July 02, 2010
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News: Fitch Expects Lenders Lose With New Rules
According to the latest Fitch Rating report, the recent release of the Fed's final restrictions on credit cards will most likely trigger a ten percent decrease in U.S. lenders earned income during the balance of this year. The prediction stems from the Federal Reserve Board's approval of the final stage of the Credit Card Accountability, Responsibility, and Disclosure Act 2009 (CARD Act) which regulates credit card interest rates, fees, and payment processing fees. Prior to the enactment of the new credit card reform bill, lenders were raising interest rates, slashing credit limits, and canceling cards; activities which are being regulated with restrictions by the CARD Act. However, new rules require lenders to review all accounts that had an interest rate increase back to January 2009 to justify the increase.
The new rules will regulate many of the abusive activities of the credit card industry over the past several years particularly during the recent recession. One important rule will prohibit lenders from double charging fees for the same offense. Under the new rules, if a cardholder is late making his payment on a $10 balance, the max the card company can charge is $10 unlike the $39 that many were charging prior to credit card reform. Furthermore, even if the balance is greater than $25, the max a lender will be permitted to charge is $25. In a very few cases, lenders will be able to charge a late fee of $39. According to Fitch, this regulation alone will cost lenders a 30 percent reduction in late fee revenue. Additionally, lenders will no longer to charge cardholders an inactivity fee or declined transactions fees. These too will add to a decrease in revenue for lenders.
Spokesperson for Fitch, Cynthia Ullrich said that the greatest impact on lenders will be on "gross yield" and the "monthly payment rate." According to Ullrich, merchants and subprime credit card lenders have the greatest amount of income to lose because these fees represent a large chunk of their overall revenue. At this time, Fitch does not expect to cut any card issuer's ratings this year because gross yields have increased by 27 percent from same time last year.