Boring Details

and fine print

Credit card minimum payments

with one comment

December 1, 2005
U.S. Treasury Department
Comptroller of the Currency – Administrator of National Banks

News release

WASHINGTON – Comptroller of the Currency John C. Dugan expressed strong concern in a speech today about negative amortization in consumer loan products, particularly in the areas of credit cards and mortgages. . . . The Comptroller noted that the issue of negative amortization in mortgages is similar to an issue that arose in the credit card industry, where monthly payment requirements had been set so low that borrowers who paid the minimum might see their balances increase, even if they made no new charges.

Regulators responded by requiring that minimum payments be sufficiently large to amortize credit card loans over a reasonable period of time. Most banks are expected to be in compliance by the end of the year.

“We recognize that the change in required minimum payments will make it more difficult for some existing credit card borrowers to pay the full amount of the increased minimum payments due,” the Comptroller said. “We have encouraged lenders to work with these borrowers to the maximum extent possible to avoid writing down the loan and cutting off the customer’s credit.”

Mr. Dugan said lenders have a variety of tools to do this, including restructuring or deferring payments and, in appropriate circumstances, re-aging accounts.

“In addition, lenders always have the option of reducing high interest rates charged to delinquent borrowers – sometimes exceeding 30 percent of the outstanding loan balance – and/or waiving fees in order to reduce a minimum payment while still amortizing a modest amount of the outstanding principal,” he added . . . .

-oOo-

November 2004

PBS: Frontline: Secret history of the credit card: The ascendancy of the credit card

-oOo-

September 14, 2004
AL 2004-10 – OCC ADVISORY LETTER

Subject: Credit Card Practices
Date: September 14, 2004

TO: Chief Executive Officers of All National Banks, Department
and Division Heads, and All Examining Personnel

PURPOSE

The Office of the Comptroller of the Currency (“OCC”) is issuing this advisory letter to alert national banks to the OCC’s concerns regarding certain credit card marketing and account management practices. These practices may entail unfair or deceptive acts or practices and may expose a bank to compliance and reputation risks.
* * * *
Repricing of Accounts and Other Changes in Credit Terms

Credit card issuers may increase a consumer’s APR to address credit risks that arise when a consumer fails to make timely payments on the account, and some credit card issuers may increase the APR when a consumer fails to make timely payments on other accounts, including accounts with other creditors. Some credit card issuers also may raise the consumer’s APR for other reasons, such as the consumer’s increased use of credit, failure to make more than the minimum monthly payment on the account with the issuer, or other behavior that reflects adversely on the consumer’s credit rating. Credit card issuers may take other actions that also effectively increase the cost of credit for some consumers, such as shortening the due date for receipt of payment or raising the amount of fees for late payment, exceeding a credit limit, or obtaining a cash advance. 3

[Note 3: In some circumstances, the credit agreement specifies when the credit card issuer may increase the APR, increase fees, or otherwise change the applicable credit terms. In other circumstances, the credit agreement permits the credit card issuer to make unilateral changes in terms.]

These practices may well be appropriate measures for managing credit risk on the part of the credit card issuer. However, certain practices in connection with repricing credit card accounts and changing terms of credit card agreements may raise heightened compliance and reputation risks. Accordingly, national banks should not:

* Fail to disclose fully and prominently in promotional materials the circumstances under which the credit card agreement permits the bank to increase the consumer’s APR (other than due to a variable rate feature), increase fees, or take other action to increase the cost of credit, such as, if applicable, failure to make timely payments to another creditor.

* Fail to disclose fully and prominently in marketing materials and credit agreements, as applicable, that the bank reserves the right to change the APR (other than due to a variable rate feature), fees, or other credit terms unilaterally.

