Consumer Credit Market - Credit and Finance Risk Analysis

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Consumer Credit Market

Consumer Credit, Federal Reserve Statistical Release G.19

Household Debt Service and Financial Obligations Ratios, Federal Reserve

On November 12, 2009, the Federal Reserve Board announced final rules that prohibit financial institutions from charging consumers fees for paying overdrafts on automated teller machine (ATM) and one-time debit card transactions, unless a consumer consents, or opts in, to the overdraft service for those types of transactions. Before opting in, the consumer must be provided a notice that explains the financial institution's overdraft services, including the fees associated with the service, and the consumer's choices. The final rules, along with a model opt-in notice, are issued under Regulation E, which implements the Electronic Fund Transfer Act. These revision will take effect on July 1, 2010.
www.federalreserve.gov/newsevents/press/bcreg/20091112a.htm

The Federal Reserve Bank reports that at September 31, 2009, U.S. household debt contracted for the fourth consecutive quarter at approximately 1.75% in the second quarter 2009. Home mortgage debt decreased by 1.5%, while consumer credit contracted at an annual rate of 6.5%.

At the end of the second quarter of 2009, U.S. household net worth was an estimated $53.1 trillion, $2.0 trillion dollars more than the preceeding quarter, and the first increase since the third quarter 2007.
www.federalreserve.gov/releases/z1/current/default.htm

The U.S. Census Bureau / U.S. Department of Commerce indicates (September 10, 2009) that real median household income in the United States fell 3.6% between 2007 and 2008, from $52,163 to $50,303. This breaks a string of three years of annual income increases and coincides with the recession that started in December 2007. Median income income had been increasing over the past 3 years prior to the decline. Adjusted for inflation, real income has declined over the course of the past decade: from $51,295 in 1998 to $50,303 in 2008. The 2008 decline in median household income was the first in four years after income growth had stagnated for the four years after the terrorist attacks of Sept. 11, 2001. In the four decades that the Census bureau has been tracking household income, there has never before been a full decade in which median income failed to rise.
www.census.gov/Press-Release/www/releases/archives/income_wealth/014227.html

The Bureau of Economic Analysis (an agency of the U.S. Department of Commerce) indicates that U.S. personal income increased $3.8 billion, or less than 0.1%, and disposable personal income (DPI) decreased $4.6 billion, or less than 0.1%, in July 2009. U.S. consumer spending increased 0.20% in July 2009, primarily related to the "Cash-for-Clunkers" program after having increased 0.60% in June 2009, but declined by 1.0% for the second quarter 2009.
www.bea.gov/newsreleases/national/pi/2009/pi0709.htm

On November 25, 2008, the Federal Reserve Board announced the creation of the Term Asset-Backed Securities Loan Facility (TALF), a facility that will support the issuance of asset-backed securities (ABS) collateralized by student loans, auto loans, credit card loans, and loans guaranteed by the Small Business Administration (SBA). Under the TALF, the Federal Reserve Bank of New York (FRBNY) will lend up to $200 billion on a non-recourse basis to holders of certain AAA-rated ABS backed by newly and recently originated consumer and small business loans. The FRBNY will lend an amount equal to the market value of the ABS less a haircut and will be secured at all times by the ABS. The U.S. Treasury Department, under the Troubled Assets Relief Program (TARP) of the Emergency Economic Stabilization Act of 2008, will provide an additional $20 billion of credit protection to the FRBNY in connection with the TALF. The TALF is designed to increase credit availability and support economic activity by facilitating renewed issuance of consumer and small business ABS at more normal interest rate spreads. www.federalreserve.gov/newsevents/press/monetary/monetary20081125a1.pdf

Products offered in the Consumer Credit Market include deposits, money market CDs, credit cards, automobile financing (lending and leasing), marine vessel financing, real estate related financing (primary mortgages and home equity loans), and non-pension / 401K retirement investments such as Annuities.

Credit Issue: Will the subprime mortgage problems of 2007, which has resulted in a situation where U.S. consumers can not easily tap the equity of their real estate property or obtain mortgages and credit cards formerly with easy application and underwriting guidelines, and a substantially weak dollar that increases the cost of imports, finally put the brakes on consumer spending which has grown annully for the past 2 decades?
The Bureau of Economic Analysis, U.S. Dept. of Commerce, indicates that U.S. consumers tapped approximately $340 billion in residential equity from either refinancing or home equity loans in 2006, a primary source of discretionary income which now may no longer be readily available.
Secondly, what does it mean for the U.S. economy? U.S. consumer spending accounts for approximately 70.3% of GDP.
Finally, on November 27, 2007, the Conference Board reported that its Consumer Confidence Index had declined to 87.3, declining from 95.2 in October, and representing a continuing 4 month decline since July.

Data provided by the Bureau of Economic Analysis (U.S. Department of Commerce) and the Federal Reserve indicates that since 1983, U.S. consumer spending has increased each successive quarter except during the short recession of 1990-91 (after which it continued on an upward path):

U.S. household debt has increased from 55% of income in 1983 to 114% (136.5% of after tax disposable income) in 2007.

