CFPA: Much consumer financial regulation under 1 roof

Here's a potent illustration, provided by the Consumer Federation of America, of one benefit of the proposed Consumer Financial Protection Agency, which was approved by a House panel today by a vote of 39-29. What's that benefit? Simplicity.

The CFPA would consolidate much of the regulation of consumer financial products and services under one agency, rather continuing with the convoluted system that exists today. One regulator handling many functions could better ensure a more efficient, less redundant regulatory system.

As proponents such as Harvard Law Professor Elizabeth Warren have noted, today's rat's nest of regulators has allowed many financial companies to cherry-pick for the least restrictive overseer. Other financial companies have escaped any meaningful regulation at all. Those situations helped contribute to the unbridled marketing of dicey consumer financial products that led many families astray in the last couple of years. 

Report: Mortgage foreclosures more profitable than workouts

We’ve previously warned consumers to avoid foreclosure rescue scams and seek help from legitimate sources instead.

But now there’s new evidence that even alternatives promoted by the federal government, such as the Home Affordable Modification Program, aren’t providing the help struggling homeowners need because many large banks and other companies that service mortgages find it’s better for their own bottom line to foreclose rather than offer loan modifications that would benefit both homeowners and the economy overall.

After homeowners sign all of those stacks of paper at closing on a new home, the original lender or investment group that purchases the mortgage on the secondary market typically hires another bank or financial company to serve as the mortgage servicer, which then collects monthly payments and administers the loan.   The problem is that unlike homeowners or the investors backing the mortgages, these mortgage servicers don’t risk losing money on foreclosures, and the system actually has built-in incentives that allow them to profit when consumers lose their homes, according to a just-released report from the National Consumer Law Center. 

“Foreclosures are a costly ordeal for the homeowner, the lender and the community.  Yet they continue to outstrip loan modifications because servicers have no incentive to help borrowers stay in their homes,” says Diane Thompson, an NCLC attorney who is the author of the report.  As a result, Americans who might be able to stay in their homes under a modification plan are unnecessarily being moved right past that option and on to foreclosure.  

The report charges that Congress, the Obama Administration, the Securities and Exchange Commission--as well as credit rating agencies and bond insurers who set the terms in the mortgage market--have all failed to provide mortgage servicers with the necessary incentives to reduce foreclosures and increase loan modifications. “What is lacking in the system is not a carrot; what is lacking is a stick. Servicers must be required to make modifications where appropriate and the penalties for failing to do so must be certain and substantial,” the report concludes. In addition to documenting how the system is failing, the report offers recommendations on specific steps that could be taken to correct the problem.–Andrea Rock

 

The Great Recession: Where's the consumer's voice?

A report recently published by the not-for-profit Pew Research Center's Project for Excellence in Journalism reveals some interesting biases in the media when covering the Great Recession. For one, the report says that TV, print, radio, Internet and other news media focused an awful lot on players at the top–President Obama and his staffers, federal agencies, and business leaders–as opposed to folks at the bottom of the ladder, often suffering the most. The stimulus package, the banking bailout, and efforts to help the struggling auto industry were the dominant topics. Most coverage took place in New York and Washington, the capitals of finance and government, respectively. And when the stock market started to rise, coverage started to peter out. 

For that reason, I'd like to brag a bit about the monthly Consumer Reports Index, which asks consumers for their sentiment on the state of their own financial well-being. That includes not only what they spent and did over the prior month, but their spending plans for the next month. The index results are based on answers by a nationally representative sample. Stay tuned for the next index, about halfway through the month, for a unique gauge of what's going on close to the ground, not up in the vaulted realms of power.–Tobie Stanger

The case for extending the CFPA to auto financing

Consumers Union, publisher of Consumer Reports, has joined 37 other not-for-profits in a letter to House Financial Services Committee Chairman Barney Frank (D-Ma), recommending that oversight of consumer auto financing be included in the proposed Consumer Finance Protection Agency. The agency is one of many aspects of financial reform now before the House panel. Click here for a report on the not-for-profits' efforts and on their opposition.

The not-for-profits are in good company in supporting the agency. Recently, more than 70 professors of law and banking law signed a similar statement of support for the agency. 

For more on this important proposal, read our series of interviews with Elizabeth Warren, a Harvard law professor and fervent advocate for consumer finance reform.

President Obama puts focus on retirement saving

In his weekly radio address yesterday, President Obama laid out what he called "several common-sense changes" aimed at bolstering Americans’ savings, especially for retirement.

The major one will encourage employers to enroll more workers automatically in a 401(k) or IRA plan.

Automatic 401(k) enrollment has been around for some time. The automatic IRA, which we covered here earlier this summer, would provide a way for employers without 401(k) plans to offer their workers something similar.

Enrolling employees automatically in a retirement plan, rather than having them elect to sign up for it, is intended to get people to save for retirement who might not otherwise be inclined to.

Of course, people fail to save for many different reasons. In some cases it may be procrastination or a lack of understanding of their options, which automatic enrollment should help address. Others, though, may not save for the future simply because they can barely ends meet in the here and now. So this initiative, well intentioned as it may be, isn’t going to do much for them all by itself. However, another Administration proposal, currently before Congress, would expand the saver’s credit, which could make it more practical for people in that situation to put some money aside.

