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Credit Card Charge-Off Rates

posted by Adam Levitin

It's great to be a permanent addition to Credit Slips. This blog has become a really great forum for discussing credit and debt issues, and I’m looking forward to contributing to the conversation. It's a nice way to start a new year.

As it is New Year's Eve, people are making resolutions, including about their finances, and that puts me in the mood to think about how to measure the effect of the BAPCPA on bankruptcy and credit. (Happy New Year, btw).

One way to measure the effect of the BAPCPA is to look at credit card charge-off rates. Credit card issuers have to charge off debts that are 180 days delinquent or otherwise uncollectable, such as by a bankruptcy discharge. Below the break are two graphs (my apologies for the HTML layout issues), one showing historical credit card charge-off levels, and the other the percentage of those charge-offs related to bankruptcy.

Bankruptcy_charge_offs_3 As the first graph shows, the percentage of charge-offs due to bankruptcy spiked,not surprisingly after the passage of the BAPCPA, and then dropped sharply a couple of months after the effective date of the act. It’s been climbing since July 2006, however, and is basically back at pre-BAPCPA rates.

The total level of charge-offs has a similar pattern, but gross charge-offs have not yet reached the rates of the years just before the BAPCPA was enacted.

Charge_offs_rates_3

My interpretation of this is that whatever in terrorem effect of the BAPCPA had on keeping people from filing is over. A major initial effect of the BAPCPA was to keep people from filing for bankruptcy. Some people thought they could no longer file, while others' filings were delayed by the increased complications the filing process. My reading of the charge-off data is that this effect was a one time deal and does not appear to be a lasting effect. BAPCPA might still force more chapter 13s (although the early data is showing it to be fairly ineffective) and limit what credit card debt can be discharged, but that bankruptcy charge offs are at pre-BAPCPA rates indicates that the in terrorem effect is over. The lower gross charge-off levels can likely be attributed to the hangover from the mortgage bubble—as housing values rose and people refinanced, they took out cash and paid down their card debts. Lower gross charge-offs might be the lingering result of that. But what we’re seeing overall are mounting credit card charge-offs, which might indicate (not surprisingly) that mortgage problems are trickling over into other areas of consumer debt.

I’m curious if any readers have thoughts about what produced the spike in charge-offs around 2001. Is this just reflecting economic conditions as a whole or some change in card issuance patterns (such as greater subprime lending) or something else (changes in accounting rules, e.g.)?

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Comments

I could be wrong here, but the spike in charge-offs from 2001-2003 probably stemmed from people who participated in the boom from 1998-2000, and borrowed to support their lifestyles and investments. I was a bond manager at the time, and I remember that it was an unusual period. The charge-off statistics were skewed to those who were better off.

How are charge off rates determined? Is it all self-reporting by the credit card companies? I have a feeling that credit card companies are following the saving-and-loan model and maintaining bad loans on the books to avoid negative financial reporting. Could the spikes in reporting of charge-offs coincide with other good new or bad news? Management builds up the numbers and reports them there is other greater news--hoping no one will notice the charge-offs? I have no evidence, but I suspect that credit card charge-offs will make the sub-prime mortgage mess look trivial.

The graph suggests the spike was in 2002 through about 2004. The recession that started in late 2001 may account for some of this effect due to job displacement and reduced wages.

Chargeoff rates spiked in 01 - 02 due in part to the economic ripple effects of 9/11 and also the job losses in telecom and tech. For example, the unemployment rate rose to 6% in 02. If you use google or EDGAR to read the SEC filings of collection companies in early 02 you'll see them reporting these reasons for the increased losses.

For Mark above, credit card chargeoffs are mandated by bank regulations as soon as an account become 6 months delinquent.

Why people keep trying to evaluate a consequence of bankruptcy or as we know it BAPCPA and fail to understand that credit card companies took a escalated hit after 10/17/05 in charge off is simple. Banks were and are required to accelerate charge off of an account if it is statused bankrupt. So with the flood of filings that occured pre 10/17/05 charge off levels increased dramatically. This also reduced delinquencies. So when comparisons are attempted to show the increase trends from 2006 to 2007 one is not comparing apples to apples.

Why is it not apples to apples to look at the percentage of charge-offs due to bankruptcy? Of course the total charge-off rate spiked because of the flood of pre-BAPCPA filings. But I'm not following Raymond Bell's comment about why comparing the current percentage of charge-offs that are related to bankruptcy with the percentage from before the BAPCPA's passage wouldn't be apples to apples. Or, for that matter, comparing current with pre-BAPCPA passage total charge-off rates.

Does anyone know if credit card companies are required to charge off accounts (at the 180 day delinquency) or it simply a suggestion. Are creditor's legally allowed to keep habitually delinquent accounts on the books?

No, it is not required that cards are charged off after 180 days of delinquency, although that is certainly the industry norm. In my experience (I negotiate settlements with credit card companies on behalf of consumers), some will charge off accounts after 210 days of delinquency. The main company that does this is Discover. Others are very steadfast about honoring the 180 day deadline (ie Citibank), while the majority charge off accounts the last day of the month the account becomes 180 days past due

Paul, that's incorrect. Since 2000, the FFIEC's Uniform Retail Credit Classification and Account Management Policy requires open-ended accounts to be charged-off when 180-days delinquent. Likewise, bank capital adequacy requirements define "default" as any exposure 180 or more past due for revolving and residential mortgage debt. This means that banks have increased capital requirements for these exposures. They are welcome to charge-off debts before then, however. (See, e.g., 12 CFR Part 3, App. C for national banks).

The only explanation I can think of for Discover using a 210-day time to charge-off is that they are using a different standard for off-balance sheet (e.g., securitized) transactions. As far as I can tell, there is nothing beyond GAAP governing charge-offs of off-balance sheet debt. The federal banking regs' charge-off requirements are for retail and wholesale exposures, but those are defined to exclude securitization exposures. This raises the question of what we can make of charge-off stats, when over 60% of card debt is securitized (Mark Furletti at the Philly Fed has a great paper on this).

I have observed that there are a large number of people who are driven into bankrupcy for credit card debts that have been keep in the spiral of negative amitorization, and whose balances bloat up to two to three times the actual purchase despite continued payments ....(classic example Ruth Owens v Discover Bank). My question is how is it that this type of account could be kept and not charged off as required by the uniform retail credit mgt policy. If an account is over the limit (be it by purchases, or more likely in case such as these, due to habitual heaping on of fees and usary interest rates) by it's very definition and account which is over the limit is delinquent.Many times these accounts are not charged off for years (not the required 180 days).
An account which continues to grow (without the remedy of returning it to on under the limit status) meets any criteria I have seen in account management policy , be it the fdic, the ooc or fed reserve and according to their policy should be required to be charged off. In many cases these accounts have not been charged off , and the creditor has continued to take payments while allowing the balance to remain in this negative status and even double or triple the balance. Any thoughts as to how this is allowed to happen?

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