June 28, 2007
Schumer Calls for New Subprime Lending Regulations
Nuvell Credit Case Affirmed by U.S. District Court
AFSA Attends CAC Meeting on Regulation Z
Option One and Asian Real Estate Association of America Partner During Homeownership Awareness Month to Provide Asian-Language Mortgage Education ...
GMAC Honors Distinguished High School Graduates
Fed Weighs Future of Contactless Payments
Credit Card Issuers Brace for Fees Cut
Banks Claim Share of Credit Card Security Costs Is Unfair
Samuelson: The Cashless Society Has Arrived
Senate Bill to Protect Del. Homeowners
HUD: Foreclosure Problem Not as Bad as Late 1990s
Foreclosures Let's Not Condemn Lenders Too Quickly
Servicers Seek Nonprofits' Help as Go-Between
Congress Eyes Adding New Credit Reporting Reforms
Council Panel Targets Rates for Payday Loans
Bank Agency Backed Off After Targeting Payday Lenders
RouteOne Facilitates Subprime Growth for Franchises, Independents
Car Lessees Find Option to Unload Online
Lender Hits Rock in Effort to Obtain Title to Cars From Unpaid Auctioneer
Credit Bureaus Fight on State, Federal Levels Against Freezes
Schumer Calls for New Subprime Lending Regulations
On June 26, Senator Charles Schumer (D-NY) chaired a hearing on “Ending Mortgage Abuse: Safeguarding Homebuyers” that was held by the Senate Banking Committee’s Housing Subcommittee. The subcommittee heard from consumer advocates, industry representatives and academics whose testimony provided little, if any, consensus.
Advocates from the Center for Responsible Lending and the National Community Reinvestment Coalition argued that, despite industry and regulatory claims that the market is correcting abusive practices, recent securitizations indicate that hybrid ARMs continue to abound in the market. They testified that these loans contain features that they believe are predatory, including prepayment penalties, unverified income for W-2 wage earning borrowers and the absence of escrows to cover taxes and insurance.
Also discussed at the hearing was S. 1299, a bill that would create a new fiduciary duty for mortgage brokers on behalf of borrowers they serve. The legislation would:
•Call for a new fair dealing standard by which all mortgage originators would have to abide.
•Create an ability to repay standard so that ARM loans are underwritten based on the maximum interest rate allowable under the loan.
•Require escrows for many ARM loans, prohibit steering and prepayment penalty features without a significant benefit to the borrower.
Industry witnesses commended the consumer protection objective of the legislation, but raised concerns that the provisions could significantly impact the availability and affordability of mortgage credit. They took exception with consumer advocates’ claims that the market was not punishing abusive lenders, pointing to the number of lenders that have closed their doors. In addition, foreclosure projections from consumer advocates were challenged as statistically flawed. Finally, academics and industry witnesses called on the committee members to allow federal financial regulators to address many of the concerns raised in the hearing, asserting that the regulators could strike a balance that would avoid a credit crunch.
(click for web site)
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Nuvell Credit Case Affirmed by U.S. District Court
AFSA participated as an amicus in the case, Graupner v. Nuvell Credit Corporation. On June 26, the U.S. District Court for the Middle District of Georgia Columbus Division affirmed a decision by the bankruptcy court in that case that negative equity is included in a purchase-money security interest and not eligible for a “cramdown” (i.e., when the amount that can be collected is reduced to the vehicle’s current market value, rather than the amount owed to the creditor). Had the court not affirmed this decision, it could have raised questions about the 2005 Bankruptcy Abuse Prevention and Consumer Protection Act’s provisions addressing the use of cramdowns.
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AFSA Attends CAC Meeting on Regulation Z
AFSA staff attended a June 21 meeting of the Federal Reserve’s Consumer Advisory Council (CAC) during which members discussed proposed amendments to Regulation Z. The amendments would revise the disclosure requirements for open-end (revolving) credit plans that are not home-secured, including credit card accounts.
Members of the CAC disagreed as to whether the APR should be inclusive or whether the fees should be disclosed separately. Members also discussed whether the 45 days of notice that card issuers would have to give consumers if they plan to raise the interest rates was too long.
In addition, CAC members talked about the “Home Ownership and Equity Protection Act” hearing on June 14 and whether the “Nontraditional Mortgage Guidance” should be made a rule. Other discussion topics included underwriting, disclosures, prepayment penalties, and escrow.
