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CFPB Consumer Advisory Board Meeting Highlights Areas of Focus

AFSA staff attended the second public meeting of the Consumer Financial Protection Bureau’s (CFPB) Consumer Advisory Board (CAB) on Feb. 20. CFPB director Richard Cordray opened the meeting with remarks on how the CFPB came into existence, what the CFPB has done so far, and four classes of problems that the CFPB will continue to focus on. The four problems include: (1) deceptive and misleading marketing, which includes not presenting critical product information to consumers in a readily understandable manner; (2) debt traps – which Cordray defined as products that trigger a cycle of debt whose substantial costs over time can disrupt the precarious balance of people’s financial lives; (3) consumers being unable to choose their provider of financial products or services in certain markets, such as debt collection, loan servicing, and credit reporting; and (4) the “evil of discrimination.”

After Cordray’s remarks, members of the CAB were invited to make comments, which included anecdotal stories about consumers, arguments for increasing regulations on payday loans, problems in the student loan industry, issues with overdraft fees, complaints about fraudulent debt settlement companies, and accusations about discrimination against protected classes. One CAB member commented on the large volume of complex regulations with which the industry is working to comply. Another suggested that before implementing regulations that would cut-off access to small-dollar loans, the CFPB should consider studying what products consumers would use to meet their short-term credit needs. A CAB member also commented, with concern, on the disappearance of the subprime mortgage market.

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AFSA Issues Letter on Georgia Lease Tax Issue

On February 21, AFSA sent a letter to Georgia Governor Nathan Deal outlining its continued concerns with HB 386, a law adopted last year that revised taxation for motor vehicles. In the letter, AFSA highlighted the negative effects of the law as written, specifically that it will result in substantially higher costs for consumers who elect to lease vehicles as opposed to those who elect to purchase. The letter urges the governor to support the passage of and sign HB 80, which would address the disparity, before the March 1 effective date of HB 386.

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AFSA Comments on Texas Proposed Consumer Bill of Rights

AFSA State Government Affairs (SGA) submitted a comment letter on Feb. 19 to Commissioner Eleanor Kitzman of the Texas Department of Insurance regarding proposed changes to the Consumer Bill of Rights for Credit Life, Credit Disability, and Involuntary Unemployment Insurance. The letter applauded changes that the department made concerning certain portions of the bill of rights during the last comment period, but highlighted additional areas where both consumers and industry would benefit from clarity and brevity. The letter also requested that the department allow at least six months for AFSA members to comply with the updated regulations.

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AFSA Comments on the Impact of the CARD Act

On Feb. 19, AFSA responded to the Consumer Financial Protection Bureau’s (CFPB) request for information regarding the credit card market. The Credit Card Accountability Responsibility and Disclosure Act of 2009 (CARD Act) requires the CFPB to conduct a review of the consumer credit card market. In connection with conducting that review, the CFPB asked for information about a number of aspects of the consumer credit market.

AFSA’s letter stated that the substantive terms and conditions of credit card agreements have changed following the CARD Act, and that these changes have had impacts on consumers that are not always positive. Issuers have moved toward variable instead of fixed interest rates and have been forced to restrict marketing to consumers. Companies also have been forced to change underwriting techniques, restrict access to credit for consumers under the age of 21 and prohibit credit limit increases for otherwise qualified borrowers.

The letter went on to illustrate how issuers are now forced to either offer higher rates or lower credit limits to all borrower in order to address the increased risk that comes with removing re-pricing as a tool. Traditionally, only borrowers that displayed high-risk characteristics would be subject to these strategies, but the CARD Act forces card issuers to mitigate risk by restricting credit to worthy consumers.

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Inside the Beltway
Consumer Bureau Said to Warn Banks of Auto Lending Suits
Bloomberg News (02/21/13) Dougherty, Carter

The Consumer Financial Protection Bureau (CFPB) reportedly has cited at least four banks, claiming that they engaged in discriminatory lending practices using the disparate impact theory. The CFPB does not have the authority to regulate vehicle dealerships, but can monitor banks who issue vehicle loans. The banks have received letters stating that they have 15 days to explain their position. The bureau accuses the banks of violating the Equal Credit Opportunity Act of 1974, which prohibits discrimination in lending.

CFPB Director Richard Cordray said that the bureau has been fielding a number of complaints from consumers regarding vehicle finance transactions and that vehicle loans fall within the purview of the CFPB. “Auto lending is within our jurisdiction,” Cordray said. “We are examining institutions around auto lending just as we are looking at them on mortgage, credit cards, student loans."

The disparate impact theory laid out by the CFPB argues that the banks, whether they intended to discriminate or not, tended to charge higher fees to persons of color. The potential CFPB lawsuits extend from dealer participation, where the discrimination allegedly occurs. Under the practice, buyers receive a loan that is costlier than the one the bank gave the dealer. The industry says the difference is a reasonable price for dealers’ services and that buyers can negotiate that spread down.

