The Federal Reserve, the Obama administration, and Congress were all commended by IMF, the Washington-based lender that has helped rescue the economies of Pakistan and Iceland, for their efforts to salvage the economy with a “well-targeted” stimulus package.

In fact, the report showed that the stimulus package will raise the gross domestic product, the value of goods and services produced in the United States, by 1 percent this year and by 0.25 percent in 2010, pointing to the likelihood of a “gradual” recovery.

Despite the IMF predicting a solid upturn in the economy in the next year, it still sees the U.S. unemployment rate topping 10 percent next year and sees a successful exit plan from the financial rescue programs as essential to the country’s recovery.

“The combination of financial strains and ongoing adjustments in the housing and labor markets is expected to restrain growth for some time, with a solid recovery projected to emerge only in mid-2010,” the staff review of the IMF report stated.

The IMF projects that public debt will nearly double from 2009 to 2011 to 75 percent of the gross domestic product, putting significant pressure on the Treasury bond rates, which are currently low, making it easier for prospective homebuyers to get low mortgage rates.

Find information on debt relief and other debt management options at ThinkDebtRelief.com

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Along with the fee cancellation – which could either be considered an act of kindness for the nation’s unemployed or an attempt to appease lawmakers who are increasingly scrutinizing banking practices – Bank of America says it’s going a step further to help customers. It’s also rolling out a program to help customers who have lost their jobs.

Under the program jobless customers could have their monthly account maintenance fees waived for three months and could have the fees they’ve incurred for having insufficient funds or for overdrawing on their account be refunded. The program may also allow for fees to be removed from jobless customers’ accounts.

The bank’s announcement comes as Congress and the Federal Reserve are considering reforms to the way banks handle these fees. Legislation before Congress, if approved, would require banks to notify consumers making a transaction at an ATM or a point-of-sale terminal that the transaction could trigger an overdraft, giving consumers the choice to cancel the transaction or accept the overdraft service and associated fee.

One Fee Down, Other Fees Remain

Although Bank of America will be canceling its overdraft fee increase, the bank is still going ahead with plans to assess a one-time fee of $35 on customers whose accounts remain overdrawn for more than five days. The bank is also raising monthly maintenance fees on certain accounts, as well as upping the balance requirements needed to avoid fees, The Wall Street Journal reports.

These policy modifications follow on the heels of changes the bank implemented in April when it cancelled a $25 discounted overdraft fee for first-time overdraft offenders and raised the maximum number of times a customer could incur a fee for overdrawing in a single day.

Overdraft fees, said Mike Moebs, chief executive of Moebs $ervices Inc., are a major source of revenue for banks and credit unions, who this year alone are expected to rake in more than $40 billion from the fees. Financial institutions make as much as 75 percent of their consumer-fee income from overdraft and insufficient funds charges.

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According to the Federal Reserve, a record 4.2 percent of consumer loans were at least 30 days delinquent in the fourth quarter and another 4 percent of consumer loans went into default during that same period. Data from the American Bankers Association and the investors service firm Moody’s Economy reflects an economic outlook for the rest of the year that isn’t much better: More consumers are paying late or not at all on their home, car, and credit card loans.

“The wheels have fallen off the economy,” says James Chessen, chief economist for the American Bankers Association. “There have been significant job losses and that translates into people having a hard time paying their bills.”

Unemployment to Blame

This year alone, the recession has claimed more than 2 million jobs, bringing the total number of jobs lost to the recession since it began in December 2007 to a walloping 5.1 million. And along with these job losses has come an increase in the number of loan defaults as families find it harder to pay their bills, says Joel Naroff, founder of Naroff Economic Advisors, an economic consulting firm.

With the added financial stress of income loss, more consumers, in a reversal of their typical behavior, are choosing to repay their credit cards and auto loans before their mortgages. Many of these consumers are underwater in their homes – owing more on their home than it’s worth – and may be giving up on paying their home loans to focus more on repaying their other debts, says Mark Zandi, chief economist at Moody’s Economy.

But the situation is expected to worsen, Zandi says. Charge-offs – uncollectable credit card balances that a bank writes off as a loss – should reach 10 percent by the first quarter of 2010, up from the current rate of 6.3 percent.

Zandi says, “I don’t think there’s … any loan category that will avoid this storm.”

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By the end of 2008, almost 6 percent of all credit card accounts were at least 30 days late, the highest percentage of delinquent accounts the Federal Reserve has recorded since it began tracking credit card defaults in 1991.

These defaults are forcing card issuers to incur significant expenses both at the time of collection on delinquent accounts and later when the companies have to write off these accounts due to non-payment. To recover a portion of their projected losses before they occur, these companies are choosing to pass the buck to at-risk cardholders through higher fees and penalties.

Consumers may not see relief for penalty rates or for late or missed payments until 2010 when new Federal regulations go into effect that will alter the way credit card companies do business, The Washington Post reports (“Accelerating Debt,” March 22, 2009).

