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Friday, January 6th, 2012

Without Bankruptcy Option, Are Student Loans Predatory?

A recent article on Forbes.com lashes out against the state of student lending and student debt in the United States. The author makes several salient points regarding the problems surrounding student debt, which cripples many graduates largely because it is very difficult to discharge in bankruptcy.

But what makes a loan “predatory?” The nation conspicuously lacks a legal or official definition for “predatory lending,” but the Forbes article cites many attributes of student loans that suggest they might fall into this category. These include:

  • Student loans do not come with “free-market consumer protections.” Student loans cannot easily be discharged in bankruptcy (compared to other unsecured loans); borrowers do not have the option to restructure their student loans; and these loans come with no real statute of limitations in most cases. Lacking these protections, borrowers are more or less bound for life to repay any money they borrow for their education.
  • The organizations that are meant to oversee student lenders (called “guarantors”) make roughly 60 percent of their revenue from fees and penalties associated with loans that have gone into default. In other words, the groups intended to protect borrowers from lender abuse actually have a financial interest in borrowers not being able to repay their loans as outlined in their loan terms.
  • Student lenders have broader debt collection rights than other types of lenders. This means that they have a better chance of collecting some or all of the money owed to them (including money owed as part of penalties and fees).

Comparing Other Types of Predatory Loans to Student Loans

To refresh your memory about problematic predatory lending that has made headlines in recent months and years in the U.S., here’s a quick outline of how two different types of predatory loans were outed and then blasted by pretty much every consumer advocate in the country.

  • Subprime mortgages: These fueled the housing bubble (and bust), and essentially amounted to lending money to people who had no real chance of repaying it. One of the hallmarks of many subprime mortgages issued was that those in the lending, loan servicing, and investment fields had financial incentives for the loans to fail. In other words, these people stood to make money when borrowers defaulted on their loans, because of late fees and other penalties (sound familiar?).
  • Payday loans: The target of several pieces of legislation in recent years, payday loans are profitable to the lenders exactly because borrowers are not expected to be able to repay them as originally agreed. Payday loans become most lucrative when borrowers must pay late fees and penalties—meaning, of course, that they were designed to extend money to those who did not have a good chance of repaying it.

Congress has made some noise about reforming the student loan industry, but as of now, no real, meaningful changes have been implemented.

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Posted in Predatory Lending | 2 Comments »

Monday, November 14th, 2011

Homeowners’ Foreclosures Could Be up for Review

Federal bank regulators from the Office of the Comptroller of Currency, the Board of Governors of the Federal Reserve System, and the Office of Thrift Supervision have announced a measure that might mean compensation for millions of families who have lost homes to foreclosure.

According to an announcement released in early November, a newly instituted program will allow certain homeowners to collect compensation for mistakes their loan servicers made during the foreclosure process. Specifically:

  • Qualified homeowners will be mailed letters about their eligibility to participate. Homeowners should expect to receive their letter by the end of the year; those who wish to find out if they are qualified can visit the website IndependentForeclosureRview.com.
  • To be eligible, a mortgage must have been handled by one of the mortgage servicers participating in the program.
  • To determine whether mistakes were made in the processing of your foreclosure, you must apply for an independent review of your mortgage and foreclosure documents. Your application must be sent in by the end of April 2012.
  • If the reviewer finds that there were mistakes in your foreclosure or mortgage documents, you may be eligible to collect compensation.

Some analysts estimate that as many as four million homeowners might be affected and eligible for compensation.

Problems in Mortgage Documents

This announcement is not the first to highlight the problems that plagued the mortgage market during the housing boom whose collapse led to the Great Recession. In addition to the robo-signing scandal and several lawsuits against mortgage servicing company MERS, lawyers and judges have found many individual foreclosure cases that did not hold up to scrutiny.

This latest iteration of the problematic foreclosure theme highlights just how troubled all components of the U.S. housing market really are.

