Comments on: The problem with banning floors on credit-card rates A slice of lime in the soda Sun, 26 Oct 2014 19:05:02 +0000 hourly 1 By: SteveVB Fri, 15 Jan 2010 21:41:26 +0000 @TRKAdvisors

I’m not sure the situation is as dire as you presented. The restrictions on floor rates means that any card issuer that has a floor rate on a variable-rate account will not be able to utilized the “variable-rate exception” in 12 CFR 226.55(b)(2). In other words, the issuer loses the ability to follow any changes in the underlying index. But, this does not mean the issuer will have to remove the floor and lower the APR. In fact, it creates an awkward situation where a card issuer has disclosed a variable-rate to the consumer but, according to the Fed, can not increase the APR even if the index changes. According to the Federal Reserve, this is for the consumer’s protection. But, as Felix pointed out there will be situations where consumers will not benefit and, in fact, might be harmed (not to mention consumer confusion).

By: TRKAdvisors Fri, 15 Jan 2010 19:36:21 +0000 Further reading of the 1155 page document (especially p. 518ff, with credit given to Mr. Chris Joy at PSCU) leads to perhaps the real intention of the Fed here: to make responding to this new limitation impossible. Though the elimination of floor rates is a new element, a 45 day notice requirement in rate changes has been in place since August. But note: the new rules (including no floors)came out 41 days before the effective date. Page 518+ then goes on to state that new rates have to go into effect BEFORE Feb 22 if they are to change rateson existing balances, which is impossible from the date the rules came out. A bureaucratic jujitsu move worthy of a Kafka novel.

To illustrate, assume you are the nicest-of-the-nice credit union, and you give cards at Prime+0%, but have a 8.9% floor (you need this as funding costs, expenses and charge-offs will eat up about 12% of balances every year in this product while non-interest fees generate about 4% revenue…leading to break even.) You have tried to provide a product where you are as low priced as economically viable in all rate environments. Well, now you will have to change those effective rates to 3.25% after Feb 22,and you do not have the 45 days required to change terms. The Fed just potentially bankrupted you- you, the one they would presumable want to celebrate.

By: Felix Salmon Fri, 15 Jan 2010 18:28:04 +0000 dWj — I think the point here is that a bank’s cost of funds, if it funds itself through deposits, can actually be lower than the Fed funds rate when the Fed funds rate starts to rise.

And I don’t think anybody is saying that vanilla options should be the *only* choice. We proponents of vanilla options would just like to see them mandated as *a* choice.

By: janon Fri, 15 Jan 2010 18:11:17 +0000 The Fed is misinterpreting the statute, which allows:

“(2) an increase in a variable annual percentage rate in
accordance with a credit card agreement that provides for changes in the rate according to operation of an index that is not under the control of the creditor and is available to the general public;

A rate change based on an index with a floor is still a change in the rate according to operation of an index that is not in control of the creditor. “Control” refers to control of changes in the index. Obviously the creditor controls the initial selection of the index and margin, but that doesn’t violate the statutory provision. If the Fed doesn’t fix this they will have trouble defending it in court–the precedents go back to the late ’70s early ’80s.

By: dWj Fri, 15 Jan 2010 17:14:10 +0000 > The point here is that banks need to charge at least 10% or so on their credit cards, no matter how low prevailing rates are, just because of charge-offs and expenses. That doesn’t mean they always need to charge at least 10 percentage points more than the Fed funds rate, however.

I would be interested in more detail on why this is the case. Is this because charge-offs are higher in recessions, and interest rates are lower, so that charge-offs are higher when interest rates are lower? I would assume expenses don’t vary with interest rates; if charge-offs didn’t, I would assume what would be needed would be a constant margin above the bank’s cost of funds.

Incidentally, it’s worth noting that for just about any product the Fed could ban, an example can be constructed where it really would be in the consumer’s interest. The move toward vanilla options, especially where it’s a move toward making vanilla the only choice, is defensible only insofar as it’s comfortable trading off the benefits (to consumers who are ignorant, naive, or simply time-constrained) against the loss of contractual freedom to tailor a specialized deal that may be better for all parties.