During 2005, the national savings rate (calculated as personal income minus personal spending) became negative and has only recently edged back into positive.

Consumer Spending (Consumer Expenditure Survey) is reported by the U.S. Dept. of Labor, Bureau of Labor Statistics and provides information on the buying habits of American consumers, including data on their increases / decreases in after tax income expenditures, income, and consumer unit (families and single consumers) characteristics.
www.bls.gov/cex/home.htm

Consumer Credit is reported by the Federal Reserve.
www.federalreserve.gov/releases/g19/current/

Personal Income Outlays is reported by the U.S. Department of Commerce, Bureau of Economic Analysis.
www.bea.gov/newsreleases/national/pi/pinewsrelease.htm

Consumer Confidence Index (CCI) for the previous month is reported by the Conference Board: as consumer confidence increases so does consumer spending. The Consumer Confidence Survey is based on a representative sample of 5,000 U.S. households.
www.conference-board.org/economics/consumerConfidence.cfm

Consumer Price Index (CPI) is reported by the Bureau of Labor Statistics (U.S. Department of Labor) and is an indication of inflation and is measured by looking at the annual percentage change of the cost of Food, Housing, Clothing, etc.
www.bls.gov/cpi/home.htm

Deposits (Savings & Checking Accounts)

The personal savings rate for the United States has been trending down since the 1980s. This rate, as computed by the Bureau of Economic Analysis (U.S. Department of Labor) from the national income and product accounts, averaged about 9% in the 1980s. Then in the 1990s, the average rate was around 5%, and in the first part of this millennium, it has been close to zero (0.4% in 2006). However, by November 2008 the BEA indicates that the personal savings rate had increased to 2.4% as a result of consumer uncertainty over economic conditions brought on by the financial crisis.

Money in a savings account, checking account or in certificates of deposit (CDs) is known as a deposit. A financial institution (commercial banks, savings and loan associations, credit unions, and mutual savings banks) is committed to returning all of the deposit (plus interest) whenever requested to so by the depositor. The term of these accounts are for either an indefinite or fixed term. There are no interest-rate ceilings on any accounts offered by savings associations and under the Office of Thrift Supervision (OTS) regulations there are no requirements for early withdrawal penalties (sight deposit, which means that it can be withdrawn at any time). The OTS believes, however, that early withdrawal penalties are useful in maintaining stability in all classes of Certificate of Deposits (CDs).

Financial institutions are also required to carry government insurance on deposits up to $100,000. The insurer is usually the Federal Deposit Insurance Corporation (FDIC; an independent agency of the United States government). Insured accounts include:: Statement Savings Accountss; Passbook Savings Accounts; Money Market Deposit Accounts (MMDAs). These accounts can be made available to any depositor, including individuals, corporations, government entities, and not-for-profit organizations.; Holiday Savings Accounts; Regular Checking Accounts; Negotiable Order of Withdrawal Account (NOW) Accounts. NOW accounts may only be held by one or more individuals, government entities depositing public funds, and not-for-profit organizations operated primarily for religious, philanthropic, charitable, educational, political, or other similar purposes.; Certificates of Deposits (CDs) also known as a time deposit.

Savings accounts and checking accounts are different. A savings account cannot be used in a payment transaction such that a check cannot be written that will automatically withdraw funds from the account. Rather, the depositor must withdraw funds from the account either in person with a passbook or debit card, use the debit card at the ATM or transfer between accounts at the ATM or on-line. In the United States savings accounts are regulated under Regulation D, 12 CFR 204.2(d)(2).
ecfr.gpoaccess.gov/cgi/t/text/text-idx?c=ecfr&tpl=/ecfrbrowse/Title12/12cfr204_main_02.tpl

A checking account is also known as a demand account, demand deposit account, current account or a transaction account. A Demand Deposit Account (DDA) means that the money deposited in the account is available for negotiable or transferable order of withdrawal for the purpose of paying a transaction. These can be interest bearing or non-interest bearing demand deposits. Checking accounts come with fees and options compared to a savings account

Direct deposit from an employer is usually available.

Monthly fee / service charge to maintain the account, which may also include per transaction fees. The account may require a minimum balance in order to waive the monthly fee.

Overdaraft option and overdraft protection fee, which allows othe consumer to write checks in excess of the amount on deposit in the account.

Cost to print checks.

ATM / Debit card availability and transaction fees, including out-of-system fees.

On-line (web browser-based) or telephone account access.

Credit Issue: Deposits are seen as a steady, inexpensive source of funding for a financial institution as persons tend to bank where they reside and always have a certain, minimal amount in their checking account and savings account balances do not fluctuate as much as checking accounts. Deposits are always listed on the liability side of the balance sheet as they are always owed to the depositor (the depositor is essentially lending their money to the financial institution in exchange for an annual interest rate).

The financial institution must offer a competitive market rate to attract deposits but the cost of funds must never exceed what is being earned on loans and investments.

The financial institution must always maintain its reputation for fiscal soundness within the market place so that depositors do not demand, en mass on a single day, the return of their deposits.

