CFPB Now Answering Consumer Questions

It’s not quite Siri, but a new online question and answer tool created by the Consumer Financial Protection Bureau is gunning to be the most comprehensive source for information about consumer products on the web.

HuffPost Money took the site for a brief spin on Thursday morning. The early review: easily the cleanest, easiest-to-use government web site we’ve seen, but still quite limited in terms of what information is available. So far, the site offers answers to common questions about credit cards and mortgages, and a more limited set of answers to questions about credit reports and debt collection, written by the bureau’s “subject-matter experts.”

All told, there are about 350 entries, on subjects like credit card pre-screening, reverse mortgages, and repairing credit scores. But the “Ask CFPB” tool was stumped when we asked about principal reduction, the recently-announced mortgage settlement, and information about specific banks and lenders.

Other questions that came up blank: “What is a fair credit card interest rate?,” “How do I fight foreclosure?” and “How do I comparison shop for a mortgage?”

We plugged these same questions into Ask.com, and got hundreds of results–some from other government agencies (The Federal Reserve on mortgage shopping) from the do-everything web site ehow (steps homeowners facing foreclosure should follow), and creditcardratings.com–which offers endless advice on picking the right card.

With each miss, though, the agency invites consumer to “suggest a question” for it to answer. And websites like Ask.com require consumers to do their own due diligence about the quality of information they find–CFPB experts, presumably, are autoritative and reliable.

In a press release, the CFPB said that the bureau will expand the database to answer questions about a range of financial products and services, including student loans, auto loans and checking and savings accounts.

HuffPost Money

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It’s Time for a “Regulatory Cocktail” Against Unethical Debt Collectors

Medical researchers came up with a breakthrough in the 1980s in their quest to cure patients of HIV. They developed the Highly Active Antiretroviral Therapy, which non-scientists called a “drug cocktail.” Even though any single medicine was not powerful enough to cure people with HIV, it was discovered that the right cocktail of drugs could be highly effective.

Many U.S. attorneys general are working with each other and with the federal government to employ the same strategy to control and eventually eradicate the scourge that is unethical debt collectors, because just one strategy alone seems not to be enough.

West Virginia Attorney General Darrell McGraw saw how the settlement against a major debt collector in a class-action lawsuit would pay out a lousy ten bucks per victim. Exercising his rights to protect the citizens of West Virginia, McGraw then brought his own suit against the company for using false affidavits when obtaining default judgments against West Virginians and for not including necessary details when suing consumers.

Attorney General McGraw said:

“Many consumers are frightened or unaware of their rights when they are sued and fail to respond to these groundless lawsuits, leaving them subject to judgments on debts that cannot be proved. Companies such as Midland rely upon this fear and typically drop their lawsuits if consumers know their rights.”

Minnesota Attorney General Lori Swanson is prosecuting agencies who work with attorneys to scam consumers. Debt-settlement companies align themselves with lawyers so they can use official-looking letterhead to collect fees up-front for promising to help consumers with their overwhelming debts. Then they fail to deliver, leaving the consumers in even-deeper debt. Attorney General Swanson said: “It’s particularly galling. Here you’re seeing people who have a special privilege — the privilege to practice law — abusing consumers who are down on their luck.”

Illinois Attorney General Lisa Madigan is going after lawyers who specialize in requesting arrest warrants for consumers behind on their bills. One example is a 53-year-old woman who was stopped for a broken taillight. When the police ran her name, she was handcuffed in front of her kids and hauled away for a $2,200 debt that had turned into a default judgment.

The Wall Street Journal surveyed just nine counties in the U.S. and found more than 5,000 such arrest warrants issued since 2010 for debt-related cases. Attorney General Madigan said: “We can no longer allow debt collectors to pervert the courts.”

Texas Attorney General Greg Abbott has gone after multiple debt-collection companies, including one whose employees took the arrest-warrant threat to a whole new level. Their employees claimed to be associated with law-enforcement agencies and the IRS. They would insist that consumers pay their debts or risk facing arrest, prosecution, and imprisonment.

Massachusetts Attorney General Martha Coakley is onto the game some debt collectors play of threatening consumers with legal action while hiding the fact that the debt is “time-barred”; in other words, the debt has passed the statute of limitations for any legal action. Her amended regulations would require that consumers be informed of that fact.

Ohio Attorney General Mike DeWine has banded together with 18 other states to go after NCO Financial, a large debt-collector, for a whole range of violations, including extracting money from consumers for debts they did not owe, and charging excessive interest.

Ohio has a tradition of pursuing debt collectors. As Attorney General in 2010, Richard Cordray investigated two other debt-collection firms, and now he heads the Consumer Financial Protection Bureau. He therefore has first-hand knowledge of the games debt collectors play.

No doubt that is why Director Cordray has already proposed regulations that would involve on-site federal inspection of the top debt collectors representing 63 percent of collections in the U.S.

