Today as I meet with city leaders from around the country at the Cities for Financial Empowerment summit in Baltimore, I am struck by the commonality of the struggles that so many of our consumers face -- consumers who would be protected by the creation of a strong and independent Consumer Financial Protection Agency (CFPA). The debate over the enactment of the CFPA has been overwhelmingly one-sided, and many Americans have been misled about the importance of consumer protection.
Lofty but vague notions of protection cannot begin to answer the multi-million dollar scare-tactics campaign portraying the CFPA as a looming big-government threat to an already fragile national economy. It's time to reset the debate and, finally, get specific about what the CFPA might actually do. A strong and independent CFPA would focus on specific, troubling financial products and services that are stripping those with low and middle incomes of hundreds of billions of hard-earned dollars. To that end, I present my "Top 10 Must-Regulate" list -- the top 10 financial products and services the CFPA could take on to protect American consumers.
10 Financial Products and Services that Must Be Regulated in 2010:
Overdraft Protection. Overdraft protection cost Americans an estimated 38 billion in 2009. Banks often charge overdraft fees even when, to the great surprise of customers, the bank itself approved the transaction, like at a cash machine or a PIN card purchase. Thankfully, the Federal Reserve Board's new rules, which go into effect this year, will require banks to obtain the consent of their customers before enrolling them in these programs but more must be done.
Refund Anticipation Loans (RALs). New York City has cracked down on tax preparers that advertise RALs as "the fastest way to get your tax refund," or as "an instant refund" instead of what they actually are - expensive loans on a taxpayer's hard-earned refund. RALs cost the typical Earned Income Tax Credit (EITC) recipient an estimated 7.8 percent of their federal refund, which adds up to 800 million of wasted taxpayer dollars each year. In addition, there's no need to pay for a quick refund; e-filing is free and takes less than two weeks.
Debt Collection. Collecting debt has grown into a 17.5 billion industry. In New York City, harassing tactics and the invalid collection debts have the Agency's mediators working year-round to erase millions of dollars in debt that have been incorrectly collected. Nationally, the Federal Trade Commission (FTC) received 66,627 complaints against third-party debt collectors in 2005 -- more than against any other industry, and nearly six times the amount of complaints just a few years earlier, in 1999.
Mortgage Loan Modification Services. With the sub-prime mortgage crisis leaving thousands of people facing foreclosure, loan modifications are a critical part of the economic recovery. Unfortunately, a shadow industry of loan modification services is preying on consumers by charging fees up front and not delivering the modifications they promise. During the 2008 mortgage crisis, almost half of the more than 3.5 million subprime and "Alt A" mortgages that were modified increased monthly mortgage payments. Given federal loan modification services available for free, fees for these services, are not just illegitimate, they are purely predatory.
Check Cashers. Close to 10 million households rely on expensive non-banks to cash their checks which have lead to 1.5 billion dollars in fees. In New York City, residents spent 225 million on check cashing fees in one year, a service that is provided for free at community banks or municipal credit unions. For many low income families, these unnecessary fees add up and siphon off hard-earned income.
Debt Settlement Services. Debt settlement services promise to help Americans who are struggling to reduce their debt. In some cases, settlement companies fail to deliver any service at all but still charge thousands of dollars in fees. Even when these companies successfully reduce a consumer's debt, they often charge fees so high that the benefit to the consumer is greatly diminished. Moreover, companies may encourage consumers to play chicken with their creditors by ceasing to pay bills in order to save for a future payment, which can result in legal judgments and damage to credit scores.
Used Car Loans. The primary place that consumers seek financing for second-hand cars is at used car dealers, which often offer the loans from third-party lenders. Consumers lulled into a comfort level on a monthly payment often don't realize the fees and interest of the financing arrangement often mean paying considerably more than if they had gotten a bank or credit union loan and paid the sticker price. Nationwide, 4.5 million consumers with lower incomes pay, on average, 2 percentage points more in interest for an auto loan than the average consumer with a higher income. This is not an accident. Taking advantage of Americans with lower incomes has allowed this industry to thrive.
Payday Loans. These loans target consumers in need of a short-term, small-dollar loan - usually no more than 500 - where the borrower must repay the full amount of the loan in two to four weeks. These loans come with high up-front fees - usually around 75 for a 500 loan - and most borrowers are not able to pay off the whole loan when it comes due. As a result, they are forced to take out a new loan to repay the last one, locking borrowers into a cycle of debt that can cost thousands of dollars.
Car Title Loans. Like payday loans, car title loans are sold to consumers as small emergency loans, but they are designed to trap borrowers into a cycle of debt. They put an asset that is essential to the well-being of working families - their cars - at great risk. If consumers are unable to repay, they can roll the loan over, initiating the debt cycle, or the lender then takes their car, sells it and keeps the money from the sale. A typical car title loan has a triple-digit annual interest rate and is made for much less than the value of the car.
. Rent-to-Own Financing. Between 1998 and 2007 the multi-billion dollar rent-to-own industry overcharged New York State consumers tens of millions of dollars. The pricing practices of these businesses can result in a 2,000 computer costing a consumer 3,600 for the convenience of a multi-month payment plan and an annual interest rate equaling nearly 71 percent.
We must respond to the anger and frustration at both financial institutions and Washington, by addressing the areas where the greatest harm is being done to the greatest number of people -- and where we can now do the most good.
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