The annual yield formula used to determine the amount of interest paid on deposits is known as the Annual Percentage Yield (APY) calculation as defined by Federal Reserve Regulation DD, 12 CFR, Ch. II, Sub. A, Part 230; Truth in Savings Act (12 U.S.C. 4301 et seq.).

The annual percentage yield (or effective annual rate) measures the total amount of interest paid on an account based on the interest rate and the frequency of compounding and takes into consideration any reinvested interest that may occur.

The annual percentage yield is expressed as an annualized rate, based on a 365-day year (or 366-day year in a leap year).

eCFR On-line - 12 CFR 230

The annual percentage yield is calculated by use of the following general formula:

APY=100 [(1+Interest/Principal)(365/Daysinterm)−1]

“Principal” is the amount of funds assumed to have been deposited at the beginning of the account.

“Interest” is the total dollar amount of interest earned on the Principal for the term of the account.

“Days in term” is the actual number of days in the term of the account. When the “days in term” is 365 (that is, where the stated maturity is 365 days or where the account does not have a stated maturity), the annual percentage yield can be calculated by use of the following simple formula:

APY=100 (Interest/Principal)

Example:

If an institution pays $61.68 in interest for a 365-day year on $1,000 deposited into an account, using the general formula above, the annual percentage yield is 6.17%

APY=100[(1+61.68/1,000)(365/365)−1]

APY=6.17%

Or, using the simple formula above (since, as an account without a stated term, the term is deemed to be 365 days):

APY=100(61.68/1,000)

APY=6.17%

Compute Annual Percentage Yield (APY)

Conversely, the formula for determining APY at the beginning of the deposit (investment) is (1 + r ÷ n)ⁿ - 1
(P = principal, r = interest per period, n = no. of periods)

FDIC Insurance

The basic insurance amount in the United States is presently $250,000 per depositor per insured bank through December 31, 2013.

Single Accounts - These are deposit accounts owned by one person and titled in that person’s name only. All of a depositor's single accounts at the same insured bank are added together and the total is insured up to $100,000. For example, if a depositor has a checking account and a CD at the same insured bank, and both accounts are in the depositor's name only, the two accounts are added together and the total is insured up to $100,000.

Joint Accounts - These are deposit accounts owned by two or more people. If both owners have equal rights to withdraw money from a joint account, each person’s shares of all joint accounts at the same insured bank are added together and the total is insured up to $100,000. If a couple has a joint checking account and a joint savings account at the same insured bank, each co-owner's shares of the two accounts are added together and insured up to $100,000, providing up to $200,000 in coverage for the couple's joint accounts.

Deposits with each FDIC-insured bank are insured separately from any deposits at another insured bank.

If an insured bank has branch offices, the main office and all branch offices are considered one insured bank, a depositor cannot increase insurance coverage by placing deposits at different branches of the same insured bank.

Similarly, deposits held with the Internet division of an insured bank are considered the same as deposits with the "brick and mortar" part of the bank, even if the Internet division uses a different name.

If two banks are affiliated, such as having a common holding company, but are separately chartered (indicated by having two different FDIC Certificate numbers), deposits in each bank would be separately insured.

FDIC www.fdic.gov/deposit/index.html

FDIC Special Alerts (Counterfeit Checks) www.fdic.gov/news/news/specialalert/2008/index.html

Certificate of Deposit Account Registry Service (CDARS)

Certificate of Deposit Account Registry Service (CDARS) are designed to provide bank customers with access of up to $50 million or more of FDIC insurance coverage for Certificate of Deposits that customers have on deposit with banks and financial institutions (must be FDIC insured). Institutions that offer CDARS are members of Promontory Interfinancial Network. When a customer places a large deposit with a Network Member, that bank can place the funds into certificates of deposit issued by banks in the Network. Other Network Members do the same thing with their customers’ funds.

Credit Cards

On May 22, 2009, President Barack Obama signed the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act of 2009.
Bans rate increases on existing balances due to "any time, any reason" or "universal default" and severely restricts retroactive rate increases due to late payment. Rates can still be increased with 45 days notice however it does not apply to credit cards with variable rates.
Contract terms must be clearly spelled out and stable for the entirety of the first year. Firms may continue to offer promotional rates with new accounts or during the life of an account, but these rates must be clearly disclosed and last at least 6 months.
Institutions will have to give card holders a reasonable time to pay the monthly bill – at least 21 calendar days from time of mailing. The act also ends late fee traps such as weekend deadlines, due dates that change each month, and deadlines that fall in the middle of the day.
Credit card companies will be required to apply excess payments to the highest interest balance first, as consumers expect them to do. The act also ends the confusing and unfair practice by which issuers use the balance in a previous month to calculate interest charges on the current month, so called "double-cycle" billing.
Requires Opt-In to Over-Limit Fees: Consumers will find it easier to avoid over-limit fees because institutions will have to obtain a consumer’s permission to process transactions that would place the account over the limit.
Fees on subprime, low-limit credit cards will be substantially restricted.
Limits Fees on Gift and Stored Value Cards: The act enhances disclosure on fees for gift and stored value cards and restricts inactivity fees unless the card has been inactive for at least 12 months.
Plain Language in Plain Sight: Creditors will give consumers clear disclosures of account terms before consumers open an account, and clear statements of the activity on consumers’ accounts afterwards. For example, pre-opening disclosures will highlight fees consumers may be charged and periodic statements will conspicuously display fees they have paid in the current month and the year to date as well as the reasons for those fees.
The act contains new protections for college students and young adults, including a requirement that card issuers and universities disclose agreements with respect to the marketing or distribution of credit cards to students.