More bad news is in store for crooked debt collectors. Recently, state and federal officials gathered to announce the $25 billion mortgage-servicing settlement. Attorney General Lisa Madigan used that event to reinforce the regulatory cocktail that’s being assembled against the worst debt collectors:

“Know that this is neither the beginning nor the end of our work to hold banks and other institutions accountable…. Today’s settlement should serve as a warning for financial institutions: there are consequences for engaging in practices that jeopardize the stability of our communities and our economy.”

Bill Bartmann

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Do We Take Debt Seriously Enough?

Debt is hardly a new part of the human experience. From the time that man first developed money, people have wanted to buy things they can’t afford. Although most Americans don’t run much risk of being sent to a debtor’s prison like a character in a Charles Dickens novel, debt can still have far-reaching and life-ruining implications.

In the simplest terms, debt happens when a person borrows money to pay for something. When he pays it back he will owe interest, causing the total cost of his purchase to increase, sometimes exponentially, the longer he maintains the debt. The problem is that, for many consumers, the consequences of debt never seem important until it’s too late.

Buy Now, Worry Later

The image many people have of consumer debt is skewed by the idea that only wasteful spending can create debt. It’s easy to understand how a person can quickly max out a credit card by buying luxury items, or how a person’s car payment for a sports car can become too much to pay. The problem is that it’s not only frivolous spending that leads to debt, and in many cases the people who have the worst debt problems are the same people who are financially unable to deal with them.

For some people in the lower classes, they often try to become credit card experts and loans become a way to compensate for painfully low incomes. Many people live paycheck to paycheck, with their income only barely covering their exact cost of living. If a bill comes due before the corresponding check arrives, a person may be faced with a choice between paying with a credit card or facing late fees and cancellations.

In these occasions, the people taking on the debt often know that it’s bad, but the consequences seem even worse. Paying off debt happens later; buying food for the family happens today. Because low-income families are constantly living “hand to mouth,” there is often no time to put off expenses or save up for purchases. Every day can feel like an emergency until payday.

The working poor aren’t the only people who face similar problems with debt. The sad truth is that income has much less to do with financial security than proper money management does. Many people never learn how to manage their money and find that the more they make, the more they spend; even though their income has doubled, they still barely get by every week.

People with higher incomes will expect a higher standard of living: nicer cars, better furniture, fancier electronics. They may be every bit as likely to live from check to check, though, as they’re living the same lifestyle as people below the poverty level only with more expensive substitutes.

Do We Take Debt Seriously Enough?

The nation is in debt. Businesses are in debt and go bankrupt every day, celebrity bankruptcies are pretty common and foreclosure defense lawyers are enjoying their most profitable time in decades. Most American consumers are in debt, too, and the amount of debt just keeps growing.

A 2010 survey by the Federal Reserve Bank of Boston estimates that the average American with debt has around $15,965 in credit card debt alone. Most people have several credit cards, many of them carrying maxed-out balances and generating compound interest for years as the consumer struggles to make minimum payments.

Nevertheless, despite the pervasiveness of debt in America, most consumers do not shy away from using credit cards or financing major purchases. Because of the way debts are applied, many people hardly realize the true price of items bought on credit. They may not realize the danger of unpaid debt, either, until they’ve already done damage to their credit score.

Buying things on credit tricks the consumer into believing he’s paying less when he’s really paying more. By breaking a purchase down into several small payments, a purchase seems much more affordable — even when the sum of the payments is more than twice the item’s value.

There is also a disconnect in many people’s minds between the money they make, the money they spend and the bills they pay. A person may not associate his credit card bill with the cost of purchases he’s made. Each month, a credit card bill or car payment arrives, and he pays it without thinking about why it costs what it does or how he may still be paying off a purchase from two years ago.

Debt as a Financial Quagmire

When compound interest is used in a savings account, it’s a great tool for increasing a person’s funds. When it’s used by a lender, it leads to debt quickly spiraling out of control. Essentially, compound interest means that the interest is added to the principal. This means that the overall cost of interest increases more and more as time goes on, even if no new charges are added to the debt.

Unsecured debts like credit cards and signature loans will have higher interest rates than debts with collateral, such as mortgages or car payments. All debt has interest, though, and interest will always cause the cost of a purchase to rise. In the case of car loans, for example, the vehicle may be depreciate faster than it takes for the loan to be paid off. If a person has a total loss accident an insurance company may not pay for everything and the owner may end up continuing to make car payments for a vehicle they can’t even drive.

Credit card companies are sometimes the worst about adding additional costs to debtors. In addition to interest fees, credit card companies might assess harsh late payment fees or fees if the balance exceeds the card’s limit. Some cards even charge fees for having a card without using it.

Although credit may look like an easy solution to financial troubles, it nearly always results in a long, difficult-to-pay quagmire of interest fees, monthly payments and hidden costs.

