In early October, the Consumer Financial Protection Bureau announced it would implement long-awaited new rules aimed at limiting the power of payday and title lenders. The bureau director, Richard Cordray, has been a vocal critic of the nonbank lenders, and the agency has been working on new rules to regulate lenders in this space for several years.
“The CFPB’s new rule puts a stop to the payday debt traps that have plagued communities across the country,” Cordray said in a statement. “Too often, borrowers who need quick cash end up trapped in loans they can’t afford. The rule’s common sense ability-to-repay protections prevent lenders from succeeding by setting up borrowers to fail.”These rules will apply to both brick-and-mortar and online lenders.
What changes are happening
Lenders are going to have to prove that a borrower can afford to repay the loan
One of the major rules is a “full-payment test” that will determine if borrowers can “afford the loan payments and still meet basic living expenses and major financial obligations.” Payday lenders typically don’t run a credit report on borrowers and only usually look at a pay stub to determine if you qualify.
Most consumers end up unable to repay the loan when it comes due, usually a couple weeks later. According to the CFPB, more than 80 percent of all payday loans are rolled over or renewed. The same is true for title loans, with 20 percent of borrowers losing their vehicle to title loan companies. Because there is little regulation on interest rates, these loans usually have APRs of 300 percent or more.
However, borrowers can avoid the full-payment test if the lender meets the following requirements: It must make 2,500 or fewer covered short-term or balloon-payment loans per year and earn no more than 10 percent of its revenue from such loans.
It won’t be as easy for lenders to access funds in borrowers’ bank accounts
Another issue is that many payday and title loans require access to the user’s bank account, where payments will be automatically debited. If the user does not have the amount available in his or her account, the account will be overdrawn. This usually results in the consumer being charged overdraft fees on top of the hefty interest already going to the payday lender.
According to the CFPB, “these borrowers incur an average of $185 in bank penalty fees, in addition to any fees the lender might charge for failed debit attempts, specifically, a late fee, a returned-payment fee, or both.”
One of the rules that the CFPB installed is a limit on attempted debits, so the lender has to get authorization from the consumer to debit the account more than twice. The CFPB also hopes to limit the amount of times a loan can be extended, as a way to decrease the fees the borrower must pay.
Borrowers can repay debt more gradually
To avoid the full-payment test, payday lenders can lend up to $500 if they structure the payments so the borrower can pay them off “more gradually.” However, there will be strict rules in place for this type of loan.
For example, lenders won’t be able to offer gradual repayment plans to customers who have recent or outstanding short-term or balloon-payment loans. They also can’t make more than three loans in quick succession and can’t make loans under this option if the consumer has already had more than six short-term loans or been in debt for more than 90 days on short-term loans over a rolling 12-month period.
Few options for borrowers in need
The CFPB’s long-awaited rules may help protect borrowers from predatory lenders, but don’t solve a key issue: There just aren’t that many viable alternatives for people who need to borrow small sums quickly.
A report from the Milken Institute, “Where Banks Are Few, Payday Lenders Thrive,” found that neighborhoods with more banks tend to have fewer payday lenders, and vice versa. There was also a strong correlation between payday lenders and neighborhoods with higher African-American and Latino populations as well as a greater instance of payday lenders where there are fewer high school and college graduates.
Jennifer Harper, who researched predatory lending in Chattanooga, Tenn., as part of the Financial Independence Committee for the Mayor’s Council for Women, said she hopes there will be a solution for consumers that doesn’t require them to take out a payday loan.
“We want to find an alternative to payday lending that would still allow people to access they need, without those crazy interest rates,’ she said. “Getting that quick access to cash may be fine for that day, but then it really puts a burden on the borrower long-term.”
Jason J. Howell, a certified financial planner and fiduciary wealth adviser in Virginia, agrees with the new regulations taking place.
“The CFPB is taking the opportunity to protect the most vulnerable consumers: lower-income borrowers that are typically ‘un-banked,’” he said. “The proposed rule would reduce fees that make payday loans especially hard to pay back; and that could also reduce the issuance of these loans in the first place.”
You may be struggling to pay bills every month, but so are plenty of other people.
The Consumer Financial Protection Bureau on Tuesday reported that 43 percent of American adults struggle to make ends meet, based on the results of a national survey conducted in 2016 on the financial well-being of U.S. consumers.
About 34 percent of all consumers surveyed reported experiencing material hardships — these include running out of food, not being able to afford a place to live or lacking the money to seek medical treatment — in the past year, the bureau said.
In the survey, the bureau asked more than 6,000 participants from all walks of life to answer 10 questions about current and future financial security and freedom of choice, and to give a score from 0 to 100 on each question. The average consumer score was 54 in the survey. Not surprisingly, consumers surveyed said that their financial conditions were closely tied to their level of education, income and employment status, according to the bureau.
Young adults are especially susceptible to financial hardships, the agency found.
Millennials — those age 34 and below — reported an average score of 51 for their financial well-being, 10 points lower than seniors ages 65 and up and three points lower than the national average.
The report, what the bureau calls “the first of its kind,” not only provides a view of the the overall state of financial conditions in the U.S., it also sheds light on how individuals from different demographics are faring financially.
Adults with scores of 50 or below have a high likelihood — more than 50 percent — of struggling to pay bills and of experiencing difficult financial situations, according to the report.
In contrast, those who reported scores of 61 and above had a much lower probability — less than 10 percent — that they would have trouble paying for basic needs.
Savings = stability
Of all the factors examined, the bureau found that the amount of savings and financial cushions is the most important when it comes to disparities in people’s financial situations.
The average financial well-being for adults with savings of less than $250 — the lowest level — is 41. That compares with 68 for people with the highest level of savings — $75,000 or more, according to the report.
Similar differences in scores were seen with the ability to absorb unexpected expenses.
“These findings highlight the importance of savings and other safety nets in helping people to feel financially secure, one of the basic elements of financial well-being,” the report said.
Having some sort of financial knowledge appears to benefit financial well-being.
