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Consumer Financial Protection Bureau Wants Payday Loan Feedback

This article was written by Flexo in Consumer. 7 comments.

While the mainstream financial industry has faced a dizzying array of government and quasi-government regulations through most of the last one hundred years, non-bank financial products have, for the most part, evaded regulations. Catering to lower-income communities, payday loan storefronts and check cashing establishments have managed to justify their business models. The more desperate you are to pay your electricity bills and your rent before your power is turned off and you’re evicted, the more likely you are to willfully ignore the fact that the companies helping you are taking advantage of you in ways that a traditional bank would never be allowed to do.

The Consumer Financial Protection Bureau (CFPB) is now charged with recommending new regulations that go beyond retail banks, thrifts, investment banks, and credit unions into the murky world of non-bank financial products.

If you compare a short-term payday loan with a loan from a bank, you might see that the payday loan’s equivalent interest rate (APR) is 450% or even higher. Mortgages tend to be 3% to 7%, business and personal loans could be 5% to 10%, and credit cards are 10% to 20% unless you default. Anything higher, and the loan might be considered usurious. So how do payday lenders get away with charging 450% or more?

Well, these lenders frame what they charge as a flat or sliding fee, not interest. The loans are typically due in two weeks, the expected arrival of your next paycheck. It might not be fair to compare these fees with interest rates, because the borrower doesn’t hold onto the loan for a long time.

Or does he? There’s some evidence suggesting payday loans create a cycle; rather than paying off the loan when the next paycheck arrives, lenders offer an enticing deal to encourage borrowers to begin the next loan. The two-week cycle repeats.

The CFPB wants to hear from people who have had experiences with payday lenders. In order to get a good grasp on how non-bank financial products can and should be regulated, the organization is seeking comments from the public. What have been your experiences with payday loans? Feel free to share here on Consumerism Commentary, or tell the CFPB your story directly.

Photo: bigburpsx3

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New Financial Regulations in the Wall Street Reform Law

This article was written by Flexo in Economy, Featured. 40 comments.

Updated: The media are calling the new Wall Street Reform Law, recently signed by President Obama, the most significant reform of the financial industry since the Great Depression. It looks to tighten the reins on a industry that helped cause the recent recession by requiring the Federal Reserve to create and enforce regulations on the financial industry. The law, whose formal name is the Restoring American Financial Stability Act of 2010 (H.R.4173), is designed to protect consumers, corporations, and the economy as a whole.

Here are the major provisions contained within the law.

The Consumer Financial Protection Bureau will exist inside the Federal Reserve. This organization will advise the Federal Reserve on issues such as changes to credit card statements and contracts, in order to help consumers understand the terms of their agreements. The result should be that credit cards and other financial products become more simplified. In addition, as more states take out payday lenders, I expect this agency to do the same on a federal level.

Enhanced free credit products will now be available. While consumers can currently obtain three annual free credit reports, one from each reporting agency, the government will now require these companies to offer free credit scores as well. While this is a positive move, I expect the availability of these scores will encourage companies to develop a new secret formula for making lending decisions.

The agency will likely limit credit card interchange fees to what is reasonable based on the cost of providing the service. As Smithee mentioned in May, swipe fees make a lot of money for certain companies involved with every use of a credit or debit card, and there is a general thought that these fees are currently uncompetitive.

Borrowers will need to document their income before qualifying for loans. Call them liar loans, no-documentation loans, or alt-a loans, these mortgages offer higher rates to individuals who for whatever reason can’t support their income with proper documentation like tax returns or pay stubs. It will be more difficult for certain consumers to obtain financing with this law in place.

Financial regulators will have a larger role in looking for systemic risk with banks and other financial institutions that are too big too fail. Large financial companies will have the same opportunity as large banks to unwind slowly in a controlled crash. The FDIC’s role will expand beyond pure banking institutions. Large institutions may also be forced to split into several smaller companies to better manage risk to the entire financial system.

The Government Accountability Office will be able to audit the Federal Reserve two years after the Fed takes emergency actions. I assume this two year buffer will allow the effect of the Fed’s actions to echo throughout the markets without immediate interruption.

Executive compensation will be regulated, in all publicly-traded companies, not just in the financial industry. There is not a lot of teeth to this regulation, as it provides for shareholders to have a non-binding advisory role. The problem with this is major shareholders are often executives, board members, and institutional funds that are usually willing to advise the company to spend the money. In addition, the shareholders’ decisions can be ignored by the company.

The bigger part of this part of the law is the encouragement for industries to self-regulate executive pay. I don’t expect much will change in executive compensation as a result of this law; in fact, it might encourage more corporations to become or remain privately-owned companies.

What do you think of the new financial regulation? Does it go too far or not far enough? Will it save or kill the financial industry? Will the new law be enforced?

