ROBERT SIEGEL, host:
This is ALL THINGS CONSIDERED from NPR News. I'm Robert Siegel.
Two items now about borrowing, one macro and one micro. In a moment we'll hear what people who watch the bond market make of a phenomenon called an inversion that took place this week; long-term interest rates dropped below short-term rates. But, first: borrowing, as millions of Americans do it with their credit cards. New regulations will drastically increase minimum payments. Robert Manning, who joins us from Rochester, New York, is the author of "Credit Card Nation."
And, Mr. Manning, first of all, what are these new regulations?
Mr. ROBERT MANNING (Author, "Credit Card Nation"): Well, the regulator of national banks, the commissioner of the Office of the Controller of the Currency, is finally enforcing an advisory that was issued two years ago that mandates a doubling of the minimum payment from the traditional 2 percent to 4 percent and, also, a requirement to pay any outstanding fees, such as late or over-limit or cash advance fees, for that specific month.
SIEGEL: What is the ostensible point of these regulations?
Mr. MANNING: There's tremendous concern, especially with the increase in interest rates, of what's called negative amortization--that people's payments are less than even the finance charges for this month--and that increasingly banks are marketing to people specifically who can't repay their debts. And as a result, there's a fear of regulators that there's going to be surge in default rates of consumers who really haven't been managing their personal finances well and have been relying on credit cards to make ends meet at the end of the month.
SIEGEL: So, in theory, there's some consumer protection at work here with--to protect one from getting too deep in the hole with a credit card. But it may hurt for those who already are deep in the hole with a credit card.
Mr. MANNING: Well, and that's really the key for people who are making their minimum payments. About one out of seven cardholders--many of them will be forced into bankruptcy by this sharp increase in minimum payments, although there is discretion of the banks to work with consumers in this transitionary period so they do not default.
SIEGEL: I understand the point behind these new regulations, as you've described it. But it's something that seems, while this may be prudent, a little unfair. That is, if I took out a car loan and I understood what the terms of the loan were when I bought the car and then two years into the car loan I suddenly was told, `You have to pay more each month,' I don't think that's right.
Mr. MANNING: Well, you have to understand that this advisory was not intended to help consumers. It was intended to force banks to essentially clean up their underperforming portfolios of people who were making far less than a minimum payment. The regulators are concerned that many banks that are concentrating on risky clients are going to have a disproportionately high charge-off rate. So, in a sense, the average consumer's being penalized by the concern of regulators about the true value of many banks' credit card debt portfolios.
SIEGEL: Just out of curiosity, has any particular lender taken a bad hit with all of those bad credit card debts being taken off their books?
Mr. MANNING: Well, Chase Manhattan Bank took a huge hit in the last quarter. They were quite taken back. Bank of America was one of the first to actually begin to implement this advisory last spring, and they were quite taken back by the number of accounts that just went into default and charge-off status. Keep in mind that under the deregulation of financial services, today the best client is somebody who can never repay their loans. And this is exactly the rock and a hard spot that the banks feared that the regulars are putting a spotlight on--is: When do consumers actually have more than they can afford to repay, and when is it responsible for the banks to actually charge them off as a loss?
SIEGEL: You mean if I'm in up to my eyebrows in debt and strapped, I'm the ideal customer. If I'm a deadbeat, then I'm the worst customer they can have.
Mr. MANNING: Absolutely. And, unfortunately, with this high charge-off rate with the credit card industry, it means that they're going to ultimately squeeze the most financially indebted and distressed consumers with higher interest rates and fees.
SIEGEL: And when do the new regulations actually take effect? In which statement will credit cardholders see these new numbers?
Mr. MANNING: Well, some cardholders have begun to see them and have contacted their credit issuers about making lower payments. Increasingly after the first of the year, consumers can expect to see this new minimum payment taking effect in their January statement.
SIEGEL: Robert Manning, the author of "Credit Card Nation."
Mr. Manning, thank you very much for talking with us.
Mr. MANNING: Been a pleasure to be with you.
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