Chris Stinebert, President and CEO of the American Financial Services Association (AFSA), reiterated the industry’s point. “It’s a very competitive marketplace, and consumers can negotiate the cost of car and financing.” Stinebert also noted that voluntary caps on dealer markups created years ago remain in place, fostering a competitive marketplace and providing excellent value for consumers.

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National and State News
Martha Coakley Presses Banks on Loans
Boston Globe (02/19/13) McKim, Jenifer

Massachusetts Attorney General Martha Coakley has requested written confirmation from nearly 300 banks that they are following rules that allow borrowers to stay in their homes. The HomeCorps program, which requires creditors to work with a borrower to modify a loan if it is more financial feasible than foreclosing on the home, has been difficult for mortgage servicers to comply with. Traditionally, servicers are not permitted to modify a first lien if a second lien exists on the same property, leaving nearly a fifth of all borrowers in the state out of the program. “We believe compliance with this provision of the statute is both straightforward and will more efficiently facilitate loan modification efforts,” Coakley stated.

Governor Deval Patrick signed Act to Prevent Unnecessary and Unlawful Foreclosures in August. The law is meant to help more holders of first loans to renegotiate because they no longert need permission from the second-lien holders, who can stall the process. Moreover, even after a modification, the first loan continues to hold priority status over the second lien in case a borrower defaults again.

Mortgage servicers have begun to make changes to existing policies that will allow them to modify loans that exist on properties with a second lien. The combination of a growing economy and regulations that allow consumers to modify existing mortgages has resulted in the rate of foreclosure to fall nearly 13 percent since this time in 2011.

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Mortgage Deal Brought Homeowners $45 Billion in Relief
Reuters (02/21/13) Viswanatha , Aruna and Rick Rothacker

The five top U.S. banks have provided nearly $45.8 billion worth of assistance to struggling homeowners via a settlement with the federal government, according to a report issued today. Combined, the banks have completed $19.5 billion worth of short sales – where they lost money – and provided nearly $11.6 billion in second mortgages and loan modifications.

Just under 320,000 borrowers have taken advantage of the settlement, which averages to nearly $76,500 per borrower. The settlement itself resolved allegations of misconduct in servicing of loans and is designed to require banks to comply with stringent new requirements, while assisting consumers who may have taken out bad mortgages under older rules.

The report issued today shows that all five banks are well on their way to satisfying the terms of the settlement and assisting in the recovery of the housing market. Ally Financial has already met and exceeded its obligations, providing $257.4 million in assistance where $200 million was required.

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Consumer Advocates Fear Effects of Proposal for Payday-Style Loan
The News Tribune (02/18/13) Lovaas, Jimmy

Washington Senate Bill 5312 is set to change the standards for loans in the state if it passes through the chamber this session. The legislation would open up a new class of loans in between payday loans, which are capped at $700, and traditional long-term installment loans. Consumers would be permitted to borrow as much as $1,500 over a term of 12 to 18 months with a capped interest rate of 36 percent. To make up for the loss, lenders would be permitted to charge a 15 percent origination fee and a $7.50 maintenance fee per $100 loaned.

Opponents argue that the bill is circumventing existing laws that restrict payday lending in the state; the number of payday locations dropped from 603 in 2009 to 256 just two years later. Additionally, they argue that the legislation would violate existing federal laws that protect service members from predatory products.

The sponsor of the bill, Senator Steve Hobbs (D-Lake Stevens), is a former Army captain who supports the Department of Defense restrictions and has seen the disastrous effects payday products can have on service members. “My hope is that the whole payday lending will just stop,” he said. Hobbs said his ultimate goal is a loan product with a limited interest rate and a payment plan. He also wants a database to track the new loans to verify that borrowers only are taking out one loan at a time.
*Note-The article incorrectly cites the bill as SB 5231. The correct bill number is cited and linked above.

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S&P Experian Auto Loan Default Index Opens 2013 Marginally Higher
SubPrime Auto Finance News (02/20/13)

S&P and Experian reported on Feb. 19 that auto loan default rates rose in January by a tenth of a percentage point from 1.09 percent in December. The S&P/Experian Consumer Credit Default Indices, which are published monthly, are designed to track the default experience of consumer balances in four key loan categories: auto, bankcard, first mortgage lien and second mortgage lien.

Other segments in credit categories also showed positive trends. The rate at which first time mortgage holders defaulted dropped in January to 1.58 percent from 1.68 in December. Second time mortgage default rates remained unchanged at 0.69 percent. The card default rate fell to 3.41 percent in January from 3.53 percent in December, the lowest in the post-recession era.

Experian's data comes from banks and mortgage companies, and covers approximately $11 trillion in outstanding loans from 11,500 lenders.

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February 21, 2013

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AFSA Newsbriefs

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