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Regulators Scrutinize Auto Lenders Over Add-Ons
Wall Street Journal (05/02/13) Sidel, Robin and Zibel, Alan

The Consumer Financial Protection Bureau (CFPB) has begun to look more closely at add-on products that automobile dealers typically factor into the final financed amount when consumers purchase vehicles. The CFPB investigation is aimed at determining whether dealers and finance companies are disclosing all of the terms of the products that they offer. Earlier this year, the CFPB warned vehicle finance companies that they would begin using disparate impact theory to determine if automobile dealers are unfairly jacking up interest rates on protected groups. The notice over add-on products represents the next significant step in the CFPB’s ongoing mission to regulate the vehicle finance industry.

In recent weeks, the CFPB has issued civil subpoenas to banks and auto captives. According to Alan Kaplinsky, a lawyer with Ballard Spahr LLP who represents financial companies, the bureau has asked numerous questions and requested data on vehicle lenders' practices, including sales of warranties and insurance. "The CFPB is on the warpath when it comes to add-on products," he said.

Industry advocates argue that the terms of add-on products are always disclosed clearly to the consumer at the time of purchase and that additional regulation of the vehicle finance sector would only serve to hamper one of the few economic bright spots during the nation’s recovery. Consumers have borrowed nearly $783 billion to purchase new and used vehicles, helping to lift the economy and the industry at a crucial time.

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SGA White Paper Studies Foreign Language Requirements

On May 7, the AFSA State Government Affairs Committee published a white paper on foreign language requirements for consumer contracts. The paper highlights three states – California, Nevada and New Mexico – that have gone farther than the U.S. Civil Rights Act of 1964 by proposing or enacting legislation or regulations with foreign language requirements for consumer contracts. In some cases, these amendments would have required lenders to translate consumer contracts into nearly 300 different unique languages, imposing a significant burden on the industry.

So far this session, at least 45 bills with contract language requirements are pending in 18 states, and two bills have been enacted in Maryland and Utah. The bills include a variety of provisions, including prohibitions on the sale of vehicle warranties unless the document is drafted in the borrower’s preferred language and requirements that a contract for the sale of a vehicle be provided in the language in which it was negotiated. A lender’s failure to comply would allow the borrower  to cancel the contract without penalty.

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Inside the Beltway
U.S. Regulator says Fannie and Freddie to Only Buy Qualified Loans
Reuters (05/06/13)

In a move designed to continue to lessen the footprint that Fannie Mae and Freddie Mac have on the mortgage market, the Federal Housing Finance Agency (FHFA) announced on May 6 that the two companies would only buy mortgages that meet the definition of the new “qualified mortgage” or QM. The QM rule, issued by the Consumer Financial Protection Bureau (CFPB), prohibits lenders from charging fees that add up to more than 3 percent.  The rule will take effect in January 2014.

Lenders have repeatedly raised concerns that they would have little incentive to issue non-qualified mortgages. While the rules were not as stringent as some feared, the FHFA's decision could cause the concerns to resurface.

Fannie and Freddie were placed into conservatorship by the U.S. government after the housing crisis in 2008. The two companies have received $187.5 billion in taxpayer funds, but recently have begun paying back the debt to the Treasury.

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U.S. Brings Charges in First Criminal Case for Consumer Agency
Reuters (05/07/13) Raymond, Nate

The Consumer Financial Protection Bureau (CFPB) has brought its first criminal case in the District Court in Manhattan. The indictment documents allege that Mission Settlement Agency and four individuals who worked at the debt collection company used wire and mail fraud to exploit nearly 1,200 people.

The documents note that Mission took nearly $2.2 million in fees from its customers, but failed to pay anything to their creditors. One of the four named defendants, Michael Levitis, is a suspended lawyer who previously served three years’ probation and faced a fine of $15,000 after lying to investigators regarding the corruption investigation of N.Y. Senator Carl Kruger.

"There is nothing to get the attention of people who are dedicating their lives to committing fraud like knowing that they could end up in prison," said CFPB Director Richard Cordray, who noted that they had just begun their investigation into the industry and would likely continue to bring criminal charges against perpetrators.

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U.S. Consumer Protection Bureau Calls for Student Loan Solutions
Reuters (05/08/13) Nawaguna, Elvina

After analyzing nearly 28,000 responses from individuals, industry and consumer groups, the Consumer Financial Protection Bureau (CFPB) announced that U.S. student loan debt could begin to drag on the economy, unless lawmakers do something to ease the financial burden on borrowers.

The average American owes about $27,000 in student loan debt. According to the CFPB, young adults aged 18 to 34 who live with their parents instead of starting a household to cut expenses account for approximately $100 billion in withheld or delayed economic spending. "We hear from many who say they just need to live with their parents until they weather the storm or tackle this debt, which could lead to delayed economic activity," said Rohit Chopra, the CFPB's student loan ombudsman. As default rates continue to rise, 6.7 million out of the approximate 37 million borrowers are at least 90 days delinquent, according to figures from the New York Federal Reserve Bank.

