Tag: CFPB

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GOP Moves to Block Rule That Allows Consumers to Join Class Action Lawsuits

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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.

Bob Sullivan
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It Could Get a Lot Easier to Sue Your Bank Thanks to This New Regulation

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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.”

Bob Sullivan
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How the “Financial Choice Act” Could Impact Your Wallet

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

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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.

Jana Lynn French
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5 Ways the CFPB is Changing the Rules on Prepaid Debit Cards

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

 

happy girl at ATM

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.

Limited Liability

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.

Credit Protections

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.

Brittney Laryea
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Brittney Laryea is a writer at MagnifyMoney. You can email Brittney at brittney@magnifymoney.com

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CFPB’s New Rules for Debt Collectors: The 5 Most Exciting Changes

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

family in debt

There’s good news for the 70 million Americans who are being pursued by debt collectors: The Consumer Financial Protection Bureau rolled out new plans to overhaul the debt collections industry.

The CFPB’s long-awaited plans to tackle the multi-billion-dollar business of debt collection were laid out in a proposal Thursday. The proposal would require debt collectors to gather “more and better information about the debt before they collect.”

“This is about bringing better accuracy and accountability to a market that desperately needs it,” said CFPB Director Richard Cordray.

Here are the 5 most remarkable changes in the CFPB’s new rules:

Collectors must know that they are collecting the right amount of debt from the right person.  Oftentimes, debt passes through the hands of so many debt buyers and sellers that by the time they reach a consumer, they could have lost important identifying information along the way. This proposed rule would put the onus on collectors to verify the debt they are pursuing before they begin contacting the consumer. Millions of consumers are pursued by collectors for debts they don’t actually owe, or for amounts of debt that are incorrect.

Collectors would only be able to contact consumers six times per week. As it stands, credit card companies allow collectors to call consumers up to 15 times per day.  The new proposed rules would limit all contact — phone, email, snail mail, etc. — to only six times per week.

No more zombie debt collections. The CFPB is proposing a rule that would force debt collectors to tell a consumer when they are contacting them about a debt that is too old to collect. As it stands, debts can only be collected for a certain number of years (this varies by state). But it’s almost impossible for a consumer to know when they no longer have a legal obligation to repay a debt. That makes it easy for collectors to pursue people for debts that are too old. The nastiest part about this tactic is that by enticing consumers to make even the smallest payment, they effectively restart the clock on that old debt, and the consumer is once again legally obligated to pay up. If this passes, this would be a major game changer in the debt collections industry.

Consumers could easily find out more information about their debts. The CFPB would have every debt collector include a “tear-off” sheet that consumers to fill out and return to them to dispute the debt. If they mail the dispute to a collector within 30 days, then the collector would have to send a detailed debt report and could no longer pursue the debt until that report is sent.

No more passing on unverified debts to other debt buyers. Debt is bought and sold at a rapid rate. Important information can easily be lost along the way, making it difficult for consumers to know if a debt actually belongs to them. The CFPB would stop debt collections agencies from selling debts that have not yet been verified.

Not everyone was cheering the CFPB’s new rules.

The National Consumer Law Center, a consumer legal advocacy group, is already calling on tougher rules than the CFPB lays out.

“Instead of simply requiring collectors to have full and accurate information, the CFPB proposal sets up a complicated and inadequate system that lets collectors rely on information that may be inaccurate,” said Margot Saunders, an attorney with the National Consumer Law Center.

The rules are also missing a key component, according to the NCLC: Stiffer penalties for bad actors.

“We are also disappointed that the proposal does nothing to increase penalties for abusive collectors,” said April Kuehnhoff, an NCLC attorney who specializes in debt collection. “Stronger penalties are essential to stop especially abusive collectors from continuing business as usual.”

What’s next?

Settle in for the long haul. This list of proposed rules is just the first step in what could be a year-long (or more) process to implement these new rules. The CFPB has to send this proposal to a panel of industry experts who will no doubt want to weigh in and propose their own changes. You can make your voice heard by submitting a public comment through the CFPB’s website.