The True Cost of Debt

The worst and most insidious effects of debt are indirect. While the financial strain of making payments each month is certainly a serious concern for some consumers, the effects on a person’s credit can be life-altering and, in some cases, devastating.

A person’s credit score represents his financial dependability. People with good credit pay their debts on time and don’t keep multiple lines of credit open at once. People with bad credit don’t pay their debts, or they make late payments and maintain many lines of credit at the same time. Once the credit score has been damaged, it will take a long time and plenty of work on the consumer’s part to repair. Credit scores are traditionally used to assess whether a person might qualify for a major loan, such as a home mortgage or a new car.

Unfortunately, credit scores are used for more than pre-screening loan applicants. Many businesses equate a person’s credit with his character, as though financial responsibility were a moral quality. People with bad credit pay more for car insurance. They may have a harder time getting approved for an apartment. Some jobs even selectively hire only people with good credit scores.

Some types of debt can have an immediate financial impact on the debt-holder in addition to destroying his credit. If a person doesn’t pay back the money that he owes, he may have his wages garnished. This will remove money from an individual’s paycheck before he has a chance to see it, often severely limiting the amount of is income and causing an already-strained financial situation to worsen. In other cases, debt can lead to repossession of a person’s house or vehicle. This can be ruinous if the person has no way of recovering their property and nowhere else to go.

A subtler long-reaching consequence of debt is the effect it has on younger generations. Children raised by parents with heavy debt may not learn the skills necessary to avoid debt themselves. Money management skills must be learned, and if a person doesn’t incorporate these skills early in his life his finances may become damaged early on. This creates a dangerous self-perpetuating cycle that can only be broken through education and self-control.

The Solution

As Americans get better at dealing with their debt, the economy may begin to follow suit. Economies only function properly when money flows freely through them. If a consumer’s income is diverted into paying off debts for purchases he’s already made, he can’t make new purchases that will stimulate the economy, generate demand for products or create new job opportunities.

Governments and businesses should be accountable for their financial health, but accountability begins at home. Individuals must learn to master their finances before they become a slave to debt. The sooner someone is able to learn money management, the better his chances of living a debt-free life and repairing any damage that’s already been done to his credit.

The only way to avoid debt entirely is to only buy what you can afford. This is harder than it sounds, as sometimes it’s not as easy as not splurging on expensive luxuries. Sometimes, it’s necessary to “go without” for a while in order to set aside money for the future. This level of self-discipline is hard to learn, but it’s invaluable, and is one of the most important skills that any individual can learn.

Alan Dunn

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When Debt Collectors Call: What You Need to Know

With many Americans struggling to pay their bills one business is booming: debt collectors.

But many consumers say the collectors are taking their tactics too far. The Federal Trade Commission received a record number of complaints about debt collectors last year — nearly 181,000. second only to complaints about identity theft.

In response to the complaints, the FTC has been cracking down on collectors who don’t follow the rules.

As Tim Bond of Montgomery, Ohio, learned, consumers have to be very careful.

Bond, 56, said he was shocked one day to open his mail box and find a letter saying he was being sued by Asset Acceptance over a debt he wasn’t even sure was his.

“I received a certified letter from  the courthouse that said I was being sued for over $7,000,” Bond said. “I felt really suffocated and trapped.”

Bond said he wasn’t even sure he owed the credit card debt, and if he did, it was 14 years past due.

“My fiancé and I did a lot of research,” he said. “What we found out — if you said anything at all, just a wrong phrase or anything, it would start statute of limitations over again.”

Asset Acceptance allegedly broke the law by threatening lawsuits on expired debts and reporting those old debts to credit agencies. The company has paid a $2.5 million fine to the government, even as it denies any wrongdoing.

Reilly Dolan of the FTC said that consumers need to be aware of the statutes in their states governing the ability of collectors to sue over old debts. It may be that for some older debts, there is no way collectors can legally force a consumer to pay.

Consumers have long complained of harassment and even threats from debt collectors, with some receiving terrifying calls from companies trying to scare them into paying up.

“Are you going to pay this bill or not? Or am I going to have to kill you?” one collector said in a call recorded by a consumer.

Another was recorded threatening: “We’re going to have your dog arrested. We’re going to shoot him up and we’re going to eat him.”

Tactics like these are illegal too.

For older debts, the amount of time collectors can sue for payment varies state by state, and can be anywhere from two to 15 years.

If the debt is large, offering to pay it off little by little to get the collector off your bak might seem like a good idea, but Dolan said that is not necessarily true.

“In most states if you pay a little bit of the debt it actually restarts the clock,” Dolan said.

That means the old debt is suddenly reactived and you can face a lawsuit after all.

Bond didn’t go that route, instead enlisting help from government consumer fraud officials. It worked, and the company backed off.

