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The Consumer Financial Protection Bureau’s Director, Richard Cordray

This article was written by Flexo in Economy. 14 comments.

As many Presidents of the United States have done, President Obama avoided confrontation with Congress by appointing an individual to direct a government organization while lawmakers were on recess. Yesterday, the President appointed former Ohio attorney general Richard Cordray to the long-delayed position of director of the Consumer Financial Protection Bureau (CFPB). Now that this department has a director, it can move forward in enacting regulations — not just suggestions — for non-bank financial entities.

Lately, the CFPB has been working on simplifying customer agreements for financial accounts. A great example is this redesigned credit card agreements. The new design highlights the important terms of the agreement, describes financial terms in plain language, and helps consumers increase awareness of their obligations and rights. The bureau is currently working on a similar resigned agreement for mortgage contracts.

Richard Cordray Without a director, none of these recommendations would be required to be enacted by financial firms. Some banks have already taken steps to improve communication, but banks are also regulated by the Federal Reserve. The Fed issued some regulations as part of the Credit CARD Act of 2009, but the regulations do not extend to non-bank financial firms.

The CFPB may face legal challenges from industry groups who insist that the bureau can have no power to issue regulations.

Who is Richard Cordray?

When Richard Cordray was the attorney general in Ohio, and when he was Ohio’s treasurer before assuming the role of attorney general, I would receive marketing emails from him every couple of months. He championed pro-consumer causes and worked to ensure the public had a better understanding of predatory financial arrangements. His emails were directed at the press to help raise issues in the media. For example, he campaigned for closing loopholes that allows payday lenders to practice predatory tactics and he warned consumers of scams related to the Cash for Clunkers program. Cordray lost in his campaign to be re-elected attorney general in Ohio.

Cordray wasn’t without enemies in the banking industry. He filed a lawsuit against Bank of America and its executives in 2009 on behalf of Ohio’s state pension funds related to the acquisition of Merrill Lynch.

Cordray is also a five-time champion on Jeopardy.

In general, judging by his past actions, Cordray appears to be comfortable with a position strongly in opposition with Wall Street interests, which is a change in direction for Washington politicians for as long as I’ve been an adult. Clinton, Bush II, and Obama have all, despite occasional moments of pro-consumer rhetoric, appointed Wall Street insiders to major financial roles in government and pseudo-government agencies.

There is some validity to that philosophy, after all, Wall Street executives have the connections and relationships with other Wall Street executives, and these connections are necessary for the government to operate efficiently with one of the largest driving forces of the American and global economy. The government, however, can’t be expected to issue effective regulations if it needs to stay on Wall Street’s “good side,” however.

It’s a tough balance to manage, and it’s one of the many reasons why I avoid politics.

Photo: Richard Cordray

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Bank of America Will Pay Whistleblower $930,000

This article was written by Flexo in Career and Work. 9 comments.

Bank of America can’t catch a break. A whistleblower, Eileen Foster, brought fraud at Countrywide Financial Corp. to the attention of Countrywide’s Employee Relations Department shortly after Bank of America acquired the company. Bank of America then allegedly fired the whistleblower in retaliation, although the bank claims the termination was due to the employee’s management style, not the fact she led an investigation that uncovered fraud.

The U.S. Department of Labor says Bank of America must reinstate the employee and pay her $930,000 for lost income, interest, damages, and attorney fees.

Countrywide specialized in subprime loans, and the employee’s investigation uncovered wire, mail and bank fraud at the company, as a matter in the course of doing business. Countrywide used predatory lending tactics and falsified loan documents.

As a result of the investigation, six branches of Countrywide in Boston closed. After the closings, Countrywide agreed to pay $3.1 million to Massachusetts and $3 billion in loan modifications. According to the Department of Labor, also as a result of the investigation, Bank of America retaliated by firing Foster.

From the Wall Street Journal:

Countrywide then initiated an investigation into allegations of harassment and misconduct by Foster, the report says. The report says Foster wasn’t initially informed of the investigation but several employees were interviewed for it. One employee who was interviewed went to the general counsel and the chief operating officer of Bank of America to express concern Foster was unfairly targeted, the report says.

An employee told the Department of Labor the investigators asked “leading questions and had a profoundly biased view” of Foster.

Foster was fired in September 2008. An executive said she engaged in “inappropriate and unprofessional conduct with your staff and displaying poor judgment as a leader,” according to an email cited in the government’s report.

Bank of America will repeal the Department of Labor’s decision.

Despite protections for whistleblowers, many who believe they witness unethical activities in an organization may not raise the issue to the appropriate authorities. The culture of an organization plays a larger role in decisions to go against co-workers and superiors than documented protections. Even though retaliation is not permitted, the fear is great enough to keep most people silent. Particularly when the unemployment rate is high, employees are willing to stay silent and keep their jobs. The Department of Labor is charged with ensuring that employees are not afraid to speak out when there is evidence of wrongdoing.

In addition to this issue for employees, consumers should also pay attention. While Countrywide Financial (Bank of America Home Loans) is not the same entity that provides savings accounts and credit cards within Bank of America, it is part of the larger organization. Interest rates and customer service tend to be the biggest drivers for the choice of banks, but the attitude of the larger corporation can legitimately play a role in these decisions, as well.

While Bank of America may not be continuing any possible retaliation, they are appealing the decisions. Of course, this is the only possible course of action because in the end, the company must answer to its shareholders who expect the company to avoid any unnecessary expenses if possible. When shareholders’ priorities are different than customers’ priorities, it may be time to consider alternatives, like credit unions and mutual insurance companies.