-oOo-

June 3, 2003

News release:  Remarks by Julie L. Williams First Senior Deputy Comptroller of the Currency and Chief Counsel before the Risk Management Association’s Retail Risk Management Conference Chicago, Illinois – June 3, 2000

“. . . . Our concern about credit line management stemmed from the growing number of card issuers extending and expanding credit without sufficient consideration of the cardholders’ ability to repay. In some cases, having established a profitable relationship with a borrower, lenders have gone on to increase credit lines or to issue additional cards, including store-specific private label cards and affinity relationships cards, without considering how such extensions might affect that relationship or overextend the borrower’s financial capabilities. It’s not unheard of for institutions to offer additional cards even to borrowers who have already started to experience repayment problems. . . . “

-oOo-

January 8, 2003
Internal memo

Interagency Issuance

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision

Subject: Credit Card Lending Description: Account Management
and Loss Allowance Guidance

Purpose

Recent examinations of institutions engaging in credit card lending have disclosed a wide variety of account management, risk management, and loss allowance practices, a number of which were deemed inappropriate. This interagency guidance communicates the Agencies’ expectations for prudent practices in these areas.

* * * *

Minimum Payment and Negative Amortization

Competitive pressures and a desire to preserve outstanding balances have led to a general easing of minimum payment requirements in recent years. New formulas that have the effect of further delaying principal repayment are gaining popularity in the industry. In many instances, the result has been liberal repayment programs that increase credit risk and mask portfolio quality. These problems are exacerbated when minimum payments consistently fall short of covering all finance charges and fees assessed during the billing cycle and the outstanding balance continues to build (“negative amortization”). In these cases, the lender is recording uncollected income by capitalizing the unpaid finance charges and fees into the account balance owed by the customer. The pitfalls of negative amortization are magnified when subprime accounts are involved, and even more so when the condition is prolonged by programmatic, recurring over-limit fees and other charges that are primarily intended to increase recorded income for the lender rather than enhance the borrowers’ performance or their access to credit.

The Agencies expect lenders to require minimum payments that will amortize the current balance over a reasonable period of time, consistent with the unsecured, consumer-oriented nature of the underlying debt and the borrower’s documented creditworthiness. Prolonged negative amortization, inappropriate fees, and other practices that inordinately compound or protract consumer debt and disguise portfolio performance and quality raise safety and soundness concerns and are subject to examiner criticism.

-oOo-

July 22, 2002
Draft Guidance – 2002-64a

Office of the Comptroller of the Currency
Board of Governors of the Federal Reserve System
Federal Deposit Insurance Corporation
Office of Thrift Supervision

Subject: Credit Card Lending
Description: Account Management and Loss Allowance Guidance

Purpose:
Recent examinations of institutions engaging in credit card lending have disclosed a wide variety of account management, risk management, and loss allowance practices, a number of which were deemed inappropriate. This interagency guidance communicates the Agencies’ expectations for prudent practices in these areas.
* * * *
Repayment Period – Repayment terms for revolving credit in workout programs vary widely among credit card issuers. Practices range from programs designed to maximize collection of balances owed to programs apparently designed to maximize income recognition and defer losses. Some institutions’ programs have not reduced interest rates sufficiently to facilitate timely repayment and assist borrowers in extinguishing indebtedness. In many cases, reduced minimum payment requirements in combination with continued charging of fees and finance charges have extended repayment periods well beyond reasonable time frames.
Workout programs should be designed to maximize principal reduction. Debt management plans developed by consumer credit counseling services generally strive to have borrowers repay credit card debt within 48 months. Repayment terms for workout programs should be generally consistent with these time frames, with exceptions clearly documented and supported by compelling evidence that less conservative terms and conditions are warranted. To meet these time frames, institutions may need to substantially reduce or eliminate interest rates and fees so that more of the payment is applied to reduce principal.

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Written by Tom Fox

January 17, 2009 at 7:55 pm

One Response

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  1. I have Fixed Rate at 3.99%. The credit card company increase from 2% to 5% the capital. I called them and gave me the following options: First, Payment the increased amount of payment (my case from $210 to $498)……… or change my fixed rate to 7.99% to lower to 2% the capital. IS IT RIGHT?……….

    ManuelRC

    August 27, 2009 at 7:45 am


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