Credit card reform may stall consumer lending efforts

An employee at a bookstore returns a credit card and a receipt to a customer in this file photo.

NEW YORK (Reuters) - Efforts by the Federal Reserve to stimulate consumer loan growth and reopen the securitization market may hit a snag if new legislation aimed at regulating credit card issuers constrains lending.

Limiting credit card companies' ability to price in borrower risks may actually lead to decreased credit and thwart government programs created to revive lending, such as the Fed's recently launched Term Asset-Backed Securities Loan Facility, or TALF.

"The government on the one hand is trying to restart the securitization market but on the other hand Congress is zealously putting forth legislation that will not allow credit card firms to price the risks of their books, which basically cuts off access to consumers," said Janet Braggs, ABS analyst at Dwight Asset Management in Burlington, Vermont.

Congressional panels are to meet this week to discuss credit card legislation aimed at cleaning up unfair and deceptive practices that have slapped consumers with unexpected fees and rate hikes.

"The whole idea is that we want to be prudent going forward. We want responsible lending and we want responsible borrowing," Ron D'Vari, chief executive officer at NewOak Capital in New York, said of the legislation. "This is the only way the market will get back to stable equilibrium, because right now, credibility has been tainted pretty badly."

Reforms are likely to result in lower revenues for credit card issuers, already in financial crisis as the U.S. economy struggles to emerge from recession.

"We need a certain amount of consumption to help drive the economy and the more that they legislate to put in rules that will not allow the credit card companies to appropriately price risks, the more they will not extend risks," said Braggs.

Analysts say about 40 percent of consumer lending comes from the securitization market, which allows credit card issuers to remove debt from their books and issue securities backed by those assets. Lenders can then make new loans.

The Fed, through its TALF program, aims to unclog credit at the consumer loan level and revive ABS issuance, which was nearly shut down by a credit crunch and soaring funding costs late last year.

Under a debut program in March, Citibank sold $3 billion of credit card securities. The Fed provided $2.8 billion in loans to investors for their purchase.

John McElravey, an analyst at Wachovia Securities, said limiting credit card issuers' ability to price customer risks is a risky scenario.

"It's somewhat contradictory given the environment that we're in right now with losses (on credit cards) rising. With risks rising, it would be appropriate for banks to be raising their risk-based pricing," said McElravey. "What this probably means is that they won't lend as much as they would have in the past," he said.

Delinquencies breached all-time highs in January, according to Fitch's latest Credit Card Index results. Prime credit card delinquencies hit a record high of 4.04 percent through the end of January.

The latest numbers point to even higher default rates and worsening consumer credit quality measures in the coming months, Fitch said.

"As unemployment goes up there's no question you're going to see a rise in delinquencies," said Braggs.

(Additional reporting by John Poirier in Washington; Editing by Dan Grebler)