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Option One and Asian Real Estate Association of America Partner During Homeownership Awareness Month to Provide Asian-Language Mortgage Education ...
Business Wire (06/27/07)
Asian Americans are the second fastest growing ethnic group in the United States, currently comprising about 5 percent of the total population. To better serve this expanding community, Option One Mortgage Corp. is teaming up with the Asian Real Estate Association of America. Together, they will be producing informational brochures in Vietnamese and Chinese in the hopes of educating prospective homeowners on the nuances of the U.S. housing system. The two groups hope that providing accessible information to the Asian American community will encourage higher rates of home ownership.
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GMAC Honors Distinguished High School Graduates
U.S. Newswire (06/25/07)
GMAC Financial Services is honoring some of the nation's outstanding high school graduates with a gift of money and financial advice. GMAC, in conjunction with the White House Commission on Presidential Scholars, the Department of Education, and the Presidential Scholars Foundation, will honor 141 students from more than 2,800 candidates through the Presidential Scholars Program. As the lead sponsor of the Presidential Scholars' annual National Recognition Week, GMAC will give each student an allowance for college textbooks and an opportunity to gain financial advice through the SmartEdge by GMAC financial literacy program. "These students have already proven themselves to be among the best and the brightest that the United States has to offer," says GMAC President Bill Muir. "But even our most talented future leaders will benefit from a clear understanding of how to establish and maintain good personal credit throughout their adult lives."
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Fed Weighs Future of Contactless Payments
InfoWorld (06/28/07) Roberts, Paul F.
As more and more major companies deploy contactless payment technology, the Federal Reserve is closely examining the technology and asking the payment industry and card companies whether the new payment systems are secure. At a meeting at the Boston Federal Reserve in May, representatives of the payment industry argued that contactless payment systems are a huge improvement over existing magnetic stripe payment technology. In addition, they said that Americans' casual handling of their credit cards in restaurants, for example, poses a much larger risk to sensitive information than wireless hackers that might target contactless cards. However, security in contactless payments remains a small issue because contactless readers are not yet ubiquitous, and there is no evidence that the technology is catching on with consumers. According to a survey of 4,000 16-to-43-year-olds by Market Platform Dynamics in 2006, contactless cards were being used for just 2 percent of purchases under $25.
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Credit Card Issuers Brace for Fees Cut
Australian Associated Press (AAP) (06/27/07)
The Reserve Bank of Australia (RBA), which is reviewing credit card industry practices, is considering cutting interchange fees to zero. Since 2002, the RBA has reduced interchange fees twice; this resulted in lenders cutting back on reward points to compensate for lost revenue. The RBA said reducing interchange fees forced lenders to concentrate on offering more products, such as lower rate credit cards. Mike Cutter, head of GE Money's Australian base, said his company would possibly stray from issuing reward points and instead would "identify a wider range of potential options for each consumer." Commonwealth Bank of Australia's Leslie Martin said the CBA would continue to issue both PIN-based proprietary cards and scheme cards, requiring only a cardholder's signature for debit purchases.
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Banks Claim Share of Credit Card Security Costs Is Unfair
Computerworld (06/25/07) Vol. 41, No. 26, P. 14; Fonseca, Brian
Financial services and retail executives in attendance at Symantec Vision user conference in Las Vegas this month disagreed over whether merchants or financial institutions should bear the brunt of the burden to ensure compliance with the Payment Card Industry (PCI) Data Security Standard. One of those executives, Christopher Leach, the senior vice president and chief information security officer at First Horizon National Corp., noted that all the plans to deal with security breaches have been with banks--despite the fact that high-profile data breaches have taken place at merchants. Meanwhile, Vanessa Pegueros, director of compliance services at AT&T, said that banks have so far not done as much as companies that accept card payments in ensuring credit and debit card security. Gartner analyst Avivah Litan agreed with Pegueros that banks were not doing enough to comply with the PCI standards. "There has not been a lot of enforcement at the bank level," she said. "All the enforcement has been on the processing and retailer side, so it has been unfair, frankly." Others in attendance at the conference--including Bob Russo, the general manager of the PCI Security Standards Council in Wakefield, Mass.--called on merchants and financial institutions to stop playing the blame game and work together to ensure that cards are secure.
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Samuelson: The Cashless Society Has Arrived
Newsweek (06/25/07) Samuelson, Robert J.