The survey found that individuals with higher levels of financial confidence, knowledge and day-to-day money management behaviors tend to report better financial conditions.
Apart from the survey, the bureau initiated an interactive online tool allowing consumers to measure their own financial well-being.
7 tips to improve your financial health:
Have “rainy day” cash available. Often, people who feel they are broke don’t have the means to absorb unexpected expenses. We’ve ranked the best options for when you need cash fast. A good rule of thumb is to set aside at least three to six months’ worth of living expenses.
Save. Save. Save. It’s never too early to start saving for retirement. Financial planners often suggest you stash at least 10 percent of your income every month.
Focus on paying down high interest debts. Sometime it makes more sense to pay off debt than to save, especially if you have high-interest debt like credit cards. Here are four fast ways to achieve that goal.
Consider changing your lifestyle. Lifestyle inflation is the ultimate budget-killer — a widespread phenomenon that occurs when people spend more as their incomes increase.
Learn to ignore the Joneses. Focusing on your needs and goals rather than aligning them with the people in your life or in your social media feed is critical to being happy with the state of your finances and your life.
Come up with strategies to help break your negative spending habits. For example, we’ve written about a simple $20 rule that can help break your credit card addiction. Explore other ways to break bad money habits here.
Educate yourself. The more you know about your finances, the better off you’ll be. It doesn’t have to be complicated. Simply using an app to track your spending or asking your HR department for a review of your retirement savings options are good places to start. The key is to engage in day-to-day money management and establish a habit of saving and budgeting.
Tens of thousands of students struggling with insurmountable student loan debt are about to get a little breathing room.
The National Collegiate Student Loan Trusts, a creditor that holds billions in private student loans, reached a settlement Sept. 18 with the Consumer Financial Protection Bureau (CFPB) in which the trusts were ordered to refund at least $21.6 million toward refunds and penalty fees for affected borrowers.
As MagnifyMoney’s Kelly Clay reported in August, National Collegiate sued dozens of former students who had defaulted on their private student loans. But in court National Collegiate failed to prove they owned the loans. This happens often when loans are sold to another lender or otherwise handed to another account manager and paperwork gets lost. Ultimately, the courts dismissed the lawsuits, citing the fact that National Collegiate had no way of proving they owned the debts in the first place.
In the settlement with the CFPB, the trusts agreed to set aside $3.5 million for reimbursements to borrowers who had already made payments after being sued for loans unlawfully. If a student loan lender can’t prove it owns a debt — for example, if it lacks the proper documentation to prove ownership — it can’t legally collect on it. Likewise, if the statute of limitations has passed, the lender can continue to try to collect on the debt, but it can no longer take legal action against the borrower.
Although there are usually limited circumstances under which student loans are forgiven, this ruling may result in many borrowers eventually having their debts wiped out. The CFPB ordered National Collegiate to have each of its 800,000 loans reviewed by an independent auditor, and the trusts will not be allowed to go forward with collection actions on any loans that they can’t prove they own.
“The National Collegiate Student Loan Trusts and their debt collector sued consumers for student loans they couldn’t prove were owed and filed false and misleading affidavits in courts across the country,” CFPB Director Richard Cordray said in a statement.
What does this mean for you?
If you borrowed educational funds from a private lender who sold your debt to the National Collegiate Student Loan Trusts, and you were sued between November 2012 and April 2016, it’s possible you’re due a refund. According to The New York Times, Bank of America and JPMorgan Chase are among the private lenders who sold private student loan debt to the trusts.
StudentDebtCrisis.org, a nonprofit dedicated to higher education funding reform, tweeted: “Thousands of Americans with student debt could see their loans cut under a @CFPB agreement with Wall Street trusts.”
If you’re owed restitution, the company will reach out to you. No action is required on your part. However, if you’d like to make a formal complaint, you can contact the CFPB.
What you can do if you’ve fallen behind on your loan
It can be tough to keep up with your student loan payments. If you’re behind, it doesn’t have to be the end of the world. It takes about nine months (270 days) of nonpayment for a federal student loan to go into default.
But many private student loans default when you are only 120 days late. Sometimes missing one or two payments can send you into default.
So make sure you carefully read your loan contract to better understand what constitutes a default and to know your rights, if you happen to default on your loan.
If you default, don’t panic. While it’s your responsibility to pay what you owe, you have rights, and it is against the law for the debt collector to harass you.
The student loan creditor must provide a written “validation notice” indicating how much you owe, the name of the creditor, what rights you have if you think you don’t owe the debt, and how to obtain information about the original creditor.
You may have options for setting up a repayment plan. Familiarize yourself with the terms of your loan and contact the CFPB if you have concerns about the practices of your lender.
‘I defaulted, and I’ve been sued. Now what?’
If you default on your loan and you’ve been sued, it can be stressful, but don’t give up. You’ve not automatically lost just because the creditor has taken legal action.
Here are four steps to take if you receive a summons.
Stick to the deadlines.
If you ignore the summons or don’t show up in court, this may result in a default judgment against you.
Verify your debt.
Is the amount correct? Is the debt valid? If there’s any discrepancy between what your records show and what the credit agency is alleging, you need to document that.
One way to do that is to send your lender or debt collector a debt verification letter. This is a formal way to ask them to verify the amount, that you are the owner of the debt, and that it’s valid. If they don’t respond to the letter within 30 to 60 days, they must cease attempting to collect the debt.
Know your rights.
Unlike federal student loans, private loans are bound to a statute of limitations. Once that statute of limitations has run out, the lender can no longer take legal action. But that doesn’t mean they’ll stop trying to collect on that debt. And that’s where you should be careful. If you pay even $1 toward an old debt after the statute of limitations is up, it automatically restarts the clock, and the lender can once again take legal action. Find out what the statute of limitations is in your state.
Hopefully you won’t need one, but every situation is different. If you don’t have the money to pay your student loans, chances are you don’t have the money to pay a lawyer.
