Credit Card Delinquency Rate Decline Could Prove Short Lived
Credit card delinquencies, like charge-offs, have trended upward over the past year. That is until recent reports on the credit card market by both TransUnion and Standard & Poor’s noted that credit card delinquencies – defined as the percentage of borrowers 30 to 90 or more days past due – had experienced a moderate decline.
In its monthly analysis of the U.S. Credit Card Quality Index (CCQI), Standard & Poor’s reported that the delinquency rate for the CCQI – comprised of 22 master trusts of bank card and credit card backed securities – declined from 4.5 percent in March to 4.4 percent in April, following eight consecutive months of increases.
On a similar note to the findings by S&P, TransUnion in its quarterly credit card analysis reported that for the first time since the beginning of 2007, the average national credit card loan delinquency rate experienced a relevant quarterly decline in the first three months of 2008. According to TransUnion, the ratio of credit card borrowers delinquent on one or more of their credit card accounts declined to 1.19 percent in the first quarter of 2008, a drop of 12.5 percent from the previous quarter.
Amid the continued deterioration of credit card debt quality within the U.S. market, this news was a welcomed reprieve. As stated by Ezra Becker, principle consultant in TransUnion’s financial services group, this development may signal that “consumers have begun to take stock of their overall debt and begun to catch up on their repayment schedules.” Though a bit optimistic, this could be a plausible conclusion as negative sentiments regarding the current economy, job market and personal financial stability continue to hammer away U.S. consumers’ willingness to take on new debts.
So if cash-strapped consumers are now paying off debts instead of taking on more, creditors will need to figure out how exactly their internal recovery efforts help position them within consumers’ minds as the creditor of first choice for repayment. And if this latest round of delinquency data proves to be an anomaly, expect to see late payments rise again later in 2008.
Gasoline Price Milestone and the Frugal Consumer
As the price of necessities such as gasoline have continued to climb, the economic mood remains negative as illustrated most recently by the Conference Board’s Consumer Confidence Index, which declined yet again from 62.8 points in April to 57.2 points in May. This was an overall decline of more than 47 percent from the 108.5 points reported in May of 2007.
Household budgets already stretched precariously thin during recent months, were met on Sunday with another milestone -- record breaking gasoline prices. The American Automobile Association (AAA) announced that the average price of gasoline nationwide reached $4 a gallon for the first time in history. Undoubtedly the soaring price of gas, which has risen 29 percent over the past year, has done its part in dampening consumer sentiment.
This consumer pessimism is hard to argue with and signal consumers have remained challenged by the broader economic downturn. Now with the average price of gasoline in the U.S. at $4.00 a gallon and spending on fuel accounting for more than 6 percent of wage income, the fear that has come front and center is the risk of declining consumer spending as confidence plummets.
Fears of slowed spending are understandable with the unemployment rate now standing at 5.5 percent and as 54 percent of consumers surveyed by the Discover Spending Monitor saying their personal finances are getting worse ("Discover U.S. Spending Monitor Rises 1.4 Points in May," June 4). Most telling, 42 percent of respondents reported putting less into saving as a response to high fuel costs, while 48 percent of respondents planned to spend less on discretionary purchases, up five points over the last three months.
Tightened budgets and a heightened awareness of one’s financial burdens will inevitably produce a difficult recovery environment for collectors, but to what extent will the severity of this slowdown be felt in accounts receivable management and for how long, remain to be seen.
Do ‘Expectations’ of Decreased Spending Mean Less Spending?
First, survey firm Gallup reported in an April poll that Americans had less money for discretionary spending. Half of consumers told Gallup that as the price of gasoline has increased over the past year, the amount of money they had available for entertainment and recreation had declined.Then, in a poll released on May 9, Gallup reported that 60 percent of Americans said they were cutting back significantly on their household spending to compensate for the rising cost of fuel.
It seems clear that increasing fuel prices are here to stay and a growing number of Americans have tightened their belts and cut back on spending elsewhere.
Headlines awash in news of unemployment and financial insecurity are another factor influencing consumer budgets. As sentiment of the overall economy has declined throughout the year, consumer expectations of cutting back on their spending have also persisted, according to the Discover U.S. Spending Monitor. In April, the Monitor showed that 57 percent of consumers making under $40,000 a year and 54 percent of those making between $40,000 and $75,000 a year, were planning on curtailing discretionary spending. The Monitor, designed as an Index on consumer spending, has declined more than 14 percent from its initial 100 point start a year ago.
As Americans added $15.29 billion to outstanding credit balances in March – for an annual rate of 7.2 percent – it is difficult to predict whether or not these expectations of reduced discretionary spending will fully materialize. What is certain is that as macro-level factors like the rising cost of fuel stretch household budgets, such issues will continue to make for great press.
For Consumers, Food as the Breaking Point?