Americans are increasingly choosing to use electronic forms of payment over cash and checks, according to a study by The Nilson Report. The study found that cash and checks made up less than half of consumer payments in 2005, down from nearly 80 percent in 1996. Nilson predicts that electronic payments will comprise 70 percent of the total by 2010. There are a number of reasons behind the transition from cash and checks to electronic payments. For instance, processing an electronic payment costs a fifth as much as a check, according to the Federal Reserve. In addition, consumers seem to prefer the convenience of paying with a credit or debit card. However, many consumers are still reluctant to use credit cards because of the monthly fees and interest rates that issuers charge. Meanwhile, there has been an uproar against the widespread use of payment cards among supermarkets and other stores, who say that Visa and MasterCard impose excessive transaction fees on merchants.
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Senate Bill to Protect Del. Homeowners
Delaware Online (06/27/07) Pappas, Leslie A.
The Mortgage Rescue Fraud Protection Act, designed to prevent Delaware homeowners facing foreclosure from becoming entrapped by unscrupulous mortgage consultants, was introduced this week in that state's Senate. The bill is based on laws in other states that have cracked down on fraudulent activities in the mortgage industry. Specifically, it would require all mortgage consultants to put their services in writing. Additionally, the measure would give homeowners a three-day window after signing paperwork to get out of the deal.
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HUD: Foreclosure Problem Not as Bad as Late 1990s
Denver Business Journal (06/26/07) Moore, Paula
Colorado's problem with home foreclosures will take a few years to resolve, but the predicament is less dire than the home foreclosure crisis of the 1990s, according to HUD. In 1990, 2.75 percent of Colorado loans were in foreclosure, compared to 1.4 percent this year, according to data from HUD. Moreover, the state's current mortgage delinquency rate, at 4 percent, is less than the national average of 4.7 percent. The Colorado housing market collapsed partly because of record home production in 2004 and 2005, explains George Antoine of HUD. During those years, permits for single-family homes reached about 17,500 permits. The state's economy was unable to support such production, particularly when combined with aggressive lending. Now, the state will drastically restrain home ownership until the market adjusts. Indeed, the number of permits issued in 2007's first quarter fell to about 2,500 permits. The federal government is also working to defuse the surge in foreclosures by cracking down on predatory lending and expanding funding for housing counselors, says Brian Montgomery, assistant U.S. secretary for housing.
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Foreclosures Let's Not Condemn Lenders Too Quickly
Flint Journal (MI) (06/26/07) P. A10
In the face of the country's skyrocketing foreclosure rate, the Association for Community Organizations for Reform Now (ACORN) is taking action. The group has compiled the stories of families who have lost their homes to foreclosure in hopes of encouraging lawmakers to crack down on unfair lending practices. Although dishonest lending is a problem that must be addressed, ACORN puts an unfair amount of blame on lenders, write the editors of the Flint Journal. ACORN's study should not just serve as a warning against corrupt lending practices. It should also be a caution to prospective homeowners against careless borrowing. If an individual takes out a mortgage, they must be prepared for future economic hardships which could render them unable to make their payments, the editors say.
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Servicers Seek Nonprofits' Help as Go-Between
American Banker (06/22/07) P. 18; Berry, Kate
In response to a Freddie Mac study revealing that 50 percent of borrowers in foreclosure in 2005 failed to contact their lenders to discuss workout options, the nonprofit Neighborhood Reinvestment Corp. and the Homeownership Preservation Foundation have created English and Spanish television and radio ads encouraging cash-strapped borrowers to phone a toll-free number for help. Servicers believe nonprofit, third-party counselors are better able to get the information they need to help borrowers restructure their loans before problems occur. Colorado Division of Housing director Kathi Williams says, "We are convinced that when a market starts to go into the toilet, the sooner you can intervene in the situation, the better. And it's very difficult for lenders to be able to get that early intervention going, when a neutral third party can do a much better job of that." Washington Mutual Inc., meanwhile, says it is using phone calls and direct mail to reach upwards of 15,000 subprime borrowers six months prior to their interest-rate adjustments, letting them know that forbearance and other loss mitigation tools are available.
