Asset-Backed Securitizations fuel the credit card industry by allowing credit card issuers to originate loans, sell the assets in bulk to investors, then service the debts for a fee. You can read all about the complex world of Asset-Backed Securities in this recent Mercator Advisory report.
Bloomberg reports on a complicated lawsuit which may add a new dimension to the $563 billion consumer market:
- A pair of lawsuits targeting entities that JPMorgan Chase & Co. and Capital One Financial Corp. use to bundle credit-card loans into bonds could threaten the future of the $563 billion market for debt backed by consumer obligations.
- At issue is whether credit card interest rates can be considered usurious.
- A Civil War-era piece of legislation has long shielded national banks from having to comply with state regulations, some of which cap the maximum rate on loans at as little as 5%.
Civil War-era legislation? POTUS 16, Abraham Lincoln, was in office. There were 34 states. The U.S. Gross Domestic Product was $10 billion (compared to the current $19.4 trillion). And the U.S. was beginning to issue an organized currency system.
At the center of the lawsuit: State usury rates (full table of state usury rates can be found in this CUNA.org table).
Opposing thought:
- The defendants say the suits are baseless because banks still maintain customer relationships and charge interest — even if they’ve bundled rights to receive the interest into securities.
- Should the plaintiffs prevail, the ruling would chill the market for bonds tied to consumer loans, industry groups say, forcing banks to keep more risk on their balance sheets and stifling their ability to extend.
Asset-backed securities carry large volumes of packaged debt. As of 2018, auto loans accounted for $223 billion, student loans for $171 billion, credit cards for $124 billion, and unsecured consumer loans at $30 billion.
- The plaintiffs — a group of New York credit-card users paying interest rates on their balances in excess of the state usury limit of 16% — are seeking class-action status for the cases.
- S. consumers pay an average interest rate of 17.1% on their credit-card debt, according to the Federal Reserve. In 2015, the Second Circuit Court of Appeals — which hears cases from New York, Connecticut, and Vermont, ruled that banks’ shield from usury laws doesn’t apply if a lender writes off bad credit card loans and sells the accounts to a non-bank debt collector.
It remains to be seen where this will go, but expect an update at the end of September when Capital One has the right to motion for dismissal.
Until then, ponder the relevance of America in 1865. Life was more straightforward but undoubtedly primitive.
Overview by Brian Riley, Director, Credit Advisory Service at Mercator Advisory Group