Read the text of H.R.4173.

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Overdrawn!: A Documentary About Bank Fees, Screening Tonight

This article was written by Flexo in Banking. 8 comments.

If you are in the area of the University of California, Berkeley, stop by Mulford Hall tonight to see a screening of Overdrawn!, a documentary film by Karney Hatch. In the film, Karney takes a hard look at practices by big banks, primarily overdraft fees. The documentary follows the writer/director as he talks to bankers, a former loan collections agent, a loan shark, consumer advocates, Ralph Nader, and members of Congress in attempt to explain the inner workings of the consumer banking industry to the public.

I took away several interesting points from the film.

The application of deposits and withdrawals

Many Consumerism Commentary readers already know this, but it’s an important reminder. Banks will “apply” deposits and withdrawals in the order that favors the institution. Even if you deposit cash on January 2, if you have checks that pay that day or ATM withdrawals, at the end of the day, the bank will apply your debits before your credits, increasing the chance of an overdraft.

Additionally, the debits are ordered from largest to smallest. If your ending balance on January 1 was $500 and on January 2, you have two checks paid, one for $550 and one for $20, the check for $550 will be applied first. You’ll receive an overdraft fee for the first $50 overdraft. Next, your $20 check will be applied, inducing a second overdraft fee on the same day.

Overdraft fees and interest rates

The Federal Reserve Board as well as consumer groups consider overdraft fees to be loan interest. Overdraft protection, a service offered by banks, is basically a loan extended to the customer. If you don’t have money in your account when your check is cashed or when you use your debit card in a transaction, rather than disapproving the transaction or bouncing the check, the bank does you a favor by letting you use their money for a time.

The size of the overdraft fee does not depend on the amount of the overdraft. Charge $0.05 more than you have in your account or $500 more, you will be assessed a $30 fee, for example. Fund your account back to zero within 24 days, and your $30 fee on a $0.05 equates to an annual interest rate of 219,000%.

Overdraft fees make a payday loan, with typical interest rates of 100% to 1,000%, sound like a good idea.

In Overdrawn!, Karney Hatch beat his bank’s overdraft policy through small claims court. His bank reversed the overdraft fees incurred through his experiment. With the bank’s bottom line always in mind, the company decided it was less costly to credit his account for the fees and court costs rather than face legal expenses.

If you can’t make it to Berkeley tonight for the screening, Karney is taking the film on tour. In addition to college theaters, you can find the film in some locations projected onto the white walls of bank buildings for a unique experience. If a public showing isn’t available for you, you can also order Overdrawn! from Amazon.com or directly from Karney Hatch.

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Weekly Blog Roundup

This article was written by Flexo in Link Sharing. Add a comment.

Here are some interesting articles from the MoneyBlogNetwork and beyond.

MBAs Don’t Prepare Managers for Real-Life Challenges
The process of getting an MBA is more about the connections you make than learning how to deal with real-life management problems, apparently. This is true about most degrees. In school you learn fundamental concepts and theories, but practical skills come from experience on the job. I’m not sure why this comes as a surprise to people. I’ve been slowly chronicling my experiences obtaining my MBA degree from the University of Phoenix, a school critics love to hate. [Free Money Finance]

Orlando Gas Gouging
Here’s an example of price gouging on gasoline, although prices at stations around airports usually are much more expensive than others. They don’t post their prices, yet motorists still stop by to fill up. Then they’re surprised when they receive the bill. [FiveCentNickel]

Do Payday Loans “Victimize” People?
Payday Loans are bad ideas, but are they victimizing customers, or should customers take full responsibility? Responsibility must be shared between companies that should operate in an ethical manner and not take advantage of people in difficult positions, and customers who must be as educated as possible about whatever product or service they’re considering. [AllFinancialMatters]

How To Talk Salaries With Coworkers
One way to find out whether you have room to negotiate your salary is to determine what your co-workers are making. This is a dangerous path to walk down. I wouldn’t recommend it. [Blueprint for Financial Prosperity]

Yard Sale Finds This Weekend
Mighty Bargain Hunter found some mighty bargains while on the hunt in the yards of northern Virginia. [Mighty Bargain Hunter]

Simple Way to Save $3,000 a Year: Brown Bag It
The money you save by spending $1 to $2 on lunch each day rather than $10 to $12 may amount to $500,000 after 25 years! As one commenter mentioned, you should also look at the “opportunity cost.” But eating alone at your desk every day, you miss out on opportunities that come by through socializing with your coworkers and management. [Zen Habits]

Here are a few more:

* A Look at the Digg Effect in Action
* Money in the Mattresses
* How Much Would A 3 MPH Crash Cost You? Hint: Thousands!
* How to Look Good on a Budget: The Business of Beauty

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