With recent reports of Costco and Wal-Mart limiting the amount of rice their customers may buy per trip, it would appear that Americans too are feeling the pressure of the global increase of food costs.
In an April 18 to April 20 poll conducted by Gallup, 46 percent of Americans reported that the current cost of food was causing them financial hardship. When broken down by income, 28 percent of respondents making $75,000 or more said that food price increases were causing them financial hardship, while 50 percent of respondents making $30,000 to $75,000 agreed with that statement.
But of all respondents those who described being most heavily burdened by the rising cost of food were Americans making less than $30,000 a year, the lowest income demographic, with 64 percent of this group reporting that food prices were causing financial hardship.
The bad news for consumers has been spelled out in a recent three-part series of statistical analysis from Trend Data, a database of 27 million anonymous consumer records sampled from TransUnion, the consumer information house. Trend Data uses the database to create a quarterly consumer lending analysis with a focus on the credit card, auto loan, and mortgage sectors.
In the auto loan arena, Trend Data projected that the national 60-day auto loan delinquency rate would rise by 33 percent through 2008 to reach 1.05 percent at year’s end.
Trend Data also projected that the national 90-day user delinquency rate on bankcards would increase to 1.9 percent by the end of 2008 from 1.36 percent in the fourth quarter of 2007.
Consider the fact that from 1983 to 2004 growth in credit card use was sharpest among families making $30,000 year or less, rising from 11 percent to 37 percent of families in 2004, suggesting that any additional financial pressure this year on these households carries additional risk of default.
Trend Data also projected that the national 60-day mortgage delinquency rate would increase from the nearly 3.0 percent reported in the fourth quarter of 2007 to 4.0 percent by the end of 2008, a 33 percent increase.
Consumer economic perception may not exactly match consumer economic reality but one thing is for certain - Americans are indeed finding it harder to pay their debts. Whether this trend continues throughout the year remains uncertain, but the impact to creditors and their agency partners is sure to be felt.
Department Stores and Debt Collectors Can Find Solace on Common Ground
Last week, retail weakness was highlighted in the release of flat U.S. same-store sales figures for the month of March.
Amid a weakening economy and rising unemployment numbers, retailers such as Gap Inc., American Eagle and Abercrombie & Fitch to name just a few, have continued to struggle, posting same-store sales declines in March of 18 percent, 12 percent and 10 percent respectively.
This news of course came as no surprise as consumer confidence – an increasingly watched barometer of overall economic health – throughout the first quarter has seen steady declines across the board in many indices tracking consumer sentiment.
Lowered monthly sales figures for retailers from apparel chains to department stores has been one of the manifestations of this plunge in overall consumer confidence about the economy and their own personal financial health. Another affect has been a shift in discretionary spending behavior focusing more on necessities as more Americans worry about the cost of essentials such as food and fuel, recently reported by a Gallup poll showing that the cost of food has superseded consumer concerns over the cost of healthcare.
This shift in part can explain why Wal-Mart Stores reported a rise of 0.7 percent in U.S. same-store sales, led by an increase of 0.9 percent in its namesake Wal-Mart chain from continued strength among sales of groceries and health and wellness products.
As news of the unemployment rate rising to 5.1 percent following the lose of 80,000 jobs in March and consumer bankruptcy filings increased 27 percent compared with the same period last year (“Economy Creating a Challenging Collections Environment”), consumers will continue to react to such news with increased anxiety, pushing this shift in discretionary spending behavior. Such figures will inevitably present collections challenges, but to what extent these numbers will impact the accounts receivable management industry moving into the second quarters remains to be seen.
Federal Family Education Loan Lending Under Pressure
As the credit crunch continues, the student loan lending market has suffered. Witness Waco, Texas-based Brazos Higher Education Service Corp., becoming the latest student lender to stop making new loans to students through the Federal Family Education Loans (FFEL) program for the 2008-2009 academic year.
Brazos joined a list of 26 other private lenders that have stopped originating federal loans according to a recent statement by FinAid.org, a publication focused on financial aid.
Though the credit crunch has perpetuated the problem of lenders exiting the market - as investors shy away from securities backed by student loans reducing the availability of capital for lenders - the September 2007 passage of the College Cost Reduction and Access Act of 2007 (CCRA) and its focus on subsidy cuts further decreased the profitability of federal loans for these lenders.
The cuts included the elimination of an “Exceptional Performer” status that allowed lenders to receive higher insurance rates on defaulted loans, and reduced the insurance paid by the federal government to lenders on defaulted loans from 98 percent down to 95 percent by October 1, 2012.
The CCRA also increased the loan fees paid to the Department of Education by student loan lenders from 0.5 percent to 1 percent of the principal amount of the originated loan. These fees cannot be passed on to borrowers.
Though premature, it is possible an academic funding gap could arise, as such large lenders as College Loan Corp. and the Pennsylvania Higher Education Assistance Agency announce they would stop originating FFEL loans for the upcoming term.
