Lending standards keep tightening, Fed says

It didn't get any easier to borrow on credit cards at the start of this year, based on a Federal Reserve survey released today.

Credit card lending standards continue to tighten
Banks are continuing to make it harder for consumers to get credit cards, with about 60 percent of issuers saying they've tightened credit card loan standards. The number saying they've tightened standards on other consumer loans is still high, but not in comparison to credit cards.

That's because banks remained cautious about extending credit card loans in the early months of 2009, according to results from the latest Federal Reserve survey of senior loan officers, as more than half of respondents again acknowledged tightening their credit card lending standards in the first three months this year.

"Nothing really changed with regards to credit cards. Things were about the same with no real easing going on," says Marisa Di Natale, senior economist with Moody's Economy.com in West Chester, Pa.

The survey showed that borrowing on credit cards was tougher than securing other forms of consumer loans. The percentage of U.S. banks saying they tightened their credit card lending standards remained relatively unchanged from the February loan officers' survey, which looked at the last three months of 2008, even while the percentage that reported tightening their policies on other consumer loans actually decreased. Based on the Fed's survey, nearly 60 percent of banks say they tightened credit card lending standards in the first quarter. Meanwhile, consumers' credit scores took on greater importance, with about half of banks saying they "reduced the extent to which credit card accounts were granted to customers who did not meet their bank's credit-scoring thresholds." Additionally, "Roughly 55 percent of the respondents, a somewhat higher proportion than in the January survey, reported having raised minimum required credit scores on credit card accounts over the previous three months."

At the same time, credit card limits were increasingly trimmed, as "about 65 percent of banks, compared with 45 percent in the January survey, indicated that they had lowered credit limits to either new or existing credit card customers."

Analysts say banks in a tough spot
While the Fed continues to watch for signs that its more recently introduced initiatives have encouraged consumer lending, analysts expressed little surprise that cardholders found it difficult to secure loans. "I think it's pretty clear that banks continue to focus on protecting themselves from further credit losses," says Keith Davis, a research analyst with Farr, Miller and Washington in Washington, D.C. "Considering the regulatory backdrop -- which continues to become more onerous -- they are not able to price for risk at they have in the past."

"It may be that in Q1 of this year there was more deterioration in credit cards than other types of loans. So it may be that credit cards are being viewed as more risky by banks," Di Natale says.

Banks, experts foresee further challenges
Recent data show that banks have reason to worry about risk. Reuters today reported that credit bureau Equifax said 4.7 percent of payments on bank-issued credit cards were at least 60 days late in March, an increase of 38.3 percent over March 2008. Asked about their expectations for credit card charge-offs and delinquencies in 2009, about 77 percent of banks say that loan quality for plastic is likely to "deteriorate somewhat" this year, while nearly 13 percent say that credit card loan quality is likely to "deteriorate substantially." Charge offs occur when lenders conclude they are unable to collect a debt and remove it from their financial accounts, while delinquencies involve credit card accounts that are more than 30 days past due.

Experts say that Fed initiatives aimed at boosting lending, like the Term Asset-Backed Securities Loan Facility (TALF), could prove themselves in the second-quarter survey of senior loan officers. "It will be interesting to see what, if any, effect that has. And that should show up in the next report," Di Natale says.

Still, lenders won't have an easy time making everyone happy. "Banks are faced with a conflicting set of objectives here," Davis says, noting that regulators have tasked them with both strengthening their own balance sheets even as they lend freely. "It's impossible to achieve both those things. When you are short capital, you're not going to go out and extend a ton of loans," he says.

Compare small business payment methods

For a home-based business, the only thing more important than attracting customers is getting paid.

Gone are the days when the one-person company operating out of the spare room had but two options: cash or checks. Today's in-home entrepreneurs have more choices, from credit cards to PayPal to branded "shopping cart" programs.

"Realistically, there are many, many options," says Don Rhodes, director of risk management policy for the American Bankers Association. "A lot of it depends on the nature of the business."

Here are today's four major payment methods for home-based businesses.

Cash
With a local clientele that you can look in the eye, "cash is obviously the best way to get paid," says Melissa Campagnelli, editor-in-chief of eM + C, an e-marketing and commerce magazine, and author of "Open an Online Business in 10 Days."