In the first quarter of 2009, the three major credit card issuers, Bank of America, Citibank and JP Morgan Chase, reduced credit line limits held by U.S. card holders by approximately $320 billion in order to reduce their exposure.

The discussion covers the consumer side of the credit card industry. To see the operational side of credit card issuance and usage please see the Cash / eCash Page. To see issues related to the securitization of credit card receivables please see the Asset-backed Securities Page.

Financial institutions issue credit cards, which are essentially unsecured lines of credit, to consumers and businesses because the interest rate is high, in most cases double-digit, and the credit card issuers / processors also charge an interchange fee, which is charged to and earned from the retailers who accept the card.

Credit cards allow a Purchaser to purchase a large ticket item that may cost more than the ready cash that the purchaser may have on hand, on a time installment schedule. As the Seller of the item may not offer an installment program, the structure of the payment schedule of a credit card is an automatic amortization schedule of the charged outstanding balance.

Credit card categories include:: General purpose credit cards are issued by a bank in either the VISA or MasterCard association and the card can be used with a merchant that is a member of the respective association.; Affinity cards are issued for a variety of groups or associations and function as a general purpose credit card.; Cobranded cards are issued on the behalf of a for-profit company such as a hotel group, airlines, retailer, oil company, and may be general purpose or have some restrictions on uasge (private label retailer credit cards), and may accrue some benefit on the behalf of the cardholder through its usage.; Corporate cards are issued to selected employees of the sponsoring company and have restrictions on its usage (no personal purchases).; Secured credit cards are general purpose credit cards collateralized by a cash deposit and the credit limit is restricted to a percentage of the cash collateral account.

Credit card applications are marketed in various ways including direct mail, telemarketing, magazine inserts, and counter top “take-one” applications. Due to the large volume of credit card applications the quickest way to underwrite the applicant is to use a scoring model. Scoring models, or scorecards, are tools used to predict the behavior of new applicants based on the performance of previous applicants. They rank order applicants or customers by risk based upon the information consumers supply in credit applications and credit bureau reports on payment history. The points for each scorable component are added, producing a score which rank orders the applicants along a risk ladder (the score scale). In a preapproved solicitation program, a credit card issuer uses a list of potential customers from which it will make a firm offer of credit. The issuing bank is prohibited from producing a credit report of the potential applicant without their permission thus a target population is identified from demographic research and /or they may either purchase a list(s) of names from a list vendor and/or the credit bureaus (credit bureaus can provide total credit scores but not specifics; however, the methodology used by the credit bureaus is well documented thus a high score clearly identifies the potential solicitation target) or they may identify a segment of the bank’s borrowers.

Credit cards are issued to consumers with some of the highest interest rates charged on any financial product. The stated rate of interest is not always the accurate portrayal of the real rate of interest due to how institutions may apply the interest from a payment made by the cardholder. The accurate real rate of interest is the APR (Annual Percentage Rate), which accurately indicates the true finance cost over the billing cycle. There may be several types of APRs:

Balance Transfer APR - Is the APR on a specific dollar amount for a specifc number of billing cycles on balances transfered from another credit card.

Cash Advance APR - Is the APR charged on cash advance balances that the consumer created by using the credit card at an ATM and withdrew cash.

Default APR - Is the APR charged on the entire outstanding balance at the time of default by the cardholder under the terms of the Cardmember Agreement (the consumer does not make at least the minimum payment on the due date or no payment thereafter; or the consumer exceeds the credit line; a payment is returned by the cardholders bank for insufficient funds).

Overdraft Advance APR - Is the APR charged when the consumer requests to charge an amount in excess of an approved credit line.

Minimum specified payments may not be sufficient to fully amortize an outstanding blance. Secondly, the majority of credit card programs are priced at a variable rate, which causes minimum payment requirements to fluctuate as rates change.

Unfortunately, the imprudent usage of credit cards can result in a level of debt that is unsustainable by household's income and may even result in a personal bankruptcy filing in order to negotiate a payment plan.

Credit Issues:: The ability to service the credit card balance, both interest payments and amortization of the balance on a monthly schedule. Credit card debt is essentially an unsecured line of credit, and repayment depends primarily upon a borrower’s capacity to repay.; The ability of a consumer to float an outstanding balance by paying off one credit card with a cash advance from another card. It is rare that a consumer will be able to satisfy in this manner an outstanding balance that exceeds their monthly income by a certain multiple (20X to 40X). If the consumer is already this far behind then floating a balance is just temporarily holding off the inevitable default. The highly competitive environment for credit card lending has provided consumers with ample opportunity to hold several credit cards from different issuers.