LISA STARK

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CFPB Proposes New Rule to Protect Privileged Information

In October 2011, the Consumer Financial Protection Bureau (CFPB) first announced that it would be gathering information from banks and nonbanks in the CFPB’s effort to examine and supervise financial service products. Financial institutions became concerned that disclosing privileged documents to the CFPB would be deemed a waiver by the courts, thus allowing competitors and consumer groups to access these privileged documents.

On March 12, 2012, the CFPB proposed a new rule that would codify protections for privileged information submitted by financial institutions regulated by the CFPB. Richard Cordray, the CFPB’s director, stated that “this is a common sense rule that is consistent with our practice of guarding the confidentiality of the information of the institutions we supervise. This rule will allow us to further protect consumers by facilitating the flow of information between the Bureau and its supervised entities.”

This proposed rule comes after extensive lobbying for a legislative solution by various organizations, including the American Bar Association and the American Bankers Association. Currently, there are bills in the United States Senate and House of Representatives, which would specify that the CFPB should be treated as a federal banking regulator, thus subjecting the CFPB to the rules governing the protection of privileged documents.

What Does the Rule Say and What Does this Mean?

The proposed rule states that the submission by any person of any information to the CFPB for any purpose in the course of any supervisory or regulatory process of the CFPB shall not be construed as waiving, destroying, or otherwise affecting any privilege such person may claim … under Federal or State law as to any person or entity other than the CFPB.” 12 CFR § 1070.48. The CFPB asserts that this rule is substantively identical to the statutory provisions that apply to the submission of privileged information to the prudential regulators, State bank and credit union supervisors, and foreign banking authorities. Significantly, however, subpart D of the rule makes clear that the CFPB is authorized to disclose, in “appropriate circumstances, confidential information to another Federal or State agency.”

While the proposed rule may provide some comfort, the uncertainty behind the constitutionality of Cordray’s appointment, along with the uncertainty of the legitimacy of a rule issued by the CFPB, continues to leave reservations on the table. Moreover, the CFPB has continued its vague language by noting that it will be sharing information with other entities under “appropriate circumstances.” How much comfort financial institutions can take in the rule, therefore, is very much in doubt.

TROUTMAN SANDERS LLP

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Fresh E-mail Scam Abuses Name of CFPB

Officials of Better Business Bureau (BBB) warn that scam e-mails, which are circulating online, pose as communications from CFPB (Consumer Financial Protection Bureau) as they target unwitting entrepreneurial organizations, published sacbee.com dated March 12, 2012.

It maybe mentioned that CFPB serves as an agency of US federation and is chiefly responsible for maintaining the security of consumers.

The fake electronic mail captioned “Financial misconduct in your company” and addressing the recipient as Business Manager, tells him that CFPB has accepted one consumer complaint regarding multiple incidences about financial malpractice by his organization. And since CFPB is continuously engaged in halting deceitful, unjust, and exploitative practices or acts, it therefore requires the user’s opinion about the given client grievance Report ID#955167, the e-mail states.

Thereafter, the e-mail politely warns that failure of the reader to reply in 14-days will prompt the federal agency to investigate his organization’s operations.

But, CFPB states that it did not dispatch these e-mails, adding that they’re scam messages although they appear genuine due to the correct address and logo of CFPB included.

BBB, in the meantime, cautions that e-mail fraudsters have again begun scaring recipients so they’ll follow the web-link provided inside the scam electronic mail. But, once they do so for accessing the so-called grievance, they’ll actually land on an intermediate website, which pulls down and installs a PC-virus.

Thus BBB advises that anyone receiving the e-mail must erase the message wholly without accessing any web-links provided.

Disturbingly, according to security experts, it’s because of the above kinds of e-mail attacks having malware-laced messages that there’s been an increase in malicious programs online. Their statement receives support when Symantec the security company reveals within its February 2012 report that there’s been one e-mail-borne virus within 274.0 e-mails or 0.37% malware-laden e-mails within the entire e-mail traffic during February 2012, causing a 0.03% rise from January 2012.

Eventually, alongside CFPB, BBB itself was recently targeted, also in USA, when consumers and organizations received malware-laced fake e-mails reportedly having bbb.org as the sender’s address. Those e-mails too notified receivers that someone lodged a complaint against their companies so they must reply ASAP.

 

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8 ways to tame household debt

Canadians often think of themselves as a thrifty people, but economists and financial experts say we are overspending at a troubling rate.

“I have a concern right now – we have more debt than our American counterparts,” says Greg Pollock, president and CEO of Advocis, the Financial Advisers Association of Canada.

Late last year, Statistics Canada published a report that found Canada’s household debt-to-income ratio was over 150 per cent (in the U.S., it’s closer to 145 per cent). That means that for every $1,000 that is earned in after-tax income, Canadian households owe $1,500.

Finance Minister Jim Flaherty and Bank of Canada Governor Mark Carney have voiced concern about Canadian consumer debt, and caution that it will only get worse when interest rates start inching upwards.

