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.
A Growing Move Toward PCI Compliance
PCI is becoming a default data security standard for creditors, merchants, and possibly debt purchasers and collectors. PCI, the Payment Card Industry Data Security Standard, was developed by the major card brands to ensure the security of consumer payment card information as it travels from the merchant point-of-sale to processors to the card issuing bank and back again.
Consider this: Visa reported that 77 percent of its so-called Level 1 merchants met PCI compliance at the end of 2007, up from 65 percent at the end of the third quarter. These are the big guys, merchants that conduct more than $6 million in Visa transactions annually. Visa also reported that 62 percent of Level 2 merchants met PCI requirements at the end of the year, up from 43 percent in the third quarter. Level 2 merchants conduct between $1 million and $6 million annually in Visa transactions.
In the second half of 2007, PCI compliance by these large merchants grew 33 percent, according to Visa.
This trend seems set to continue as Visa and other major card firms such as MasterCard and American Express enforce PCI compliance by levying monthly punitive fines on non-compliant merchants.
So what does this mean for the ARM industry? As more credit grantors require their service providers meet PCI standards, agencies servicing credit card debt will need to meet these demands of their clients.
A number of the larger collection agencies have already begun to use PCI compliance as a default standard for business.
In addition, legislative change may soon play a larger role in pushing the importance of PCI compliance for the financial service industry.
Proof of this can be found with the introduction of bills at the state level that codify specific PCI requirements, with the Plastic Card Security Act (Minnesota Statute E356E.64), and Texas HB 322 as two examples.
Whether or not legislative action continues to proliferate among the states or action is taken to the federal level, PCI is certain to continue making headlines for 2008.
Now that Washington has Reached a Deal, Will Americans Save their Tax Rebate?
In 2001, an economic stimulus package provided many Americans with a tax-rebate check ranging from $300 to $600, in an effort to support consumer spending and re-energize the sluggish economy.
By all measures, this initiative succeeded in boosting consumer spending with studies showing that 20 percent to 40 percent of those checks were spent in less than a week. Two-thirds of the total rebates were circulating in the economy by the end of the following quarter.
That was then, this is now, and as Congress and the White House reached a $150 billion deal that will give tax-rebate checks ranging from $300 to $1,200 per household, many are still wondering whether this stimulus package will actually spur on our slowing economy.
Some economists are suggesting that, this time around, many Americans may opt to keep their purse strings tightened, and forgo spending that check in the near term.
Though this assumption seems possible, what with the slumping housing market and rising prices for gas, food and energy, it also seems to gloss over the fact that such stimulus packages are aimed squarely at lower income Americans feeling the financial pressure of paying for these necessities, and the most likely consumer group to spend that money.
There is one very good reason behind the blistering 11.3 percent growth of revolving debt between October and November of 2007, and the over $900 billion in revolving debt now owed by consumers—Americans are broke.
The truth is that consumers may be burdened by mortgage resets and other outstanding debts, but they still need to put food on the table and gas in their cars, and it is almost certain that these cash-strapped consumers will need to spend their rebate.
A likely beneficiary of the economic stimulus package will be the credit card companies, certain to see consumers attempt to pay down their balances.
At the same time, it’s unlikely that lenders offering mortgages or closed-end loans will see any benefit from the rebate program. Paying down the balance of a credit card allows the consumer some temporary liquidity, but that ‘easy fix’ can’t be applied by most consumers to mortgages, equity loans, and auto loans.
The same goes for any other outstanding or delinquent debt that would allow for no future use of the credit line. This fact will present ongoing recovery challenges to the ARM industry, which will see no benefit from this stimulus package.
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