Consumers are now familiar with the Credit Card Accountability Responsibility and Disclosure Act of 2009 or CARD and how it protects borrowers against unfair interest rate hikes and other exorbitant credit card fees. However, most consumers are not aware that the Federal Reserve enacted new rules for credit card companies on February 22, 2010 to ensure that consumer rights outlined in the CARD Act of 2009 are truly protected. As the regulatory agency of America’s banks, the Federal Reserve has to police the banks to make sure that they don’t try to exploit potential loopholes in legislation and thereby exploit consumers.
The February 2010 regulations enacted by the Federal Reserve provide the following protections to credit card consumers:
Credit card companies must tell you how long it will take to pay off your balance. Now your monthly credit card bill must include a breakdown of how long it will take to pay off your balance if you only make the minimum payments as well as what you would need to pay each month in order to pay off your balance in three years.
No interest rate increases for the first year. Credit card companies can no longer increase your rate for the first 12 months after you open an account, EXCEPT IF:
Your card has a variable interest rate tied to an index.
There is an introductory rate, but it must be in place for at least 6 months.
You are over 60 days late in paying your bill.
You violate a payment arrangement agreement.
You MUST be notified when they plan to increase your rate or other fees. Your credit card company is now required to give you 45 days written notice before they can
Increase your interest rate;
Change fees that apply to your account
Make any significant changes to the credit contract terms.
If you do not agree to the new terms you now have 45 days to cancel your card before the changes are put into effect. However, if you do choose to cancel your card your credit card company may close your account and increase your monthly payment, with certain limitations.
Your credit card company DOES NOT have to give you 45-day written notice if:
You have a variable interest rate tied to an index and the index goes up.
Your introductory rate expires.
You violate a payment arrangement agreement and you experience a rate increase as a consequence.
Increased interest rates can only be applied to new charges. If after 12 months your interest rate is increased it cannot be applied to a balance accrued before the rate increase itself.
Restrictions on over-the-limit transactions. You must now opt-in to allow transactions above your credit limit to be processed; otherwise the charges must be denied. If you do not opt-in and your credit card company allows your card to be charged above your credit limit, you cannot be charged an over-the-limit fee. Also, if you do go over your limit you can only be charged one over-the-limit fee per billing cycle, and you can opt-out at any time.
Payments must be directed to highest interest balances first. If you make more than the minimum payment, the difference must be applied to the balance with the highest interest rate, with one exception:
When you owe a balance on a deferred interest plan, the credit card company may give you the option to apply payment in excess of the minimum balance to the deferred interest balance before other balances. Otherwise, for two billing cycles prior to the end of the deferred interest period, your entire payment must be applied to the deferred interest-rate balance first.
No double-cycle billing.Interest charges can only be applied on balances in the current billing cycle.
Standard payment dates and times. Your credit card bill mustbe mailed or delivered at least 21 days before your payment is due. Furthermore,
Your due date must be the same date each month
Payments must be accepted until 5 p.m. on the due date.
If your payment due date falls on a weekend or holiday you will have until the following business day to pay.
New caps on high-fee cards. If a card comes with fees such as an annual fee or application fee, those fees cannot total more than 25% of the credit limit. The 25% cap does not, however, apply to penalty fees.
Protections for underage consumers. Applicants under the age of 21 must prove that they have the income to pay their balances or they must have a cosigner in order to open a credit card account. Also, if an underage cardholder wishes to increase their credit limit and they have a cosigner, the cosigner must agree in writing to the limit increase.
The Fed also announced in October 2010 that it would amend Regulation Z, the regulations implementing the statutes of the Truth In Lending Act, in order to stop certain predatory practices enacted by credit card companies in attempts to maneuver around the CARD Act rules and earlier Federal Reserve regulations. The amendments will clarify matters of compliance for card issuers on the following:
Promotional programs that waive interest charges for a specified period of time. Reduced interest rate promotions are subject to the same protections as promotions that employ a reduced interest rate for a specified period. Credit card companies have recently used a ‘bait and switch’ approach to certain reduced rate offers, not disclosing that the promotion rules would allow them to revoke the benefit at any time.
Fees charged before a credit card account is opened. Application fees and other fees that are paid before a credit card account is opened are covered by the same limitations as fees charged during the 12 months after the account is opened to further avoid predatory lending practices.