These warnings, along with persistent speculation about another recession, have made household spending a pressing issue. So what can you do to curb your debt?

Experts say that the most effective strategy in taming household spending is not to impose draconian rules — like cutting your cable subscription or that daily latte — but to ask yourself how necessary your individual expenditures are.

“I can’t tell [clients] as a financial coach to reduce this and this – they need to ask themselves the questions about what are priorities for them,” says Pat White, executive director at Credit Counselling Canada.

“One family may say, ‘It’s important for us to have those cable services, because we never go to a movie, we don’t rent any movies, that is our entertainment.’ They don’t want to cut that expense. Everyone’s different.”

Here are eight tips that should help you budget better.

1. Organize your finances.

For those who aren’t inclined to keeping a ledger, the idea of becoming your own accountant can seem daunting. When Pat White proposes it to some clients, she says they assume it means “sitting down every day and accounting for every penny and having a really complex filing system with nice little tabs and the whole bit.”

That works for some people, but for the novice, White suggests a more measured approach. “If you just took the step to say, ‘Here’s two envelopes, I’m putting all my unpaid bills in one, all my paid bills in the other, and twice a month I’m sitting down to look at what’s going on,’ that would help immensely.”

2. Distinguish between your wants and needs.

If you’re going to buckle down on the home front, you have to ask yourself some tough questions — and answer honestly.

In going through your regular expenses, decide which items are must-haves and which are luxuries: Do you need to subscribe to more than one newspaper? Do you really need call display?

One way to avoid this consumer quandary when going to the mall is to make a list first.

“You stick to the list, you don’t make the shopping exercise a way to add to your debt,” says Pollock. “Shopping should not be a hobby. Get a real hobby to keep you busy.”

3. Don’t pay for things you no longer use.

In going through your expenditures, you might come across payments you’d actually forgotten about, which could be pre-authorized withdrawals for things like magazines, overdraft protection or a gym membership.

Some of these items will be easier to drop than others, but the key is to stop being aspirational and start being rational.

“You look at that gym membership that comes off your chequing account every month and you feel guilty and keep saying to yourself, ‘I wish I’d get there,'” says White. “You just need to say, ‘I’ve got to cancel that, because it’s just not working for me — I’m paying for something I don’t use.'”

4. Look for things that are low- or no-cost.

Everybody loves the idea of saving money, but the methods aren’t always apparent. By doing just a bit of research, says White, you can discover some low- or no-cost alternatives to some of your regular expenditures. The library is always a good bet – borrowing books, magazines and DVDs for free could seriously lighten your entertainment budget, for example.

5. Get rid of your credit cards.

Pollock insists that slaying your debt requires you to take a pair of scissors to your plastic. “The key thing about addressing debt is not to get into more debt,” he says. “One way that you can assist in not getting into more debt is by getting rid of credit cards.”

Without credit at the ready, you’re more inclined to think twice about imprudent purchases.

6. Pay your bills on time.

This seems obvious – after all, if you don’t meet your payment deadlines, you incur a late fee.

But Pollock says some people are so afraid of their bills, they won’t even open the envelope. “[People] just put them aside, like they’re going to take care of themselves,” he says. “It’s not realistic.”

7. Build an emergency fund.

Having a cash reserve is a great hedge against unexpected future expenses and stumbling into deeper debt. “If something does go wrong, you don’t have to borrow the funds, which then gets you back into the debt cycle,” says Pollock.

“The furnace breaks down, the car breaks down, you’re temporarily laid off – whatever the emergency might be, you can address that with the savings that you have.”

The rule of thumb for an emergency fund is typically three to six months worth of income. This is a large figure for most people, Pollack concedes, so the key is to build it up incrementally, but regularly.

8. Put your tax returns toward paying down debt.

For some Canadians, tax season provides a financial windfall. But rather than buying bottles of bubbly, you should put that money to smart use.

“It’s not an opportunity to all of a sudden just go on a spending spree,” says Pollock. “It’s an opportunity to pay down some debt. Pay off the highest-interest bill that’s coming through your front door.”

CBC News

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Credit card debt grew by 424 percent in 2011

Credit card debt is on the rise again, and new reports show massive growth rates in 2011.

Nearly $48 million in new credit card debt was added in 2011, which is a 424-percent increase from the previous year, according to the Chicago Tribune.

The number of new credit debt consists of a $4-billion rise in outstanding credit on top of $44.2 billion in consumer defaults.

“Looking back two years, with the exception of a single quarter, U.S. consumer-debt management has consistently worsened,” CardHub told the Chicago Tribune in the report. “First-quarter pay-downs have become less significant, and the amount of new debt added in each subsequent quarter has grown compared to its respective counterparts in the previous two years.”

The average balance in the nation for February reached $6,105, a slight increase from $6,069 in January, according to Bankrate.com. In January, consumers were able to drop their debts by 8 percent from $6,576 in December.