Private student loans would likely be an easy finance option for many facing any such gap. With fees and interest rates at times double those of their federally-backed counterparts, private student loans inevitably carry a higher risk of default. As this market continues to grow so too will the growth of the private student loan collection market.
Federal Security Changes Will Impact ED, IRS Collectors
For agencies working on behalf of the U.S. Department of Education (ED) or the Internal Revenue Service, comments made at recent Senate hearing may indicate future complications for data security compliance.
Several experts testified that vulnerabilities still existed in federal agencies’ handling of data security, and that the federal government continued to struggle in keeping its information systems secure.
It appeared clear that the Senate Homeland Security Committee was prepared for alarming news when it named the hearing “Agencies in Peril: Are We Doing Enough to Protect Federal IT and Secure Sensitive Information?” Much of the hearing revolved around the Federal Information Security Management Act (FISMA).
Greg Wilshusen, Information Technology Director for the Government Accountability Office, said that “Twenty of 24 major federal agencies continue to experience data security troubles.”
According to Wilshusen, most agencies “did not implement controls for limiting system access or guarding against intrusion, nor did they regularly configure devices to fix vulnerabilities.”
Both Wilshusen and Cyber Security Industry Alliance President Tim Bennett agreed legislation to enhance FISMA is needed. While the hearing was not focused on a specific bill, the U.S. House is considering a measure to ramp up security as well as reporting and auditing requirements.
Toughening federal government security programs will probably impact the 17 private collection agencies currently on the ED contract, and the two working on behalf of the IRS (“IRS Renews Collection Contracts with Two Agencies,” March 4). Bottom line, FISMA requirements involve the auditing of partners to federal agencies, a fact that became clear when ED announced in January that that some its agency partners would undergo data security audits by the Office of Inspector General.
Any future changes or enhancements to FISMA would surely lead to more headaches for these ARM partners.
Consumer Confidence Falling Fast though Impact on ARM Unclear
As the fears of recession and inflation continue to threaten the U.S. economy and business community, consumer confidence continues to tumble.
Though the Federal Reserve has acted on the possibility of slowed consumer spending and weak economic growth with multiple interest rate cuts, the effect on the U.S. consumers has been muted. Consumers on a whole continue to see weak prospects for the immediate future. Recently released statistics from the Conference Board’s Consumer Confidence Index showed it standing at 75.0, a decline of more than 12 points from January’s 87.3.
This followed January’s decline from 90.6 to 87.3, giving back the moderate gains made in December.
The troubling development for the ARM industry is that this deterioration of short-term expectations has continued as charge off rates have risen for a broad spectrum of outstanding consumer debt. Evidence of this was recently shown as the Federal Reserve reported credit card charge off rates rose to 4.13 percent in the fourth quarter of 2007, up from 4 percent in the third quarter, and a 17 basis point rise from the 3.96 percent seen in the fourth quarter of 2006.
For residential real estate loans the charge off rate for the fourth quarter was 0.44 percent, up from 0.12 percent one year prior.
It is widely anticipated that financial pressures on consumers will adversely affect the ARM industry for 2008, to what extent is yet to be seen.
Washington Attempts to Perk Up Consumers
The Federal Reserve woke from its slumber and realized the economy might be in bad shape. Since September it has reduced its benchmark fed funds rate from 5.25 percent to an even 3.0 percent on January 30.
Meanwhile, Congress and the White House have taken aggressive measures in the form of an economic stimulus package – which will eventually provide Americans with tax-rebate checks ranging from $300 and $600 – with the aim of providing both the economy and consumers a boost.
Such measures make sense, considering that personal consumption accounts for some 70 percent of the economy. Whether these actions lead to a boost in consumer sentiment is up for debate, but any tightening of household budgets will affect the economy, the ARM industry included.
To read my full analysis on this topic, please click here.
Up Front Costs Limit ED Contract Players
With over $40 billion dollars of defaulted federally-backed student loans in the Department of Education’s (ED) portfolio, there is little wonder why the opening of the General Services Administration (GSA) schedule for agencies to contract on behalf of ED has garnered so much attention.
The collection and rehabilitation of Federal Family Education loans (FFEL), for the successful collection agency, can represent a substantial opportunity. In 2007 alone, private collection agencies collected some $2.3 billion dollars, and the Department of Education paid out over $300 million to its agency contractors.
But while the opportunities inherent in being awarded an ED contract are obvious, some considerations should be kept in mind. Chief among these are substantial up-front capital requirement of participants.
In addition, recent changes made to the business of federally-backed student loans by the passage of the College Cost Reduction and Access Act of 2007 (CCRA), should also be considered by agencies interested in the student loan collection market.
I have just released a 42-page research report on the federal student loan collection market. You can download a free executive summary of the report here. The report is also available for sale in the insideARM bookstore.
