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AFSA Attends CFSI Small-Dollar Credit Conference

AFSA attended the Center for Financial Services Innovation’s one-day conference on small-dollar credit entitled The Future of Small-Dollar Credit in the U.S. from Research to Real Life. The Aug. 6 meeting was an open discussion on improving policy making and the marketplace for innovative small-dollar credit products, as well as promoting products that produce financially healthy consumers. The event explored recent research about consumers who use small-dollar credit products; shared insights from discussions with industry and advocacy groups as part of the development of the Compass Guide to Small-Dollar Credit; and offered attendees a chance to hear from providers that are piloting new high-quality approaches to meeting consumers’ small-dollar credit needs. 

The first half of the agenda explained research surrounding current products, including payday loans and traditional installment loans. The second half of the morning was used to brainstorm and discuss real-world solutions for producing high-quality small-dollar credit products. The discussion included considering products such as traditional installment loans that already perform well for both industry and consumers.

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Inside the Beltway
What Makes the DOJ's Subprime Auto Loan Probe Different
American Banker (08/06/14) Wack, Kevin

With U.S. Attorney Preet Bharara’s subpoena of GM Financial on August 4, financial institutions are wondering whether subprime auto loans are the next target, just as the legal grappling over the subprime housing bubble begins to cool. The subpoena sought information about GM Financial’s underwriting practices and about the specific assurances given to investors that held securities composed of the bundled loans. In a statement, GM Financial noted that the request was focused on subprime auto finance in general and it believes it is not the only financial institution being investigated.

The Justice Department’s probe is based on the nearly 25-year old Financial Institutions Reform, Recovery and Enforcement Act (FIRREA), which suggests that investigators are drawing lines between subprime mortgages and subprime auto loans. The act essentially allows regulators to investigate banks because of faulty representations made to investors surrounding mortgage-backed securities. However, industry analysts point out that the mortgages and auto loan situations are not analogous. The fundamental difference between mortgage-backed securities and auto-backed securities is that the latter performed well before, during and after the recession and continue to do so. "In the mortgage space, you had MBS that didn't perform,” said Bill Himpler, Executive Vice President at the American Financial Services Association. “Here we're talking about assets that have performed." Himpler also noted that many in the industry are expressing surprise over the subpoena.

Industry analysts also note that the investigation may have a tangential effect on both auto dealers and the current debate surrounding dealer reserve.

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Bank of America, Justice Near $17B Settlement
USA Today (08/06/14) Johnson, Kevin and McCoy, Kevin

An official with knowledge of the negotiations said on August 6 that Bank of America and the Department of Justice have reached a record $17 billion settlement in principle over alleged fraudulent marketing of its mortgage-backed securities that contributed to the economic crisis. The official, who is not authorized to speak publicly, noted that the deal was reached on July 30 directly between Attorney General Eric Holder and Bank of America CEO Brian Moynihan. A second anonymous official indicated that the settlement is expected to include hundreds of millions of dollars to aid struggling homeowners.  The announcement likely will not be made for several days as many facets of the deal are still being worked out.

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CFPB Criticizes 10 Institutions for Lack of Transparency
American Banker (08/06/14) Witkowski, Rachel

In a blog post on August 6, the Consumer Financial Protection Bureau’s (CFPB) student loan ombudsman Rohit Chopra said that ten financial institutions are not being transparent enough with their agreements with large universities where they market their products to students. The post noted that several financial institutions have not posted their disclosures and agreements online. The bureau contacted university officials to request that their business partners do so.

"Based on a scan of your financial institution partner's website, it appears that" the partnering institution "has not disclosed this agreement. We wanted to alert you that this failure to be transparent may pose potential consumer protection risks," Chopra said in a sample letter posted to the blog.

The bureau continues to push for transparency between schools and financial institutions, as the latter promotes and sells products on campus through an agreement with a university. The bureau previously warned financial institutions in December 2013 against secretly paying universities in order to market their products on campus.

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Debt Collectors under Fire by Regulator
The Wall Street Journal (08/03/14) Zibel, Alan and Gershman, Jacob

The Consumer Financial Protection Bureau (CFPB) filed its first lawsuit last month against a debt collector that it accuses of violating consumer protection laws. Industry analysts believe it is likely the first salvo in the bureau’s attempt to rein in law firms that file several hundred similar lawsuits to collect from delinquent borrowers, a practice the bureau says is unfair. Individuals who are the subject of the lawsuits typically do not have the legal knowledge or financial means to fight the charges and do not show up for court.