Sources note that mistakes or misrepresentations in foreclosure or mortgage documents that could make a homeowner eligible for compensation might include the following:

  • Fees that were unwarranted or calculated incorrectly;
  • Foreclosures that were carried out while the homeowner was protected by bankruptcy’s automatic stay; and
  • Foreclosures carried out while the homeowner was in talks with a lender about the possibility of a mortgage modification.

Who’s Paying for All This?

The independent review firms will be compensated by the mortgage loan servicers targeted by the federal investigation. As part of the terms laid out in the investigation’s findings, regulators required those mortgage servicers to hire review agencies unrelated to them to conduct the review of mortgage documents.

In other words, homeowners who apply to have their mortgages reviewed will not be responsible for paying the fees associated with the independent review process.

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Posted in Home Foreclosure, Predatory Lending | No Comments »

Tuesday, September 13th, 2011

FTC Shuts Down Illegal Payday Lender Wage Garnishment

The Federal Trade commission reported this week that it has halted a payday lender from attempting to garnish consumers’ wages without the necessary court order. The company, Payday Financial, LLC, reportedly did business under the names Big Sky Cash and Lakota Cash.

Sources note that, in order to garnish its customers’ wages, Payday Financial divulged information about alleged payday loan debts to their employers, which is illegal. The attempt to garnish wages also prevented customers from disputing the debts in court or working out a payment plan with the lender.

Wage Garnishment Rules

Federal law permits government entities to request wage garnishment for unpaid debts owed to the government; however, the law requires that private creditors (i.e. anyone other than the government) go through the court system if they want to pursue wage garnishment.

According to the FTC, Payday Financial sent customers’ employers paperwork designed to look like documents from the federal government requesting wage garnishment to repay debts. That move has led the FTC to charge Payday Financial with:

  • Misrepresenting their legal wage garnishment status to employers (in other words, lying about their legal ability to garnish the employees’ wages);
  • Lying about their communication with consumers (specifically, by indicating that they had already given the employees an opportunity to contest or pay the debt);
  • Illegally revealing the existence and amount of alleged debts without consumers’ consent or knowledge;
  • Violating the FTC’s Credit Practices Rule, which does not permit lenders to require that consumers consent to wage garnishment in the event of default; and
  • Violating the Electronic Funds Transfer Act, which prohibits payday lenders from requiring borrowers to authorize direct debit payment of loans.

Payday Financial has agreed to stop garnishing its customers’ wages until a court decides on the case.

Halting Wage Garnishment through Bankruptcy

Consumers who are dealing with legal wage garnishment have the option of filing for bankruptcy to prevent further withdrawal of funds from their wages. Personal bankruptcy includes a legal protection called the automatic stay, which prevents collection actions of all kinds for the duration of the bankruptcy case.

The automatic stay can halt:

  • Wage garnishment;
  • Debt lawsuits;
  • Foreclosure;
  • Repossession; and
  • Phone calls and mailings from creditors.

In bankruptcy, filers may have debts discharged or enter a repayment plan to catch up on past-due debts. Once a debt has been discharged or repaid in part through the bankruptcy court, creditors no longer have a legal right to collect on it (meaning they can no longer legally garnish wages to cover that debt).

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Posted in Predatory Lending | No Comments »

Wednesday, May 11th, 2011

Lawsuit Alleges Mortgage Fraud by Deutsche Bank

News reports this week announce that the U.S. Department of Justice has initiated a lawsuit against Deutsche Bank, one of the world’s largest, claiming that the institution lied to federal regulators in order to secure taxpayer-funded insurance for less-than-secure mortgages.

Here’s a look at the details and some of the underlying issues.

The Charges against Deutsche Bank

According to the lawsuit, Deutsche Bank and its subsidiary MortgageIT:

  • Initiated risky mortgage loans to homebuyers. Some of these loans may have been subprime, and since their initiation, sources indicate, about a third have defaulted.
  • Lied to federal regulators. While the loans themselves may have been a bad move financially, what interests prosecutors is what happens next: that Deutsche Bank allegedly lied to officials with the Federal Housing Authority (FHA) in order to secure insurance for the shoddy loans.
  • Got taxpayer-backed insurance for questionable loans. Because of its reportedly false claims that it was evaluating its mortgages for default risk, Deutsche Bank managed to secure FHA funding (which comes from tax dollars) for the questionable loans.
  • Required money from the government when the loans defaulted. Now, as many as 12,500 of Deutsche Bank’s loans have apparently defaulted (meaning that the homes have gone into foreclosure), leaving the government responsible for covering the losses. The money goes to those investors who own the mortgage debt. Sources note that, to date, defaulted Deutsche Bank loans have cost the government more than $386 million.