Currently, credit card issuers are getting away with charging an average late-payment penalty rate of almost 27 percent, according to a 2008 survey by advocacy group Consumer Action, and may end up collecting as much as $21 billion from cardholders as a result of these higher penalty fees, estimates Robert Hammer, chairman of the consulting firm R.K. Hammer.

Elevated fees “are a recognition of risk going up,” Hammer says. Financial institutions “are not going to watch their costs go up and take no action.”

Fees Double For Some

Earlier this year, American Express raised its late fees from $29 to $39 for corporate cardholders who were 45 days late on their payments, USA Today reports.

Wells Fargo customers who withdraw funds from their credit cards inside the bank branch have seen their fees double from $10 to $20, and likewise those who withdraw credit card funds from the Wells Fargo ATM have seen their fees double from $5 to $10.

In January, JPMorgan Chase levied a $10-a-month fee on about 400,000 cardholders who had carried a high balance for more than two years and who had made little effort to pay it off. Minimum payment requirements for these customers jumped from 2 percent of their account balance to 5 percent, forcing cardholders to pay more than double what they owe on their accounts each month.

“[Card issuers] have been very much damaged by this economic downturn and tightening of credit and all the losses that their banks have faced,” said Bill Hardekopf, chief executive of LowCards.com, a credit card review site. “If you as a consumer do anything to increase your risk, you will probably very quickly be hit.”

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Currently, credit card companies, based on a 1978 Supreme Court decision, are only required to abide by the interest-rate restrictions enforced in their home state. Many financial services companies have taken advantage of this state-by-state enforcement and established headquarters in South Dakota and Delaware, states that don’t have restrictions on how much interest banks can charge.

Sanders’ bill would overrule that court decision, imposing the 15-percent interest rate cap on credit cards and consumer loans issued in all states, and would limit the fees banks can charge. His plan is modeled after a similar interest rate cap implemented under the Federal Credit Union Act nearly 30 years ago, which was set at 15 percent and later increased to 18 percent in 1987 by the National Credit Union Administration.

“If a rate cap has worked for credit unions all these years, it could work for our friends in the financial industry as well,” Sanders said.

A New Era for Credit Card Rates

Sanders believes his legislation will be met with staunch resistance from banking industry lobbyists, but he says it’s time for financial service companies to end their “culture of greed.”

Credit card companies are taking billions of dollars in taxpayer bailout money, and, in some cases, receiving zero-interest loans from the Federal Reserve, all while ratcheting up fees and interest rates. Citigroup credit card holders, for example, have been told their rates could go as high as 30 percent if they miss a single payment, and JPMorgan Chase customers who have large balances may have to start paying $10 monthly fees.

Sanders says the free-wheeling rate hikes and fees currently implemented by banks is “loan sharking,” and these banking tactics are making it even more difficult for struggling consumers to pay down their debts.

“This is very significant because right now there are millions and millions of people who are paying outrageously high interest rates on their credit cards. We think enough is enough,” Sanders said. “At a time when things are so bad, they need relief in terms of these interest rates.”

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The proposed government agency, the Financial Product Safety Commission, would also help consumers make informed decisions regarding mortgages, credit cards, retirement accounts, and other types of financial products, Reuters reports (”U.S. Lawmakers Propose Financial Products Watchdog,” March 10, 2009).

“This will be a new regulator that will focus like a laser on financial products and financial products alone,” said Sen. Charles Schumer, D-N.Y., during a press conference Tuesday. “The Federal Reserve was supposed to do this, but they were asleep at the switch.”

Sen. Dick Durbin, D-Ill. argues a financial safety commission is needed because the nation’s current financial regulatory system has broken down and has “diminished consumer protections and eroded consumer confidence” (”Durbin’s Big Idea: Consumer Oriented Financial Product Safety Commission,” Chicago Sun-Times, March 10, 2009).

The safety commission would enforce the same types of consumer protections for financial products that are currently being enforced by the Food and Drug Administration for prescription drugs, by the Environmental Protection Agency for drinking water, and by the Consumer Product Safety Commission for children’s toys, Gannett reports. The agency would have rule-making authority but would coordinate enforcement with other federal regulators that oversee consumer financial products.

Elizabeth Warren, chairwoman of the congressional panel responsible for tracking the distribution of the Troubled Asset Relief Program’s $700 billion, first pushed for the creation of the financial safety commission two years ago. Had the banking and lending industry been forced to employ proper safeguards before the economic crisis, she says, the proliferation of excessively risky financial products that has contributed to the global economic meltdown would’ve been prevented.

“Consumer financial products were at the front end of the destabilization of the American system,” Warren said at a news conference. “When you have good safety standards, you have a floor, and the competition is then consumer-friendly competition.”

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To help offset their record losses, some of the nation’s largest lenders Capital One, Citibank, and HSBC are raising interest rates for millions of consumers with certain credit cards.