The case filed last month accused a Georgia law firm, Hanna & Associates, of filing nearly 350,000 lawsuits, many of which owed nothing or far less than the lawsuit claimed on back credit card balances. The law firm stated that its staff carefully ensures that the debts are correct before collection begins. There is some question as to whether the CFPB can take action against the law firm. The bureau contends that it can do so if the firm is acting as a debt collector as opposed to a law firm. Bureau officials also are considering additional regulations that would make it tougher for debt collectors to establish that they have a right to collect a debt.

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National and State News
Future Cloudy on Payday Loan Legislation
St. Joseph News-Press (08/03/14) Daves, Vanessa

The use of payday loans in Missouri has not gone unnoticed and their large presence has drawn ire from consumer advocates and legislators alike. Gov. Jay Nixon recently vetoed a bill passed by the legislature that was sponsored by Sen. Mike Cunningham, R-Rogersville, because it did not go far enough. Consumer advocates agreed, calling the bill nothing more than “sham reform.” “Sen. Cunningham noted that he introduced and sponsored the legislation because it was time to take action. “We need to make payday lenders more responsible and work with us,” he said. If the Senate thinks it will have enough votes, it will try to override the governor’s veto. Cunningham expects to have a decision before the annual veto session in September. “We’ve been trying to get payday reform for 12 years now and [the bill] had lots of good stuff in it,” Sen. Cunningham said. “I’m disappointed the governor didn’t see that perspective.”

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Poll Finds Widespread Economic Anxiety
The Wall Street Journal (08/05/14) O’Connor, Patrick

According to a new poll released by The Wall Street Journal and NBC News, Americans have serious concerns over the state of the economy, opportunities for younger Americans to gain meaningful employment and long-term economic progress. The poll found that 76 percent of adults lack the confidence that their children’s generation will have a better life than they do. Seventy-one percent think the country is on the wrong track broadly.

Americans blame Washington leaders for the perceived failings of the country over broader global economic trends by nearly a seven to ten margin. Moreover, 79 percent of Americans have some level of dissatisfaction with their government. Frustration is taking its toll on approval ratings for both President Obama and Congress, who have seen their numbers precipitously drop in almost every category, foreign and domestic.

Several analysts note that the negative sentiments could spell serious trouble for Democrats who are in vulnerable seats this election cycle. Equally, however, Republicans could see serious hurdles in the road as they continue to fall out of favor with women, something else the Aug. 5th poll showed. On the economic front, 64 percent of respondents noted that they are still feeling the effects of the recession in one way or another. Hiring has picked up and salaries continue to grow, but the median family income is still eight percent below 2007 levels.

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5 Recommendations When Reviewing Arbitration Clauses
Subprime Auto Finance News (08/06/14)

As the Consumer Financial Protection Bureau (CFPB) continues to look closely at how financial institutions structure contracts, industry analysts state that it is more critical than ever that companies take a close look at their arbitration clauses to ensure that they remain binding. According to David Missimer, general counsel for Automotive Compliance Consultants, courts are increasingly viewing arbitration clauses as unconscionable and attempting to find ambiguity that would release the consumer. “Consumer groups object to the use of mandatory arbitration and are lobbying the CFPB hard to pass rules and regulations to limit the use of arbitration in consumer loan transactions,” Missimer said.

Missimer recommended five clear guidelines based on the Federal Arbitration Act, which preempts state law and would help financial institutions maintain their clauses. First, be clear and concise on any waivers, including waiving the right to participate as a class representative or class member. Second, make the arbitration provision of the contract conspicuous, and consider highlighting through bold or different size type any waivers of legal rights such as class-action waivers. Additionally, the agreement should be balanced and not pro-seller. The agreement also should avoid provisions and arbitration organizations that would make it financially burdensome for consumers to arbitrate. Finally, clearly define any legal remedies not subject to arbitration, such as self-help remedies, or proceeding in small claims courts.

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August 7, 2014

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AFSA Newsbriefs

AFSA Newsbriefs is a weekly executive summary of AFSA initiatives and consumer credit articles. AFSA Newsbriefs is free for members. Send an email to newsbriefs@afsamail.org to subscribe.

The American Financial Services Association, or AFSA, is the national trade association for the consumer credit industry, protecting access to credit and consumer choice. The association encourages and maintains ethical business practices and supports financial education for consumers of all ages.