- Rights at Risk in Privatized Public Housing, by Jaime Lee, Tulsa Law Review, Vol. 50, 2015, pp. 759-801.
- Making Firms Liable for Consumers’ Mistaken Beliefs: Theoretical Model and Empirical Applications to the U.S. Mortgage and Credit Card Markets, by Alexei Alexandrov, Consumer Financial Protection Bureau, Apr. 27, 2015.
- Discrimination at the Margins: The Intersectionality of Homelessness & Other Marginalized Groups, by Kaya Lurie, Breanne Schuster, & Sara Rankin, Seattle University School of Law, May 6, 2015.
- Supply Restrictions, Subprime Lending and Regional US House Prices, by André K. Anundsen & Christian Heebøll, Norges Bank Working Paper 18, 2014.
- Global Liquidity, House Prices and the Macroeconomy: Evidence from Advanced and Emerging Economies, by Ambrogio Cesa-Bianchi, Luis Felipe Céspedes, & Alessandro Rebucci, IDB Working Paper No. IDB-WP-576.
Tag Archives: credit card
HELOC vs. Cash-out Refinance for Card Debt Repayment
CreditCards.com quoted me in HELOC vs. Cash-out Refinance for Card Debt Repayment. It reads, in part,
On paper, it may look as if it makes a lot of sense to replace high interest card debt with a low interest payment if you have home equity you can tap into. If it’s available and will ease your pay-off pain, why not use it, right?
While using a home equity line of credit (HELOC) or cash-out refinance (in which you refinance your mortgage, but tack on an additional cash payout) to rectify your debt woes might seem like a no-brainer, there are lots of factors to consider to determine which avenue is right for you or if you should go that route at all.
“One size doesn’t fit all,” says Malcolm Hollensteiner, director of retail lending sales at TD Bank. “Utilizing equity to pay down or eliminate higher interest rate consumer debt can be a very beneficial strategy, but it should be done in moderation, accessing some — not all — of your equity,” he says.
Gone are the days when banks allowed homeowners to tap into 125 percent of their home value (thanks to the lessons learned during the real estate market meltdown, which left many people “underwater,” owing more on their home loans than the value of the home). And, you’ll need to have a respectable credit score to qualify. But even with more restrictions in place now than in years past, borrowers still should tread carefully if they’re contemplating borrowing against their home.
“Although the interest rates are much lower on a HELOC or cash-out, the issue becomes that you’re taking your short-term debt and turning it into something you’re going to be paying back for 30 years,” says John Walsh, CEO of Total Mortgage Services.
And then there’s the risk factor. Before you jump on that lower rate, you have to understand that if you cannot keep up with your new payments, you risk going into foreclosure, warns David Reiss, professor of law and research director of the Center for Urban Business Entrepreneurship at Brooklyn Law School, who also writes the REFinBlog. “In other words, you are getting the lower rate in exchange for putting up your house as collateral for the debt,” he says.
With stakes this high, it’s not as simple as using a HELOC or cash-out refinance as your “get out of debt free” card. Here are the factors you need to consider.
* * *
As you consider your options, think about both the short-term and long-term benefits and costs, says Reiss. “You can’t think of home equity as free money. That’s your retirement, money you may leave to your children or use for an emergency. It’s money that your future self may need,” he says. If you do decide to move forward, make sure you’re using your home equity wisely — paying off your debt would fall into that category, as long as you commit to smart spending habits moving forward.
Take an honest assessment of where you are in life, and think through your ability to pay off the debt in whatever form it may take. “Run some numbers, and talk this through with someone whose financial judgment you trust,” says Reiss. By being honest with yourself and becoming an educated consumer, you can figure out which option makes the most sense for you.
Consumer Thoughts on Credit Reports
The Consumer Financial Protection Bureau has issued a report, Consumer Voices on Credit Reports and Scores. This report builds on other recent work from the CFPB about how much people really understand about consumer finance. The answer — they still have a lot to brush up on. The CFPB conducted a series of focus groups about credit reports and credit scores. The CFPB concluded that
that many consumers are interested in and concerned about credit reports and scores. We found that some of the consumers we talked to expressed confusion about the best way to access credit reports and scores, what makes up credit reports and scores, and how to improve their scores. Some of the consumers we spoke to often do not feel empowered to take action to improve their credit histories, to use their credit reports and scores to negotiate better credit terms, or, ultimately, to use credit reports and scores as a helpful tool in achieving their financial goals.
The diversity of consumer perceptions, attitudes, and behaviors we heard around credit reports and scores suggests that there is much work to do in helping consumers understand and manage this complicated financial topic. Because consumers have a wide range of knowledge about and perceptions of credit reports and scores, there is no single message or approach to encourage consumers to engage more fully with their credit histories.
However, consumer perspectives on credit reports do suggest that many consumers feel that the credit reports are “hard to get, and hard to read.” Efforts by credit reporting agencies to make it easier for consumers to access and interpret their reports could be a useful contribution tohelping consumers navigate their credit histories.
