Consumer Law & Policy Blog

CardHub.Com Study of Credit Card Disclosures: "Federal Reserve has set an embarrassingly low bar for issuer disclosures"

Here.  Here is the key finding section of the report:

• The Federal Reserve has set an embarrassingly low bar for issuer disclosures, as evidenced by the 7.5% score its model disclosure received in this study.

• The Consumer Financial Protection Bureau obviously recognized the inherent flaws with the Federal Reserve’s implemented guidelines for credit card disclosures and created its own proposal, which received a score of 85% and is open for public comment.

• While the CARD Act successfully improved transparency and consumer rights throughout the credit card industry, regulatory guidance directs issuers not to disclose some of the most important changes, including the following:
  • Interest rate increases of any kind are prohibited during the first year an account is open unless a promotional rate concludes (must be in place for at least six months), the cardholder is at least 60 days delinquent, a variable rate’s index changes, or there is a workout agreement in place.
  • Rate increases may never be applied to existing balances unless a cardholder is at least 60 days delinquent, a variable rate’s index changes, or there is a workout agreement in place.
  • Issuers are required by law to remove a Penalty APR from an existing balance if a cardholder makes on-time payments for the next six months following a rate increase.

• As one would expect, all of the major credit card issuers use disclosures that are at least on par with the Fed’s model.  Two issuers – namely American Express and Bank of America – provide additional information on top of what regulators recommend in order to further consumer understanding.

• 70% of major credit card issuers use Penalty APRs.

• USAA, U.S. Bank, and Wells Fargo are the only major issuers that do not use Penalty APRs at all.  Bank of America also deserves credit, as it explicitly states that it only applies Penalty APRs to new transactions.

American Banker Report on Comments on Proposed Mortgage Disclosure Rules

Here.  Behind a paywall, unfortunately.  But here's a quote:

In more than 2,000 letters responding to the CFPB's plan,bankers said several requirements -- including a rigorous timeline for presenting borrowers with the new forms, limited deviation of estimated charges between initial and final disclosures, and an "all-in" annual percentage rate -- will add constraints and confusion.

More From Creola Johnson on Payday Lending

Creola Johnson of Ohio State has written Congress Protected the Troops: Can the New CFPB Protect Civilians from Payday Lending? 69 Washington & Lee Law Review 649 (2012). Here's the abstract:

In 2007, Congress enacted a law, commonly referred to as the Military Lending Act (MLA), which placed a 36% interest rate cap on several consumer loans, including payday loans, and prohibits lenders from engaging in several practices considered predatory. However, the MLA grants these protections only to active-duty military members and their dependent family members.

In the wake of the mortgage foreclosure crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act), which creates a new federal agency, the Bureau of Consumer Financial Protection (CFPB), to focus on protecting consumers in the credit market place. In this Article, I assert that the newly-created CFPB should use its authority to afford to ordinary Americans protections similar to those now enjoyed exclusively by military families. To support my assertion, I describe how payday loans entrap civilian Americans in a cycle of indebtedness just like they once ensnared military families and yet both groups are equally lacking in financial sophistication. I further describe how regular payday lenders and now major banks, such as Wells Fargo, are engaged in reckless lending because when issuing a payday loan, they fail to do any assessment of a borrower’s ability to repay, charge triple-digit-interest rates, issue loans frequently in excess of the borrower’s next paycheck, and require loans to be repaid in a single balloon payment usually in fourteen days or less.

The CFPB needs to act to protect civilians because, despite attempts by several states to curb payday lending, payday lenders exploit loopholes in state laws or use scams to skirt consumer protection laws. The CFPB also needs to protect civilians because they are more vulnerable to ensnarement by payday loans than the active-duty military members. Military families enjoy a strong social safety net, which is comprised of numerous benefits, including complete health care coverage, educational assistance and subsidized housing. In contrast, average low-to-moderate-income civilian families face financial difficulties due to high unemployment rates and ever-shrinking compensation and benefits packages. If military families, who enjoy strong social safety nets, need protection from payday loans, then unquestionably civilian Americans, who are largely left to fend for themselves, deserve protection from payday loans.