The CFPB has called for refinancing at the current low rates to allow borrowers to begin to climb out of debt.

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Bankers Warn Fed of Farm, Student Loan Bubbles Echoing Subprime
Bloomberg (05/07/13) Zumbrun, Joshua

The Federal Advisory Council (FAC), a group of 12 bankers who regularly advise the Federal Reserve on issues concerning the industry, has raised the alarm about the expanding bubbles of student loan and agricultural land debt. They, like the Federal Open Market Committee (FOMC), argue that the benefits of keeping interest rates artificially low may not outweigh the costs of doing so, as new bubbles could quickly form.

“Members believe the run-up in agriculture land prices is a bubble resulting from persistently low interest rates,” notes one section of the minutes of the Feb. 8, 2013, meeting obtained by Bloomberg. The expansion of agricultural lending is a result of investors who have opted to invest in real estate as opposed to bonds. On the student loan side, the increasing credit bubble – now over $1 trillion – is attributable to borrowers believing they are “in pursuit of a social good.”

The low interest rate environment has caused more loans to become available to more people, causing tuition to increase. This, in turn, causes many to take on higher credit risk and search for higher return on their investment, which creates greater pressure on the economy.

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National and State News
Americans Are Borrowing Again but Still Less than Before Freeze
The Wall Street Journal (05/07/13) Shah, Neil

According to a new survey of bank loan managers released by the Federal Reserve May 6, 28 percent of banks lowered the cost of their credit lines to smaller businesses making less than $50 million. It appears that the long frozen credit market is finally beginning to thaw, as $713 billion in credit  made it to borrowers in 2012, almost double from a year earlier.

While many Americans are now able to get loans for new cars, homes and their small businesses, they are still having difficulty, particularly young people and those with poor credit. Banks have imposed new restrictions and requirements as a result of the financial crisis. Still, banks are again becoming willing to dip into slightly riskier territory as the credit market thaws, including subprime auto loans – which accounted for 43 percent of all auto loans in the country in the final quarter of last year – and jumbo mortgages. Many Americans are taking advantage of the low rates to refinance their mortgages as well, freeing up cash and allowing them to infuse it back into the economy elsewhere.

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Foreclosure Activity Reaches Six-Year Low
USA Today (05/09/13) Schmit, Julie

According to RealtyTrac, in April one out of every 905 homes received a foreclosure warning, which is the lowest in the nation since the financial crisis began. The figure represents a 23 percent decrease from just a year ago. However, in judicial foreclosure states, the rate of foreclosures is increasing because the process, which is slowed down significantly by the court, is finally catching up with borrowers.

In Florida and New Jersey – both judicial foreclosure states – foreclosures have increased by 55 percent and 91 percent, respectively, when compared to the same time last year. California, although not a judicial foreclosure state, recently passed new laws that provide new protections for homeowners, including prohibiting foreclosure actions while loan modification options are being sought. These laws initially caused a slowdown in new foreclosure starts, but as mortgage companies have adjusted to the laws, they have picked back up again. Nearly 5.6 percent of home loans are in foreclosure in judicial states versus just 1.7 percent in non-judicial states, highlighting the drag judicial processes can place on the economy.

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Outlook Bleak for Legislation to Tighten Rules on Payday Lending
Star-Telegram (05/08/13) Montgomery, Dave

With the May 27 adjournment date of the Texas state legislature fast approaching, the House sponsor of a bill to regulate the payday and title loan industries in the state has admitted that the bill’s outlook is bleak. Representative Michael Villarreal (D-San Antonio) said that the only vote he could count on when the bill hits his committee was his own. He currently serves as the Chairman of the House Investments and Financial Committee. He noted that the bill has three guaranteed opponents and the three remaining committee members are on the fence.

“I don’t want to just pass a bill,” Villarreal said. “If we cannot pass a meaningful bill at the state level, then the cities need to be empowered and encouraged.” Part of the reason for some lawmakers continuing their holdout on the bill is that they believe it does not go far enough. Senators Wendy Davis (D-Fort Worth) and Rodney Ellis (D-Houston) noted that it is critical that the bill include a provision that permits local ordinances to supersede the state law if they are stronger.

The House bill also does not include caps on interest rates and fees, instead favoring caps on monthly payments. It also removes a provision added in the Senate version that would have cataloged all the loans made in the state to track lending activity. Villarreal says that if the bill fails, he will campaign from town to town to garner support for a new bill.

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May 9, 2013

Forward To A Colleague

ParaData Financial
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Carleton, Inc.
Allied Solutions
Wells Fargo Preferred Capital
Counselor Library
Life of the South
AFSA Newsbriefs

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