The CFPB plans to extend mortgage absences until the end of the year; What about the cards?
Abstentions, a deal to prevent collection activity against an overdue account, give consumers a short-term solution to withhold payments when needed. Mercator Advisory Group addressed the subject in a recent viewpoint titled Credit Card Account Withholding: No Forgiveness and Not Forever.
In the context of credit cards, abstention freezes the aging of delinquencies. It disrupts the aging flow and prevents the account from discharging as required by the Office of the Comptroller of the Currency (OCC), which applies to all domestic banks and their operating subsidiaries. In 2000, the OCC reaffirmed the trigger for delinquency with this explicit rule:
- The policy establishes standards for the classification and management of retail credit accounts in banks and thrifts. It typically requires closed loans to be debited when they are 120 days past due and open credits to be debited when they are 180 days past due.
Credit cards are credits of indefinite duration because there is no explicit term. Once the card is opened, loading can take place up to the card’s expiration date; in the most common case, the card will be reissued.
From the consumer’s point of view, tolerance offers room for maneuver; forbearance removes the write-off from the point of view of the financial institution, which you see in the current numbers. The point is, the December 2020 write-offs for U.S. credit cards were only 2.62%. A year earlier, before COVID, the rate was 3.75%. Put simply, today’s numbers are about a third better than the year before, even though most people know the global economy is unstable.
Latest CFPB announcement on mortgages
On April 5, the Consumer Financial Protection Bureau (CFPB) proposed that prerogatives be extended on mortgages until the end of 2021. CFPB cites this data:
- Millions of families risk losing their homes: As of February 2021, there were nearly 3 million homeowners behind on their mortgages, with around 2.1 million mortgages in forbearance and at least 90 days past due. If current trends continue, there could be 1.7 million such loans in September 2021.
- Preventing foreclosures allows homeowners and communities: Foreclosures are expensive for homeowners, with an average cost to borrowers of at least $ 12,500. Neighboring homes are also losing value, with sale prices dropping 1% to 1.6% after nearby foreclosure sales. Families experiencing foreclosure are also at risk of other harms, including wider financial distress and housing instability.
- The housing crisis worsens racial inequalities: Black and Hispanic homeowners were more than twice as likely to be behind on housing payments in December 2020, according to a March CFPB report.
What about credit cards?
The CFPB is silent on credit card abstentions at this point, which is appropriate. In our opinion, unsecured perpetual credit should not prolong the forbearance process for cards, because accounting for aging overstates the health of a debt. There is no credit manager worth his salt that suggests a parent doesn’t pay for a doctor’s visit on a credit card or let a mortgage foreclose to pay off. an overdue credit card bill.
Yet at the same time, it is essential to have a good idea of the risk level of the credit card wallet. As mentioned in a recent Mercator report, credit card debit collections take brains, not Brawn; Insecure consumer collections require finesse to solve problems. The context for secured loans to households is very different. It is difficult to replace a home that is subject to foreclosure; for credit cards, there are many options once housekeeping returns to normal.
For now, there is no direction, but perhaps a realistic look at the health of credit card portfolios will require that the numbers represent the safety and strength of the debt. And that will mean higher debits in 2021 and 2022. For credit cards, it’s much better for consumers, financial institutions and investors to tackle than a wave of uncontrolled delinquency that has been underestimated for two years. years.
Presentation provided by Brian Riley, Director, Credit Advisory Services at Mercator Advisory Group