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.”
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.
Certain credit card debtors are in for some relief.
Citibank has agreed to provide nearly $16 million in consumer relief and forgo collecting on about $34 million in debt held by nearly 7,000 cardholders as part of two enforcement actions taken by the Consumer Financial Protection Bureau.
The CFPB consent orders, released on Tuesday, allege that, from February 2010 until June 2013, Citibank sold credit card debt with inflated interest rates and failed to forward consumer payments promptly to debt buyers, who went on try to collect on 128,809 accounts sold to 16 different debt buyers. For some accounts, Citibank claimed the APR was 29% when it was actually 0%, the CFPB said.
Citibank also allegedly hired two debt collection law firms — Faloni & Associates, LLC, of Fairfield, N.J., and Solomon & Solomon, P.C. of Albany, N.Y. — that went on to alter affidavits filed in New Jersey debt collection lawsuits. The dates of the affidavits, the amount of the debt allegedly owed, or both, were changed after they were executed, a violation of the Fair Debt Collection Practices Act, the CFPB said.
Per the agency, Citibank learned that one of its law firms had altered affidavits back in 2011 and stopped referring new credit card accounts to it. At Citibank’s request, a New Jersey court dismissed actions pending as of Sept. 12, 2011, that Citibank identified as involving altered affidavits or incorrect information.
The bank did not admit or deny any of the CFPB’s allegations as part of the enforcement action.
“We are pleased to resolve these legacy issues, which impacted a small percentage of customers in the U.S.,” the bank said in an email to Credit.com.
Providing Consumer Relief
In addition to the consumer relief — an estimated $4.89 million for roughly 2,100 consumers affected by the purportedly inflated APRs and $11 million in refunds to consumers affected by the allegedly altered affidavits, which has already been paid out — Citibank must pay a $3 million penalty to the CFPB’s Civil Penalty Fund. It must also stop selling debt it cannot verify, including protections that prohibit debt buyers from reselling the debt and provide basic consumer information, including the name of the original creditor, the credit agreement and recent account statements.
Solomon & Solomon, P.C., and Faloni & Associates, LLC, also must pay $65,000 and $15,000, respectively, to the CFPB’s Civil Penalty Fund. Both firms admitted no wrongdoing as part of the enforcement action.
“Solomon entered into the Settlement Agreement merely to avoid the anticipated costs of defending itself in litigation against the Bureau, which would have likely exceeded the amount of the fine,” the law firm said in an email to Credit.com. “Solomon remains committed to providing its clients with high-quality legal services that comply with the law and treat consumers fairly. To that end, Solomon has in place a robust compliance management system that it updates and enhances periodically to keep pace with changes in the law and industry best practices.”
Faloni & Associates, LLC did not respond immediately to request for comment.
The CFPB has made debt collection practices a focus in recent years. This past summer, JPMorgan Chase was fined $216 million for selling bad credit card debt and illegally robo-signing court documents. And American Express was fined back in 2012 for illegal credit card debt collection practices.
“Citibank sent inaccurate information to buyers when it sold off credit card debt and it also used law firms that altered court documents,” CFPB Director Richard Cordray said in a press release. “Today’s action provides redress to consumers who were victimized by slipshod practices as part of our ongoing work to fight abuses in the debt collection market.”
Debt Collection 101
Receiving a debt collection notice can certainly prove stressful, but it helps to know your rights. Under the Fair Debt Collection Practices Act, for instance, collectors are required to provide written verification of a debt, can’t call too early in the morning or too late at night and must honor a written request to cease communications (Note: This request will make the collector, but not the debt itself, go away). You can find a debt collections crash course here.
Remember, too, if a collection account does appear on your credit report, it will impact your credit scores. (You can see how collection accounts may be affecting your credit score by viewing your free credit scores, updated each month, on Credit.com.) If you do have a collection account appear on your credit, but believe the information is wrong, you can dispute it with the major credit bureaus. (You can find a guide on how to dispute errors here.)