Because of all these allegations, the Justice Department is reportedly suing the bank for $1 billion, an amount that represents the dollar amount lost plus individual penalties for each mortgage that went into default.

What Mortgage Lending Rules Were Broken?

The government’s lawsuit charges that Deutsche Bank and MortgageIT failed to follow the rules required of anyone interested in federal mortgage insurance. These rules require lenders to:

  • Annually verify various records of mortgage borrowers, including credit reports, incomes and record of employment. This measure is to make sure borrowers are not at risk of defaulting.
  • Examine any loan that goes into default shortly after being originated in an effort to prevent and eliminate careless lending techniques.
  • Act in the government’s best interest, because any money needed to guarantee loans that defaulted would come directly from taxpayers’ pockets.

The lawsuit claims that Deutsche Bank did none of these things and so is both on the hook for the money lost by the government and responsible for paying penalties for breaking the rules of engagement for obtaining federal insurance.

Some sources suggest that the Deutsche Bank lawsuit could be the first of many; after all, reckless lending techniques were fairly common during the housing boom that touched off the current recession.

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Posted in Home Foreclosure, Predatory Lending | No Comments »

Monday, April 4th, 2011

Payday Lender Forks Over Cash to Settle with FTC

The Federal Trade Commission announced this month that it has settled charges with two men who allegedly bilked consumers out of hundreds of thousands of dollars by using an online payday loan “matching” scam. Here’s what the FTC says happened:

  • The web site offered to match consumers with payday lenders in their areas.
  • As part of the online application process, consumers were reportedly sent to a page that had an offer for a debit card. The “yes” box to order the debit card was pre-checked on this page.
  • Consumers who clicked through to the “finish” page without realizing they’d agreed to the embedded debit card offer were automatically signed up for the debit card. Clicking through reportedly also meant consumers granted authorization for their bank accounts to be charged for the funds.
  • Victims of the scam were apparently charged up to $54.95 extra for the debit card they did not intend to apply for.

Terms of the Settlement

The newest settlement, which reflects an amended charge filed in April 2010, means that the men charged with the offenses, Matthew Patterson and Mark Benning, will be prohibited from doing the following:

  • Presenting false or misleading information about any product or service, including information about how customers will be charged or billed;
  • Misrepresenting the cost or status of a product or service (e.g. incorrectly suggesting that something is free or a “bonus”) for any of its terms and conditions;
  • Charging consumers without complete disclosure of how much will be charged to them, all terms and conditions of the transaction, what billing information will be used and to what account the payment will be charged; and
  • Failing to keep track of affiliates to make sure that they comply with all the above terms (and those laid out in the court order).

In addition to these restrictions, the FTC settlement imposes a $5.2 million judgment on the two men, which will reportedly be suspended for Patterson once he pays $800,000 over a period of 10 years and for Benning when he provides the court with money raised from the sale of his house.

Protecting Your Finances from Predatory Lenders

While a number of consumer protection groups and government organizations exist to police the market and keep scammers from finding new victims, perhaps your best defense against predatory lenders is knowledge.

Take a look at this predatory lending glossary to get an idea of what kinds of loans and offers qualify as “predatory” and how you can keep your money from falling into the wrong hands (and keep yourself from falling into bankruptcy).

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Posted in Predatory Lending, The Law and Your Money | No Comments »

Monday, February 28th, 2011

Personal Finance Taking a Hit as Banks Close in Poorer Areas

A recent report from the New York Times highlights a troubling change in the banking industry: according to the Times, banks across the country have taken to closing branches in middle- and low-income neighborhoods even as they maintained or opened new branches in wealthier areas.