Wall Street Journal

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Reverse Mortgages

This article was written by Flexo in Real Estate and Home. 24 comments.

Homeowners over the age of 62 have a unique option available for accessing cash. Reverse mortgages can help seniors access home equity without having to make monthly payments to repay a loan. When a qualifying homeowner has paid off a mortgage in full, or is very close to paying off a mortgage, a reverse mortgage (or home equity conversion mortgage) can turn the equity into cash through a payment plan. The reverse mortgage is repaid from the proceeds when the owner sells the house.

For seniors who have discovered their expenses are higher than what they’ve planned, a reverse mortgage can help pay the bills. Considering you can’t take your wealth with you when you die, there’s always a case for spending down your assets while you still have time to enjoy your life.

If those are two of the benefits to reverse mortgages, they may be easily overshadowed by the drawbacks.

Reverse mortgages are expensive. Just like regular mortgages, you’ll have closing fees and points to pay. They’ll be rolled into the loan amount, so when you or your estate pays back the mortgage when the home is sold or when you die, you’ll owe more than the converted equity plus interest.
You’ll be at the mercy of the market. Reverse mortgages have interest rates, just like regular mortgages. This interest will also add to the total you’ll need to repay the mortgage after the sale, and if this interest rate is higher than inflation, you’re losing more overall value.
You might not qualify for Medicaid. The proceeds from a reverse mortgage increase your income. If you’ve been relying on Medicaid, you may no longer qualify.

The first point above, the fact that reverse mortgages are expensive, is an important point to consider. Here are some of the expenses associated with reverse mortgages:

Mortgage insurance (2% of the appraised home value)
Origination fee (up to $6,000)
Title insurance
Title, attorney, and county recording fees
Real estate appraisal ($300–$500)
Survey ($300–$500)

In order to qualify for a reverse mortgage, the U.S. Department of Housing and Urban Development (HUD) requires you to receive counseling, which helps borrowers understand the concepts of reverse mortgages and identifies the best lenders.

Wells Fargo and Bank of America have recently exited the reverse mortgage business. They say that HUD requirements go to far to limit lender’s profitability, but in all likelihood, lenders are having a harder time making money from reverse mortgages — which were very profitable during the height of the real estate market — now that home prices are low. Reverse mortgages, like traditional mortgages, are packaged and sold to investors, and if lenders are having a difficult time finding investors for these securities, they’ll stop doing business.

While Wells Fargo and Bank of America are no longer offering reverse mortgages, MetLife is increasing its reverse mortgage business.

Due to the high fees, most reverse mortgages are seen as predatory products. I can understand the appeal of getting access to cash locked away in home equity, but it comes at a high price. Many people argue that you can’t be buried with your wealth, but there are ways to make it work for you after your die if selling your house is not appealing while you’re still alive.

Photo: Warren Brown Photography

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Bank Branches Abandon Poor Communities

This article was written by Flexo in Banking. 23 comments.

Whether banks are still dealing with the effects of the 2008 financial crisis, merging with other institutions, or taking advantage of increased automation opportunities, brick and mortar bank branches are closing more frequently than new locations are opening. According to the FDIC, 2010 was the first year in fifteen years that the balance tipped in favor of branch closings.

Most of these closings are taking place in poor communities. With new regulations, it’s more difficult for banks to make money on overdraft fees, and it’s possible that banks in poor communities rely on this type of revenue more than others. Banks are being replaced by payday loan storefronts and check cashing businesses, services that cater to the needs of poor communities, but are more predatory, more expensive, and more financially damaging to consumers and the community in the long run.

Banks face a dilemma. How can they cater to low-income communities while remaining profitable? Most likely more relevant than overdraft fees, in tough financial times, banks that lend money for homes in poor communities may be more likely to need to resort to foreclosure, though a foreclosure heat map from May 2010 shows that foreclosures occur more frequently in areas that have seen bubble-like real estate growth, such as California, Nevada, and Florida.

I’m not sure what the solution should be. Poor communities need financial services. Low-income households need choices other than what payday lenders and check cashing establishments provide. While families can be happy regardless of financial condition, banks should be helping to find innovative ways to increase financial security among the poorest communities.

New York Times

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The Best Prepaid Debit Cards, February 2012

by Flexo

Prepaid debit cards have always been a controversial topic, particularly the cards that carry insanely high fees just for making everyday purchases. Suze Orman’s entry into the prepaid card business, the Approved Card, prompted heated debate about whether it represented a conflict of interest, given Orman’s following. In 2010, after the Kardashians announced their branded ... Continue reading this article…

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Payday Loans Fees and Interest Rates: Fair Comparison?

by Flexo

I consider payday loans one of the worst forms of debt. That being said, in states where these services are still legal, they provide a way for struggling individuals to afford necessities like food and housing until their next paycheck, for a fee. Unfortunately, many borrowers don’t simply use their paycheck to pay back the ... Continue reading this article…

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Credit Card Rules May Be Enacted Sooner

by Smithee

We reported earlier on some new regulations that attempt to curb “predatory” practices by credit card issuers, like an end to Universal Default and more accurate credit offers. One of the interesting things about these new rules is that Congress didn’t vote on them, they were approved by a Federal Reserve committee, and they were ... Continue reading this article…

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Thanks to This Week’s Guest Authors

by Flexo

While I visited with family on the opposite side of the country this past week for Thanksgiving, I offered the opportunity to feature a few guest authors at Consumerism Commentary. The guests provided a number of excellent articles to keep this website going strong while I was away, and I thank them for doing so. ... Continue reading this article…

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