Credit card fees are increasing purposefully as these fees add to the overall yield of the portfolio of the card Issuer:: Late fees; Annual fees; Overlimit fees; Returned check fees; Cash advance fees; Transaction fees; Attorneys’ fees and costs; Copy fees; Replacement card fees; Stop payment fees; Currency conversion fees

Some credit cards provide cash-refunds to users of the card depending on the volume of usage and the amount charged with the card. Some of the companies that provide this option are Capital One, Bank One (acquired by JP Morgan Chase), MBNA, Stockback (issued with MBNA) and Upromise (issued with Citibank). Some of the cards also include the additional feature of a loyalty program such that the consumer will earn a greater refund if they purchase items from affiliated retailers.

Banks issue credit card accounts with pre-set expiration dates, typically two or three years. These expiration dates provide the issuer with the opportunity to determine whether or not to continue the relationship. The bank uses scoring models and/or established credit guidelines for this process. The guidelines consider the age of the account, utilization rate, average balance carried, delinquency status, payment history, and, if available, account profitability. Based upon this information, the issuer makes a decision to renew or not to renew the card.

Promotion of credit card usage as a national policy can have far reaching consequences. For instance, as part as the plan to help financial institutions in South Korea revive from the corporate lending crisis in South Korea the mid-1990s, the government assisted and cooperated with the banks in promoting credit card usage to a society who up until that point had been, historically, a culture of savers. The government even offered tax credits to consumers for credit card usage. Consumers responded and credit card issuance increased dramatically. Unfortunately, the banks did not have much experience in consumer credit card credit analysis and issued cards rather indiscriminately in order to gain market share. The resultant consequence was that although increased consumer spending helped to improve the economy in the short-run, in the long-run the level of household credit card debt increased 5X and as a percentage of GDP, the credit card payment default rate (payment delinquent over 30 days) increased to almost 15% (compared to a industry high of 4% in the United States) of outstanding balances, embarrasment over debt-related problems disrupted family relations and cultural patterns, and the financial sector came under operating pressure due to liberally extending new loans with longer maturities in the attempt to cover already non-performing loans.

The use of a credit card in a retail transaction provides some protection to the consumer. Under the terms of the Fair Credit Billing Act, a charge questioned by the consumer and under investigation by the card issuer must temporarily be removed from the monthly bill. If one can demonstrate that there was a problem related to the charge (for instance, did not receive the item purchased from a retailer's website) then the liability to the consumer is supposed to be a maximum of USD $50.

Lost or Stolen Credit Card Notification:: American Express Blue: 1-888-BLUE-741 (258-3741); American Express Card Replacement Unit United States: 1-800-992-3404; Outside U.S.: 1-336-393-1111 (Call collect).; Discover Card United States: 1-800-DISCOVER; Outside the U.S.: 1-801-902-3100; TDD: 1-800-347-7449; MasterCard Global Service United States: 1-800-MasterCard (1-800-627-8372); Outside the United States 1-636-722-7111
www.mastercard.com/us/personal/en/cardholderservices/emergencyservices/index.html; Visa Global Customer Assistance Center United States: 1-800-847-2911
usa.visa.com/personal/security/get-help-now.html

Debit Card

Consumers in the United States use their debit cards more often than their credit cards to make retail purchases. However, debit cards do not have the same protection that credit cards provide. If a debit card is lost or stolen and the holder of the card figures out the PIN number to access the account then the account holder has no grace period of recourse to the bank to get the money back. Tf the thief also utilizes the overdraft line then the account holder is also liable for thae amount of the overdraft. If the lost or stolen debit card is used in a retail transaction then the consumer has a liability of a maximum of USD $50 as long as the loss or robbery of the card is reported within 48 hours. If the loss or robbery of the card is not reported within the first 48 hours then the liability level increases.

When a consumer uses the debit card in a non-PIN (signature) transaction such as to book a hotel room, rental automobile or air fare it is also not uncommon for the company providing the service to block cash in the account, cash which the consumer can no longer access until the bill is paid.

Under the terms of the Electronic Fund Transfer Act, the debit card issuer is not required to reimburse the consumer if the debit card holder does not receive an ordered item and used the debit card holder did not receive the item in shipment.

MasterCard offers consumers the opportunity to sign up for the SecureCode service as an additional layer of security when using a debit card for online purchases. The consumer must register for this service and establish a personal password. The consumer must also have a personal computer web browser program enabled to accept cookies from the registration site. The consumer enters account details on this secured site and creates a password to complete the transaction. Once the debit card is registered, no one else can use that Debit Card SecureCode card number at a participating online merchant without the consumer's personal password (the merchant must also be registered with the MasterCard SecureCode service). When the consumer makes a purchase at a participating merchant, the MasterCard SecureCode window will appear and one enters the password, submits the password and then completes the transaction.
www.mastercard.com/securecd/welcome.do

Visa offers a similar service, Verified by Visa, which is available only for Visa cards (for both credit cards and "check" cards / debit cards) issued in the United States.
usa.visa.com/personal/security/vbv/index.html

Credit Issues:: The usage of the debit card by consumers provides less income for the issuing financial institution because the transaction fees are lower and there is no opportunity to earn interest on the revolving balance.