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Congress Eyes Adding New Credit Reporting Reforms
Credit Union Journal (06/25/07) Roberts, Ed
The recent practice of consumers checking their credit reports has opened up the whole system of consumer credit to thousands, if not millions, of disputes, both large and small, between consumers, their credit bureaus, and providers of credit: credit unions, banks, insurers, and others. During a U.S. House Financial Services subcommittee for Financial Institutions hearing recently, one witness reported that Equifax is now party to more than 2,000 consumer suits over their credit reports, and the other two bureaus have seen a similar wave of litigation. One member of the subcommittee, Rep. Jeb Hensarling (R-Texas) suggested the Fair and Accurate Credit Transactions Act, or FACT Act--which became law in 2003 and aimed to protect consumers from erroneous or inaccurate credit reports--has also contributed to a significant amount of what he called "predatory borrowing," in which consumers challenge negative or unflattering information about them that is true. Rep. Carolyn Maloney (D-N.Y.), who chairs the subcommittee, said to help relieve some of consumers' burdens she will introduce a bill to allow consumers to "freeze" their credit if they believe it is inaccurate or threatened by identity theft. The credit freeze would not affect the ongoing use of credit cards or other existing lines of credit, but would prevent the opening of any new credit lines, according to Maloney. At least a dozen states already have passed legislation providing for credit freezes, Maloney said.
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Council Panel Targets Rates for Payday Loans
Washington Post (06/22/07) P. B4; Fekeiki, Omar
At a June 21 Washington, D.C., Council hearing, payday lending was criticized as abusive by some people for preying on impoverished customers and minorities. Others, however, said the service benefits individuals who need money in emergencies. Supporters of payday lending included owners and employees of stores offering short-term loans; the hearing was held before the council's Public Services and Consumer Affairs Committee. Critics argued that payday lending forces borrowers into cyclical debt and urged the implementation of rules that would restrict fees, which are currently set at 400 percent or higher annually. "We are not saying they shouldn't exist. We are saying that they should be capped," asserted the Rev. Noemi Mena of the National City Christian Church. Meanwhile, the city's attorney general has proposed restricting the yearly rate charged at payday loan services to 24 percent. A committee vote is likely to take place next week. If the proposal is approved, the maximum fee that firms could charge for a $100 repaid loan repaid within two weeks would be less than $1. Customers are currently charged $15 or $16 to borrow $100 for two weeks. Borrowers unable to repay a loan within the stipulated time can usually get the loan rolled over for an additional fee.
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Bank Agency Backed Off After Targeting Payday Lenders
NH.com (06/22/07)
The New Hampshire Banking Department issued cease-and-desist orders for three payday lenders in the summer of 2006, but closed the cases in February 2007 for undisclosed reasons. The Banking Department initially charged Advance America, New England Auto and Pay Day Loans, and EZ Cash with failing to provide a cooling-off period between loans. Loan rollovers, combined with high interest rates, are at the center of critics' objections to the payday loan industry. New Hampshire law bars payday lenders from "refinancing" a high interest, short-term loan, but does not explicitly forbid a lender from granting a new loan that includes the old loan's interest. The resulting loan is, in essence, a camouflaged rollover and a breach of the law, according to attorney Sarah Mattson. Though the Banking Department's attempt to stop the rollover loan practice was abandoned, the Banking Department is currently targeting Web-based lenders that are employing similar practices.
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RouteOne Facilitates Subprime Growth for Franchises, Independents
SubPrime Auto Finance News (06/26/2007) Reed, Jennifer
Finance dealers operating on the franchise side can improve their subprime business by adopting RouteOne's new, integrated platform. Because the platform unites the dealer body's finance sources, the platform can process finance applications for consumers through both captives and non-captives. RouteOne Vice President Brad Rogers explains, "What really makes RouteOne relevant to the subprime space is the presence of the top four captive lenders. Today, we process 100 percent of all indirect finance business on behalf of Ford Credit, Chrysler Financial, GMAC, Toyota Financial Services and the affiliates of each. For these franchises, that represents a significant portion of business." The platform allows dealers to send applications rejected by captives to non-captives operating lower in the credit spectrum, all without re-entering any data. The platform covers national lenders, regional lenders, and the entire range of credit levels. In addition, the platform helps dealers track the status of each deal, which in turn helps managers detect problems that can prolong a deal's funding. Dealers can also employ the platform to electronically engage with their captive and manufacturer. Though RouteOne collaborated primarily with franchised dealers in the past, the organization is now expanding to include independent dealers.