The great thing about cash: You don't have to pay middleman fees, and -- barring counterfeiters -- worries diminish. Checks don't bounce and credit cardholders don't try charge-backs.

Three caveats:

• Keep accurate books showing who paid, when and for what.
• Get a separate business account to make accounting easier.
• Report every cent to the IRS.

Checks
If you provide a monthly service or your customers are local, checks are another way to go.

Getting a business checking account is like getting a personal one, but in this case, banks have different pricing schedules and may ask to see your business's registration or incorporation documents.

Checks are easier to track than cash. But occasionally, one bounces. The business lesson: Never release merchandise until the check clears. Otherwise, you will be out both goods and your fee.

If you get a rubber check for services you've already performed (like cleaning or dog grooming), the usual recourse is a few letters or phone calls. Then you have to make a decision: Is it worth it to keep pursuing payment? Further remedies include payment requests from a lawyer or filing a claim in small claims court.

The cost: the fees associated with a business checking account and losses from any bad checks.

Credit cards
"If you want to do an Internet business, you have to accept credit cards," says Joel Elad, proprietor of 10-year-old NewComix.com, owner of Real Method Consulting, and author of a book about selling online. "It's the lifeblood of the Internet."

But credit cards present a host of challenges to small businesses. Many owners believe that their sales are too small to justify accepting credit cards. Others may be leery of new security regulations that require merchants taking personal financial information to have layers of security to protect the data.

Years ago, when Tony Bates operated a small online store, Internet security was simpler. These days, merchants who accept credit cards must adhere to the Payment Card Industry (PCI) Data Security Standard, which means answering a 200-plus-question form "I consider myself reasonably technically savvy, and there's no way I could answer that thing," says Bates, now chief operating officer and partner in PSC, a consulting firm that specializes in payment security and compliance.

In a time of tightening credit, home-based entrepreneurs may also worry about qualifying for a merchant account. "If you're an individual, they will look at your personal credit," says Rhodes.

There are a number of ways businesses can arrange to accept credit cards.

You can go through a merchant services provider -- a middleman who will set up and service the accounts in exchange for a fee. The provider may offer data security, fraud protection, accounting services or credit card processing.

Some Internet hosting services will integrate card processing into the suite of services they offer to small businesses. There are also third-party payment option providers, such as PayPal, that offer merchant accounts allowing buyers to pay with credit cards.

For a fee, PayPal will process the cards and handle data and security Merchants receive the customer and shipping information -- plus the payment. "For the small business owner, the first choice I recommend is PayPal. They offer one of the easiest methods to take credit cards," Elad says.

PayPal
Formerly consigned almost exclusively to eBay, PayPal now stretches out across the Internet.

"There are not a lot of minuses," says Rick Segal, author of a book on online retail business. While he offers the method, the number of his clients who use it "is very minute," he says.

How it works for a merchant: You apply for a PayPal account. Once you receive it, you link it to an existing business bank account. When someone buys an item, PayPal processes the payment, and you're notified so that you can ship the merchandise. Then, on a regular (but varying) basis, PayPal sweeps that money into your bank account.

With certain types of accounts, merchants can also accept credit cards. The upside for businesses: You don't have to apply for a merchant account or worry about setting up special security to handle data. Unknown to the buyer, the transaction is processed by PayPal. The merchant gets only the buyer's order and shipping information, but none of the financial data.

"It may be more expensive, but the whole PCI issue is removed," says Bates.

Merchants pay a fee based on the amounts that pass through the account, plus a transaction fee. Like credit cards, the more business you do, the lower your rate.

The downside: As with regular PayPal accounts, some merchants feel that the return policies favor the customer. In those cases, they say PayPal will remove the money in question from their accounts and they have to haggle to get it back.

Hammering out the right deal
"One thing I've found over the years is that really everything is negotiable," says Jeremy Shepherd, CEO of PearlParadise.com and author of "How to Start a Home-Based Online Retail Business." "Taking your first offer is not the best deal."

Comparison-shop. Question your own bank, merchant service providers and third-party payment systems.

While you're bargaining, watch the long term. "What happens if you're successful?" says Bates.

