The article on page 3 in the Sept. 26 issue [“Portfolios Can Gum Up the Merger Works”] did the industry a service by pointing out oft overlooked difficulties in merging credit card programs in an overall credit union merger. In addition to what was discussed in the article, I’d also point out that there are significant compliance risks in such a merger due to little understood complexities of CARD Act.
Most critically, the surviving credit union needs to understand that there is only a six-month window to bring the acquired credit card program’s terms in line with the existing program’s terms. If it does not do that (keeping in mind that the credit card program is typically shuffled to a lower priority status give all else required in a merger), it must maintain ongoing tracking and management burdens based on the practices of the portfolio owner prior to the merger. That information is often unavailable and virtually guarantees a compliance issue in many instances.
If, hopefully, during the six-month window the acquiring credit union does review and reprice the entire portfolio in a manner consistent with their current practices, there are still impacts that might not be anticipated. First, this may result in significant price reductions and earnings impacts that were not contemplated in the original merger valuation. Second, in many cases it is not even practical to reunderwrite those accounts as the information typically required for underwriting a new account is not available in a merger (applicant income, for example), or if available, this implies that a review of all historic paper applications is suggested. Third, this can cause a complex fixed-to-variable or variable-to-fixed change of terms. Such situations can alienate card holders and create disproportionate noise in an otherwise sensible merger.
The worst-case scenario is a merger where the credit union neither gets the information regarding past repricing practices from the merged-in institution (and therefore cannot track repriced accounts) nor does it actively review and reprice the acquired portfolio within six months of merger. In such cases it is unclear what compliance issues could be flagged, the remedies a regulator may require, or potential penalties or liabilities.
There is no evidence that our regulators are actually able to parse through these situations and details. There appear to be no instances of a credit union cited for violating CARD Act in any way. But it is important that your readers understand these additional merger risks, which survive indefinitely, and manage the process accordingly.
Timothy R. Kolk