Annuities

An Annuity is an investment contract designed for individual investors and is sold either directly by an insurance company, a bank or through a financial planner. An annuity purchased from a bank is not an FDIC insured account.

The performance of an annuity is based on 2 situations:: The performance of the financial markets or instruments in which the principal was invested; The financial health of the institution that has written the annuity contract

A Deferred Annuity allows one to invest into an investment account where the taxes on the principal and capital gains, dividends or interest earned on the invested principal are deferred until one begins withdrawing from the account, ideally after retirement when the annuity holder is in a lower tax bracket. Earnings continue to accumulate in the Deferred Annuity even after the annuity holder commences withdrawals (only taxed until disbursed from the account). There is no limit imposede by the Internal Revenue Service on the amount of annual cotribution into a Deferred Annuity account by the investor. If the annuity holder should pass away then the balance of the annuity passes on to deceased's designated heirs as either a probate or non-probate asset of the estate, depending on how the contract was set up and what other estate planning is in effect. A spouse may assume the ownership of the contract upon the death of the annuity holder as long as no withdrawals had been made from the annuity prior to the death of the annuity holder.

An Immediate Annuity is a lump sum cash investment or conversion of an existing investment to create an account from which the annuity holder can start making monthly, taxable withdrawls. One does not pay taxes on the withdrawn principal, only on the interest, dividend and / or capital gains earned by the principal invested in the account.

A Fixed Annuity is an investment strategy for an annuity contract account that earns a guaranteed fixed return of interest over the life of the contract. Thus, as it is an investment strategy, an investor may have a Deferred Fixed Annuity or an Immediate Fixed Annuity. In both a Deferred Fixed Annuity, the rate of interest earned on the principal investment is usually set for a specifc term, and then at the expiration of that term it is reset again for another terrm period. A fixed annuity is considered a conservative investment, its structure and performance is almost like that of bank Certificate of Deposit.

A Variable Annuity is an investment strategy for an annuity contract account that where the investment of the principal is in either a single asset class or is spread across several asset classes (money market, equities or bonds) and the growth of principal is based on the performance of the investments, which in turn will eventually determine how much will be available for the annuity holder to receive once withdrawals are made from the account. In a Variable Annuity, the principal and income earned on the investment are not guaranteed. Thus, as it is an investment strategy, an investor may have a Deferred Variable Annuity or an Immediate Variable Annuity.

Student Loan

Loans to cover tuition costs are available for students of all ages from pre-Kindergarten to post-graduate level, including trade schools.

In the United States, there are 3 types of loans available to college-level students:: Federal direct loan - made by the Federal government directly to the student; Federally-backed loan - made by a private lender to the student and guaranteed / insured by the Federal government; Private loan - made by a private lender to the student without any government participation

In April 2008, the largest insurer of private loans, the Education Resources Institute, Inc., (TERI), filed for Chapter 11 bankruptcy court protection.

It was then reported in the media in August 2008 that several large U.S. lenders had decided to either exit or curtail their participation in the private student loan market. the largest lenders included Bank of America, Citigroup, HSBC, M&T Bank Corp., TCF Financial Corporation, and Wachovia. The cause of the pull back is that the auction-rate securities market for student loans and the secondary market securitization for both government-guaranteed loans and private loans have not been able to attract investors. Additionally, some lenders have indicated that the the College Cost Reduction and Access Act (2007) reduced the profitability of these type of loans. Some non-profit lenders such as the Massachusetts Educational Financing Authority (MEFA) and the Michigan Higher Education Student Loan Authority have also curtailed private loan programs. It was also reported that those lenders that remained in the market required substantially higher FICO scores in order to underwrite the loan.

The graduation rate and student loan default rate of a specific school can also have an influence on whether a private loan is granted.
Education Trust College Results On-Line (graduation rates per school): www.collegeresults.org/ (there are complaints about the methodology for compiling these type of statistics due to that the majority of college students in the United States transfer to another institution at least once, and often twice, however they are considered dropouts by the United States Department of Education’s method, which tracks only one cohort of first-time full-time freshmen across a six-year span at one institution)

Thus far in 2009, the remaining private lenders have reduced loan availability, lowered loan amounts disbursed to borrowers, and increased interest rates and origination fees. Some private lenders have discontinued loan programs for foreign students coming to the U.S. to study and are requiring U.S. co-signers for all pending loans (co-signers must have acceptable FICO scores). Due to the losses that many school investment / endownment funds incurred in 2008, many schools are not in a position to provide subsidized loans to either U.S. or foreign students.

The cost of a college education in the United States has increased annually at a higher rate than inflation (the College Board indicates an average annual rate of 4.9% per year over the past decade). The College Board indicates on their website regarding Average College Costs for 2009 / 2010:: Private four-year $26,273 (an increase of 4.4% from the previous year, $25,166, which was an increase of 5.9% from the previous year); Public four-year in-state: $7,020 (an increase of 6.5% from the previous year, $6,591, which was an increase of 6.4% from the previous year); Public two-year $2,544 (an increase of 7.3% from the previous year, $2,372, which was an increase of 4.7% from the previous year); www.collegeboard.com/parents/csearch/know-the-options/21385.html

In addition, due to many fiscal budget funding problems incurred by several states in the United States during 2008 / 2009, there will be budget cuts at public, state universities that will have to be partially offset by tuition fee increases.

