Jeopardy for Credit Card Underwriters

Yesterday in Cleveland, Randall Kroszner, a member of the Federal Reserve in Washington D.C., noted that three-fourths of all consumers have some type of debt. Kroszner noted that credit is the life-blood of the economy.

Credit Card companies are the center of concern. Simply put, Kroszner believes that credit card companies need additional regulations to police various business practices. Two areas deserve particular scrutiny:

1. Two-cycle billing in credit cards.
2. Practices such as add-on interest where payments are posted to the lowest interest rate first, and the highest interest rate last.

Credit Card companies were placed in the same category as other predatory lenders (a.k.a. loan shark) type operations who have been blamed for a large portion of the foreclosure crisis. In an election year, not to mention weak economic conditions, it places credit card companies in the unenviable position of political fodder for the political pundits. Barack Obama is even pledging a credit card user's Bill of Rights. This will force McCain to make a gesture vilifying credit card companies as well.

Collateral and Liens

Unlike the banking and mortgage industry, credit card companies do not have secured debt. While there are various ways to "collect on debt" it is apparent that underwriters of credit cards have serious exposure when it comes to collecting delinquent debts. According to one source, Citi (C) grants consumers $2,500.00 worth of credit based on a name that matches a social security number. Beyond that limit, an actual address is needed as well.

Should the economy continue its slowing cycle, credit card underwriters will face considerable risk. According to Jack Craven of Debt Settlement U.S.A. "The Consumer Debt Index reflects an alarming trend for consumers who are trying to get out of debt. Clearly, people are increasingly unable to pay their credit card bills and mortgages."

Implications

Bank of America (BAC) is the largest credit card issuer in the United States, and is currently facing intense pressure from Wall Street. Capital One Finance (COF), which serves a standard and sub-standard market, is also at considerable risk. Enjoy the short-lived rally of these underwriters, as there is no doubt that both will return to their slide into the abyss.