ST. PETERSBURG, Fla.-The "floor" has dropped from beneath credit card issuers with a surprise rules interpretation by the Federal Reserve, and now the race is on to meet a Feb. 22 deadline.
PSCU Director of Credit Card Services Glenn Schechter, told Credit Union Journal the ramifications from the Federal Reserve's UDAP regulations and Congress' 2009 CARD Act legislation have resulted in compressed margins for issuers due to a loss of flexibility to rapidly change pricing. The combination of the new regulations and laws mean credit card balances must be protected, or "grandfathered" in the case of a price change, and there has to be a 45-day notice given to cardholders.
"Issuers thought they understood the regulations, and were moving in the direction from fixed to variable-rate financing, which helps protect the margin on the portfolio," Schechter said. "On Jan. 12, new interpretations were released by the Federal Reserve. In the interpretations there was one rule that was never discussed or communicated previously that has made the whole industry sit up and make critical decisions in a limited time."
The interpretation mandates that minimum interest rates, known as "floor" rates, must be eliminated. "The industry had been moving toward variable rates, but with floor rates included to protect issuers from interest rate compression and to be at least able to make a profit," he said. "But with this new rule, the industry has been put into the position of making decisions that affect the profitability of their portfolio."
The options? Convert outstanding balances to a fixed rate from a variable, with a variable rate on new purchases, which presents some interest rate risk. In a worst-case scenario, an issuer might not be able to respond in a rapidly changing rate environment. Option two: keep the current rate variable and eliminate the floor, but that potentially creates margin compression risks.
"Credit unions will have to determine what they think the cost of funds will be and what they think the rate environment will be," Schechter assessed. "This might be easier to do, but carries greater risk. We are telling our credit unions to look at a variety of scenarios. They should assess what they believe cost of funds will be in the future, as well as the returns they will need to receive to meet portfolio requirements. It is not an easy decision. These need to be in place by Feb. 22, so the time window is just six weeks to understand and implement."
Of course, PSCU is not the only company facing such challenges. Mitch Raymond, SVP of products for Dallas-based TNB Card Services, said the amount of tumult in the credit card industry today is "unprecedented." "With all the changes the regulatory bodies have put in, and with most of those due by Feb. 22, a lot of the issuers are trying to figure out what the long-term impact will be on card programs," he said. "I don't know of an issuer, big or small, that is not grappling with changes. There are marketing considerations, training, backoffice, accounting and notice requirements that must be figured out."
Sara Petty, VP of strategic initiatives for The Members Group, Des Moines, Iowa, agreed. "The lack of floor rates was a surprise to everyone. It came out of the blue to all the lenders," she said.
Pricing issues have not been affecting CUs as much as banks, Petty continued. "Credit unions have not been as aggressive in pricing, especially in fees. Credit unions are member-sensitive and usually do not price fees heavily-more just to cover their costs. With the new regulations, credit unions are having to pay attention to their fees. They are maintaining interest rates where they were prior to the CARD Act changes."
At Card Services For Credit Unions in Clearwater, Fla., Bill Lehman, VP of portfolio consulting, said the majority of CSCU's member credit unions have opted to continue to offer a fixed-rate credit card product in the wake of the new rules rather than switching to variable rates. "Our responsibility is working with our member credit unions on the growth of their portfolios and getting them through changes caused by the CARD Act," he said. "Credit unions traditionally have been in fixed-rate products, and were priced fairly, but they were not really diligent about repricing. Our membership decided to stay at a fixed rate as an important differentiator after the CARD Act."