National banks tightening credit card lending standards

Two out of three national credit card issuing banks have tightened standards for getting cards and no bank has made it easier to get a card, according to a new report issued Tuesday by federal banking regulators.

n a survey of the largest national banks, including 19 that issue credit cards, 68 percent indicated to bank examiners that they had tightened credit card lending standards during the 12-month period ending March 31, 2009. That was nearly double the 35 percent reported in 2008. Conversely, 18 percent of banks surveyed in 2008 had eased standards to credit card borrowers while none — zero percent — reported easing standards in 2009.

The report, issued by the Office of the Comptroller of the Currency (OCC), which regulates national banks such as Bank of America, Citi and JP Morgan Chase, indicates nearly a third of credit card banks (32 percent) reported no change in lending standards for 2009, compared to 47 percent reporting unchanged standards in 2008.

What does it mean for cardholders? The statistics bolster stories from millions of Americans who have had their credit card accounts closed or credit limits reduced or who were denied credit altogether when applying for new cards in recent months. Lending underwriting standards can involve several different aspects of a credit card account. An issuer can decide to set a low credit limit, require a higher credit score or deny credit entirely based on card users’ credit scores or payment history. Increasingly, lenders are also closing accounts, increasing interest rates and minimum payments or denying credit cards altogether for riskier borrowers.

Risky portfolios ahead
Nine out of 10 national credit card issuing banks in the survey also indicated they expect their credit card portfolios to become more risky in the next 12 months, with 69 percent saying they expect “somewhat” increased risk and 26 percent expecting “significantly” increased risk. Only 5 percent indicate they expect risk to remain unchanged. None of the banks predict their risk levels to decline in the coming year.

The economy and high job losses have sent credit card defaults, delinquencies and charge-offs soaring in recent months. Some analysts predict that could continue into 2010. Credit industry analysts and banking executives also predict the new credit card reform law will dramatically revamp the way credit cards are issued, billed and processed. The Credit CARD Act of 2009’s provisions will be implemented in phases, with the first kicking in Aug. 20, 2009. The majority go into effect in February 2010.

The law will, among other things, limit when credit card interest rates can increase on existing card balances. Banking executives call the existing industry practice “risk-based pricing.” Without it, they say, their ability to re-price for risk will be significantly curtailed starting in 2010.

Securitization risks
It is common practice for major card issuers to sell as much as 50 percent of their portfolios to investors in asset-backed securities. U.S. Rep. Barney Frank and other lawmakers have accused banks of taking on risky credit card loans because they can shift the risk to investors by selling securities. In its press release, the OCC warned banks against shifting risk in this manner: “The OCC reminds national banks that underwriting standards should not be compromised by competitive pressures or the assumption that loans will be sold to third parties.”

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