Under Title X of the Dodd–Frank Act, the CFPB has the authority to issue rules as well as guidelines to prevent a covered financial institution from committing an unlawful practice in connection with any consumer financial product or service. Because the rulemaking process could take as long as ten years, I propose that the CFPB issue immediately guidelines and a policy statement to get lenders to voluntarily cease predatory lending practices. The guidelines would give notice to all lenders about which common payday lending practices the CFPB considers unfair, abusive and deceptive and, therefore, unlawful. The CFPB’s policy statement would identify responsible lending practices, such as applying reasonable criteria to assess a consumer’s ability to pay and avoiding any practice that extends the loan’s due date for the primary purpose of generating fees for the lender. While the guidelines would warn lenders that they may be subject to enforcement actions for committing unlawful practices, the policy statement would provide a safe harbor, exempting from enforcement actions lenders who follow practices that comport with responsible lending standards. In addition to using the guidelines and policy statement to decrease the supply of payday loans, the CFPB should use its educational mandate to increase the demand for safe affordable loans. To accomplish this mandate, the CFPB needs to employ a multi-faceted strategy that harnesses the power of social media and uses a national public service announcement campaign to make it easy for consumers to access safe affordable loans from lenders with a demonstrated commitment to responsible lending practices.

 

 

George Will Attacks the CFPB

by Jeff Sovern

Here.  It's the usual right-wing attack, most of which has been said before.  I refuted some of what he says in August of 2011 in a column in the Pittsburgh Post-Gazette. One other point: Will complains that the Bureau will write law through case-by-case enforcement and that this creates uncertainty.  Apparently Will doesn't know that plenty of other agencies make law through enforcement. Or that the courts make law by deciding cases. 

Free Webinar on the CFPB's Amicus Program Next Wednesday

Next Wednesday (November 21), at noon, I'll be presenting a free webinar focusing on the Consumer Financial Protection Bureau's amicus program from both consumer and industry perspectives. On the industry side, I'll be joined by Alan Kaplinsky and Christopher Willis of Ballard Spahr's Consumer Financial Services Group. We'll discuss the factors likely to influence the CFPB's selection of cases and the potential impact of the CFPB's decision to participate in a case. We will also analyze the CFPB's amicus briefs thus far, looking at the bureau's positions and the effectiveness of its efforts in shaping the law. Read more at the CFPB Monitor blog.

Those interested in participating are asked to register online two days before the webinar.

Creola Johnson on the CFPB and Payday Lending

Creola Johnson of Ohio State has written America's First Consumer Financial Watchdog Is on a Leash: Can the CFPB Use Its Authority to Declare Payday-Loan Practices Unfair, Abusive, and Deceptive? 61 Catholic University Law Review (2012). Here's the abstract:

To stop payday lenders from skirting state laws, this Article asserts that the CFPB should exercise its rulemaking authority to declare many payday loan practices as unfair, deceptive, abusive, and, consequently, unlawful.

The CFPB's imposition of restrictions on payday loans will not end short-term, small-dollar loans in America, but will cause an increased prevalence of responsible lending practices. The results of a recent pilot program implemented by the Federal Deposit Insurance Corporation (FDIC) demonstrate that lenders can issue small-dollar loans subject to the types of restrictions proposed above and still achieve long-term profitability. Therefore, the CFPB's regulatory intervention will correct the continuing market failure by promoting profitable, yet fair loans by responsible lenders.

The CFPB's Proposed Mortgage Disclosures and the De-Emphasizing of the APR

by Jeff Sovern

One of the big changes in the CFPB's proposed mortgage disclosure forms is the de-emphasis of the APR.  The APR has historically been one of the most central Truth in Lending disclosures.  For example, for closed-end loans, it must be clear and conspicuous and appear in the "Federal Box" under 12 C.F.R. 1026.17 (formerly 226.17).  But the proposed forms relegate the APR disclosure to page three, behind dozens of other disclosures. This has drawn opposition from both conservatives and liberals.

