Tuesday, August 3rd, 2010
Despite sweeping financial reforms passed by Congress a few weeks ago, there remain loopholes in the new laws that spell continued danger for consumers. Specifically, the new laws still allow some predatory lenders to roam free.
While the reforms put lending restrictions on most major financial institutions, car dealers and community banks escaped the grasp of the new federal regulations. This oversight poses a serious threat to many consumers, as these two industries are annually involved in billions of dollars in loans to tens of millions of people.
Car Dealers
Most folks don’t pay for automobiles with cash. As a result, auto dealers are seasoned veterans of the loan industry. With high stakes in the financial reform package, sources indicate that the auto industry lobbied hard to escape the regulations. Some of their key gains include:
- We Didn’t Do it: One of the most criticized loopholes of the financial reform bill was the “carve out” won by auto dealers. Car dealers escaped further regulation because they convinced legislators that they were not responsible for the recent economic meltdown.
- Power in Numbers: How do car dealers have so much lobbying muscle? Mostly because there are more than 18,000 dealers nationwide. And the financial institutions who aid in most car loans were glad to assist their friends in the car industry, as well.
- More Escapees: In addition to the exemption for car dealers, companies who sell boats, motorcycles, and RVs are also not governed by the new legislation.
Finally, while 90 percent of car loans are financed through standard financial institutions, like banks, car dealers serve as brokers about 80 percent of the time. So, according to consumer groups, the car dealer’s role as a broker leaves room for them to push loans with unfairly high interest rates. According to some reports, car dealers are more likely to charge excessively high interest rates to minorities and lower-income borrowers.
Community Banks
In order to avoid further regulation, community banks successfully argued that they are much different entities than larger financial institutions. Typically, small community banks charge smaller fees than their larger counterparts and are more dependent on aid of small, local businesses.
As a result of lobbying efforts, community banks are now exempt from paying the same Federal Deposit Insurance premiums as large banks. In addition, all banks with assets under $10 billion are not required to follow new lending regulations.
Still, the Independent Community Banks of America recognize the potential for loan scams, and they warn that consumers should always be wary of loans that sound too good to be true. If you are unsure of whether or not you’re the victim of a financial scam, don’t hesitate to contact a bankruptcy attorney.
Posted in Bankruptcy and Predatory Lending, auto loans, financial reform, predatory lending | Comments Off
Saturday, July 3rd, 2010
There’s been a lot in the news about the financial regulatory overhaul bill currently working itself out in Congress and, with the bill expected to be signed into law by the Fourth of July, it’s a good time to look at how you’re likely to benefit from the bill’s passage. Here’s a look at how various aspects of the legislation are likely to play out when the financial reform hits the books (adapted in part from this article).
Outlook Good for Consumers
One of the major changes the bill will make is the creation of the Consumer Financial Protection Agency, which would be a unit dedicated to regulating financial products with consumer rights in mind. The necessity for such an organization was made clear when millions of Americans fell victim to the terrors of subprime mortgages during the real estate boom.
In addition to the creation of the CFPA, the bill could benefit ordinary Americans for the following reasons.
- Because the CFPA would be part of the Federal Reserve, it will get funding from the Fed and be able to ask Congress for additional funds, if needed.
- The protections introduced to shield consumers from predatory and/or dangerous financial products can be lifted (by bankers’ petitions) only if such protections can be shown to threaten the larger financial system.
- The CFPA would have the ability to create and enforce rules for various consumer financial products, including mortgages and credit cards.
- One potential downside to watch out for is that auto dealerships likely will not be regulated by the CFPA, which means that consumers can probably not expect any amped-up protections for vehicle-related loans.
Credit Rating Agencies Face New Restrictions
Credit rating agencies were partly responsible for deceptively high credit labels on risky investment products like the securitized pools of subprime mortgages that led to the housing market’s crash in 2007 and touched off the Great Recession. The financial regulation bill would attempt to eliminate such deceptive ratings:
- These agencies will have greater liability for the ratings they give and will be subject to lawsuits if it can be proved that they recklessly ignored or failed to review important information when evaluating a product.
- The Securities and Exchange Commission (SEC) will develop a solution for the conflicts of interest that currently exist and are partly responsible for the incorrect and deceptive ratings of the past.
Essentially, the new regulations should make investments safer for investors by eliminating some of the guesswork and conflicted interests that led to past problems. Such improvements could lead to greater stability overall in financial markets and thus the entire economy.
Posted in Financial Literacy, consumer rights, financial reform | Comments Off
Monday, June 7th, 2010
The financial reform bill approved by the Senate last month and now being revised before it faces votes in both houses of Congress could lay the groundwork for significant changes in the country’s financial system. Here’s a look at what you, as a consumer, can expect.
- More protection: If passed and signed into law, the bills would introduce an agency devoted solely to consumer protection. As part of the Federal Reserve, the Consumer Financial Protection Bureau would be charged with regulating lenders and protecting consumers from predatory lending.
- Free credit scores: While free credit report access (available at www.annualcreditreport.com) has been a reality for a while, Americans still have to pay to view their credit scores. The new bill would give citizens the right to view one free credit score along with their free reports from each of the bureaus per year.
- Increased protection at the bank: For now, the FDIC insurance limit for bank accounts remains at $250,000 (before the change, they stood at $100,000). This limit is set to expire in 2013, but could be made permanent with the new bill.
- More privacy: Currently, employers are permitted to check a potential employee’s credit report during the hiring process; one provision of the new bill would prohibit such employment-related credit checks unless the job involves matters of national security.
- Fewer mortgage penalties: Some provisions of the bill would limit or eliminate prepayment penalties on mortgages, which can act as a disincentive for a borrower to repay a loan early. Similarly, the bill would prohibit mortgage lender compensation that’s based on loan type, which has been linked to lenders leading customers into more expensive loans than they qualified for.
- Debit card fee limits: One provision seeks to lower debit card fees vendors pay, which could lower prices for consumers but could also backfire by prompting banks to raise fees in other areas to make up for lost revenue.
- Credit card use changes: In addition to offering customers discounts for shopping with a specific type of credit card, retailers would be able to set minimum transaction amounts for credit card use (as long as they’re applied universally).
As of now, of course, none of these provisions is guaranteed to make it into the final draft of the bill, but the changes reflect concerns brought on by the collapse of the housing market and the general problems associated with predatory lending that have reared themselves in recent years.
Additional Resources
Summary: Senate Financial Reform Bill
Summary: House Financial Reform Bill
Posted in Congress, Financial Literacy, financial laws, financial reform, house, senate | Comments Off
