’s good to here from you. I hope all is well with you and your family.

Let me show you how I calculate the saving in a rate refinance. After you review it fell free to call and we can discuss it in more detail.

The analysis is to determine exactly the saving due to rate alone. It’s easy to make a refinance appear to save you money if you compare a new 30 payment to say a 20 year remaining term on the existing mortgage. We need to factor out the impact of extending the term of the mortgage over the remaining life of the current mortgage.

We start by calculating the remaining term of your current mortgage. Your current balance is $213,389.40. You are paying monthly $1,539.30. At your current interest rate of 6.25% your mortgage will be paid off in 247 payments. You obviously made some prepayments of principal over the last year. For this comparison I’m going to assume no additional prepayments are to be made. You will be paying $1,539.30 a month for the next 247 months.

There will be some cost incurred in doing a refinance. I’m going to add it into the loan balance. The exact number isn’t important so I’m going to work with a new mortgage amount of $217,000 to cover any closing costs.

The current interest rate is 5.5%. If I take a mortgage amount of $217,000, an interest rate of 5.5% and a term of 247 months I come up with a payment of $1,469.53. This is a saving of $69.77 a month.

$217,000 – 213,289.40 = $3,710.60 is what I allocated for closing costs. $3,710.60/$69.77 = 53.18. That is it will take over 53 payments before you received your closing costs back. I recommend refinancing when this number is 24 or less.

Of course it’s your decision and I will be happy to take care of the refinance for you but I would suggest waiting to see if the rates drop to around 5.0% before refinancing. I’m not predicting we will ever see that rate, but I feel we need to be closer to 5.0% before a refinance yields adequate savings.

What’s your opinion?

Don

Hi Don,

Tks for the msg and really appreciate your honest opinion. I perfectly u/stand your point and know you are looking after my best interest and giving these scenarios. Will wait and see how market works in the future. Again thanks for the time taken to write detail msg below.

Take care.

B.rgds/[name deleted]

This is common mistake. The remaining term on the existing mortgage is ignored giving the illusion of greater savings. The older the original mortgage is or if a prepayment of principal was made the greater the illusion. If I calculated the mortgage payment based on a new 30-year mortgage the payment would be $1,232.10. It would appear there is a potential saving of $307.20 per month ($1,539.30-$1,232.10). $69.77 of which was due to the lower interest rate and $237.43 due to extending the mortgage payments out and additional 113 months.

There may be a need to lower the mortgage payments now that supercedes the downside of extending the term. Then, by all means the refinance should be done. You need to make the decision based on facts and your personal financial situation. Whatever you do, you want to do it for the right reason.