Personal finance experts of all stripes are understandably upset about the shift – fewer available banks could have disastrous consequences for the financial health of families in affected areas.

The High Cost of Being “Unbanked”

Here’s a look at some of the potential ramifications closing banks in poorer areas.

  • Increased reliance on payday lenders and check cashers: Without nearby bank branches, families in effected communities will be pushed to rely for their financial needs on so-called “predatory” lenders such as payday loan stores, cash advance outfits and check cashers. Such organizations can contribute to a cycle of poverty by charging high interest rates and fees for their services without offering clients a vehicle for saving their money.
  • Diminished saving incentives and opportunities: Without ready access to savings accounts, people living in communities without brick-and-mortar banks have a slimmer chance at reaping the benefits of opening a savings account (including earning interest on their money). In the long term, this can make financial emergencies particularly devastating, and can lead to bankruptcy filings.
  • Damaged credit and decreased ability to get loans: One thing that a savings account does is to bolster a person’s credit rating – when lenders run a credit check, they can view the status of a potential borrower’s bank accounts. Those with accounts in good standing who have a cash cushion available to them are considered better credit risks than those without any cash reserves. This can affect interest rates a borrower pays and thus determine how expensive or inexpensive a loan is.

A Look at the Numbers

So how dramatic was the shift toward closing banks in lower-income areas in the last two years? Here’s a look at the numbers, as reported in the Times:

  • More closings than openings: 2010 reportedly marked the first year in a decade and a half that more banks closed their doors in the U.S. than opened them.
  • Number of closings: In 2009, the country boasted 99,550 bank branches; last year, that number had fallen to 98,517 branches, nearly a 1,000-branch drop.
  • Number of unbanked Americans: It seems that as many as 30 million Americans rely primarily or in part on “non-traditional” financial institutions like check cashers and payday lenders – that’s about 10 percent of the country.
  • Big banks participating: While some smaller banks reportedly closed branches as part of consolidation moves to survive serious debt, it seems that Bank of America also closed 25 branches in communities with moderate income levels and opened 14 in richer places.

So why is this happening? On proposed reason is that the Community Reinvestment Act, meant to improve financial opportunities in poorer areas, is being insufficiently enforced.

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Posted in Economic News: How Are We Doing?, Predatory Lending | No Comments »

Wednesday, January 26th, 2011

Avoid Refund Anticipation Loans this Tax Season!

If you’re counting on a tax refund this year, you may have heard of refund anticipation loans (or RALs), which some tax-preparation services offer to people as part of tax preparation services. But these loans, as most consumer advocates will agree, are not a good deal for you the consumer.

Here’s a look at why tax refund anticipation loans (sometimes called a refund anticipation check) may not be all that they're promised, and what the federal government is doing to help you avoid them.

Why RALs Are a Bad Financial Move

So what is a refund anticipation loan? Basically:

  • It’s a cash advance loan that charges you a high interest rate to get some of your tax return dollars earlier than you would have otherwise gotten them.
  • Some tax preparation services offer them to customers who are expecting a tax return that year. Generally, a customer can receive the money for a “fee” of some kind – just like a payday loan. In fact, RALs are very much akin to payday loans: their “fees” are just high interest rates disguised to look harmless.
  • RALs eat into whatever tax return you can expect to get. After all, you have to pay for the privilege of receiving your money early, and that money comes out of whatever you would have received from the federal government.
  • RALs can also set you up for debt. What happens if there’s a mistake in your tax forms or if you end up getting a smaller return than you expected? If you take out a refund anticipation loan for the full amount of your return and then receive a smaller actual return from the government, you’ll still be responsible fore repaying the loan amount in full. Yikes.
  • RALs may present a tempting prospect to unbanked Americans – after all, if you don’t have a bank account, waiting for a refund check from the government and then paying to have it cashed can seem like a waste of time and money. But paying for the RAL itself will almost always cost more.

So What Are the Feds Doing about the RAL Problem?