Have you been pursued by a debt collector for a debt you don’t owe? File a complaint with the CFPB.

Mandi Woodruff
Mandi Woodruff |

Mandi Woodruff is a writer at MagnifyMoney. You can email Mandi at mandi@magnifymoney.com

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The One Tool That’ll Help You Find the Best Mortgage Rates

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The One Tool That’ll Help You Find the Best Mortgage Rates

Well it happened. The first interest rate hike in almost a decade occurred at the end of 2015.

If you’re in the market for a house right now, the rate hike may have been a bit of a downer, but fear not, there’s still time to find great deals. This current hike was a relatively small one (moving interest rates from 0% to 0.25% to 0.25% to 0.5%), but mortgage rates will rise, so if you are looking for that dream home, it may be time to get serious about your research.

Luckily, the Consumer Financial Protection Bureau is here to help.

Their nifty tool, which you can find here, is a great way to compare interest rates from actual lenders with information that gets updated on a daily basis. You’ll need some basics to start the process — your credit score, state, home price and down payment percentage — but you’ll be rewarded with a graph of lenders and interest rates specific to where you’re shopping for a home.

Let’s go through an example. Say Carry is looking for a house in her Colorado hood. She has a credit score of 625 (the average credit score for millennials), and she’d like to purchase a home for $250,000 with a 15% down payment. According to a quick CFPB tool search, in Colorado, most lenders are offering rates at or below 4.625%, while two lenders are actually offering rates of 4.090%.

Armed with this information, Carry can head into her pre-approval meetings with the knowledge of what’s a “good” offer and what’s not-so-great, which makes her odds of negotiating successfully that much greater.

Carry can even do a quick Google search to see which lenders are offering the 4.090% because the CFPB unfortunately doesn’t provide the names of lenders.

If you’re ready to start the house hunting process and you’ve already armed yourself with knowledge from the CFPB tool, check out this piece about when it’s smart to apply for a mortgage without your spouse, and this one about why you can’t afford a 3% down payment mortgage.

Cheryl Lock
Cheryl Lock |

Cheryl Lock is a writer at MagnifyMoney. You can email Cheryl at cheryl@magnifymoney.com

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New Mortgage Rules Could Delay the Home Buying Process

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

Purchase agreement for house

Have you ever felt overwhelmed by the mortgage process? You’re not alone. For years, consumers have complained about the seemingly endless amounts of mortgage loan paperwork. Making matters worse, these forms have consistently been littered with complicated and confusing terminology. But the Consumer Financial Protection Bureau (CFPB) wants to make the mortgage process easier. And that’s why its overhauled the system with the new “Know Before You Owe” disclosure rules.

Earlier this month, the CFPB’s new disclosure rules went into effect, making the entire mortgage process more transparent. This new process should help you understand your options, make it easier to shop around for mortgages, and avoid costly surprises at closing.

Although the real estate industry has spent over a year preparing for these changes, experts are predicting closing delays. However, some of the reasons for delays can be avoided. If you’re thinking about buying a home, here’s what you need to know about the CFPB’s new “Know Before You Owe” disclosure rules.

The Loan Estimate Makes it Easier To Shop Around and Compare Offers

Did you know nearly half of U.S. homebuyers don’t shop around and compare mortgages? A recent CFPB survey found 47% of all U.S. homeowners only seriously considered one lender or broker for their mortgage. And failing to shop for a mortgage can be expensive. CFPB’s research shows 30-year fixed rate conventional loans can vary by more than half a percent between lenders. This can add up to hundreds of dollars over the course of a single year.

So, how can this costly mistake be avoided? By arming yourself with knowledge.

Over the past four years, the CFPB has received countless complaints about the complexity of trying to get a mortgage. And as a response, they’ve simplified the mortgage loan application process by consolidating four overlapping disclosure forms into two. The first of its new disclosure forms combines the initial Truth-in-Lending disclosure and the Good Faith Estimate. This new form is the Loan Estimate.

