US Treasury Dept ban on no payment deferred financing

Does anybody have any details about this Treasury Department letter that looks like it bans any no-payment deferred financing, like lots of furniture and electronics stores use?

Yes, no payment offers have gone the way of the dodo.

This, IMO, is a good thing...

This will hurt sales cause people to lose their jobs. Sounds like lucky people will be high fiving each other after getting laid off and looking forward to watching The Price is Right and Judge Judy on their 79 weeks of unemployment.

Kalun47 said: tripleB said: Yes always works out well when government blocks free markets.

free markets only work well if the people are education about finance, which the majority of them are not. hence I shudder when I pass a Rent-A-Center or the like..

Marketing that preys on gimmicky credit finance sales is not marketing but psychological thievery.

sell an honest item, for honest price with honest terms or get out of the biz. Your kind is not welcomed if you will sell at any ethical cost.

Technically it's not a ban; the letter is very carefully worded. It's a reminder that minimum payments should be imposed by rule. It's unclear what would happen if the savings institution in question didn't do that. Would they force 90% reserve on those debts?

Also, it only covers savings associations. Do store credit cards fall into that?

All my 0% BT offers require a minimum payment...so what 0% promotions by savings institutions is this covering?

Guess I'm gonna be paying someone's unemployment down the road rather than paying for a new TV. We should exchange our congresspersons living room TV with that unemployed person, see who they like watching best.

mannyv said: Also, it only covers savings associations. Do store credit cards fall into that?
The requirements aren't new, this is just a friendly "reminder" about the requirements from 2003. Since those requirements were jointly issued by the Office of Thrift Supervision, the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System, and the Federal Deposit Insurance Corporation, they'll apply to most financial institutions.

Stores can't and don't issue credit cards. Store-branded cards are issued by banks. In rare cases, the bank may be a subsidiary of the store itself (in which case it's usually a Utah-chartered industrial bank), but more commonly the store has a relationship with a major bank.

tripleB said: Yes always works out well when government blocks free markets.I can tell that $100K tuition didn't raise the economics understanding above HS level. When the question about government action is asked, the only correct answer is "it depends".

In this case, the action is clearly positive.

One key tenet of safe and sound retail lending is the monthly minimum payment requirement. Regular monthly payments add structure and discipline to the lending arrangement, provide regular and ongoing contact with the borrower, and allow the borrower to demonstrate and the bank to assess continued willingness and ability to repay the obligation over time. Conversely, the absence of a regular payment stream may result in protracted repayment and mask true portfolio performance and quality.

I am going to write a letter to Treasury to encourage that all banks and lenders verify that the customers are brushing their teeth each night. Daily dental hygiene is a key tenet for long term oral health.

In addition, I would be a big supporter for the lenders read a bedtime story to the borrower's kids. Bedtime reading is a key tenet for the future education of the children.

Kalun47 said: tripleB said: Yes always works out well when government blocks free markets.

free markets only work well if the people are educated about finance, which the majority of them are not. hence I shudder when I pass a Rent-A-Center or the like..

The lack of education is the fault of the whom now? Did the store somehow prohibt the person buying the goods from learning about finance?

If I go in and sign up for one of these 'bad' deals. the only person I would blame is the one I see in the mirror.

ifyouhavetoask said: So when does Rooms To Go
file bankruptcy?

Their entire business model seemed to depend on selling young, foolish people cheap furniture with no payments for 2 years. Then, they would immediately sell that debt to Citi, who would later get a default judgment and/or trash the fool's credit.

Seems to me that no one will be lining up to buy RTG furniture if they actually have to PAY for it. Sure enough, it was a Rooms To Go
radio ad that got me wondering enough to look this up. They said in the ad that the Federal Government is forcing them to change their financing incentives, but wouldn't-you-know-it, we still have 2 more weeks where we are allowed to run this promotion. Buy now and have no payments until 2013!

I also found a letter written by a retailers lobby (which Rooms To Go
was part of) that was strenuously objecting this action to Secretary Geitner. It seems they thought it would force them to alter their business model to drastically.

brettdoyle said: This will hurt sales cause people to lose their jobs. Sounds like lucky people will be high fiving each other after getting laid off and looking forward to watching The Price is Right and Judge Judy on their 79 weeks of unemployment.I would argue the jobs of lending to clueless consumers who can not pay back the loans to buy overpriced crap they don't really need isn't a very productive use of the resources.

Didn't you express the same sentiment in this post?

a lot of our GDP is phony nonsense.

70% of our GDP is based on consumer spending which requires asinine policies like encouraging consumers to live paycheck to paycheck, ultra low interest rates, insane amounts of government borrowing and huge stimulus programs, baby boomers not saving enough for retirement, squandering the social security trust fund, government bailing out credit card companies, trying to force banks to make imprudent loans with depositors money that aren't likely to be paid back, paying people to buy cars\houses, etc.
So now the government tries to do the right thing, then somehow the "phony nonsense" aren't so phony anymore?

tazzy531 said: Yes, I understand the benefit of this regulation to some (ie.. people that are being taken advantage of). But regulations like this also restrict the freedom and flexibility of those that are educated, understand the risk, and can manage their own affairs. Else, you're just lowering the entire society to the lowest common denominator.