Despite the uptick, the total is still considerably lower compared to last year when credit card debt reached $7,168 nationally.

“That’s a general trend that we see,” Ken Lin, chief executive officer of CreditKarma.com, told Bankrate.com. “Consumers continue to pay down debt.”

Lin also told Bankrate that debt reduction will continue through the second quarter, but spending may increase as banks sign on new credit card customers.

But credit card companies are already seeing a rise in spending.

Visa and MasterCard reported a rise in the number and value of credit card purchases, according to Debtmerica Relief. MasterCard saw a significant increase in card use in the past two months, with volumes increasing 26 percent overall in January and February.

MasterCard also reported a 14-percent rise in the value of purchases.

Rising credit card purchase values will make it hard for consumers to reduce debt later in life, according to the Debtmerica article.

By Joey Ferguson

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The CFPB’s powers continue to expand; UDAAP is still a potential black hole for consumer financial services companies

There is a relatively well-known theory in science (note: I am not a trained scientist) called the Big Bang theory, which is an effort to explain what happened at the very beginning of our universe.  Under the standard theory, astrophysicists posit that our universe sprang into existence about 13.7 billion years ago as the result of a “singularity.”

No one knows for sure what the singularity is or from where it came.  But it had to happen for the Big Bang to happen.  The Big Bang itself is an ongoing event in which the universe continues to expand and cool, creating millions of galaxies and billions of solar systems along the way, each of which is likewise expanding.

THE CONSUMER FINANCIAL SERVICES BIG BANG

Not quite 13.7 billion years ago, the financial sector had a somewhat less mysterious singularity of its own in the form of the world recession and financial crisis of the late 2000s.  One of the consequences of this particular singularity was a big bang called the Dodd-Frank Wall Street Reform and Consumer Financial Protection Act (“Dodd-Frank Act”).  The Dodd-Frank Act  has spawned all sorts of administrative and bureaucratic galaxies and solar systems of its own, each of which is, like the sun, an independent source of great power.

One example is the Financial Stability Oversight Council (“FSOC”) created under Dodd-Frank Act.  The purpose of FSOC is to:

(1) identify the risks to the financial stability of the United States from both financial and non-financial organizations;

(2) promote market discipline by eliminating expectations that the Government will shield them from losses in the event of failure; and

(3) respond to emerging threats to the stability of the US financial system.

Somewhat akin to our expanding universe, FSOC has been given expansive powers to monitor, investigate and assess any risks to the financial system in the United States.  In support of this power, the Council has the authority to collect information from any State or Federal financial regulatory agency, and may direct the Office of Financial Research, which supports the work of the Council, “to collect information from bank holding companies and nonbank financial companies.”

THE BUREAU BECOMES THE CENTER OF ITS OWN SOLAR SYSTEM

Another example of a powerful and sprawling new federal agency developing out of the post-Dodd-Frank primordial ooze is the Consumer Financial Protection Bureau (“Bureau”).  The Bureau now oversees and regulates most consumer financial products and services under federal law.  The Bureau is, in a sense, the center of the consumer lending solar system, with everything that comes close to falling within its statutory mandate being swept into an orbit around this new super agency.

This is not just a theory, of course.  For proof, one need look no further back than the last couple of months to see the Bureau’s expanding power and reach.

FURTHER AND CONTINUED EXPANSION

The Bureau has taken it upon itself to move swiftly to implement Dodd-Frank Act mandates, as well as to take what some might call liberties with its statutorily given discretion to define the limits of its own power.  Recent instances of this phenomenon are myriad.

In February of this year, for example, the Bureau issued a proposed rule pursuant to which the Bureau seeks to add to its growing list of supervised entities.  In particular, the rule – which is expected to go into effect later this year – will sweep in consumer debt collectors with annual receipts greater than $10 million and consumer reporting companies with annual receipts above $7 million.  The Bureau is exercising this power under its authority to define (and therefore regulate) the so-called “larger participants” in the consumer financial services area.

To put this particular proposed rule in some context, for purposes of determining which insured depository institutions and credit unions the Bureau is to have exclusive supervisory authority over, the Dodd-Frank Act itself defines the largest of such institutions as having total assets of more than $10 billion.  The “larger participant” debt collectors would qualify weighing in at a fraction of that number.

In the same vein of the Bureau defining which entities are “larger participants” – that is, entities which traditionally have not been regulated at the federal level – the Bureau’s first director, Richard Cordray, recently noted that retailers that offer consumer financial products and services may soon be pulled into the Bureau’s gravity.

Also in February, the Bureau announced that it was starting a probe into bank checking account overdraft policies.  As part of the probe, the Bureau has made it clear that it may initiate enforcement actions as well.  In essence, the Bureau will demand data on the issue from banks, seek input from the public (as it does with ever-increasing frequency), and then pass judgment on the practices it reviews.