But if you find yourself in a situation where you really need someone to simplify the complexity of your case and speak to a creditor on your behalf, you may consider consulting a student loan attorney. Private loans are subject to state law, and a licensed attorney may be the best person to help you navigate those waters. The CFPB has a tool that can help you find an affordable lawyer in your state.
A rule that would make it easier for consumers to join together and sue their banks might be shelved by congressional Republicans or other banking regulators before it takes effect.
Members of the Senate Banking Committee announced Thursday that they will take the unusual step of filing a Congressional Review Act Joint Resolution of Disapproval to stop a new rule announced earlier this month by the Consumer Financial Protection Bureau. Rep. Jeb Hensarling (D-Texas) introduced a companion measure in the House of Representatives.
The CFPB rule, which was published in the Federal Register this week and would take effect in 60 days, bans financial firms from including language in standard form contracts that force consumers to waive their rights to join class action lawsuits.
The congressional challenge is one of three potential roadblocks opponents might throw up to overturn or stall the rule before it takes effect in two months.
So-called mandatory arbitration clauses have long been criticized by consumer groups, who say they make it easier for companies to mistreat consumers. But Senate Republicans, led by banking committee chairman Mike Crapo (R-Idaho), say the rule is “anti-business” and would lead to a flood of class action lawsuits that would harm the economy. They also say the CFPB overstepped its bounds in writing the rule.
“Congress, not King Richard Cordray, writes the laws,” said Sen. Ben Sasse (R-Neb.), referring to the CFPB director. “This resolution is a good place for Congress to start reining in one of Washington’s most powerful bureaucracies.”
Congress’s financial reform bill of 2010, known as Dodd-Frank, directed the CFPB to study arbitration clauses and write a rule about them. The rule permits arbitration clauses for individual disputes, but prevents firms from requiring arbitration when consumers wish to band together in class action cases.
Consumer groups were quick to criticize congressional Republicans.
“Senator Crapo is doing the bidding of Wall Street by jumping to take away our day in court and repeal a common-sense rule years in the making,” said Lauren Saunders, associate director of the National Consumer Law Center. “None of these senators would want to look a Wells Fargo fraud victim in the eye and say, ‘you can’t have your day in court,’ yet they are helping Wells Fargo do just that.”
Meanwhile, the new rule also faces a challenge from the Financial Stability Oversight Council, made up of 10 banking regulators. The council can overturn a CFPB rule with a two-thirds vote if members believe it threatens the safety and soundness of the banking system. A letter from Acting Comptroller of the Currency Keith Noreika, a council member, to the CFPB on Monday asked the bureau for more data on the rule, and raised possible safety and soundness issues. Any council member can ask the Treasury secretary to stay a new rule within 10 days of publication. The council would then have 90 days to veto the rule via a vote. It would be the first such veto.
The CFPB rule also faces potential lawsuits from private parties.
How to be sure you’re protected by the new rule
Barring action by Congress, the CFPB rule is slated to take effect in late September 2017, with covered firms having an additional 6 months to comply, meaning most new contracts signed after that date can’t contain the class-action waiver. Prohibitions in current contracts will remain in effect.
Consumers who want to ensure they enjoy their new rights will have to close current accounts and open new ones after the effective date, the CFPB said.
With looming existential threats from both the Trump administration and the federal court system, the Consumer Financial Protection Bureau went ahead on Monday with a controversial rule that will change the way nearly all consumer contracts with financial institutions are written.
The end of forced arbitration?
The rule will ensure that all consumers can join what CFPB Director Richard Cordray called “group” lawsuits — generally known as class-action lawsuits — when they feel financial institutions have committed small-dollar, high-volume frauds. Currently, many contracts contain mandatory arbitration clauses that explicitly force consumers to waive their rights to join class-action lawsuits. Instead, consumers are forced to enter individual arbitration, a step critics say most don’t bother to pursue.
Consumer groups have for years claimed waivers were unjust and even illegal, but in 2011, the U.S. Supreme Court sided with corporate lawyers, paving the way for even more companies to include the prohibition in standard-form contracts for products like credit cards and checking accounts.
How to be sure you’re protected by the new rule
Monday’s rule is slated to take effect in about eight months, meaning most new contracts signed after that date can’t contain the class-action waiver. Prohibitions in current contracts will remain in effect.
Consumers who want to ensure they enjoy their new rights will have to close current accounts and open new ones after the effective date, the CFPB said.
“By blocking group lawsuits, mandatory arbitration clauses force consumers either to give up or to go it alone — usually over relatively small amounts that may not be worth pursuing on one’s own,” Cordray said during the announcement.
“Including these clauses in contracts allows companies to sidestep the judicial system, avoid big refunds, and continue to pursue profitable practices that may violate the law and harm large numbers of consumers. … Our common-sense rule applies to the major markets for consumer financial products and services under the Bureau’s jurisdiction, including those in which providers lend money, store money, and move or exchange money.”
A long road ahead for the CFPB
The ruling was several years in the making, initiated by the Dodd-Frank financial reforms of 2010, which called on the CFPB to first study the issue and then write a new rule. But it almost didn’t happen: With the election of Donald Trump and Republican control of the White House, the CFPB faces major changes, including the expiration of Cordray’s term next year.
Also, House Republicans have passed legislation that would drastically change the CFPB’s structure. Either of these could lead to the undoing of Monday’s rule. When I asked the CFPB at Monday’s announcement what the process for such undoing would be, the bureau didn’t respond.
“I can’t comment on what might happen in the future,” said Eric Goldberg, Senior Counsel, Office of Regulations.
Cordray cited the recent Wells Fargo scandal as evidence the arbitration waiver ban was necessary. Before the fake account controversy became widely known, consumers had tried to sue the bank but were turned back by courts citing the contract language.
Under the new rules, consumers would have an easier time finding lawyers willing to sue banks in such situations. No lawyer will take a case involving a single $39 controversy, but plenty will do so if the case potentially involves thousands, or even millions, of clients.
Consumer groups immediately hailed the new rule.