Proof of ability to pay must be proven for the cardholder as an individual, not household income. Predatory lenders often issue cards to individuals who do not truly have the ability to maintain their accounts based on household income or other income credits, locking these consumers into a debt trap.
This Is A “Fill In The Blanks” Financial Crisis. Now It’s Time To Fill In Your Blanks.
In the following article, we invite you to just fill in the blanks where you see parentheses. Fill in each blank with any old Bank and see what you get:
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Banks Have Their Backs Covered. Who’s Got Yours?
On [just pick a date], the Federal Reserve, the US Treasury, the US President, and Congress agreed to give [Big Name Bank] 300 [Billions or Trillions, take your pick] Dollars in tax payer money, so [Big Name Bank] could buy [Bank About to Fail] for 1 Billion. For those who didn’t know, [Bank About to Fail], one of Wall Streets largest and best known investment bank was bankrupt. [Bank About to Fail] owed more debt than it had in value. Sounds familiar. Kinda' sounds like many people in Foreclosure. Actually, it also sounds like many homeowners not in foreclosure, who have a mortgage loan greater than the value of their home. Just like many ordinary people who have more debt than cash. But I digress. [Bank About to Fail] was in financial trouble because they were worth nothing on paper. So we heard in the news “[Bank About to Fail] must be saved.” Why? “Because if [Bank About to Fail] went under than the whole financial system could have fallen apart. “COULD HAVE”. The stock market “would have” plunged. Big investors “would have” lost lot’s of money. There “would have” been a world crises.
Now let’s think about their bailout logic, one more time. This is my take:
First: [Bank About to Fail] was about to file for bankruptcy because…THEY WERE REALLY BANKRUPT!!.
Second: The Federal Reserve, the US Treasury, the US President, and Congress determined that if [Bank About to Fail] does fail we will have a World Wide Financial Crises.
Third: The Federal Reserve, the US Treasury, the US President, and Congress “saves the day” by essentially GIVING [Big Name Bank] [Billions or Trillions, take your pick] of DOLLARS OF TAXPAYER MONEY so [Big Name Bank] could buy [Bank about to Fail] for 1 BILLION.
Fourth: The Federal Reserve, the US Treasury, the US President, Congress, [Big Name Bank], [Bank About to Fail] and All the Kings Men shake hands, hug, pat each other on the back, exclaim “JOB WELL DONE” b/c the WORLD DID NOT DESCEND INTO FINANCIAL CHAOS.
Do you see what just happened? What does it mean?
No# 1 : There are certain people and businesses TOO IMPORTANT to let go Bankrupt even WHEN BANKRUPT.
No# 2 : The Federal Reserve, the US Treasury, the US President, and Congress DO NOT NEED YOUR PERMISSION to give taxpayer money away to a BANKRUPT BUSINESS.
No# 3 : The Threat of a World Wide Financial Crises is a REALLY GOOD EXCUSE.
No# 4 : It doesn’t take a genius to figure out WHO GOT ALL THE MONEY.
No# 5 : The employees of [Bank about to Fail], who saw the value of their IRA’s or pensions drop because their [Bank about to Fail’s] stock tanked, WATCHED their MONEY they PAY IN TAXES given to…Well let’s say it WAS not given to them to SAVE THEIR IRA’s or PENSIONS.
Truth be told, it is entirely possible that had [Bank about to Fail] actually failed, there would have been a financial crises. It is equally true that if [Bank about to Fail] actually failed, there would NOT have been a financial crises. As is everything in life that could have been, WE WILL NEVER KNOW.
So the rules are made and when things get BAD there is only one Sheriff in town and that Sheriff has friends to protect.
This is history repeating itself over and over. DO FOR YOUR FRIENDS AS YOU WOULD DO FOR YOURSELF. There are those who claim that the bail out of [Bank about to Fail] created a “moral hazard” because [EVERY SINGLE BANK] will take even more risks and ask for even more bailouts because the Federal Reserve, the US Treasury, the US President, and Congress will cover their behind.
And cover their behind they have. For the first time in history, the Federal Reserve allowed Wall Street Investment banks to borrow money from the Fed at a discount (window). For the first time in history, investment banks can become commercial banks. For the first time in history, the Federal Reserve, the US Treasury, the US President, and Congress can hand out TRILLIONS OF DOLLARS of YOUR MONEY without telling YOU where it is going.