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Car Lessees Find Option to Unload Online
Fort Wayne Journal Gazette (IN) (06/25/07) P. C7; Ambrose, Eileen
Web sites like LeaseTrader.com and Swapalease.com are now making it easier for people to get into and out of vehicle leasing agreements. These sites match up someone looking to transfer their lease with someone in the market to pick one up. Sellers at LeaseTrader, for example, pay around $80 to advertise their vehicles on the site, and buyers pay around $40 to subscribe to the site for 60 days. When a prospective match is found, the seller's leasing company does a credit check on the buyer and approves or denies the transfer. If the transfer goes through, the site charges a brokerage fee that ranges from $150 to $250. These sites can also perform initial credit checks, inspect out-of-state vehicles, and transport vehicles for extra fees.
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Lender Hits Rock in Effort to Obtain Title to Cars From Unpaid Auctioneer
Commercial Lending Litigation News (06/21/07) Vol. 20, No. 4,
Quartz of Southern California, a used car auction house, typically received vehicles lacking title certificates, because the titles were generally unavailable at the time of the sale. Quartz also had an agreement with Mohawk Leasing, a used car dealer, permitting Mohawk to defer paying for the vehicles until Quartz obtained the title certificate from the selling dealer and got in touch with Mohawk. Mohawk purchased 17 vehicles from Quartz, took control without paying, and then sold each vehicle to a retail buyer. The buyers funded their purchases with conditional sale contracts, which Mohawk then sold to Mullen Bros. Inc. for the full amount of the settled price. After receiving title certificates for the 17 cars, Quartz contacted Mohawk only to find that Mohawk had folded, leaving $94,720 in debt to Quartz. Quartz declined to give the title certificates to the retail buyers until Mullen reimbursed Quartz on behalf of Mohawk, but Mullen refused. After a trial, the California Court of Appeal ruled that Quartz was the proper owner of the disputed cars, and that the lender would have to pay Quartz to obtain the titles. Mullen argued that the case should be regulated by California's version of the UCC, because the vehicles qualified as goods. The court replied that though the vehicles counted as goods, they were clearly excluded from California's UCC scope. Therefore, the proper owner is the certificate of title owner. In addition, the court noted that Mullen did not act in a reasonable manner when it neglected to confirm Mohawk's title before buying the sale contracts.
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Credit Bureaus Fight on State, Federal Levels Against Freezes
USA Today (06/26/07) P. 1B; Acohido, Byron; Swartz, Jon
The Consumer Data Industry Association (CDIA) is urging federal legislators to check the wave of state laws authorizing consumers to freeze access to their credit histories to thwart identity theft. However, more and more states are forcing credit bureaus to streamline the process enabling consumers to block others from viewing their credit files. In the battle for control of consumer credit information, credit bureaus are losing ground as identity fraud and data theft grow rapidly. The most troublesome type of identity theft is new-account fraud, in which criminals utilize stolen information to open multiple credit card and cell phone accounts, as well as to pay medical bills and take out mortgages and car loans. Victims are left with tainted credit histories and higher interest rates. Credit consultants and fraud investigators assert that credit freezes are the best defense against new-account fraud. However, such freezes would significantly diminish the credit bureaus' business. To offset the burden, CDIA lobbyists are calling on states to impose, as California has, fees for freezing reports. Some states are moving in the opposite direction; Montana became the first state to order the credit bureaus to freeze a consumer's credit report within 24 hours, so long as the report comes from a verifiable victim of identity theft. The CDIA argues that the mandate may impair the integrity and accuracy of consumer reporting files. Also concerned are retailers and auto dealers, who fear that the lack of instant access to credit might cut into big-ticket item sales. In response, many states have instituted a "quick thaw" policy that permits consumers to unfreeze their credit histories in 15 minutes.
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Abstract News © Copyright 2007 INFORMATION INC.
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AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. For more information,
please contact newsbriefs@afsamail.org.
AFSA's mission is to protect and improve the consumer credit business, maintain a positive public image, and create a legislative climate in which reasonable credit regulation can and will be enacted. The Association operates in the public interest, encourages and maintains ethical business practices, supports financial education for consumers of all ages, and provides other assistance in related fields on an as-needed basis. The American Financial Services Association has provided services to its members for over ninety years. The Association's officers, board, and staff are dedicated to continuing this impressive legacy of commitment through the addition of new members and programs, and increasing the quality of existing services.
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