For example, in this situation, the solution isn't to restrict lenders/retailers for allowing these no interest plans. The solution should be to provide financial education to the general public.

What's the difference between a regulation like this and one that requires everyone entering a pool to wear swimmies (whether you can swim or not)?

Addendum:
And speaking of tuition... Why not implement this on the largest 0% interest deferred payment plan out there... student loans?
A number of points in the memo were:
Regular monthly payments add structure and discipline to the lending arrangement -- Students would benefit from the lesson in financial discipline
provide regular and ongoing contact with the borrower, -- Another thing that would apply to student loans
and allow the borrower to demonstrate and the bank to assess continued willingness and ability to repay the obligation over time. -- Same here...
Conversely, the absence of a regular payment stream may result in protracted repayment and mask true portfolio performance and quality. -- Also a problem of student loans.Let me break out my case-by-case evaluator on the 3 things you mentioned above:

1. banning of non-payment financing for retail purchase: it is a good policy, because [you fill in the reasons]
2. requiring everyone to wear swimmy in a swimming pool: it is not a good policy because [you fill in the reason]
3. require payment of student loans when the students are in school: I think if the federal loans were to require an interest only payment in school that would/could be a good thing. As an investor of these type of bonds, I have the misfortune of knowing such a private loan lender who did precisely that. However since it was the only one, they got terribly adversely selected (by borrowers who could not get "better" products).

The main point is, there isn't an overarching principal to say the market or the government is always better, I wish there is one.

Is this similar to my Discount Tire card that gave me no interest for 6 months, which requires minimum monthly payment, but with deferred interest? I pay off the balance before the expiration so I never got hit with the deferred interest, but I can imagine some finance-challenged fellow citizens getting hit by the deferred interest, which is at 24% APR.

This recently screwed me, as I have a "store card" for my auto mechanic shop, and my recent required purchase couldn't have been put under one of these no-payment interest-deferred plans. I've always paid off the purchase before the interest was charged, and it was a nice guilt-free tool to have for required auto repairs when I didn't have the cash. Boooooooooooo.

Banks and thrifts can't do this anymore. Theoretically an unregulated non-bank financing company can still do it. The question is where they can find the funding?

NYCII said: I would argue the jobs of lending to clueless consumers who can not pay back the loans to buy overpriced crap they don't really need isn't a very productive use of the resources.

Do you not agree some people can and have done this wisely?

Just screwing the rest of us who used bestbuy's money instead of ours.

nycll said: tripleB said: Yes always works out well when government blocks free markets.I can tell that $100K tuition didn't raise the economics understanding above HS level. When the question about government action is asked, the only correct answer is "it depends".

In this case, the action is clearly positive.

how excatly is this action 'clearly postive'?

Like others pointed out, there are clear negatives.

you brushed of the swimmies example, but is it really that different? The logic behind requiring these payments is 'stupid people might do something stupid and that will suck for them'.

Well the same logic would apply to those that try to swim without knowing how.

Would there be a clear benefit if everyone at a pool had to wear a swimmy? well yes, there would be far fewer people drowning.

Lets get the goverment right on that, after all theres a benefit.

donotdrinkPBR said: Why would anyone on FWF concern themselves with how this might affect a Rent A Center? I'll be pissed that I can't take advantage of free financing for items I would otherwise pay cash for, but instead leave the money in rewards checking and pay in full when the 0% financing ends.

All 0% financing means is that they're selling it for more than it's worth. Offer them 10% less than what they're trying to sell you for 0% finance, and you'll get a lower total cost without the hassle of arbitrage while they get cash without the risk of default and 1yr negative cash flow. However, this doesn't work for cars since the financing normally comes from the mfg and not the dealer/retailer.

nycll said: OS, of course some people can handle the zero payment offers wisely. But the majority of the targetted customers can and when their loans and credit blow up their is a negative spillover. Like brettdoyle sail this particular practice being discussed is not a good use of economic resources. Hence banning it is a good thing.

Can't make the same argument for requiring swimmies...maybe michael1980' strawmen army can wear them.

drowning is not a good use of life. Maybe we should ban swimming, or swimming pools. Or any other activity that migth result in a negative outcome.

But what strawman is being used here? Its a similar example. The only reason you dont want to answer the swimmies question is because it means you relize that to ban this pratic is absurd.

Or is goverments role now to mandate the postive outcome of individuals?

My earlier posts explained how this pratctice is worse than a zero sum game between the 2 parties. Hence banning it is a good thing, economically. How one party can screw up elsewhere doesn't change the validity of this reasoning.