Will TALF Work in the Credit Card Industry?
Yesterday, the Federal Reserve officially launched TALF--Term Asset-Backed Securities Loan Facility. It is a $200 billion program that is intended to start money flowing for small employers, credit card issuers, and auto lenders. While the government intends to use this to stimulate lending, it may not work exactly as expected in the credit card industry.
The purpose of TALF is to use $200 billion in loans to encourage investors to buy AAA securities that are backed by new consumer and small business loans. The Fed says the program could generate up to $1 trillion of lending for businesses and households. Requests for loans will be accepted starting March 17. Funds will be dispersed later in the month. If TALF works, it unclogs the credit pipeline, making it easier for Americans to finance large and small purchases at lower rates, and helping revive the economy.
"Basically, TALF encourages lenders to lend more money, and consumers to borrow and spend that money. Ideally, this helps the economy to recover. But we have to remember that questionable loans are one of the reasons we got into this economic mess. Unfortunately today, consumers are deeper in debt, have possibly lost their job or have experienced a pay cut or furlough, and have seen the value of their home and investments drop. This is probably not a good time for consumers to do significant borrowing and increase their debt, even it it will help stimulate the economy," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
"Credit card issuers also aren't in a position to increase their lending. They are trying to stay afloat despite a growing delinquency rate that threatens to pull them under. American Express even offered $300 as an incentive for some of their higher risk customers to pay off their balance and close their account," says Hardekopf. "Issuers and financial institutions joined together to create a website, HelpWithMyCredit.com, and a toll-free number to help their cardholders pay off their credit card balances instead of defaulting or declaring bankruptcy.
"Currently, credit card issuers are still trying to recover and survive. Despite loud protests and anger from their cardholders, issuers have increased interest rates, lowered credit limits, and raised the standards for credit card approvals. It is not clear whether issuers are going to take the money and make new loans or just use it to get rid of some the bad debt they have on the books. Even if TALF does open the credit markets again for more lending, I am not sure the U.S. government
should be introducing a program to encourage easier access to credit for consumers in this recession," says Hardekopf.
The purpose of TALF is to use $200 billion in loans to encourage investors to buy AAA securities that are backed by new consumer and small business loans. The Fed says the program could generate up to $1 trillion of lending for businesses and households. Requests for loans will be accepted starting March 17. Funds will be dispersed later in the month. If TALF works, it unclogs the credit pipeline, making it easier for Americans to finance large and small purchases at lower rates, and helping revive the economy.
"Basically, TALF encourages lenders to lend more money, and consumers to borrow and spend that money. Ideally, this helps the economy to recover. But we have to remember that questionable loans are one of the reasons we got into this economic mess. Unfortunately today, consumers are deeper in debt, have possibly lost their job or have experienced a pay cut or furlough, and have seen the value of their home and investments drop. This is probably not a good time for consumers to do significant borrowing and increase their debt, even it it will help stimulate the economy," says Bill Hardekopf, CEO of LowCards.com and author of The Credit Card Guidebook.
"Credit card issuers also aren't in a position to increase their lending. They are trying to stay afloat despite a growing delinquency rate that threatens to pull them under. American Express even offered $300 as an incentive for some of their higher risk customers to pay off their balance and close their account," says Hardekopf. "Issuers and financial institutions joined together to create a website, HelpWithMyCredit.com, and a toll-free number to help their cardholders pay off their credit card balances instead of defaulting or declaring bankruptcy.
"Currently, credit card issuers are still trying to recover and survive. Despite loud protests and anger from their cardholders, issuers have increased interest rates, lowered credit limits, and raised the standards for credit card approvals. It is not clear whether issuers are going to take the money and make new loans or just use it to get rid of some the bad debt they have on the books. Even if TALF does open the credit markets again for more lending, I am not sure the U.S. government
should be introducing a program to encourage easier access to credit for consumers in this recession," says Hardekopf.