Capital One informed some of its borrowers that it is raising interest rates to 17.9 percent from 12.9 percent – a 5-percent increase – in order “to reflect the current risk environment,” says bank spokeswoman Pam Girardo. For consumers who owe $8,000 in credit card debt – the average debt amount an American household carries – the interest they would accrue on that credit card with the 17.9 percent interest rate, if they made no new charges on the card, would amount to $1,577 if they paid off the card in two years, or $3,260 if they paid off the card in four years.

JPMorgan Chase is tacking on a $120-a-year fee and is more than doubling the minimum payment – from 2 percent to 5 percent of the credit card balance – for hundreds of thousands of borrowers who have low fixed-interest rate cards. JPMorgan gave some of these borrowers a choice between accepting a higher interest rate of 7.9 percent on their promotional balance of 3.9 percent or making a higher minimum payment on top of the new monthly fee.

While the Federal Reserve and other bank regulators have approved new credit card regulations meant to protect consumers from interest-rate increases like these and other unfair credit card practices, the new rules aren’t scheduled to take effect until July 2010.

“We’re all going through an economic crisis right now, and we need reforms that will help consumers now,” says Bill Hardekopf, CEO of LowCards.com.

Sen. Charles Schumer, a member of the Banking, Housing, and Urban Affairs Committee, says the “type of tripwire pricing” lenders are engaging in “is predatory and must end.”

But Ken Clayton of the American Bankers Association cautions lawmakers that any additional crack down on banks could “send further chills in a market already in a deep freeze.”

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The Fed’s initiative, titled the “Homeownership Preservation Policy,” will specifically target $74 billion in mortgage assets the Fed acquired as part of last year’s bailout of Bear Stearns and American International Group and will allow the Fed to extend mortgage loan modifications to homeowners who are 60 days or more behind on their mortgage payments.

This is the first step the central bank has taken under the TARP law to help prevent foreclosures and to “promptly” review mortgages that would qualify for modification. Already, 850,000 homes have been foreclosed on and another 1 million homes are expected to be at risk of foreclosure in 2009.

“This is a very big deal,” said Barney Frank, chairman of the House Financial Services Committee. “It reflects the understandable desire of the Federal Reserve to have some cooperation.”

Principal Write-Downs Key to Program’s Success

The Fed says it will notify all homeowners whose mortgages it holds in assets if they’re eligible for a mortgage loan modification under the new policy, but the Fed has yet to announce just how many homeowners could stand to benefit. Eligible homeowners could see their interest rates lowered, their loan terms extended, or their principal loan balances reduced if the loan adjustments would offer them “a better long-term payoff than foreclosure,” suggests The Washington Post (”Fed Adopts Program to Stem Foreclosures, Jan. 28, 2009).

Unlike other third-party lenders who offer mortgage loan modifications, the Fed will specifically push for principal balance reductions under its own modification program, especially for those homeowners who owe more than 125 percent of their property value. Private lenders who have been doing home loan modifications have been reluctant to reduce principal balances on mortgage loans because of the potential revenue loss for the lenders.

Alan White, an assistant professor at Valparaiso University of Law, said these “principal write-downs are still the critical issue” to stemming the tide of home foreclosures. The Fed’s new strategy, if successful, could soon serve as a model for other mortgage holders.

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Banks are closing these inactive accounts in an effort to minimize the risk of having financially-strapped consumers who, in a worsening economy with already limited credit options, may choose to run up balances on long-unused credit cards that still have available credit.

J.P. Morgan Chase is lowering the credit limits of customers who the bank perceives to be “risky,” and Bank of America is “closing accounts with zero balances that have been inactive for more than a year and may adjust customers’ credit lines up or down” based on “their risk profile and performance,” a Bank of America spokeswoman told The Wall Street Journal.

American Express Co., US Bancorp, Washington Mutual Inc., and Wells Fargo & Co. are also reducing the credit limits of cardholders who carry high balances or who’ve made late payments, according to a July credit card survey by Consumer Action, a national consumer education and advocacy group.

In all, about 20 percent of banks have reduced credit limits on the existing credit cards of prime borrowers, and 60 percent of banks have lowered limits for nonprime borrowers, according to a Federal Reserve survey of senior loan officers from October.

With lower credit lines and less access to credit, consumers could see their credit scores drop and may find it harder to get a loan.

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The Fed’s new purchasing program will be overseen by The Federal Reserve Bank of New York, which will work with four investment managers — BlackRock Inc., Goldman Sachs Asset Management, PIMCO, and Wellington Management Co. — to purchase more than $500 billion in mortgage-backed securities from government–sponsored mortgage holders Fannie Mae and Freddie Mac.

This initiative to purchase securities came after the U.S. Treasury decided against its original plan to use its authority under the $700 billion bailout plan, the Troubled Asset Relief Program, to buy high-risk, subprime mortgage securities from the nation’s ailing banks. Treasury officials decided, instead, to use the money to invest directly in national banks whose books have been burdened by hundreds of billions of dollars in losses and write-downs.

The central bank says it plans to release further information about its new mortgage-securities purchases later this week. The Fed, of its own accord, had already bought nearly $100 billion dollars of mortgage-backed securities prior to the creation of the program.

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