“The CFPB’s rule restores ordinary folks’ day in court for widespread violations of the law,” said Lauren Saunders, association director of the National Consumer Law Center. “Forced arbitration is simply a license to steal when a company like Wells Fargo commits fraud through millions of fake accounts and then tells customers: ‘Too bad, you can’t go to court and can’t team up; you have to fight us one by one behind closed doors and before a private arbitrator of our choice instead of a public court with an impartial judge.’”
The CFPB and Monday’s rule also face an uncertain future because a federal court last fall ruled that part of the bureau’s executive structure was unconstitutional. The CFPB is appealing the ruling, and a decision may come soon. Should the CFPB lose, it will be easier for Trump to fire Cordray immediately, and companies may have legal avenue to challenge CFPB rules.
On the other hand, enacting the rule now may give supporters momentum that will be difficult for the industry to stop — a situation similar to the Labor Department’s fiduciary rule requiring financial advisers to act in their clients’ best interests. While the Trump administration took steps to stop that rule from taking effect, many companies had already begun to comply, and simply continued with that process.
The U.S. Chamber of Commerce was heavily critical of the new rule.
“The CFPB’s brazen finalization of the arbitration rule is a prime example of an agency gone rogue. CFPB’s actions exemplify its complete disregard for the will of Congress, the administration, the American people, and even the courts,” the Chamber said in a statement.
“As we review the rule, we will consider every approach to address our concerns, and we encourage Congress to do the same — including exploring the Congressional Review Act. Additionally, we call upon the administration and Congress to establish the necessary checks and balances on the CFPB before it takes more one-sided, overreaching actions.”
But consumer groups called Monday’s ruling a victory.
“Forced arbitration deprives victims of not only their day in court, but the right to band together with other targets of corporate lawbreaking. It’s a get-out-of-jail-free card for lawbreakers,” said Lisa Donner, executive director of Americans for Financial Reform. “The consumer agency’s rule will stop Wall Street and predatory lenders from ripping people off with impunity, and make markets fairer and safer for ordinary Americans.”
A plan to repeal major aspects of Dodd-Frank — legislation enacted to regulate the types of lender behavior that contributed to the 2008 economic crisis — crossed its first major hurdle last week when the U.S. House passed the Financial Choice Act.
The bill still has to pass the U.S. Senate and be signed by the president before becoming a law. However, if it does, significant changes would be made to some regulations that might require consumers to pay more attention to their financial decisions.
“[The Financial Choice Act] stands for economic growth for all, but bank bailouts for none. We will end bank bailouts once and for all. We will replace bailouts with bankruptcy,” Rep. Jeb Hensarling (R-Texas), House Financial Services Committee chairman, said in a press release. “We will replace economic stagnation with a growing, healthy economy.”
What’s at stake with the Financial Choice Act, and how does it impact your finances? We’ll explore these questions in this post.
What did the Dodd-Frank Act do, anyway?
Bailouts: After it was implemented in 2010 by President Barack Obama, one of the law’s main pillars was enacting the “Orderly Liquidation Authority” to use taxpayer dollars to bail out financial institutions that were failing but considered “too big to fail” — meaning their collapse would significantly hurt the economy. In addition, Dodd-Frank created a fund for the FDIC to use instead of taxpayer dollars for any future bailouts.
Consumer watchdog: Dodd-Frank also created the Consumer Financial Protection Bureau, an independent government agency that focuses on protecting “consumers from unfair, deceptive, or abusive practices and take action against companies that break the law.”
In one of its most high profile cases to date, the CFPB in 2016 fined Wells Fargo $100 million for allegedly opening accounts customers did not ask for.
The CFPB’s actions against predatory practices in a number of industries, including payday lending, prepaid debit cards, and mortgage lenders, among others, have won the agency many fans among consumer advocates.
“In fewer than six years, [the CFPB has] returned $12 million to over 29 million Americans, not just harmed by predatory lenders or fly-by-night debt collectors, but some of the biggest banks in the country,” says Ed Mierzwinski, director of the consumer program for the U.S. Public Interest Research Group, a Washington, D.C.-based nonprofit that advocates for consumers.
And how would the Financial Choice Act change Dodd-Frank?
No more bailouts: The Financial Choice Act would replace Dodd-Frank’s Orderly Liquidation Authority with a new bankruptcy code. So financial institutions would have a path to declare bankruptcy in lieu of shutting down completely.
Fewer regulations for banks: The act will provide community banks with “almost two dozen” regulatory relief bills that will lessen the number of rules small banks need to comply with, making it easier for them to operate.
A weaker CFPB: It would convert the CFPB into the Consumer Law Enforcement Agency (CLEA) and make it part of the executive branch. The Financial Choice Act also gives the president the ability to fire the head of the newly created CLEA at any time, for any reason, and gives Congress control over it and its budget. These changes will take away much of the power the CFPB holds to monitor the marketplace and pursue any unfair practices.
“It not only took the bullets out of [the CFPB’s] guns, it took their guns away,” Mierzwinski says.
Specifically, he says the CFPB would no longer be able to go after high-cost, small-dollar credit institutions, such as payday lenders and auto title lenders.
However, some experts see benefits from taking the teeth out of the CFPB.
“I personally think that’s a good thing because I think the way that the CFPB is structured is fundamentally flawed,” says Robert Berger, a retired lawyer who now runs doughroller.net, a personal finance blog. “You basically have one person with very little meaningful oversight that can have a huge impact on the regulations of the financial industry.”
The bill also would roll back the U.S. Department of Labor’s new fiduciary rule, which isn’t part of Dodd-Frank, but requires retirement financial advisers to act in their clients’ best interests. It went into partial effect on June 9.
What does this mean to consumers?
If the Financial Choice Act becomes law, opponents say it could mean that consumers will have to be even more careful with their financial choices and who they trust as a financial adviser because there will be less government oversight.
“If you’re a consumer, you’re going to have to watch your wallet even if you have a zippered pocket with a chain on your wallet,” Mierzwinski says.
