The new Presidential administration will soon dissect the Dodd-Frank Act, a group of regulations the Obama administration developed in response to the 2008 financial crisis. Some political analysts expect them to disband the Consumer Financial Protection Bureau (CFPB). So what exactly is it, and what does it do for consumers?
Senator Elizabeth Warren proposed the idea for an agency like the CFPB in 2007 and, following the Great Recession, it was officially launched in 2010. In general, the CFPB’s goal is to protect consumers by regulating banks, credit unions, payday lenders, mortgage servicers, and other institutions that offer financial products. Many of these institutions, particularly payday lenders, are notorious for preying on consumers. Some argue that it’s up to the consumer to read the fine print and figure out how these products work on their own. This sounds simple enough, but the problem is that many of these companies make their terms deliberately misleading, so the CFPB was created to provide more transparency.
Especially now that the Bureau is in danger of disbanding, it helps to understand how it works. The goals of the CFPB tell you what you should be concerned about as a consumer.
More Transparency From Mortgage Lenders
Banks played a big role in the 2008 financial crisis thanks to subprime mortgage loans. To sum it up briefly, banks gave out massive loans to almost anyone, even if their credit was terrible and even if there was no way in hell they could afford to pay the loan back. This created a bubble that eventually burst. Housing prices in the U.S. fell almost 30% and the stock market fell by about 50%. We were smack dab in a recession.
“Well, people shouldn’t have taken out those loans,” you might say. Fine, but we’re talking a global financial crisis here. The solution isn’t quite that easy.
To prevent this from happening again, the CFPB created some rules and guidelines to keep consumers from borrowing more than they can afford and foreclosing on their home. Perhaps the most important among these is the ability-to-repay rule. This rule required lenders to consider a handful of different, crucial factors in approving the loan, a few of which include income, debt to income ratio, and employment status. In general, lenders now have to make sure you actually can pay back the loan. A few other mortgage rules the CFPB established to help consumers include:
- Mortgage servicers have to send you a clear monthly statement that details how they’re crediting your mortgage payments.
- Servicers have to credit your payments the day they get them.
- Servicers have to give you advance notice if your Adjustable Rate Mortgage is going to change.
- If you’re in danger of a foreclosure, servicers can’t initiate it until you’re more than 120 days late on your payment. This way, you have enough time to submit an application for loan modification.
In general, the CFPB’s rules are meant to ensure homeowners can actually afford their homes and force lenders to be more transparent with how they handle your account. You can see a full list of their final rules here.
Where to turn without the CFPB: Regardless of what legislation will go, stay, or get replaced, if you’re a potential homeowner, you should know all the hidden costs that come with homeownership. Most experts also recommend putting down at least 20% upfront, although that’s certainly not the only guideline to figure out how much house you can afford. Even with the CFPB’s rules, lenders often approve you for more than you can comfortably afford, so do your own math.
A Forum to Report Shady Business Practices
The CFPB has a massive database of customer complaints. It’s basically a forum for customers to submit their issues with a bank, credit union, or other financial entity. You can sort by account type, date, and company. They also keep track of consumer “narratives,” which are optional compliant descriptions from customers.
This is useful if you’re thinking about switching banks, for example, and want to research another bank’s reputation. However, it’s also useful if you’re having problems with your current bank. Remember that whole Wells Fargo fiasco? Well, the CFPB actually had a bunch of related complaints from Wells Fargo customers before it all came to light:
If you were having issues with Wells Fargo, this database would’ve been a good place to lodge your complaint. If the CFPB gets an onslaught of similar complaints, they investigate the company in question. They were, in fact, the agency that busted Wells Fargo.
Where to turn without the CFPB: The Federal Deposit Insurance Corporation also has an online consumer assistance form that lets you file a case with an FDIC-regulated institution. The Federal Reserve accepts consumer complaints at FederalReserveConsumerHelp.com. You can also call their consumer line at (888) 851-1920 or send a fax to (877) 888-2520. If you want to research a bank or credit union’s reputation, online tools like Nerdwallet and Consumer Affairs include reviews and customer feedback.
Protection From Credit Card Companies and Payday Lenders
We all know credit card companies can be shady, but sometimes they actually use illegal tactics to get one over on customers, and that’s when the CFPB (and FDIC) steps in. For example, back in 2012, the CFPB investigated and ordered three American Express subsidiaries to pay $85 million to 250,000 customers for reportedly misleading them. The New York Times reported:
In doling out credit, they said, American Express also discriminated against applicants based on their age. The company also duped consumers into paying off stale credit card debt with the promise of improving their credit score, the investigators said; in fact, regulators found, American Express was not reporting the payments to the credit bureaus at all.