To keep you informed, lenders must provide the Loan Estimate within three business days of submitting a mortgage application. The Loan Estimate makes comparing loan options easier by clearly listing the following details:

  • Monthly Principal & Interest
  • Prepayment Penalty
  • Balloon Payment
  • Mortgage Insurance
  • Estimated Escrow
  • Estimated Total Monthly Payment
  • Estimated Closing Costs
  • Estimated Cash To Close

The CFPB recommends comparing Loan Estimates from at least three different lenders. Also, it created the Loan Estimate Explainer to further demystify this new disclosure. The Loan Estimate Explainer includes a helpful checklist of details to review. It also offers a sample Loan Estimate and detailed definitions of the key terminology from each page.

The Closing Disclosure Offers More Time To Review Paperwork Before Closing

We’ve all heard nightmare stories about borrowers being surprised by unexpected expenses at their closings. But why was this happening? Many believe borrowers weren’t given sufficient time to review their paperwork.

To eliminate confusion, the CFPB has created the Closing Disclosure by combining the final Truth-in-Lending disclosure and HUD-1 Settlement Statement. And lenders must provide the Closing Disclosure at least three days before your closing.

Tripling your previous period of review time, you now have three days to compare the Loan Estimate and Closing Disclosure line by line. And if something doesn’t look right, you now have more time to ask why. This extra time gives you the chance to ask for a second opinion from a real estate agent or lawyer before signing your mortgage paperwork.

The closing process doesn’t have to feel overwhelming. CFPB’s Closing Disclosure Explainer provides the same transparency as their Loan Explainer, making it much easier to carefully compare the two documents. Also, the CFPB has created a closing checklist to help you stay organized.

How “Know Before You Owe” May Delay the Closing Process

While many agree the simplification and increased transparency are both wins for consumers, the traditional 30-day closing period may no longer offer enough time. Some real estate agents are now preparing clients for at least 45-day closings. And some agents are even estimating 60-day closings.

Why? Everyone involved with a real estate transaction must comply with the CFPB’s new rules. This includes real estate agents, title companies, mortgage brokers, bankers, and more. And although the industry has spent over a year preparing for these changes, there may be unexpected delays as the new system and processes are implemented. But, hopefully, “Know Before You Owe” will grow more efficient as time passes and the process becomes the new norm.

How To Prevent Unnecessary Closing Delays

Closing delays aren’t just caused by professionals. You may inadvertently delay the closing process by missing a mistake on your Closing Disclosure. To speed up the process, review the Closing Disclosure immediately and let your lender know right away if you discover any errors. Even small changes require the creation of a new Closing Disclosure, triggering another three-day window for review. And this three-day period cannot be waived.

A delay could also be caused by a change in your mortgage’s interest rate. To avoid this issue, don’t mess with your credit score during the closing period. And consider asking for 45-day interest rate-lock period, rather than the traditional 30-day rate-lock.

What’s the big deal about delays? Delays can create a headache when selling another home, moving to a new city, or starting a new job. Also, longer waiting periods could potentially hurt your chances of home ownership in competitive markets. Wall Street Journal explains how extra delays could put you at a disadvantage. Especially if you’re competing with cash offers in popular neighborhoods.

“Know Before You Owe” is a Long-Term Win For Consumers

“Know Before You Owe” can help you understand your options, make it easier to shop around for mortgages, and avoid costly surprises at closing. But it’s important to know what has recently changed in the mortgage process. And you need to know how these changes may affect your closing. By preparing yourself in advance, you may be able to avoid the headache of unnecessary delays.

Kate Dore
Kate Dore |

Kate Dore is a writer at MagnifyMoney. You can email Kate at kate@magnifymoney.com

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The CFPB Just Made Shopping For A Mortgage Easier

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Shopping for a mortgage is not fun. Aggressive mortgage brokers confuse and overwhelm borrowers. Comparing the true cost of the loan between competing lenders can be a challenge. When you buy a home, you can be charged origination fees, application fees, underwriting fees, appraisal fees, credit reporting fees, and many more fees on top. The lack of transparency makes it difficult for borrowers to understand the true cost of the loan and get the best deal.

