From Consumer Debt to Consumer Debt Traps

Jumbo Rate News 35:02

While the Eastern seaboard was being pummeled by Winter Storm Grayson, we were reflecting on the happenings of 2017.

January: A willingness to spend and put things on credit showed an increased confidence in both the recovery and the overall economy. However, for the first time since the recession, we started to see an uptick in the delinquency rate of consumer loans.

February: After faltering  in 2016,  the Federal Reserve released its January 2017 Senior Loan Officer Opinion Survey on Banking Lending Practices (SLOOS)showing that most banks surveyed tended to believe C&I loan quality would be improving in 2017.

March: After a contentious  battle, and a very close vote, divided almost entirely on party lines, Steven Mnuchin, was sworn in as Treasury Secretary on Monday, February 13th. As such, Mnuchin is well on his way to accomplishing his top two priorities: rewriting the U.S. tax code and stripping away parts of  Dodd-Frank to the satisfaction of both the President and Congress.

April: We reported that banks and credit unions that specialize in  financing taxi medallion loans are overwhelmed by the rise of smart-phone ride sharing  apps. Once considered to be one of the safest and surest investments in the world, the value of taxicab medallions in many U.S. cities has plummeted. The loans made to finance these once elite assets are now faltering.

May: It’s never good news when a bank fails, but the May 5th closing of Guaranty Bank, Milwaukee, WI, (which ironically also did business as BestBank in Georgia and Michigan) was particularly disheartening. The acquiring bank, First-Citizens B&TC, NC, has a sprawling network, but   most of its branches are located in wealthy neighborhoods. The majority of Guaranty Bank’s branches were in grocery or retail stores in primarily lower income neighborhoods. All of these in-store branches were closed in the transaction. Most of the customers of these in-store branches had direct deposit of their: paychecks; social security checks; and/or disability checks. That left a lot of disenfranchised customers with no bank branch at all.

June: As we expected, the Fed’s Open Market Committee (FOMC) raised short-term interest rates on June 14th by a quarter point. Banks were quick to respond by increasing the prime lending rate from 4% to 4.25%. CD rates have been much slower to rise. The FOMC also announced plans to begin unwinding its balance sheet in what they dubbed Project Policy Normalization. It’s been a long time coming.

July: We saw a welcome uptick in interest margins (NIMs), even though we didn’t like the reason. Many (most) banks were able to keep deposit rates low allowing them to make the most out of the rate hikes by raising interest charged on loans at a faster pace than rates paid on deposits. The average NIM at March 31, 2017 was 3.19%, up from 3.10% a year earlier.

Also in July: The city of Davenport, Iowa disclosed it was preparing to sever its 32-year relationship with Wells Fargo Bank, NA, Sioux Falls, SD after the Office of the Comptroller of the Currency (OCC) downgraded the bank’s CRA rating from “Outstanding” to “Needs to Improve”. Davenport’s policies require that institutions have “satisfactory” CRA ratings both in their Metropolitan Statistical Area (MSA) and nationwide in order to be eligible to receive city deposits.

August: In August, we had our eyes on Tropical Storms and on growing credit card balances. The pace of the latter accelerated in the latest 24 months, growing 6.4% from June 30, 2015 to June 30, 2016, and another 4.5% in the following 12 month period.

September: Seven of the largest eight credit card banks posted increases in past due credit card loans that exceeded the increases of their respective credit card portfolios. And that was before Harvey, Irma, Maria and Nate, and prior to the wildfires in California.

October: President Trump nominated Jerome “Jay” Powell to be the next chairman of the FOMC and replace Dr. Janet Yellen. That will leave five empty spots in the Board of Governors, but the President is already vetting his options.

November: The CFPB finalized a new rule intended to put an end to payday debt traps. President Obama addressed the issue while he was in office:

“At first it seems like easy money. But the average borrower ends up spending about 200 days out of the year in debt….You take out a $500 loan at the rates that they’re charging at these payday loans — some cases 450 percent interest — you wind up paying more than $1,000 in interest and fees on the $500 that you borrowed.”