Advanta/FDIC Agreement Might Prevent Servicing Transfer

Advanta Bank Corp. entered into two regulatory agreements with the Federal Deposit Insurance Corp. (FDIC) effective on June 30.
 
The first agreement — a stipulation and consent to the issuance of and order to cease —requires Advanta to continue to service its managed credit card accounts and receivables, including those owned by the Advanta Business Credit Card Master Trust.
 
Bank of America/Merrill Lynch analysts think that although this should diminish the potential negative impact of a servicing transfer, it might also limit ABS investors’ ability to replace Advanta as the servicer under the trust’s documents.
 
The first agreement also mandates deposits remain fully insured. It also has a list of provisions that are subject to the approval of the FDIC. This includes the submission of a strategic plan and budget providing for the orderly discontinuance of deposit-taking operations; a plan for Advanta to achieve and maintain sufficient capital; an acceptable, comprehensive liquidity contingency plan; and, at all times, a maintenance of the current Tier 1 leverage capital ratio at a level of no less than 5% and a total risk-based capital ratio equal to or greater than 10%, among other provisions.
 
The second agreement — a stipulation and consent to the issuance of desist and an order to cease and desist, order for restitution and order to pay — relates to the bank’s alleged violations of consumer protection and banking laws. Advanta has disagreed with certain assertions made by the FDIC in relation to the cash-back program. Under the agreement, Advanta must pay a civil money penalty of $150,000 and restitution to eligible customers of up to $14 million related to the cash back program, and up to $21 million related to pricing strategy.
 
These limits exclude restitution related to charge-off accounts.
 
BofA/Merrill analysts said that the restitution will be treated as dilution, and therefore absorbed by the transferor interest.
 
In light of the current economy, they expect that closing the accounts will add to the level charge-offs, as the credit card accounts have lost their utility to cardholders. Based upon the limited history, charge-offs could potentially fall within a range of 35% to 45%. Both the monthly payment rate and the portfolio yield can be expected to decline, to mid-to-high single digits from the high-teens, and to the low-to-mid teens from the low 20s,   respectively.
 
A lack of additional fees combined with the loss of 400 basis point  to 450 basis points from the portfolio yield as a result of the closed account may also place downward pressure on the yield. As a result, the quality of servicing might suffer, but according to the first agreement, will still be available.