Other initiatives mentioned in the radio address include:

• A check box on tax returns allowing people to receive their tax refunds in the form of U.S. Savings Bonds. Savings Bonds generally have to held for 12 months before they can be redeemed and for five years to be redeemed without penalty, so this could encourage at least short-term saving (assuming anybody actually checks that box).
• Making it possible for employees to direct payments from unused vacation and sick days into their retirement accounts, rather than taking them in cash. This could benefit workers with the financial resources, as well as the will power, to take advantage of it.

--Greg Daugherty

Greg writes the “Retirement Guy” column each month in the Consumer Reports Money Adviser newsletter.

Prof. Elizabeth Warren on why we need the CFPA, Part 4

Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this fourth Q&A segment, she discusses personal finance education, disclosure, and personal responsibility.

Elizabeth Warren photo courtesy Phil Farnsworth

CR: Does anything in the current proposal to create the CFPA address the role of personal finance education for school-aged children and adults?

EW: Financial education is important, and the Administration and others are examining how the current education models can be improved and expanded.  One advantage of the CFPA is that it can be a home for policy innovation in this area and also a platform for advancing financial literacy. At the end of the day, however, no amount of education will empower consumers to compare reams of mortgage disclosures or dozens of pages of credit card fine print that are designed to be incomprehensible.  Consumer protection regulations need to be streamlined and simplified so that consumer education can work. 

CR: If you could design a new mortgage disclosure form for individuals, what information would be in it? And what would you like to see changed in the Schumer box, used to diclose credit-card terms?

EW: The American Enterprise Institute, a conservative think thank in Washington, has developed a one-page mortgage disclosure form that covers a lot of ground–amount of loan, interest rate, type of loan, beginning interest rate, possible future interest rates, percentage of monthly income, prepayment fee, balloon payment, costs and fees, and so on. That one-page form should be a model for further development in this area.

A one-page credit card  form can include blanks for interest rate, penalty amount, when a penalty is triggered, what the free gift is, and so on. The lender would fill in the blanks and could, of course, still use risk-based pricing. The problem with the Schumer box is not what is included within it, but that lenders can bury a wide assortment of tricks and tracks further down in the contract.  The purpose of streamlined disclosure is to get rid of the incomprehensible legalese that hide the true cost of credit.

CR: What role does personal responsibility play in making good consumer financial choices?

If someone goes to the mall and charges thousands of dollars to buy things they can’t afford, they should have to deal with the consequences.  And if someone signs on to buy a budget-busting home or car, they should expect to lose it. The CFPA would enable real consumer choice and real market innovation by putting consumers in a position to understand and compare financial products. The CFPA would not substitute for personal responsibility. It would support personal responsibility.

Click here for a summary from the White House of the proposed CFPA's role and authority. To support Consumers Union's efforts toward consumer-focused financial reform, click here. 

Prof. Elizabeth Warren on why we need the CFPA, Part 3

Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this third Q&A segment, she dicusses the current regulatory climate, and how the CFPA would improve protections for consumers of financial products.

Elizabeth Warren   [Photo: www.cop.senate.gov]

CR: Opponents of the proposed CFPA maintain that the functions of monitoring financial institutions’ safety and soundness and of protecting consumers should be kept under its roof. Your comments?

EW: The Federal Reserve, the Office of the Comptroller of the Currency, and the Office of Thrift Supervision have had the legal authority to protect consumers for decades.  The agencies’ well-documented refusal to protect consumers – refusal that ultimately jeopardized safety and soundness of financial institutions and that brought the economy to its knees –is the best proof that the current system doesn’t work.  If we don’t learn from this crisis, we will be doomed to repeat it.

The current structure is structurally flawed.  First, financial institutions can choose their own regulators, which causes regulators to under-regulate.  By changing from a bank charter to a thrift charter, for example, a financial institution today can change from one regulator to another.  In fact, an institution may decide to evade a federal regulator altogether by housing its operations in the states and forgoing a federal charter.  Institutions can shop around for the regulator that provides the most lax oversight, and bank holding companies can shift their business from their regulated subsidiaries to those with no regulation--and no single regulator can stop them.  The problem is exacerbated by the funding structure:  regulators’ budgets come in large part from the institutions they regulate.

The second structural flaw is a cultural one: consumer protection staff at existing agencies is small, last to be funded, and always playing second fiddle to the primary mission of the agencies.  At the Federal Reserve, senior officers and staff focus on monetary policy.  At the Office of the Comptroller of the Currency and the Office of Thrift Supervision, agency heads worry about capital adequacy requirements and safety and soundness.  As the current crisis demonstrates, even when they have the legal tools to protect families, existing agencies have shown little interest in effective consumer protection.

Keeping safety and soundness and consumer protection together has not ensured safety and soundness or not protected consumers.

CR: Critics of a new CFPA say it would add another layer of regulation, which could be costly to banks and hurt smaller banks’ ability to compete.