Slightly more recently, in March, the Bureau announced that it would advance new rules governing adjustable rate mortgages (“ARMs”) and – even though the Bureau has absolutely no power to regulate the business of insurance – mortgage insurance.  For ARMs, by the end of the year, the Bureau expects to have in place new rules that will require banks to give homeowners several months notice before monthly payments rise.  For “forced placed” mortgage insurance (i.e., mortgage insurance that is taken over by a bank when a borrower does not make the payments), the new rule will require banks to have a reasonable basis to believe that a borrower is not maintaining their own insurance.

Like the slow creep of an ever-expanding universe arising out of that singularity, the Bureau is slowly, assuredly, and definitively expanding.  Lurking in the Bureau’s solar system is a danger that has yet to be fully realized: UDAAP.

UDAAP IS A BLACK HOLE

UDAAP is the Dodd-Frank Act’s prohibition against unfair, deceptive, or abusive acts or practices in the consumer financial services galaxy.  Like the examples above, UDAAP is an extraordinary power held by the Bureau.  But UDAAP is different.  What differentiates UDAAP from the powers outlined above and many other powers the Bureau has exercised is that UDAAP defies definition.  It is vague, amorphous, and with very little shape.  We know that UDAAP exists – it is right there in the text of the Dodd-Frank Act, but we have yet to see it in action.

Like a black hole, then, UDAAP has the potential to vacuum-up consumer financial products and services, and the marketing practices that sell the products.  But since the Big Bang of Dodd-Frank, the Bureau has not provided much guidance on what it thinks UDAAP really is, or how it might apply in the post-Dodd-Frank era.  More on the black hole concept in a moment.  For now, are you wondering whether UDAAP really exists?  Is it really a threat?  Should banks and other consumer financial services companies really be worried about UDAAP?  Yes, yes, and yes.  And many already are.

UDAAP IS A CLEAR AND PRESENT DANGER TO CONSUMER FINANCIAL LENDERS AND SERVICERS

How do I know? The federal government has told me so!  Repeatedly.

One of the most recent examples is President Obama making it clear during his 2012 State of the Union address that his administration will not tolerate UDAAP in consumer financial products and services:

And if you’re a mortgage lender or a payday lender or a credit card company, the days of signing people up for products they can’t afford with confusing forms and deceptive practices are over.  Today, American consumers finally have a watchdog in Richard Cordray with one job: To look out for them.

But there are other clear statements of this policy goal.  In particular, the Bureau itself has made it clear that UDAAP is a major agenda item.

Last July, the Bureau laid out its three-part vision:

A consumer finance market place:

…where customers can see prices and risks up front and where they can easily make product comparisons;

in which no one can build a business model around unfair, deceptive, or abusive practices;

…that works for American consumers, responsible providers, and the economy as a whole.

Right there sandwiched between better disclosures and a fully functioning marketplace is UDAAP.  A full third of the Bureau’s dream for a better consumer financial products and services marketplace related to UDAAP.

Just a couple of months later, in September of 2011, the Bureau issued version 1.0 of its Supervision and Examination Manual (“Manual”).  As the moniker suggests, the Manual is a guide to how the Bureau will supervise and examine consumer financial service providers under its jurisdiction for compliance with the various federal laws covering consumer financial transactions.  The Manual references UDAAP concepts about 100 times, with 17 pages devoted to discussing each of the component notions (i.e., unfair, deceptive, abusive).

In January 2012, the Bureau provided two updates to the Manual.  The first addresses mortgage examination procedures.  The second addresses short-term, small dollar amount lending, frequently referred to as payday lending.  Both of these updates also discuss UDAAP in their respective contexts.

In short, yes, yes, yes UDAAP is very important and a big deal to the Bureau and, for that matter, the current presidential administration.

THE UDAAP STANDARDS

With all that UDAAP saber rattling by the President and the Bureau, with tens of pages of UDAAP coverage in the Manual, with one-third of the Bureau’s vision devoted to UDAAP, you might conclude that there is clear guidance about how to steer clear of UDAAP violations.  That conclusion would be reasonable, but dead wrong.

We know precious little about what Congress and the Bureau think falls within the UDAAP ambit.  What do know?  Well, we know the standards as the Bureau has filtered them through the Dodd-Frank Act.

An act or practice related to a consumer financial product or service is deceptive when:

(1) a representation, omission, act, or practice misleads, or is likely to mislead, a consumer;

(2) the consumer’s interpretation of the representation, omission, act, or practice is reasonable under the circumstances; and

(3) the misleading representation, omission, act, or practice is material.

Curiously, Congress left deception undefined under the Dodd-Frank Act, notwithstanding decades of use of the term in the FTC Act and other similar statutes, and the myriad judicial opinions interpreting the term in those contexts.  The Bureau, accordingly, filled in the blanks on this standard.

An act or practice is unfair when:

(1) it causes or is likely to cause substantial injury to consumers;

(2) the injury is not reasonably avoidable by consumers; and

(3) the injury to consumers is not outweighed by countervailing benefits to consumers or to competition.