If the bill passes the Senate, it could still face some hurdles. Any changes to Dodd-Frank regulations would need to be approved by the heads of the Federal Reserve System and Federal Deposit Insurance Corp. and the Comptroller of the Currency.
Financial reform is now being … reformed, and consumers could feel some of the proposed changes almost immediately. So what do the changes mean for your money? Let’s take a closer look, but first, a quick history lesson.
In 2008, in the wake of the economic collapse, Congress passed the most extensive financial reform package since the Great Depression. The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 was designed to give consumers more power and to keep banks from making the kinds of risky decisions that helped lead to the housing bubble.
Last week, House Republicans voted to undo many of the reforms put in place by Democrats in 2010. On a party-line vote, House Republicans passed the Financial Creating Hope and Opportunity for Investors, Consumers and Entrepreneurs Act, or the Financial Choice Act.
The Choice Act faces an uncertain future in the Senate. But Republicans have another path to enact much of what’s in the Choice Act.
The Senate Doesn’t Have to Act for Changes to Be Implemented
This week, the Treasury Department is releasing its own report on reforming financial reform, mandated by an executive order signed in the first few days of Donald Trump’s presidency. Many Choice Act provisions can be accomplished via administrative orders from Treasury, so it’s worth understanding the main tenets of the bill.
In general, Republicans have argued that Dodd-Frank rules have hurt banks, particularly smaller banks, which has reduced competition, ultimately hurting consumers.
“We will make sure there is needed regulatory relief for our small banks and credit unions, because it’s our small banks and credit unions that lend to our small businesses that are the jobs engine of our economy and make sure the American dream is not a pipe dream,” Rep. Jeb Hensarling, (R-Texas), the driving force behind the bill, said in a statement.
Critics say the bill would recreate the pre-bubble atmosphere that led to widespread abuse and economic collapse.
“This legislation releases every bloodthirsty, greedy Wall Street super-predator back onto the American people to feast on our misery, like they did pre-Dodd-Frank,” said Rep. Gwen Moore (D-Wisconsin) during floor debate.
The bill repealing Dodd-Frank is more than 600 pages long. Many are devoted to back-end bank rules, such as how often institutions must pass “stress tests” to prove they aren’t at risk. But the bill also includes measures consumers would feel pretty immediately.
The law would essentially dismantle the CFPB and reconstitute it with far less power as the Consumer Law Enforcement Agency. Instead of having a single leader, it would have a commission — similar to how the Federal Trade Commission operates. Critically, it would not have a dedicated source of funding. Both steps would make the agency more subject to political whims.
The law also prevents the consumer agency from taking enforcement actions against unfair, deceptive or abusive acts and practices — a catch-all category that generally forbids fraudulent activity — significantly narrowing the agency’s ability to file lawsuits on behalf of consumers.
Public Complaint Database Targeted
The CFPB’s consumer complaint center is perhaps the most public manifestation of financial reform. As of March, 1.1 million complaints had been filed, each one requiring an answer from industry. The database is public, so it serves as a kind of search engine for consumers who want to learn about the background of the financial companies with which they do business. It’s a tool that CFPB employees and other regulators use to find potential patterns of abuse. Banks have complained that responding to every complaint — some are indeed frivolous — is a costly burden. More generally, critics say it’s unfair to publish unverified complaints against companies.
“Is the purpose of the database just to name and shame companies? Or should they have a disclaimer on there that says it’s a fact-free zone, or this is fake news? That’s really what I see happening here,’’ said Rep. Barry Loudermilk (R-Georgia) during hearings on reform that made clear elimination of the database would be a priority.
Single-Agency Regulation Changed
Prior to Dodd-Frank, consumer protection was split among 10 banking regulators. Many, like the Office of the Comptroller of the Currency, were unfamiliar to consumers. In some cases, such as with private student loan issuers or payday lenders, it wasn’t clear if any banking regulator had jurisdiction. The CFPB’s one-stop shopping to get redress — often through the complaint database — made obtaining answers easier. Through its various enforcement efforts, the bureau has returned $12 billion to 29 million consumers. Under the Choice Act, many enforcement responsibilities would be returned to their original regulators.
Payday, Arbitration, Auto Lending Rules Rolled Back
After years of study, the agency published rules last year to regulate the payday and title loan industries. Those rules would be eliminated. The Choice Act contains a provision that prevents any federal agency from “any rulemaking, enforcement or other authority with respect to payday loans, vehicle title loans or other similar loans.” (See how loans affect your finances by viewing a free credit report snapshot on Credit.com.)
The CFPB also has spent six years working to eliminate binding arbitration agreements that prevent consumers from filing lawsuits against corporations, requiring them to use arbitration for complaints instead. The Choice Act prevents the agency from making rules about arbitration.
The Choice Act also nullifies a 2013 rule that requires third-party auto lenders — sometimes called indirect lenders — to comply with the Equal Credit Opportunity Act. The rule was put in place because CFPB research alleged that some indirect lenders were charging high loan markups to minority groups.
Fiduciary Rule Eliminated
Efforts to undo reform would reach beyond CFBP rules, however. Another provision in the Choice Act would essentially eliminate the fiduciary rule requiring certain financial advisers to act in the interests of their clients. After a decade-long debate, the Labor Department is set to institute the rule this summer. It will take effect in January, and many financial firms are already abiding by it. The Republican legislation would remove the requirement.
“The final rule of the Department of Labor titled ‘Definition of the Term ‘Fiduciary’; Conflict of Interest Rule—Retirement Investment Advice’ and related prohibited transaction exemptions published April 8, 2016 … shall have no force or effect,” the legislation says.
Risky Mortgages Made Easier
The Choice Act also makes a wide series of changes to rules governing the way banks issue mortgages. The most obvious would be an easing of “qualified mortgage” rules designed to make sure lenders make good-faith efforts to ensure borrowers have the ability to repay home loans. Qualified mortgages don’t have risky elements such as balloon payments or negative amortization. Banks that offer qualified mortgages are exempt from more stringent ability-to-repay requirements. The Choice Act expands the definition of qualified mortgages, making it easier for banks to issue some mortgages.