This year, the Treasury is launching a new program that offers an alternative to refund anticipation loans, particularly aimed at people without bank accounts who might be susceptible to the RAL’s siren song. Here are the gist:

  • Debit card distribution: The Treasury will be sending debit cards pre-loaded with people’s refunds to 600,000 Americans selected at random to participate.
  • Experiment to see what works: If the program proves popular, the pre-loaded debit card system could become standard practice in future years.
  • Varied terms on cards: In order to test various features, the debit cards will come with a variety of features. Some will require no fees to make purchases or withdraw money from ATMs, while others will charge small fees to be activated, check balances or use at certain retailers.

The goal of this program, it seems, is to offer a lower-cost alternative to RALs and RACs to the people most likely to be tempted to choose them.

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Posted in Finance 101: Secure Your Future, Predatory Lending | 1 Comment »

Wednesday, January 12th, 2011

What’s the Latest on Payday Loans?

In the last few years, lawmakers in many states have taken on payday loans as a pet cause, passing legislation that outlaws or severely limits what these predatory lending institutions can charge and how they can operate.

But a recent post at CreditBloggers points out that many payday lending operations are still thriving, for a number of reasons. Here’s a look at the latest payday lending landscape and a reminder of just how expensive these seemingly innocuous loans actually are.

Restrictions on Payday Lending

In recent years, state lawmakers have put a variety of limits on how payday loan stores can operate:

  • Ohio: State legislators limited payday lending interest rates to 28 percent (a significant decrease from the 400+ percent some lenders charge annually). The legislation affected the payday lenders, naturally, but apparently did not result in their flight from the state.
  • Montana: In November’s election, 72 percent of voters reportedly voted to make payday lending illegal in the state, and a new measure that went into effect on the first day of 2011 limits interest rates to 36 percent. The result, it seems, is that most payday loan stores have packed up and headed out, unable to make sufficient profit under those terms.
  • Arizona: When a law permitting high-interest lending was not renewed, sources note that some lenders remained in the state but one national chain (Advance America Cash Advance Centers) quit the state entirely.
  • Other states: Elsewhere in the country, legislation has been introduced and/or passed to limit the amount of interest payday lenders can charge and how they can operate their businesses.

So why, with so many restrictions in place and so much public energy devoted to eliminating payday lending abuses, are some payday lenders still thriving?

The Credit Crunch and Payday Lending

Unfortunately, one effect the recession has had on the lending landscape is that many lenders have tightened their lending standards. In fact, while the number of banks in the nation reportedly increased between 2007 and 2009, the dollar amount of loans they issued dropped by a staggering 51 percent.

What does that mean for ordinary consumers (and especially those whose credit is less than pristine)?

  • Fewer borrowing options: With banks holding onto their money more tightly, fewer consumers have a chance at getting loans from these mainstream, trustworthy sources.
  • Prime ground for alternative lenders: When people need money, though, they have to get it from somewhere. And, because of the way their business model works, payday lenders are often the go-to place for folks who can’t get loans elsewhere.
  • Serious danger for serious debt: Unfortunately, just because payday loans may seem like your only option does not mean that they’re any safer than they used to be. Payday loans can lead to a debilitating cycle of debt and can come with interest rates of more than 400 percent over the course of a year! Remember that many financial advisors recommend almost every other source of financing over payday loans.

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Posted in Predatory Lending | No Comments »

Wednesday, January 5th, 2011

What You Can Learn from 2010’s Top Scams

While many people are looking forward to the new year, it’s also important to take time to look back on what we learned from 2010. So here’s a review of some of the major scams that we saw in the past year and what you can do to protect your finances from similar ones.