The Consumer Financial Protection Bureau has been actively trying to make the mortgage shopping process easier. The first tool introduced by the agency helped people see the lowest interest rate available. A borrower can use the CFPB Mortgage Tool to input their credit score, down payment, loan amount and zip code. The CFPB, using real data, will show the average and best interest rates available in the market. Savvy borrowers have been able to use the tool to negotiate for the best interest rate. Although MagnifyMoney applauded the tool, we would like even more transparency. The CFPB should show the names of the lenders. In addition, the tool only shows the interest rate. A comparison of typical costs, points and fees would also be useful.

This month, the CFPB has introduced its second big initiative, which is a much clearer loan disclosure form. It is a three-page document written in simple human language. The first page is illustrated below.

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The CFPB has a guide to the new disclosure form on its website. This form is given to borrowers when they receive a loan estimate. For anyone who has shopped for a mortgage before, the clarity of the form becomes immediately obvious.

On the first page, the document provides the key terms, including the loan amount, interest rate, monthly payment and any prepayment penalties or balloon payments. Most useful, the bottom of the page displays the total closing costs and the total cash required to close. The amount of cash required to close can often be a surprise, and many borrowers seem surprised or overwhelmed when they arrive at the closing.

The second page has a real innovation. It breaks the costs into two sections. The first section details closing costs that “you cannot shop for” and closing costs that “you can shop for.” For example, you cannot shop for a better mortgage insurance deal, so you shouldn’t bother. Borrowers can shop for better deals on title insurance and property inspections. Many mortgage companies own their own title company and extract high prices for a very simple product. Incredibly, title insurance companies generate nearly $20 billion of annual revenue in the country. And most borrowers don’t realize that they can shop around for a better deal. This disclosure makes it clear.

Perhaps the greatest innovation is a box called “comparisons” which is pictured below. This box makes it very easy to understand how much you will end up paying over a five-year period, including all expenses. When you are shopping around for mortgages, you can compare those five-year costs to see who is giving you the best deal when all costs are included.

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With increased transparency, borrowers should be able to shop for the best deal. These disclosures are a great step in the right direction. Now it is up to potential borrowers to take advantage of the transparency to save money.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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In Auto Lending, Dealer Discounts Are Dangerous And Potentially Predatory

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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This week, the Wall Street Journal reported that the Consumer Financial Protection Bureau’s crackdown on racial bias in auto lending could result in higher prices for many borrowers. Over the last few years, the CFPB has aggressively fined large auto lenders for charging higher interest rates to minority borrowers. In 2013, Ally Financial was ordered to pay $80 million in damages to harmed African-American, Hispanic, Asian and Pacific Islander borrowers. In addition, Ally also had to pay $18 million in penalties.

Although the CFPB does not have oversight of auto dealerships, it does have oversight of indirect auto lenders like Ally. Typically, auto dealerships will sign deals with multiple auto lenders. The lender will set a risk-based interest rate, called the “buy rate.” The interest rate charged to the customer can never be lower than the buy rate. Higher risk borrowers with lower credit scores would be charged a higher buy rate. For example, a lender may set a 4% buy rate for someone with a 750 FICO, and an 8% buy rate for someone with a 650 FICO score.

In addition to the buy rate, there is a “dealer markup.” Dealers try to get as much as they can, and for good reason. Historically, dealers have been allowed to add up to 2.5% to the buy rate and they are able to keep a big portion of that extra interest as revenue. So, the higher the interest rate charged by the dealer, the more money that the dealership will make on the loan. Auto dealerships make most of their money from financing and warranties, not from the sale of automobiles. And the dealer markup is a disproportionately large contributor to the dealership’s earnings. That is why MagnifyMoney always recommends that borrowers shop around for an auto loan interest rate before walking onto a car lot. Dealers have a lot of room to negotiate, and can often beat the rate that you find online before you shop for your car. But if you do not come prepared with good financing already in hand, dealerships will do their best to charge the highest interest rate possible.