Enforcement, So Long as the Industry Isn’t Harmed
Finally, and perhaps most importantly, the Choice Act requires the CFPB replacement to consider the impact of any potential enforcement actions on the financial industry when deciding to pursue action against a misbehaving company.
The new agency must “carry out a cost-benefit analysis of any proposed administrative enforcement action, civil lawsuit or consent order of the Agency; and … assess the impact of such complaint, lawsuit or order on consumer choice, price and access to credit products,” according to the legislation.
This dual role — enforcing consumer protections while also ensuring the safety and soundness of the industry — puts regulators in a tough spot. Suing a bank for mistreating customers can hurt the fortunes of that bank, and other banks that might be employing consumer-unfriendly tactics. That can make siding with consumers a serious challenge.
The CFPB was set up specifically to avoid this dynamic, and set up so that fighting for consumer rights was its main task. The Choice Act eliminates this “on-your-side” structure.
Credit cards may be in the wallets of most Americans, but not everyone is happy with their travel companion.
The Consumer Financial Protection Bureau (CFPB) released its monthly snapshot of consumer complaints in the financial services industry this week. The report, which regularly focuses on a different financial product to highlight consumer complaint trends, focused on credit cards and what irks consumers about their plastic friends (or foes, depending on how you view it).
Credit cards represent only about 10% of total complaints to the CFPB, a small amount considering how prevalent the cards are in Americans’ daily routine. That puts them in fourth for the most complained-about financial products, behind debt collection, credit reporting and mortgages.
Here are four of the major credit card complaints that surfaced in the bureau’s review.
1. Disputes Over Fraudulent Charges
Billing disputes were number one on the CFPB’s top credit card complaint list. Of the nearly 100,000 complaints the CFPB analyzed, 17% were over billing disputes. Credit cards often offer purchase protections and chargebacks — tools consumers can use to combat faulty merchandise or high prices — and these tools are rarely offered by debit cards and never offered by cash. But fraud seems to be the source of most complaints, as consumers finding fraudulent charges cite trouble removing or getting re-billed for them.
How to Avoid It: The best way to keep yourself from having to dispute fraudulent charges is to keep your credit card information as safe as possible from fraudsters. Never share your credit card with shady sites that don’t have a “lock” symbol or https:// when taking your data. And even though it’s convenient, avoid letting shopping websites “remember” your credit card info for next time. While some of those sites have excellent security, data breaches are becoming more and more common and credit card info is a literal gold mine for a hacker. (To keep an eye out for signs of identity theft, you can view your free credit report summary on Credit.com.)
2. Rewards Program Murkiness
If you’ve ever owned a rewards credit card, you know that to make the most of your card’s program, you need to read up on all the details (and those details do change). The CFPB found that confusion over how a credit card rewards program works was sometimes attributed to differences between what consumers encountered online and what they were told by customer service representatives over the phone.
How to Avoid It: The CARD Act of 2009 did a lot to make credit cards more consumer-friendly, but little regulation pertained to rewards programs specifically and business credit cards were not included at all in the act’s purview. That means you need to be a careful shopper, as you should be with all financial products — mortgages, business loans, you name it. Before you sign up for a rewards credit card, read the rewards terms carefully — they are often in a separate piece of paperwork from the APR and fee disclosures.
3. Being a Victim of Fraud/Identity Theft
Identity theft/fraud/embezzlement as a category came in third on the CFPB’s list at 10% of all credit card complaints. Many complaints pertained to account activity that the cardholder didn’t initiate, the report said. It points back to that top complaint of fraudulent charges as well — fraud is a problem for consumers as well as credit card issuers too.
How to Avoid It: In addition to keeping your credit card information safe (see tip #1), keep your identifying information safe. To open a new credit card in your name, a fraudster would need to have access to your Social Security number, name, address and other details. Protect that info and you limit your chance of getting got. And because “embezzlement” is included in this category as well, business owners should be sure to have a policy in place if they’re extending a company credit card to an employee. The rules should be clear so you don’t have to go through the painful process of disputing charges with your issuer.
4. Trouble Closing/Canceling an Account
Even though closing a credit card can do some credit score damage, it doesn’t stop consumers who want to avoid the temptation of spending too much or just have too many cards to manage. Roughly 7% of the CFPB’s credit card complaints pertained to consumers struggling to close accounts.
How to Avoid It: Call your issuer directly (you normally have a number on the back of your credit card) and ask to close the account. Be ready though — you’ll most likely be transferred to a department that is specifically going to try to keep you as a customer, perhaps offering a lower APR or a waived annual fee for that year. (Some consumers use this as a tactic to get a better credit card, in fact.) If you’re adamant on closing the card, just stick with your plan and make sure to monitor your email or mail for your last statement. You don’t want to miss the last payment on your card and put a black mark on your credit report just because you thought the card was closed. A credit card with a positive payment history, even though it’s closed, can still help your credit score. But missing a payment will definitely hurt it, and if you have a business credit card, it could impact not just your personal credit, but your business credit scores as well. You can find a full explainer on canceling credit cards right here.
Free markets mean corporations and consumers are engaged in a constant arm-wrestling match over prices and rules governing marketplaces. When President-elect Donald Trump takes office, will the rules of this engagement change substantially?
Already, Republicans are fighting hard to dismantle, or at least disempower, the nation’s newest federal consumer protection agency, the Consumer Financial Protection Bureau (CFPB). But that’s just one of several steps being weighed that could dramatically impact the balance of power between consumers and corporations during the next several years. Trump and his appointees will soon be dealing with everything from net neutrality to robocalls to late fees. Like so much with Trump, it’s hard to know if he stands with traditional Republican positions on these issues, or if he has his own ideas. But clearly, the future of issues ranging from payday-loan regulation and binding arbitration rules to debit card swipe fees are at stake.
