The FDIC on Wednesday shut down NextBank's securitized portfolio of 800,000 credit card accounts - rendering the cards useless - and invited other Visa banks to offer balance transfers to the more creditworthy customers.
The move was the biggest of its kind in the agency's history and represented an acknowledgement that there would be no buyer for the NextCard Inc. subsidiary after months of wrangling with potential bidders, bondholders, Visa U.S.A., and the portfolio's trustee.
The FDIC said the last straw was an early-amortization trigger in the portfolio that occurred Wednesday. It was then determined that losses in the portfolio had reached a point where all credit card payments would be used to pay off bondholders, and that no more money would come in to fund new purchases.
"The FDIC could have chosen to lend money to the receivership" but opted not to, said George Alexander, the agency's marketing manager. "To the extent there is a significant percentage of losses in this portfolio, that is money that would be lost to the Bank Insurance Fund.
"It would not be prudent for the FDIC" to make such loans, Mr. Alexander said.
The agency sent letters and e-mails to NextCard customers on Monday and Tuesday to inform them that their cards would no longer work and their rewards points were voided. Still, some cardholders will likely learn at the point of sale that their cards have been deactivated. NextCard's customer service line offers only a recorded announcement.
Two other credit card operations that have been shuttered in recent memory, but none of nearly as large as NextBank.
• In March the FDIC closed Net First National Bank of Boca Raton, Fla., which had specialized in Small Business Administration loans and secured credit card accounts. Of Net First's 286,000 accounts, 135,000 were active.
• In 1998 the FDIC shut down the credit card portfolio of BestBank of Boulder, Colo., but it was able to sell those accounts to Credit Store of Sioux Falls, S.D., which itself is now threatening to file bankruptcy.
Since February, when it was named as NextBank's receiver, the FDIC has marketed the credit card portfolio widely, but has been able to sell only the approximately 200,000 accounts NextBank held on its books. The remaining 800,000 accounts, with more than $1 billion in receivables, were bundled in a security with Bank of New York as trustee.
The poor quality of the loans, along with the complexities of buying the interest in the security, made the sale difficult, Mr. Alexander said. Although the FDIC originally predicted it would sell the loans by May, it only received two bids - from CompuCredit Corp. of Atlanta and First National Bank of Omaha, a division of First National of Nebraska. Both bidders issued a requirement that the FDIC hand over the loans along with a cash payment and take back nothing in return.
CompuCredit, which specializes in subprime credit card loans, formed a marketing alliance with NextCard a year ago to offer credit cards to online applicants NextCard rejected, offering interest rates as high as 34%. Neither CompuCredit nor First of Omaha returned a call by press time.
"None of the parties that looked at this trust were interested in acquiring the receivership interest" or the obligations that went with it, Mr. Alexander said. "You have the obligation to fund new receivables in the initial revolving period even if you aren't getting enough new charges, and to continue to service the trust" for the next three years.
NextCard pioneered the concept of immediate approval for online credit card applications, giving customers a line of credit they could use online immediately, even before they received a card in the mail.
David B. Watson, the chairman of Merrick Bank of South Jordan, Utah, which bought the approximately 200,000 on-book NextCard loans for $126 million, said that he had looked over other NextCard loans but had decided not to bid on them. The Internet origination of the loans presented some problems, Mr. Watson said, but some positives as well.
"We took that into account in our due diligence," he said. "A concentration of channel is always a risk. It also has some potentially positive aspects of being computer-literate folks, with access to PCs. We think we can service them well online."
Mr. Watson said Merrick Bank will integrate the NextCard accounts into its own portfolio and has not contacted cardholders yet but will within the next 30 days.
As to the rest of the accounts, the FDIC, working with Visa, has approached other banks to offer new accounts and balance transfers to NextCard customers. Several banks - which neither Visa nor the FDIC would name - agreed to do so, but only to cardholders whom they deemed creditworthy. Those plans were just finalized, and customers may get e-mails or phone calls from issuers in the near future, Mr. Alexander said. "We tried to make sure to the extent possible we could arrange for new credit," he said.
The rising chargeoff rate in NextCard's portfolio, which reached 16.61% in June, triggered the early amortization. The FDIC and the trustee went to bondholders to ask for a waiver of the early amortization, but bondholders declined to give it. A waiver might have bought the FDIC some more time to look for other solutions. It received word last Friday, July 5, that early amortization would be triggered as of July 10, and it began sending out letters to affected cardholders Monday.
NextCard holders will be responsible for paying off the loans on their cards but will not be able to spend any loyalty points they have earned or to use the cards for further purchases.
Any fee-based services, such as NextCard's Credit Guard credit insurance, were canceled as of Wednesday, the FDIC Web site says. Claims that are already in progress will continue to be paid, it said.
The FDIC mailed 800,000 letters to cardholders on Monday, and sent 500,000 e-mails on Tuesday, explaining the situation, but on Wednesday a NextCard cardholder who had received neither found it difficult to get information on her account.
Calls to the account's customer service number go directly to a recording. The recording says that all NextCard credit cards should be destroyed, and that customer service can provide no additional information other than to direct cardholders to a NextCard Web page that answers a list of questions on the shutdown.
That advice does not apply for the approximately 200,000 accounts held on NextBank's books that were purchased last week by Merrick Bank of Utah. That sale is expected to close in September, and those cards will continue to function, according to the FDIC.