The CFPB and FDIC also investigated Discover’s “credit protection” service, which included identity theft protection and credit score tracking. According to the agencies, Discover implied that these services were free but they actually charged customers to opt into them. Discover agreed to refund $200 million to more than 3.5 million cardholders.
Cash America violated the Military Lending Act, which restricts the rate on certain types of loans given to servicemembers to 36 percent. Cash America extended payday loans exceeding that rate to more than 300 active-duty service members or dependents…For nearly five years, Cash America’s debt collection subsidiary in Ohio, Cashland Financial Services, Inc., had been preparing, executing, and notarizing documents filed in its Ohio collections litigations without complying with state and court-required signature rules.
As a result, Cash America had to refund customers $14 million. Last year, the CFPB proposed a new rule to regulate payday lenders, too. Basically, these rules included:
- A “full-payment test” which required lenders to verify that a borrower could make payments and still pay for basic living expenses
- A regulation for penalty fees
- Regulations that would make it harder for lenders to reissue or refinance loans, trapping borrowers in a cycle of debt
Not everyone was convinced these rules were enough to fix the main problem with the industry, crazy high interest rates, but at least they were a step in the right direction. For now, the proposed changes are in limbo.
Opponents of the CFPB’s proposed rule argue that it decides “for all Americans whether they can take out a small-dollar loan to meet emergency needs,” but that’s not really true. First of all, the rule doesn’t get rid of payday loans at all.
Second, and more importantly, there are other small-dollar loan options. Most personal finance experts will tell you: payday loans are probably the worst, avoid-at-all-cost option for meeting your “emergency needs.”
Where to turn without the CFPB: Even with the CFPB’s proposed rules, payday loans probably aren’t a good option. However, it’s especially important now to learn about the dangers of payday lending and know your alternatives. You’re probably better off with a small-dollar loan from a bank or credit union. The FDIC’s Small-Dollar Loan Program is an initiative to provide affordable loans to borrowers, so you can find a list of institutions here.
The National Credit Union Foundation’s REAL Solutions® program is another initiative that helps borrowers who don’t have a lot of money. Some credit unions also offer “signature loans,” which are aimed at people with bad credit. Peer-to-peer loans through services like Kiva and Lending Circles another alternative for borrowing money in a pinch. With any of these options, you still have to pay back the loan but the terms are a hell of a lot better than payday loans and designed to help you get back on your feet.
Protection for Student Loan Borrowers
For-profit colleges are nearly as sketchy as payday loans, and they’ve been called out quite a bit in recent years due in no small part to the Consumer Financial Protection Bureau.
Just last September, for example, the CFPB made Bridgeport Education, Inc. refund $23.5 million to students after encouraging students to take out loans by telling them the wrong monthly payment amount. The CFPB reported:
Specifically, the CFPB found that Bridgepoint told students that borrowers normally paid off loans made by the school with monthly payments of as little as $25, an amount that was not realistic.
Predatory lending is one thing, but some for-profit colleges flat-out lie about their job placement rates to lure potential students, too. All of this sucks for students, but it’s not great for taxpayers, either, considering we pay tens of billions to fund these companies.
Beyond investigating for-profit schools, the CFPB also has resources, tools, and guides to help student loan borrowers navigate the loan process. Their college cost comparison tool, for example, helps students compare offers from a few different schools, breaking down the first-year costs, along with the costs after they graduate.
Where to turn without the CFPB: Under the current administration, many analysts expect for-profit colleges to rebound. The best thing you can do when picking a college? Research. If you’re considering a for-profit school (or any school, really), My College Guide suggests asking the following:
- Are job rates “placed” or “employed”? Placed might just mean the student went on to grad school. Employed means they actually found work.
- Were they employed or employed in their field of study? There’s a huge difference. After all, you can be employed at a minimum wage job that doesn’t require your degree. One school was recently fined $30 million for advertising high employment rates even though many of their grads were working fast food and other low-income jobs.
- What’s the time frame of the statistic? Do students find jobs six months out or did they study job placement rates years after graduating?
Finally, the CFPB has a been a big proponent of financial literacy—you know, that thing detractors say consumers should embrace? The CFPB website includes educational resources for setting financial goals, preparing taxes, taking out auto loans, and so on.
Thankfully, most basic financial literacy advice is free, and here are a number of courses you can take at no cost. With Dodd-Frank on the line, it’s more important than ever for consumers to protect themselves, and that means learning what exactly we need protection from.
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