Consumer Protections On the Line
The power of federal consumer protection agencies like the Federal Trade Commission (FTC), which fields things like consumer identity theft complaints, tends to ebb and flow based on which political party holds power in Washington, and on the state of the American economy. The economic collapse last decade, combined with the rise of Democratic power in Washington, led to a host of steps taken to reign in what supporters say were abusive practices that hurt consumers, particularly by the financial industry. Financial reform saw passage of the CARD Act, which banned several credit card issuer practices that consumers found frustrating, such as double-cycle billing or seemingly random late fees and interest-rate hikes.
More importantly, the Obama years also saw creation of the first new federal consumer protection office in decades. As Trump takes office on Friday, a battle royale has already developed between consumer groups and conservatives who want to gut America’s youngest consumer-oriented agency. The war of words escalated last week, with opponents of the bureau calling for Trump to immediately remove bureau chief Richard Cordray, calling him “King Richard,” while supporters have promised they have “gone to Defcon One” to protect it.
The CFPB is the brainchild of Elizabeth Warren — then a bankruptcy expert, now a Democratic Senator from Massachusetts. The bureau was designed to pick up where other banking regulatory agencies, like the Office of the Comptroller of the Currency (OCC), left off. Bank regulators like the OCC have the difficult job of serving two masters — both the safety and soundness of the banking industry and the fairness with which consumers are treated. Critics said the abuses apparent during the housing bubble, such as unclear mortgage documents, demonstrated that regulators sided too often with banks and neglected consumer protection. So the CFPB was designed as a consumer-first agency. It was also designed to enjoy independence from industry pressure — it is not subject to Congressional purse string requirements, and its director not subject to removal for political reasons. At least, that was the intention of Warren and Democrats who wrote the legislation creating the CFPB.
A lawsuit that went in the favor of CFPB opponents last fall has, at least for now, paved the way for removal of CFPB director Cordray. The bureau and its supporters plan to appeal the ruling, but Republicans aren’t waiting around for that. They are urging Trump to remove Cordray as soon as he takes office.
“It’s time to fire King Richard,” Senate Banking Committee member Ben Sasse, R-Nebraska, wrote in a January 9 letter to Trump. “Underneath the CFPB’s Orwellian acronym is an attack on the American idea that the people who write our laws are accountable to the American people. President-elect Trump has the authority to remove Mr. Cordray and that’s exactly what the American people deserve.”
Bureau opponents say the CFPB should operate more like the FTC, with a slate of politically-appointed commissioners running things.
Last week, the Trump administration signaled it was leaning toward removing Cordray and reigning in CFPB power by revealing it had interviewed retired Texas Republican Congressman Randy Neugebauer as a potential CFPB chief. In Congress, Neugebauer was a leading CFPB critic, calling its efforts to regulate payday loans “paternalistic erosion of consumer product choices.”
Meanwhile, Rep. Jeb Hensarling, R-Texas, indicated he will move immediately to pass legislation he proposed last term named the Financial Choice Act, which is largely designed to roll back provisions of the Dodd-Frank Financial reform bill. It would eliminate the Volcker Rule, designed to prevent banks from taking some kinds of risks with their own money; it would also remove the Durbin Amendment that limited fees on debit card transactions.
“We were told [Dodd Frank] would lift our economy, but instead we are stuck in the slowest, weakest, most tepid recovery in the history of the Republic,” Hensarling said while supporting the bill last fall.
Bureau supporters are fighting back. Warren held a conference call on January 13 with 3,000 consumer advocates where she rang the alarm about the future of the CFPB and financial reform.
“It’s time to send a message to big banks, payday loan lobbyists and their Republican friends in Congress: The American people are watching,” Warren said, according to a press release from Americans for Financial Reform, an advocacy group. ”We’re going to fight back against any efforts to gut financial reform and to allow big banks and shady financial institutions to once again cheat consumers and put our economy at risk.”
Consumer advocacy groups universally support the CFPB, which says it has returned $12 billion to 27 million wronged consumers since its inception. One group held a “One of 17 Million” event in Washington, D.C. earlier this month.
“We’ve gone to DefCon One on protecting the CFPB because the predatory lending industry and the big Wall Street banks are all demanding the President-elect illegally fire the extraordinary CFPB director Richard Cordray and replace him with one of several industry henchmen who will help Congress eviscerate the successful bureau,” Ed Mierzwinski, program director at the Public Interest Research Group, an advocacy organization, said. “But how do you fire an effective official who has protected consumers and families from financial predators exactly as Congress asked him to do? You ignore the law and you ignore the voters’ demand for an unrigged financial system. We hope Mr. Trump has better judgment than that.”
Some Consumer-Friendly Officials Departing D.C.
Already, some noted consumer-friendly officials have started to leave Washington.
At the FTC, Chairwoman Edith Ramirez announced she would resign on Friday. Ramirez focused on emerging internet of things technologies during her six years at the FTC.
“Ramirez cast a spotlight on emerging privacy issues, involving ‘smart TV’s,’ cross-device tracking and other technologies,” the Center for Democracy and Technology said, praising Ramirez’s time at the agency. “Through a series of cutting-edge cases — Snapchat, D-Link, inMobi and Turn, for example — the commission made it clear that tech companies that deceived consumers or failed to protect their security would be punished and publicly shamed.”
In addition to consumer issues like privacy, the FTC’s main charge is to enforce antitrust law. During his candidacy, Trump signaled a break with traditional Republicans over anti-trust law, suggesting, for example, that he would have blocked the Time Warner-AT&T merger. But Trump picked former FTC commissioner Joshua D. Wright to run his FTC transition team. Wright, a traditional conservative who, in an op-ed penned days after Trump’s election victory, criticized “anti-merger mania.” He said evidence shows big mergers often help consumers, and cautioned against a return to the days of trust-busting.
Wright is widely believed to be the leading candidate to head the commission after Trump takes office.
The Trump transition team did not immediately respond to Credit.com’s request for comment.
So Long Net Neutrality?