As for abusive, an act or practice fails the test if it:

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of (a) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of a consumer financial product or service; (b) the inability of the consumer to protect its interests in selecting or using a consumer financial product or service; or (c) the reasonable reliance by the consumer on a covered consumer financial product or service provider to act in the interests of the consumer.

Abusive is a new term in this galaxy.  UDAAP appears to be an evolution from other statutes that sought to prohibit unfair or deceptive acts or practices, or “UDAP.”  Because of the newness of the term, more guidance is warranted if not mandated.  But none has really surfaced.  In fact, the only “guidance” given by the Bureau begs many, many more questions than it answers.

Specifically, in the Manual, the only direction the Bureau provides beyond reciting the statutory definition is that “although abusive acts also may be unfair or deceptive, examiners should be aware that the legal standards for abusive, unfair, and deceptive each are separate.”  In other words: it is all different, even though it is all the same.  To say the Bureau’s guidance on this score is unhelpful to the Bureau.  And the statement is perplexing in its deliberate avoidance of the issue.  The manual has commentary on and provides a myriad of examples of “unfair” and “deceptive” acts or practices, but not on “abusive.”  The Manual is essentially deafeningly silent.

IS UDAAP REALLY A BLACK HOLE?

So we have standards, but they are, as standards go, fairly amorphous and undefined.  Come too close to them and you are likely to be sucked in.  Like a black hole, the UDAAP standards have the potential to envelop anything that even approaches their gravitational field.

The Bureau has yet to issue any regulations on UDAAP and, as demonstrated above, guidance is relatively thin.  The danger under these current conditions is that political whimsy and personal agendas will blindside seemingly legitimate consumer financial service companies.

The Bureau’s first and present director, Richard Cordray, has a track record of arguably doing just that: using UDAAP to fill a legislative gap.  As the financial crisis heated up, the then-attorney general of Ohio used a local UDAP statute to go after mortgage servicers.  Among other things, Cordray, on behalf of the state of Ohio, accused the mortgage servicers of putting consumers through excessive wait times when they called the companies.  At the time, there were no statutes, rules, or regulations governing wait times.  Nonetheless, through the magic of UDAP, Ohio was able to go after the servicers.  At the time, the mortgage industry had been vilified, and its corporate participants were easy and vulnerable targets.

Might this happen at the federal level?  Could an undefined payday lending practice lead to a UDAAP violation?  Is it possible that big box retailers who offer credit services will find themselves subject to new and undefined customer service restrictions?  Will UDAAP be used to advance federal policy goals where existing law is otherwise silent?

Stay tuned… all of this and more is possible as the Bureau continues to expand.

By Martin J. Bishop

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Prepaid debit card firms test new fee disclosures

Three major issuers of prepaid debit cards said Tuesday they will test a new fee-disclosure box designed to help people understand the costs of using cards to access their money.

The disclosure box, designed by a non-profit group focused on people who don’t have bank accounts, aims to improve the transparency of the increasingly popular cards. Prepaid cards are similar to debit cards but are not attached to an underlying checking account.

The Center for Financial Services Innovation also called on regulators to improve disclosures and other consumer protections for prepaid card users.

“Consumers need to be able to easily determine the true cost of a prepaid card and compare different products before deciding which to purchase,” said David Newville, CFSI’s policy manager, in a statement. He said a standardized disclosure “will ultimately attract more consumers to prepaid cards.”

CFSI is funded in part by banks and other financial companies that sell financial products and services to people who don’t have bank accounts.

The companies testing the fee disclosure are Green Dot Corp., Plastyc Inc. and Ready Credit Corp. Green Dot, the biggest publicly traded issuer of prepaid cards, said it will add the box to its card package this fall.

“Consumers should not have to worry about surprise fees hidden deep within cardholder agreements,” Green Dot CEO Steve Streit said in a statement.

Prepaid cards have been criticized by consumer advocates because some of them carry higher fees that what banks charge for comparable services. However, research funded by the prepaid card industry has found that prepaid card users often pay less than people who have checking accounts with low balances.

Prepaid cards are regulated separately from debit cards. They do not always offer the same protections against fraud and theft that credit and debit cards do.

The Consumer Financial Protection Bureau has the authority to write rules governing prepaid cards. The agency, created under the 2010 overhaul of financial rules, regulates broad categories of consumer financial products and services.

The bureau is considering adding prepaid card companies to the list of industries that it can monitor and supervise on-site, according to a public notice published last year.

In its release, CFSI called on the bureau to “do consumer testing of prepaid disclosures.”

A bureau spokeswoman declined to comment on the proposed fee disclosure or on any agency plans involving prepaid cards.

CFSI president and CEO Jennifer Tescher is set to testify Wednesday at a Senate subcommittee hearing about prepaid cards.

 Daniel Wagner

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