EW: Current regulations in the consumer financial area are layered on like pancakes: See a problem and fry up a regulation, but don’t integrate it with the earlier regulation.  The result is our complicated, fragmented, expensive, and ineffective system.  With consolidated and coherent authority, the CFPA can harmonize and streamline the regulatory system. The CFPA …  is not another layer of regulation.

Prof. Elizabeth Warren on why we need the CFPA, Part 2

Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this second Q&A segment, she explains how the marketing of consumer financial products might change under the CFPA.

Elizabeth Warren photo courtesy Phil Farnsworth 

CR: Can you explain the “plain vanilla” financial products mentioned in connection with the CFPA?

EW: The CFPA will approve templates for “plain vanilla” contracts [such as 30-year fixed mortgages] designed to be read in a few minutes.  …  Consumers would be able to lay out a half dozen simple-to-read contracts on the kitchen table and see which product best fits their needs. Banks and other lenders could continue to offer complicated or risky products, so long as the risks are disclosed clearly enough that customers can understand them without a lawyer nearby.

Once consumers can understand the cost and risk associated with products, they will be able to make clear-eyed choices and comparisons.  This will ultimately make the market work by making the costs of credit products clearer and by steering innovation toward consumer preferences.

CR: So, is there anything in the statute that says the CFPA will dictate the types of products that can be made available to consumers? 

EW: No. The CFPA will offer pre-approved templates (that's the plain vanilla part) and also allow anything that is comprehensible (meets the rules for meaningful disclosure). It will more closely regulate anything that is incomprehensible.

CR: In your view, how would the agency's existence affect the ability of financial companies to innovate new products?

EW: I think that the CFPA will support innovation.  When people can't compare different products because the fine print buries all the tricks and traps, companies innovate by developing more tricks and traps.  When products are easy to compare (for example, 2-page credit card agreements on 1-page mortgages), then innovation works. 

Two years ago, Citibank was under a lot of pressure from Congress, so it made a
big deal out of promising to stop a nasty practice called universal default.  Less than a year later, it quietly picked up the practice again. Why? With all those 30-page credit card agreements, Citibank itself said that customers couldn't see that their card was actually a little better.  So Citi made it worse again. That's how a broken market works.  When customers can't make comparisons, better products don't get more market share -- and real market innovation goes south.

Click here for a summary from the White House of the proposed CFPA's role and authority. To support Consumers Union's efforts toward consumer-focused financial reform, click here.

NY car dealers slammed for "cash for clunkers" fraud

Along with the concerns we wrote about yesterday in connection with the federal "cash for clunkers" program, you can add car dealer advertising fraud.

New York Attorney General Andrew Cuomo recently announced that he has issued cease and desist orders to nearly 40 dealers statewide. Cuomo has accused these dealers of using misleading and deceptive advertising in connection with the federal Car Allowance Rebate System (CARS) program.

Cuomo said the ads omitted significant requirements for program, which provides a credit of up to $4,500 for anyone who trades in a federally-designated gas-guzzling clunker for the purchase or lease of a qualifying new vehicle.

A statement from Cuomo’s office said that the ads “mislead consumers into believing that their trade-in vehicle qualifies for the program when it does not or that they are eligible for a several-thousand-dollar rebate, when they are not.”

The Cuomo action underscores the need for anyone considering buying a new vehicle under the program to research the requirements before going to the dealership. 

For a trade-in to be eligible, it must be EPA-rated at 18 mpg or less. Check the fuel-efficiency rating for your old vehicle, as well as the new ones you are considering. Learn more about the "cash for clunkers" program by visiting the federal government’s CARS Web site and the Consumer Reports CARS resource center.–Anthony Giorgianni 

Prof. Elizabeth Warren on why we need the CFPA, Part 1

Consumer Reports asked Elizabeth Warren, Leo Gottlieb Professor of Law at Harvard Law School and a leading proponent of consumer finance reform, to talk about the proposed Consumer Financial Protection Agency. In this first Q&A segment, she explains why the CFPA is so necessary now.

CR: Why do you support a new consumer financial protection agency?

EW: The market for consumer financial products is broken. 

It is broken because incomprehensible legalese prevents consumers from being able to understand the basic features of financial products and from comparing those products. In 1980, the average credit card contract was one-page long. Today, it is more than 30 pages long. Because the agreements can be changed repeatedly after a customer takes out a credit card, the power of ratings from a trusted group like Consumers Union is completely undercut. While lenders have learned to compete on a few highly visible features—nominal interest rates, free gifts, and warm and fuzzy branding—the real revenue enhancers are the tricks and traps buried in the fine print. 

The fact that consumers can’t compare products leads to higher cost and also prevents the industry from innovating around consumer preferences. Instead of developing genuinely useful new features, the industry innovates by developing more tricks and traps.

The broken market helped bring us to the current crisis by allowing enormous amounts of risk to percolate throughout the system and by reducing stability in the banking sector.

CR: Why, in your view, doesn’t the current system work?

EW: The market has remained broken in large part because our regulatory system is fragmented, cumbersome, and complex. While various regulators—including the Federal Reserve and the chief banking supervisors—have long had the legal authority to protect consumers, they have refused to do so.