8:06 a.m., April 9, 2009----The current economic crisis could have been avoided if borrowers were more informed about the financial choices they make, Ric Struthers, president of Bank of America Global Card Services, said at the University of Delaware on Tuesday, April 7.

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“It all starts with financial literacy and it's young people in grade school, middle school, high school and college,” Struthers said. “We need to spend more time educating them about fundamental financial tools: balancing their checkbook, thinking about their own income statement. If they have a part-time job, what percentage goes to savings, spending, charity, etcetera.

“That's really important. If we had done that many years in the past, especially in the mortgage industry, we wouldn't be having some of the problems we have today. People would be paying a little more attention to the loans that they signed up for .... Instead of just getting engaged in the excitement about buying a new home, they are thinking about what their commitment is going to be for the next 15 or 30 years."

Struthers was speaking about “Managing Consumer Lending Through Troubled Times,” during a seminar for Delaware high school teachers organized by James B. O'Neill, director of UD's Center for Economic Education and Entrepreneurship (CEEE).

Struthers also discussed the series of measures that have been implemented to stabilize the financial industry, including the requirement of a “stress test” for major banks, the creation of a toxic asset fund, the Troubled Asset Relief Program (TARP), and the Unfair and Deceptive Acts or Practices (UDAP), credit card rules that regulate how credit card issuers price risk, determine grace periods and allocate payments between low interest and high interest portions of balances.

Struthers explained that the Bank of America, which has borrowed $45 billion from the government through what is commonly referred to as the bank bailout, paid $400 million in interest in February and is on track to pay another $700 million in May, with a projected total of $3 billion in interest this year.

“A lot of taxpayers are thinking, I believe, that this is free money, but it is not free money. It is money that we are paying interest on,” Struthers said. “All the companies that borrow money are paying interest, and it is a considerable sum.”

Struthers pointed out that while UDAP regulations seem to be consumer friendly, disallowing the adjustment of interest rates based on the borrower's circumstances will limit the amount of money available to lend, while the requirement that credit card payments be applied first to high interest balances means that “you won't be getting solicitations in the mail for zero-interest balance transfers.”

Struthers said that although the U.S. economy experienced significant declines in the Gross Domestic Product toward the end of 2008, a trend that is expected to continue for part of this year, low interest rates are helping the mortgage industry, in which Bank of America is now actively involved through its acquisition of Countrywide Financial Corp.

Using the example of a $250,000 mortgage, Struthers said a refinancing that lowers the interest rate from 6 percent to 4.5 percent saves about $300 to $400 a month that can be used to spend, pay down debt or added to savings, which are growing across the country.

“These lower mortgage rates are really, really helping and I think they have a much bigger impact than even the tax breaks,” Struthers said. “A tax break of $60-70 a month is not going to be significant enough to move our economy.”

Struthers explained that although the unemployment rate stands at 8.5 percent, the credit card industry also pays attention to the underemployment rate, which includes the number of people who are working part time but want to work full time. That number, he said, stands at 15.6 percent, with the worst effects being felt in California, whose unemployment rate was 10.5 percent in February.

“My parents always said to me 'You should always have three months or six months worth of savings in case something happens.' I would encourage you to tell your students they ought to have six months to 12 months worth of savings in case something happens because this is a time when people are out of work for 15 weeks, out of work for 27 weeks ... that's growing to be a higher number each month,” Struthers said.

Struthers said positive indications in the housing market, with housing starts rising by 22 percent last month, suggest that more people are starting to buy new homes, which is one of the leading indicators. However, banks have experienced a decline in revenues and interest income, as well as large charge-offs for bad debt along with accrued interest and fees, he said.

In order to assist credit card holders, Bank of America has discontinued automated credit line increases and shifted to more direct communication with staff to evaluate the customers' circumstances and update their financial information. The bank has also started cutting the credit lines of some inactive cards.

“Statistically we can show when those folks activate they have a credit loss of somewhere, depending on the part of the country they live, between 20 and 30 percent. Every 30-40 percent of the people that are activating that are going to have some sort of a problem,” Struthers said.

Other measures taken by the bank are modifications of mortgages and increasing awareness of financial options, including credit-counseling services.

Struthers expressed optimism for the future and said the financial industry will emerge from the crisis with more responsible lenders and investments banks, as well as more prudent consumers and investors, but some smaller and regional banks will fail.

“The more we can do to educate young people about the importance of financial literacy, the better off we will be in the next five, 10, 15 years,” said Struthers, who lauded the success of the “Keys to Financial Success: An Introduction to Personal Finance” program offered to Delaware high schools by the CEEE and sponsored by Bank of America.

Article by Martin A Mbugua
Photo by Duane Perry