It doesn’t end there, the Federal Reserve, the US Treasury, the US President, and Congress gave [Big Name Banks] Treasury Bills (your money) in exchange for [Big Name Banks] worthless collateralized paper. YOUR MONEY FOR BAD PAPER. The paper that consists of collateral debt obligations, sub-prime mortgage backed securities, alt-a mortgage backed securities, credit card backed securities, auto loan backed securities…and the BAD PAPER list goes on and on and on…..
It all boils down to one thing. When it all hits the fan, the BIG NAME BANKS’ Peoples get together, handle their business and do what is necessary to keep their stuff together.
The question for you is “Will Your Peoples Come together, When it starts to get BAD”. It’s time to fill in your blanks.
Is 5.00% APY On A 3-Year CD A Good Deal Right Now?
With all the chaos in the American banking system going on right now, consumers across the country are looking to for the safest place to store and grow their hard-earned dollars. The stock market crashed last week, with double-digit declines for each of the 3 major indexes. Though American equities regained some ground today, we are still dealing with a serious bear market. From the Prime Rate website:
"...Since closing with record highs on October 9, 2007, the DJIA has now lost 5,713.34 points (40.336%), while the S&P 500 Index has declined by 665.93 points (42.547%). The record high for the DJIA is 14,164.53; for the S&P 500 Index it's 1,565.15..."
Most of us don't trade individual stocks on a regular basis, but most of us are linked to stocks by our retirement savings, like 401(k) and 403(b) plans. The waning stock market is especially bad news for those near retirement, as most portfolios have lost a lot of value this year.
I Am Grateful for The Conservative Ways of Credit Unions
Back in 2003, when the Federal Reserve dropped the fed funds target rate to 1.00%, which in turn caused the U.S. Prime Rate to drop to 4.00%, I was very interested in a credit card on offer from my credit union. The APR was 6.99% fixed, and the typical credit line for this particular Visa® card was $5,000. I wanted this card bad, not just because of the interest rate, but also because it was from my credit union, and I knew that the term and conditions associated with this card would be more consumer-friendly than any card on offer from any traditional bank.
When I applied for the card, my application was met with fierce resistance. My credit score wasn't that bad, but I was, and still am, self-employed, so my credit profile must have caused one or more red flags go up. The loan officer who reviewed my application asked for 2 years of tax returns and proof that I was making the money that I claimed I was making on the application. I submitted all the documentation they wanted (took about a week to fax it all), but, in the end, my application was rejected. I did not received a canned "dear john" letter from the credit union. The loan officer called me at my home and explained that the credit union could not approve my credit card application because I did not have enough collateral with them, i.e. I did not have enough cash on deposit. I was told that I could reapply at any time. That rejection was painful, but I understood: the best credit cards on offer from the best financial institutions will only go to consumers who are very secure financially. If I had around $5k in my saving or checking account, I probably would have been approved.
Play it very safe; lend conservatively; don't lend unless the member has been thoroughly vetted. It's because my credit union stuck by these principles that it has managed to avoid the financial ravages caused by the excesses of Wall Street investment banks and the debt associated with lending hundreds of thousands of dollars to first and second homeowners who couldn't afford the monthly payments. Wall Street banks like Citigroup® chased the 11%-13% returns promised by super risky mortgage-backed securities, and, when the subprime fiasco was unfolding last year, ended up paying 11% on a loan from the sovereign wealth fund owned by oil-rich Abu Dhabi. Bottom line: Citi® was relegated to subprime borrower status because they got sloppy and too greedy. They were, in essence, issued an 11% APR subprime credit card by a foreign government that makes unbelievable sums of money for doing next to nothing. How's that for irony?
Is 5.00% APY On A 3-Year CD A Good Deal Right Now?
Right now, financial institutions are really into Certificates of Deposit (CD's), as evidenced by the high yields being offered these days. A week ago, my credit union was offering -- and they were pushing this offer very hard -- a generous 5.00% APY on a 3-year CD (CD's are called Share Certificates at credit unions), which may seem kinda' weird, because, as you can see in the screen capture image I've posted to the right, the rates on offer for 42 and 60 months are lower. Should be: the longer you let them hold your money, the better the interest rate you get, right?