Many savvy auto shoppers understand how the game works. As a result, they are ready to negotiate hard with auto dealers. People who negotiate at dealerships tend to get much lower interest rates. People who don’t feel confident negotiating often end up paying more.

The CFPB performed an analysis of the borrowers, and determined that minority borrowers paid higher interest rates than white borrowers. The difference ranged between 0.2% and 0.3%. The statistical analysis has been widely disputed by lenders, dealerships and the Wall Street Journal. Car lenders complained because the CFPB was fining them for the activities of auto dealers.

In response to the CFPB actions, auto lenders have responded by eliminating or dramatically reducing the dealer markup. To make up for lost revenue, the buy rate has been increased. Before, good negotiators could get better rates than bad negotiators. Now, that ability to get a lower interest rate has been largely removed. Some borrowers will see higher interest rates, and some will see lower interest rates.

Fixing Interest Rates Is Not A Bad Thing

Economists generally believe that bartering is not an efficient way to manage supply and demand. Although tourists often enjoy bartering when on vacation, most people are happy that prices are fixed in grocery stores. Imagine if every item in a grocery store had a base price, and then a mark-up on top. When you take your items to the cashier, you are forced to negotiate on every item’s price. In this system, pricing goes down for those who are most willing or able to negotiate. But prices overall remain higher than they should. With fixed costs and transparent pricing, supermarkets are forced to compete systematically.

Unfortunately, auto financing has remained largely on the inefficient barter system. Rather than a national competition between lenders fighting to offer the lowest interest rates for people with certain FICO scores, the negotiating takes place behind closed doors in the back of auto dealerships.

Whenever you empower an employee to negotiate price, there are unintended consequences. Early in my banking career, banks would often allow branch employees to set the interest rate of loans. Here are some examples of the type of abuse that can happen:

  • A racist branch manager gives African American borrowers rates that are 2.5% higher than interest rates charged to white individuals.
  • An aggressive sales agent wants a big commission, and gets aggressive with the most vulnerable. Customers who had the least education, the lowest level of financial literacy or the least self-confidence would be charged higher interest rates.
  • A young, recent college graduate is enjoying his new pricing power. Whenever a young, beautiful woman comes into the office, he reduces the interest rate.

When I worked in banking, we regularly eliminated the ability of front-line sales agents to charge higher prices. But why has the barter system survived in auto lending?

Why Did This Happen In Auto Lending?

Why were auto lenders willing to give so much power to dealerships? Unlike credit cards, which banks can sell online or in branches, auto loans are usually sold in dealerships. The dealers are not controlled by the finance companies or banks. And the dealers want to make the banks compete. Banks would give auto dealerships big dealer markups to buy loyalty. Auto dealerships would be told that they could keep what they were able to charge. Banks would compete on the lowest buy rates and the highest markups.

A bargain-based system is inefficient, painful and particularly punitive for people who are least likely to bargain. At MagnifyMoney, we support transparent, public and painless pricing structures. Although we agree with the Wall Street Journal analysis that pricing will increase for many borrowers, we do not think that is necessarily a bad thing.

Competition should be systematic. A 750 FICO borrower should be able to shop for the best interest rate without having to fear a painful negotiation in the back room of an auto dealership. Lenders will still have to compete. However, going forward, anyone with a good risk profile will benefit from market competition, rather than side-deals for those who are the best at negotiating.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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Consumer Complaints About Credit Reporting Agencies Surge 56%

The editorial content on this page is not provided by any financial institution and has not been reviewed, approved or otherwise endorsed by any of these entities.

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Yesterday, the Consumer Financial Protection Bureau (CFPB) released its monthly consumer complaints snapshot. When the CFPB was established, it created a controversial service that enabled consumers to complain directly to the CFPB. Consumers can go online and submit a complaint about a financial services company. A member of the regulatory agency investigates the complaint on behalf of the consumer. Since launch, the agency has handled over 677k complaints.