Federal Student Loans

There are 4 types of loans presently available under the Federal Family Education Loan Program (FFELP) and the Federal Direct Loan Program (FDLP):: Subsidized Federal Stafford Loans (the primary loan under the FFELP and FDLP), which are low interest loans made to undergraduate and graduate students attending accredited schools at least part-time. In the Federal Direct Loan Program (FDLP) the Federal government is the lender. In the the Federal Family Education Loan Program (FFELP) a private commercial institution is the lender. The key to the Subsidized Stafford Loan is that the lender pays interest while the student is in school and during grace and deferment periods.; Unsubsidized Federal Stafford Loans. The key to the Unsubsidized Stafford Loan is the borrower pays interest while the student is in school and during grace and deferment periods. In addition, Unsubsidized interest rates are usually higher than Subsidized interest rates.; Federal PLUS Loans. The loan is made to the parent(s) of the dependent student and the borrower is responsible for all interest payments. The maximum amount that can be borrowed is equal to the cost of attendance minus any other financial aid the student receives.; Federal Consolidation Loans

In these programs the student usually borrows the cost of tuition directly from the Federal government through the financial aid office of the school.

A Perkins Loan is a low interest federal loan from the U.S. Department of Education for both undergraduate and graduate students who can demonstrate "exceptional" financial need by filing the FAFSA (Free Application for Federal Student Aid). In this program the funding is made avialable to the school and the school is actually the lender; payment is then owed to the school that made the loan. www.fafsa.ed.gov/

Overall, the Federal student loans offer more consumer-beneficial terms such as low fixed interest rates, income-based repayment plans, loan forgiveness and deferment options, including deferment of loan payments when a student returns to school.

Private Student Loans

Loans at the public and private 4-year college, masters programs, professional programs (doctor, lawyer) and professional trade scholls are normally made by a private institution with a guarantee from the U.S. federal government and/or an interest rate subsidy, also from the government. Loan repayment terms are usually for ten years and repayment usually commences six months after graduation. Loans are usually considered in default after 270 days.

As indicated above, the largest insurer of private loans, the Education Resources Institute, Inc., (TERI; which is actually a private company not part of the Federal government), filed for Chapter 11 bankruptcy court protection in April 2008. The loans insured by TERI were in turn pooled for securitization by First Marblehead Corp., however both companies were effected by the credit crunch in 2008 when private / commerical insitutuins could not obtain financing in the markets to make new loans and then private investors had no further interest in purchasing student loan securitizations.

The recovery rate on defaulted student loans is fairly good as compared to other types of consumer credit there is no statute of limitations on attempting to collect against a borrower and a 1998 revision of U.S. federal law does not always automatically allow a borrower to cancel a student loan in personal bankruptcy.

SLM Corp. (formerly known as Sallie Mae or the Student Loan Marketing Association) is the largest originator of U.S. government guaranteed student loans in the United States. In Decmber 2004, the company completely cut the implicit support it enjoyed as a GSE (Government Sponsored Enterprise) and now operates as a private corporation. SLM manages its own portfolio of student loans and has branched into other services such as debt collection / consolidation and servicing, and non-student consumer finance products.

Primary Residence Mortgage

Please see Residential Mortgage Market

Credit Scoring

Perhaps the most well known credit scoring methodology is Fair Issac Corp. / FICO Score. The purpose ot the methodology is to review all past and presently open credit granted to an individual (credit cards, student loans, automobile loans, baot loans, mortgages and home equity lines of credit) and weigh the actual repayment history and utilization to attempt and develop a numerical rating of the individual's credit history and capability. FICO scores range from 300 to 850 (the higher the score the lower the risk).

In 2007 / 2008 there was some controversy related to the FICO scoring model after the widespread increase in defaults in the residential mortage market and increasing problems within the credit card market. Many consumer credit approvals (and corresponding interest rate) were based on a potential borrower's individual score as it was promoted as an analytical methodology that could calculate the likelihood that a borrower will default on a loan. FICO maintains that the methodology and scoring should never had been substituted for traditional, full documentation mortgage underwriting and individual borrower credit analysis. However, the U.S. banking industry utilized scores as the primary decision factor and the scoring methodology was even promoted as an additional tool to review and rate mortgage portfolios in the secondary market (in the form of the range of FICO scores of the pool of mortgages, which was endorsed by Fannie Mae, Freddie Mac, Standard & Poor’s and Fitch IBCA). In 2008 the company is scheduled to release FICO o8, which the company indicates will account for different types of credit (the present model treats all types of credit accounts and loans payment history in a similar manner).

