Last May, when the biggest change in consumer credit protection in over 40 years was passed, the economy was still on a downward spiral. One year later, with consumer spending up 3.6% from the same time last year, effects of the Credit Card Accountability, Responsibility and Disclosure Act of 2009 (CARD Act) finally have some spending behind it.
Though many lenders, buying groups and retailers reported seeing little change in day-to-day business due to the CARD Act, several legislative adjustments were made. As of Feb. 15, promotions less than six months in length will be discontinued—it is the end of the 90 days with no interest offering. “No pay” pro- motions will also be discontinued and require no advertising or offers to consumers after Jan. 3 of this year.
Also effective in February, card issuers cannot increase annual percentage rates on existing balances for one year after the account is open, with the exception of several contingencies.
“The CARD Act of 2009 requires lending institutions to take into consideration the debt load of the consumer and the ability to repay,” said Jim Seger, GE Money Response’s vice president of flooring. “Previously, lending institutions used models to determine how much to lend, however this is now being legislated.”
Some see it as less of change but really more a tightening of the reins. “The criteria has not changed, just become tougher,” said Chris Davis, president and CEO of the World Floor Covering Association (WFCA). “One Texas retailer told me that three years ago, 80% of his credit applications were approved for financing, whereas now it is only 30%. Remember, [at that time], the main criteria for obtaining a subprime home mortgage loan was the ability of the borrower to fog a mirror—if you were breathing, someone would give you a loan.”
Jump forward to a very different scenario two years ago when credit approval was non- existent and banks put a freeze on advances. “Credit is still tight and the small business owner can’t get a line of credit at the bank any easier today than two years ago,” said Olga Robertson, president of FCA Network.
As with all new things, it has taken some time to work out the kinks of the new laws. “There was confusion at the retail level about the impact of the law and a learning curve on how to sell and advertise no pay programs,” said Jon Logue, co-CEO of Alliance Flooring. However, he saw little change in the number of consumers being approved.
While Abbey Carpet reported credit approvals at a slight drop, others experienced little to no change. FCA Network declared an 89% approval rate for financing from Wells Fargo, and Alliance found no change in approvals or in the amount financed, due to its end user’s good credit ratings.
Most retailers FCNews spoke with have also not been affected by CARD Act’s recent legislation. Worldwide Wholesale in Edison, N.J., did not see a decrease in long-term financing, said Darren Braunstein, nor did Nebraska Furniture Mart in Omaha, Neb., according to Gary Cissel.
“Most homeowners who finance carpet aren’t having any trouble,” said Jim Mudd, president of Sam Kinnaird’s in Louisville, Ky.
Consumers are still taking advantage of financing programs, but the new consumer model has changed the product mix. “Consumers in general are buying lower grade, less expensive merchandise; credit is available, it just costs more,” said WFCA’s Davis. “Since financing is more expensive, one way to counter that is to select less expensive products or look for additional value, such as sales, bargain installation prices or other perceived enhancements.”
Buying groups found 12-month programs with no interest payments as the most popular programs. “The consumer credit longer-term volume is starting to increase as the economy gets better and retailers feel more comfortable about selling minimum pay credit,” Logue said.
Abbey also had a positive outlook. “We still see financing as a traffic driver, deal closer and positively impacting the average ticket,” said Ted Dlugokienski, vice president of finance. “We are also encouraged by the fact that credit limits appear to be adequate to meet sales needs.”
Seger added, “Because home equity lines are not as readily available as in the past and major credit card lines have been reduced, many homeowners— now more than ever—see the value of private-label credit programs and long-term deferred interest payment options. We see continued growth and opportunity in the flooring industry.”