With most payment options, fees will decrease as your sales increase. When you start grossing more than $5,000 a month and definitely when you get to $10,000, consider offering credit cards through your own merchant account rather than through PayPal, says Elad. Then again, PayPal rates will drop, so price it out and decide which will better suit your needs, he says.

"It depends on how your customers want, and are willing, to pay you," says Paul Edwards, co-author of "The Best Home Businesses for People Fifty+." "Getting paid is as essential as getting the business in the first place."

Feds: Close rate-hike loopholes in credit card rules

Federal credit card regulators are taking steps to close potential loopholes that, if left unaddressed, could allow card issuers to get around limits on when interest rates can be increased on existing credit card balances.

In proposed rules publish May 4 in the Federal Register, regulators are seeking public comment on "clarifications" to the sweeping credit card rules finalized in December 2008. Those rules limited interest rate hikes on existing consumer credit card balances to four circumstances: when a cardholder is more than 30 days late paying a bill, when an introductory APR or teaser rate ends, if a card has a variable interest rate or after the first annivesary of a new account. Issuers must give 45 days' advance notice of changes to accounts. (See: What the new credit card rules mean for you.)

Extending consumer protections
The proposed clarifications make it clear that APR's also cannot be increased:

• On balances of closed accounts. As currently written, the rules apply to open accounts.
• When an account is acquired by another credit card issuer (such as when one bank buys or acquires another or purchases their credit card portfolio).
• When the balance on the account is transferred to another account with the same issuer.

"For example, an institution would not be permitted to increase the rate on a credit card balance because the account has been closed," according to a Federal Reserve release on the changes. The notice was jointly issued by the Fed, the Office of Thrift Supervision, which regulates savings and loan associations, and the National Credit Union Administration, which regulates credit unions.

Regulators also note: "The acquisition of an account does not involve any choice on the part of consumers, and the Agencies believe that consumers whose accounts are acquired should receive the same level of protection after acquisition as they did beforehand."

Deferred interest changes
Other clarifications involve deferred interest programs offered by many retailers and card issuers. They are advertised with "no interest payments until" some future date.

According to the Fed, "Institutions and retailers may continue to offer deferred interest and similar programs, but these programs are subject to all of the protections in the final rules. For example, if a consumer makes a purchase under this type of program, the terms governing interest charges on that purchase cannot be changed through a "hair trigger" or "universal default" rate increase. In addition, institutions and retailers must comply with enhanced disclosure requirements."

The public has until June 4 to comment on the proposed changes. According to the Fed, the revisions do not affect the implementation time line for the federal rules. Issuers still must comply with the new federal rules by July 1, 2010.

"Since publication of the two rules, the Agencies have become aware that clarification is needed to resolve confusion regarding how institutions will comply with particular aspects of those rules," according to the notice.

To comment on the changes, go to the Federal Reserve's Web site.

Fed: Please limit remarks
The last time the Fed open its Web site for comments on credit card rules, it received a record 66,000 comments from consumers, bankers, credit unions, thrifts, consumer groups and elected officials. The Fed noted in its announcement that the new comment period is not opening the floodgates for general comments about the need for credit card reform and asked those submitting comments to focus only on the proposed clarifications.

Public comments sought by regulators
The public has until June 4 to comment on the latest revisions to federal credit card rules. To comment, go to the Federal Reserve's Web site.

"The Agencies emphasize that the purpose of these rulemakings is to clarify and facilitate compliance with the final rule, not to reconsider the need for -- or the extent of -- the protections that the rule affords consumers. Thus, commenters are encouraged to limit their submissions accordingly," according to the notice.

The latest Fed rule changes raise the question of whether members of Congress -- who are working with President Barack Obama -- will incorporate any of the clarifications into legislation currently under consideration on Capitol Hill. The Credit Cardholders' Bill of Rights passed by an overwhelming 357-70 vote in the U.S. House of Representatives on April 30. The Credit Card Accountability, Responsibility and Disclosure (or Credit CARD) Act (S. 414) may be up for debate by the full U.S. Senate late this week or early next week.

The legislation in both the House and Senate largely mirror the federal rules, but also include additional provisions for protecting minors and veterans and adding requirements for studying the impact of the legislation of availability of credit. Lawmakers said they wanted codify the federal rules into law so they would be more difficult to revise.