Proprietary credit scores are also reported as part of the Equifax (Beacon), Experian (FICO), TransUnion (Empiraca) credit reports (see next below). These scores were all developed based on Fair Issac software applications and methodology. As of March 2006, the 3 major reporting agencies have also provided a standardized credit score known as VantageScore, which reports a numerical range of 501 to 990 (the higher the score, the lower likelihood of risk) and also a parallel alphabetic scale that classifies consumers into fixed A, B, C, D, F scoring grade.

Credit Reporting Agencies (CRAs)

As per the Fair and Accurate Credit Transactions Act of 2003 (FACTA), and The Fair Credit Reporting Act (FCRA), as of March 1, 2005, gives every U.S. citizen the right to a free credit report from each of the 3 major credit bureaus every 12 months.

Fair and Accurate Credit Transactions Act of 2003 www.treasury.gov/offices/domestic-finance/financial-institution/cip/pdf/fact-act.pdf (.pdf format)

e-OSCAR (Online Solution for Complete and Accurate Reporting) www.e-oscar.org/

The website, www.annualcreditreport.com, is the only legitimate website from which applicants can obtain free information. One may also call toll-free at (877) 322-8228, or request a form via mail at:
Annual Credit Report Request Service
P.O. Box 105281
Atlanta, GA 30348-5281
www.annualcreditreport.com/ (AnnualCreditReport.com will not approach consumers via email, telemarketing or direct mail solicitations)

Federal Trade Commission (FTC) www.ftc.gov/bcp/conline/pubs/credit/freereports.shtm

The three major national consumer credit bureaus are Equifax, Experian and TransUnion.

Equifax Credit Information Services, Inc.
PO Box 740241
Atlanta, GA 30374
Order a credit report: 1-800-685-1111
Place a fraud alert on your credit report: 1-888-766-0008
http://www.equifax.com

Experian
475 Anton Blvd.
Costa Mesa, CA 92626
Phone: 1-888-EXPERIAN (1-888-397-3742)
http://www.experian.com/

Please note that the address listed above is for the Experian corporate office, and consumer assistance is not available at that location. Please call Experian's toll-free number or visit their web site to locate mailing addresses specific to your question/situation.

TransUnion
PO Box 2000
Chester, PA 19022
Phone: 1-800-916-8800
http://www.transunion.com

Please note that the address and phone number listed above are for disputing an item on your credit report. Please visit TransUnion's web site for contact information specific to your question/situation.

If a consumer is denied credit then under the terms of the the Equal Credit Opportunity Act (ECOA) they have the right to request and obtain the reason(s) for the denial within 30 days.

Financial Crime Against Consumers

Unfortunately, technology has increased the number of financial related schemes against consumers all around the world. The types of problems are well publicized: identity theft, information theft, phishing and a number of Internet-related problems. Similarly, the capabilities and accuracy of digital imaging / printing also provides opportunists with the means to attempt new types of mail fraud.

U.S. Federal Trade Commission (FTC) Identity Theft Site www.ftc.gov/bcp/edu/microsites/idtheft/

One often repeated mail fraud attempt is to send an official or authentic looking check to a stranger and then that person deposits the check or is asked to send a percentage of the face amount of the check to the mailer as a processing fee. This type of activity is an attempt to obtain account information or payment, illegally. If the consumer does not have any relationship with the company or entity that sent the check then it should be sent to the authorities.

FDIC Special Alerts (Counterfeit Checks) www.fdic.gov/news/news/specialalert/2008/index.html

You can also check our Directory of Bank Websites to determine if a bank really does exist.

Internet E-mail messages or regular mail letters / notices that indicate that the consumer has won a lottery drawing in another country are false. With regard to U.S. citizens:

It is against U.S. federal law to play a foreign lottery through the mail or over the phone.

Common sense indicates that one must purchase a ticket for the lottery thus the consumer would had to have physically been in the foreign country to purchase the ticket. If the consumer has never been in the country of the supposed drawing and never purchased a ticket then they are not a winner.

FDIC Consumer Alerts www.fdic.gov/consumers/consumer/alerts/index.html

Federal Bureau of Investigation - Internet Fraud www.fbi.gov/majcases/fraud/internetschemes.htm

Internet Crime Complaint Center (IC3) www.ic3.gov/

Anti-Phishing Working Group (APWG) www.antiphishing.org/

Peer-To-Peer Lending / P2P Lending

This type of lending requires a group of individuals (non-bank lending) to pool their extra cash and then lend as a group to a borrower determined to be credit worthy by all members (or at least a sufficient number to provide the amount of funding being sought by the borrower).

In most cases the borrowers are individuals (personal loans) so the entire concept is often referred to as a "social lending network."

The primary criteria for borrowers to qualify is to have a minimum acceptable FICO score.

The interest rate on the funds provided to the potential borrower is also determined by that individual's FICO score (interest rates are regulated by local usury limit guidelines).

The appeal to a potential lender is that it allows one to invest small sums of money in a large number and variety of loans.

Secondly, potential lenders can also earn an interest rate on the loan well in excess of a comparable term CD or money market investment.

The risk to lenders is that this is still a growing business sector and the track record of borrower performance in various economic conditions is still being developed. Secondly, these loans are unsecured.

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Credit & Finance Risk Analysis

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