The complaint service was created for two main reasons. First, it is a public service. If a consumer is in a dispute with a massive bank, it can often feel like a lost cause. The only real alternative is asking to speak with a manager, which often yields limited results. When a complaint is referred to the CFPB, banks will have to defend their actions to a powerful regulator.

The second reason the CFPB created the complaint process is that it gives the regulator the opportunity to spot trends and emerging issues. Historically, regulators would conduct audits and on-site reviews to find problems. However, regulators often find it difficult to uncover deep, hidden, systematic issues. If the CFPB starts to receive a lot of complaints about a single issue, they would be able to investigate the problem more fully. A good example of how the process can help consumers and regulators is Ocwen, the nation’s largest non-bank servicing company. Ocwen grew rapidly, but was not prepared for its growth. And it got a lot of things wrong, especially in the foreclosure and litigation departments. As a result, a number of homeowners lost their homes when they shouldn’t have. Ocwen was doing this regularly, and complaints to the CFPB started to surge. At one point, Ocwen was receiving more complaints than Bank of America. With such elevated complaint levels, the CFPB was able to increase its scrutiny and review of the operation.

Credit Reporting Agencies Are A Mess

The three main credit reporting agencies in the United States are Experian, Equifax and TransUnion. The information contained in your credit file has a huge impact on your financial life. A low credit score could limit your ability to obtain a mortgage, auto loan or any form of credit. If you are approved, a low score could result in higher interest rates. Credit scores are also used in many states for determining your insurance premium. Negative information in your credit report can adversely impact your ability to get a job or rent an apartment.

However, your credit score is based upon information in your credit report. And if your credit report contains incorrect information, you could suffer. The process to dispute credit reporting information should be simple. You can do it online, and we explain how to dispute credit report information online here. However, just because you submit your complaint does not mean it will be handled properly. Over the last year, complaints to the CFPB about credit reporting agencies have increased 56%. Far too many people have experienced an automated decline to their dispute, and found it impossible to find a real person at the credit reporting agency to fix their issues.

State attorney generals have been turning up the heat on credit reporting agencies. For example, the Sate of New York reached a settlement with all three credit reporting agencies. The previous process of disputes was almost comical. A consumer would submit a dispute to the credit reporting agency. The agency would send a question to the bank. If the bank confirmed the record, the credit reporting agency would automatically side with the bank. A human would not even review the information. In the settlement, the credit reporting agencies have promised to use live experts to review the dispute.

Credit Reporting Agencies Need To Transform

When credit reporting agencies were initially created, they were viewed as tools for the banks. Banks wanted to find a way to share default information so that better lending decisions could be made. A fraudster would no longer be able to go from bank to bank, borrowing money and not paying it back. The reporting agencies were clearly viewed as services for banks. And the credit scores were black boxes that banks used to make decisions. Consumers were left in the dark.

With the explosion of personal finance tools on the internet, the paradigm has changed completely. Consumers want to understand how their credit scores are calculated, and businesses like CreditKarma have helped demystify the black box.

And people are starting to take greater ownership of their own personal data. The credit reporting agencies no longer exist for bankers to avoid fraudsters and dangerous credit risks. These businesses exist so that consumers can use their reputation as an asset when shopping for better deals and lower interest rates. This transformation means that consumers are very engaged in managing and ensuring the accuracy of their credit reports.

This transformation is important. The credit reporting agencies have been built to service banks. That is why, in consumer disputes, it was the banker’s words that mattered. But that is changing. Credit reporting agencies are now trying to market direct to consumers. The bureaus are offering competing products to CreditKarma. But, to ultimately make the transition complete, the businesses need to invest heavily in much better dispute and data reconciliation processes.

This issue has been festering for a while. But the CFPB data shows that the problems will become increasingly public. There is a cost to consumer empowerment, and the credit reporting agencies will need to be prepared to pay that cost.

Nick Clements
Nick Clements |

Nick Clements is a writer at MagnifyMoney. You can email Nick at nick@magnifymoney.com

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