Why did the Bureau propose this change?  Because the firm the Bureau engaged to perform consumer testing reported that

[Consumers] often do not grasp the basics of Annual Percentage Rate (APR). They often confused it with the loan’s interest rate. Across the rounds, we worked with various definitions, but found none worked as well as the simple statement of “This is not your interest rate.” Obviously, that statement did not tell consumers what the APR was, but it minimized the confusion with the interest rate.

 Kliemann, Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 303 (2012). 

So that leaves the Bureau in a quandry.  Does it make sense to take up valuable disclosure real estate with a disclosure that consumers don't understand?  It seems to me that the answer depends on whether consumers will use the disclosure to make borrowing decisions.  It is possible that consumers could use a disclosure that they don't fully understand (after all, many drivers don't understand the internal combustion engine but don't let that keep them from getting behind the wheel).  All consumers really need to know is that the lower the APR, the less they will pay in interest and fees. 

But my (only-partly informed) intuition is that consumers don't use the APR all that much.  Some of that can be laid to the feet of the industry; consider, for example the predatory lender (quoted in my Ohio State article) who told consumers "I told the consumer that the interest rate was what the consumer and I care about, that the APR is what the federal government cares about, and that the bank cares about the yield.  I told consumers that APR was just an estimate and that it is always higher than the interest rate." But I suspect there's more to it than that and that even if lenders had not undermined the APR disclosure, consumers might not use it much (though ideally, we would have more consumer testing to determine whether that is so).  If I am right about that, then the Bureau faces two choices: either try to educate the public about the APR or de-emphasize it (or both, which seems to be what the Bureau will try to do).  The Bureau has chosen to downplay it for now.  Maybe over time, if the Bureau can increase awareness of the APR's significance, it would make sense to change that, but for now, I can't argue with the Bureau's decision.  It is not in fact clear that consumer education will help on this one; Lauren Willis's work has raised questions about the efficacy of consumer education. 

All this reflects an underlying problem in consumer protection. Too often, in my view, consumer protection efforts assume that consumers will use protections (chiefly, though not only disclosures) that they may not in fact use.  Before we create and perpetuate consumer protections, it would be preferable to verify, to the extent possible, that consumers will actually take advantage of the protections. Otherwise, much energy may be devoted to creating unhelpful protections and the problem they are intended to correct will continue.

But I should emphasize (and this is wishy-washy, but that's an academic for you), it is not crystal clear (to me, anyway), that consumers don't/won't use the APR on mortgages, and so the argument that the APR should be de-emphasized is not a slam-dunk.  Another argument for maintaining it front and center is that some consumers may use it, even if others do not, and such consumers may suffer if it is moved to page three.  But (another speculation) the consumers who use it are likely to be sufficiently careful that they can find it on page three.

CFPB Head Cordray Joins Regulators' Letter Opposing Agency Review Bill

The American Banker has the story here and here is the Chicago Tribune's coverage.  The bill would require the CFPB, as well as other independent federal agencies, to jump through additional hoops before adopting regulations.  Many consumer groups have also opposed the bill in a letter.

National Law Journal Article on What Happens to CFPB if Romney Wins

Here. An excerpt:

Lawyers believe Cordray will remain at the helm of the agency until his appointment expires in December 2013, though some predict he'll step down a few months early to run for governor of Ohio. As a result, the CFPB — at least initially — is likely to hold course. That means more enforcement actions and a heightened focus on the mortgage industry, including mortgage servicing, settlement procedures and disclosures.

* * *

Once Cordray's term is up and if Romney chooses his replacement, the effect on the agency could be dramatic, said Richard Gottlieb, who is the head of Dykema Gossett's financial industry group. * * * The potential result: fewer enforcement actions, milder penalties and regulations that give more weight to industry concerns.

Obama vs. Romney on Consumer Protection Issues

Here.