Protect Your Finances from Future Scams

  • Mortgage Relief Scams: Scammers know that people who are feeling desperate make good targets, so times of economic distress provide scam artists with plenty of opportunities for ripping people off. Scams offering fake mortgage relief take advantage of people in danger of losing their homes by offering fake services to negotiate with lenders or change mortgage terms, and real opportunities for struggling homeowners to throw away money they can’t afford to lose. Lesson: You are the only one responsible for saving your home and/or mortgage. If you want help, you must ask for it and do some work to find the right group to provide it.
  • Debt Relief & Reduction Scams: Like mortgage relief scams, debt relief scams work by charging consumers steep upfront fees for debt-reduction services that the scammer never delivers. Though new rules have strengthened consumer protections against debt settlement companies (which are sometimes little more than dolled-up scammers), many groups are apparently still finding ways to get around these rules. Lesson: Do your homework before committing to any debt relief firm. Visit the Better Business Bureau, compare fees among companies, and consider your alternatives (like credit counseling and bankruptcy). Most importantly, if something sounds too good to be true, don’t believe it.
  • Robocall Scams: These scams work by contacting vast numbers of consumers with recorded telephone messages and promising some attractive service (like quick debt reduction) – naturally, for a steep price. Lesson: Getting out of debt is almost never a quick process. If someone promises a quick fix for your debt, turn the other way and run (and don’t write any checks in the meantime).
  • Identity Theft Scams: Identity theft is perhaps one of the most troubling crimes of the information age – correcting the damage done by identity thieves can take hours of time and lead to anger and frustration. And identity thieves are masters at taking advantage of new technologies to get our information – emails, text messages, online buying sites and other popular media have all been used by identity thieves to lure in unsuspecting consumers. Lesson: Guard your personal information carefully. Don’t ever wire money to strangers, reply to unfamiliar emails, text sensitive information or otherwise reveal too much of your personal data.

Keep Your Money Safe in 2011

The sad truth about scams is this: there will always be a new scam out there – the nature of legislation is that it is slow and retroactive, meaning that unscrupulous individuals will always be able to outpace laws. But if you approach your everyday transactions and interactions with reasonable skepticism, you should be able to keep yourself and your money safe.

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Posted in Finance 101: Secure Your Future, Identity Theft | No Comments »

Monday, December 13th, 2010

FTC Halts Robocall Credit Card Scam

The Federal Trade Commission announced this week that it has shut down operations of a company charged with a scam that involved illegally making robocalls and taking consumers’ money by falsely promising them lowered credit card interest rates.

The scam, according to the FTC, worked like this:

  • Automated phone calls: The company, JPM Accelerated Services, reportedly set up robocalls to thousands of homes (some of which were on the National Do Not Call Registry). The calls indicated that the company was a “card services” provider and little else.
  • False promises: Telephone respondents who pressed one were apparently transferred to live telemarketers who offered to lower their credit card interest rates and thus save them thousands of dollars. The price of the service, sources note, ranged from $495 to $995, and the company apparently guaranteed a full refund to anyone not satisfied with the results.
  • Failure to follow through: Of course, because this was a scam, the company did not follow through, and thousands of consumers in need of financial relief ended up losing even more money they couldn’t afford.
  • Serious settlement fine announced: As part of the settlement, judgments of $5.9 million against JPM Accelerated Services and $3.2 million against related scammers have been imposed; however, the defendants at this time are unable to pay the fines, according to sources. The judgments represent the amount of money consumers were bilked out of as a result of the scams.

The Truth about Lowering Your Credit Card Interest Rates

Scams like the one recently halted by the FTC are all too common, perhaps because unscrupulous scammers know that financially strapped consumers are often willing to take even big chances to get out of debt.

But if you’re interested in lowering your credit card interest rates, the truth is that you can negotiate with your creditors yourself. Here’s how:

  • Figure out where you stand financially: Look at your monthly budget and figure out what you can afford to pay toward your credit card debt each month.
  • Stop charging: When you commit to paying off credit card debt, it’s important to stop putting new charges on your accounts.
  • Look at your bills: Lay out your most recent bills and figure out what you owe, what your current interest rates are, and what your current monthly payments are.
  • Call your credit card issuers: When you’re armed with all this information, contact your credit card companies directly, explain your situation and ask for some sort of lowered payment. It’s usually a good idea to ask for something specific, like lowered interest rates, lowered monthly payments, or a reduction of the total principal you owe.
  • Reassess your situation: If your credit card issuer denies you, you may want to explore other debt-relief options, like filing for personal bankruptcy.

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Posted in Predatory Lending, Your Credit Score | 2 Comments »

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