The target rate at which most healthy American banks and credit unions can borrow overnight funds from each other via the Federal Reserve -- the target fed funds rate -- was lowered to 1.50% last Wednesday, and is expected to be lowered again at the October 29 FOMC meeting. With all the turmoil in the credit markets, the Fed has allowed financial institutions to borrow vast sums at very low interest rates and for terms much longer than overnight[1][2][3]. But the prospect of locking in a rate of 5% for 3 years is very tempting for my credit union, because they know how rates are going to look about a year from now.
With all the money the Fed is dumping into the American and international banking systems, the price we'll all have to pay for the Fed delivering truckloads of cheap cash at the doorsteps of our banks is inflation. A lot of money is being dumped in an effort to loosen up frozen credit markets, and this will inevitably translate to high inflation down the road. The Fed will respond to runaway inflation by raising interest rates, no matter how anemic the economy is. Since all that money that'll be sloshing around in the economy is likely to cause inflation to accelerate at a fast clip, the fed funds target rate (FFTR) will likely be raised to a relatively high level. The median FFTR from 1990 to now is 4.5%; the average is 4.367%. Don't be surprised if the FFTR is 6.0% or higher 12 months from now.
So if my credit union can lock in 5% for 3 years, and the FFTR will go to 6.0% or higher within 12 months or so, then you can see that my credit union will have gained the advantage by the time the CD matures.
So, is investing in a 3-year CD @ 5.00% APY a good idea right now? Absolutely! But, if you can, go for a 12-month CD for now, or reserve as much cash as possible for next year. When the Fed ends the next cycle of raising the FFTR, I'm betting that you will be able to get even better returns with 3-5 Year CD's, so much better that I'm confident it'll be worth the wait.
Yes, I am grateful for my credit union. My Roth IRA has continued to grow despite all the nonsense going on in the banking system. And I'm confident that I have nothing to worry about.
The Fed's Plan for Dealing with The Mortgage Problem
The Federal Reserve has released it's plan on how to tackle the problems in the American mortgage industry. Here's how I feel about certain bullet points from the Fed's press release:
Creditors would be prohibited from engaging in a pattern or practice of extending credit without considering borrowers’ ability to repay the loan.
Creditors would be required to verify the income and assets they rely upon in making a loan.
It's a real shame that Alt-A mortgages were abused. I was hoping this financing option would be available to me when I'm ready to buy, since I am self-employed and have undulating income. The way it looks now, ALT-A loans may eventually disappear from the market forever.
FYI: With stated income mortgages, you provide the lender with your social security number so that they can check your credit score, but the lender doesn't require hard proof of income, like a 2 years of tax returns or payment stubs. A stated income home loan is a type of Alt-A mortgage.
Prepayment penalties would only be permitted if certain conditions are met, including the condition that no penalty will apply for at least sixty days before any possible payment increase.
Weak! The Fed should simply ban all mortgage prepayment penalties and be done with them. This is one (of many) reason why I like credit unions much more than banks: a federally chartered credit union cannot charge prepayment penalties, ever. The Federal Credit Union Act of 1934 prohibits federally chartered credit unions from assessing prepayment penalties of any type on any loan.
A credit union is a financial institution that's owned by its members. When compared to credit unions, banks tend to offer more services, and they tend approve loans and credit card applications more readily. But credit unions almost always have better interest rates on loans, better yields on savings and certificates of deposit, and reasonable fee schedules. Also, with credit unions, the terms and conditions attached to loans and credit cards are invariably more consumer-friendly.
I like the idea of benefiting from both worlds: I keep my savings in a credit union, and my business checking account with a large bank.
Lenders would be prohibited from compensating mortgage brokers by making payments known as “yield-spread premiums” unless the broker previously entered into a written agreement with the consumer disclosing the broker’s total compensation and other facts. A yield spread premium is the fee paid by a lender to a broker for higher-rate loans. The consumer’s written agreement with the broker must occur before the consumer applies for the loan or pays any fees.
This will definitely help. During the height of the mortgage origination frenzy, mortgage brokers would target subprime borrowers with loans that would likely go into foreclosure, so as to make big money with premium spreads.
Creditors and mortgage brokers would be prohibited from coercing a real estate appraiser to misstate a home’s value
Fraudulent appraisals were a big part of the problem, and lots of guilty appraisers won't be prosecuted due to lack of evidence. This proposed rule would certainly help to keep appraisers honest.
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