Even bigger changes might be coming to the Federal Communications Commission (FCC), however Multichannel.com reported this weekend that Trump’s picks to head that agency — several veterans of the conservative American Enterprise Institute — have plans to eliminate the FCC’s consumer protection tasks altogether. Currently, the FCC helps consumers in dispute with telecommunications providers and sets policies, like net neutrality.
FCC Chairman Tom Wheeler, who led the charge for net neutrality and new privacy rules for broadband consumers, will vacate his spot on Inauguration Day. While Trump picked FCC transition team members with anti-net neutrality track records — one a Verizon economist, the other a former Sprint lobbyist — Wheeler said in a speech last week that overturning the commission’s rule is not a foregone conclusion. Changes would require a new rule making process, he said — and that would be a mistake.
“Tampering with the rules means taking away protections that consumers in the online world enjoy today,” Wheeler said in his speech.
While Trump transition team members Ajit Pai and Michael O’Rielly advocated for a streamlined FCC before, backtracking on issues like net neutrality seems less a sure thing after Trump added Republic Wireless co-founder David Morken to that transition team. As head of a small telecom company, Morken has said he is against changes that help entrenched competitors, and has a populist bent to his rhetoric.
His lack of opposition to net neutrality, in addition to that open challenge of established Republican thinking, has led some to think he might provide balance on a Trump FCC. But as with the many critical consumer issues the Trump administration will take on in the coming months, only time will tell whether populist positions or conservative leadership will win that arm-wrestling match — and how consumers will fare in their own wrestling match with corporations.
This story is an Op/Ed contribution to Credit.com and does not necessarily represent the views of the company or its partners.
The Consumer Financial Protection Bureau on Wednesday finalized long-awaited regulations that will add federal protections for millions of Americans who use prepaid debit accounts. The agency’s new rule has been more than four years in the making and will equip prepaid card accounts with federal protections similar to those of credit card accounts. The rule officially goes into effect in October 2017.
Consumer advocate groups largely supported the agency’s rules. “The CFPB’s rule on prepaid cards is a big win for consumers,” said Nick Bourke, director of consumer finance for the Pew Charitable Trusts. “First and foremost, it keeps the cards free from overdraft penalties — which aligns with consumers’ preferences. Research shows many consumers turn to prepaid cards to control spending and to avoid overdraft fees.”
However, the Network Branded Prepaid Card Association criticized the final rule, saying it will create onerous restrictions on prepaid debit card issuers and ultimately lead to fewer options for consumers.
“Instead of fostering financial innovation and inclusion, the CFPB’s rule will ultimately limit access to an essential mainstream consumer product that helps millions of Americans participate in the digital economy, affordably manage funds, and safely hold money,” Brad Fauss, NBPCA president and CEO said in a statement.
According to a report from Pew Charitable Trusts, use of general purpose reloadable prepaid accounts among U.S. adults jumped more than 50% between 2012 and 2014. The accounts are widely used as budgeting tool or an alternative to traditional bank accounts for people who have poor banking histories. But they can also be used to issue federal benefits like Social Security, student loan refunds, tax refunds, and even paychecks.
5 ways the New Rule Will Affect Prepaid Account Customers:
Easy Access to Information
The final rule grants prepaid accounts similar protections to credit card accounts. It requires financial institutions to make account information such as account balances, transaction history, and charged fees, easily accessible and free to consumers. Consumers also will have access to the information over the phone, online, and in writing upon request, unless the institution issues periodic statements.
A Standardized Dispute Process
The new rule also means that financial institutions will have to cooperate with customers to fix errors such unauthorized or fraudulent charges in a timely manner. If you’ve registered your card and the financial institution can’t complete the investigation within 10 business days, it will have to credit the disputed amount to your account while it completes the investigation. Investigations are usually required to be completed within 45 days.
Under the new rule, a customer’s losses are limited in the event that funds are stolen, similarly to debit accounts. So as long as you report the loss within two business days of finding out about it, your losses are limited to $50. If the institution is notified after two business days, then the loss is limited to $500. The rule limits liability for unauthorized charges and creates a way for consumers to get their money back as long as they notify the financial institution in a certain amount of time.
“Know Before You Owe”
There’s a disclosure included in the new rule, coined “Know Before You Owe.” It requires institutions to give customers more information about the prepaid accounts available upfront, before someone elects to sign up to make comparison shopping easier.
The information has to be presented to you in two forms before you sign up: long and short. The short form would be a more concise overview of the account’s terms and fees that can fit on store packaging, while the long form would have more detailed list of fees and information. Card agreements also have to be publicly available, and posted on card issuers’ websites. Institutions must also submit all of their agreements to the CFPB, which will post them in the future on a public site maintained by the bureau in the future.
Some prepaid accounts can be paired with credit lines that provide funds for purchases if a customer doesn’t have sufficient funds in their prepaid account. The accounts are laden with hidden fees and considered a potential debt trap by some critics.
Prepaid companies now have to wait at least 30 days and make sure the consumer has the ability to pay back the debt before they offer a line of credit to a prepaid debit card user. The rule also requires prepaid companies to give consumers regular statements and at least 21 days after the statement is issued to make a payment before charging a late fee. Late fees have to be “reasonable and proportional” to the corresponding violation and can’t total more than 20% of the consumer’s credit limit during the first year the credit account is open.
The rule also puts a wall between the cardholder’s prepaid funds and their credit debt so that companies can no longer take funds from the prepaid account to repay the credit bill without the consumer’s consent.
Which Accounts Are Impacted by the New Rule?
The rule applies to general purpose reloadable cards as well as a growing number of electronic prepaid accounts. That includes mobile wallets such as Apple Pay or Google Wallet, person-to-person payment products like PayPal or Venmo, and other electronic prepaid accounts that can store funds. Other prepaid accounts like payroll cards, student financial aid disbursement cards, tax refund cards, and certain federal, state, and local government benefit cards such as those used to distribute unemployment insurance and child support are included under the rule.
Until the rule goes into effect next fall, consumers should make sure they are informed of the financial institution’s policies regarding fees, errors, and possible fraud because how they will be handled will depend on the card, company, and circumstances.