The growing number of financial services companies that provide their customers with regular access to their credit scores on monthly credit card statements or online provides an opportunity to engage consumers around their credit reports. Once consumers see their credit scores, they may be motivated to learn more about their credit histories, check their full credit reports, and take action to improve their credit reports and scores. (19)
I am happy to see that the CFPB is trying to understand where consumers are at in terms of their financial literacy. This should help them to target their financial education efforts realistically. The report notes that the subject of credit reports is a complicated one. The mortgage application process is far, far more complicated so this report gives us a sense of how much work is to be done for consumers to achieve financial well-being.
Solving Complexity in Consumer Credit
Kathleen Engel posted Can Consumer Law Solve the Problem of Complexity in U.S. Consumer Credit Products? to SSRN. The abstract reads,
People like to know and understand the total cost of credit products they are considering. They also like to know and understand products’ terms and features. Given these preferences, issuers of credit should market products with transparent features and simple pricing. That is not the case. In fact, over the last few decades we have seen a plethora of complex terms in products such as mortgage loans, credit cards, and prepaid debit cards.
As credit products have become ever more complex, consumers have more choices and can select products that satisfy their particular needs and preferences. No longer are borrowers limited to a 30-year, fixed-rate mortgage. If they know they will be moving in a few years, a 3-year fixed-rate mortgage with a low interest rate that converts to a 27-year adjustable rate mortgage based on the LIBOR might be the right product for them. However, for borrowers who do not understand the complexities of a 3-27 mortgage loan, the low, initial interest rate could be a costly lure. Confusion is commonplace. In one study giving consumers a choice between two credit cards that varied only in terms of the annual fee and the interest rate, forty percent of the participants chose the more expensive card.
One would expect that consumers, who cannot decipher terms and calculate the cost of complex products, would turn to those with easy-to-understand terms. There are some simple products on the market. Instead, consumers often misperceive that the more complex products are less expensive than the simple ones. They, thus, shun the products that would be in their best interest.
In this paper, I explain why borrowers make sub-optimal choices when selecting credit products. I then analyze whether extant laws could be used to address obfuscating complexity. I ultimately conclude that policy-makers should look to extra-legal remedies to protect consumers against exploitative complexity.
I find those “extra-legal remedies” to be the most interesting part of this paper. Engel writes,
The approach I find most appealing is to use digital technology to help consumers make decisions. A software program would act like an agent, helping consumers determine what they could afford, what product would best meet their needs, and, lastly, would generate bids from providers of the product. Several goals motivate this idea: (1) the approach is preventative; (2) it does not require the courts to interpret vague standards; (3) it is less costly than litigation; (4) it protects unsophisticated consumers without requiring them to become sophisticated; and (5) it permits consumers to “pull” the information they need to select a product, rather than having issuers “push” hundreds of pages of information to them on multiple products. (24-25)
The paper does not explore how consumers would access this “choice agent,” but it is certainly an idea worth exploring. As some of my recent posts suggest, it is hard to rationally regulate for the entire population of consumers as they are a heterogeneous bunch. But it is important that we keep trying. Engel’s paper has some interesting ideas that are worth pursuing further.
Financial Literacy Rehash
The Consumer Financial Protection Bureau released its second Financial Literacy Annual Report. In blogging about last year’s report, I noted that the CFPB assumed that financial education worked more than research had shown it to work. Unfortunately, this report seems to be mostly a rehash (in many cases an extensive word-for-word rehash) of last year’s (pace Senator Walsh). From what I could tell, the only significant new financial education research that the CFPB has undertaken since last year is its “rules of thumb” project.
“Rules of thumb” are a decision-making and education technique that uses practical, easily-implemented guidelines for making decisions. Existing research has found rules of thumb to be a successful technique for improving decision making in many areas, and more successful than comprehensive education in some instances. Thus, rules of thumb could be a cost-effective method to improve consumer decision making. However, little research exists examining the effectiveness of rules of thumb for financial decision making.
Accordingly, in 2014 the Bureau began a research project to study the effectiveness of rules-of-thumb-based approaches aimed at helping consumers decrease their credit card debt. Rules-of-thumb-based education may be particularly appropriate for improving consumer literacy about credit card use, as credit card decisions are repetitive and frequent. We have finished the first phase of the project to understand how to create rules of thumb, when they are most useful, and how they can be implemented to ensure maximum success. The second phase of the project will test a set of rules of thumb aimed at helping consumers decrease their credit card debt. When we release the final results, which are expected in 2015, we expect that this project will increase knowledge of the efficacy of a rules-of-thumb approach to financial education both within the CFPB and among a range of external stakeholders who serve consumers. (72-73, footnote omitted)
This seems like a great project for the CFPB to undertake. But the rest of its efforts to improve its understanding about the efficacy of financial literacy leaves me under, underwhelmed, particularly because the rule-of-thumb project is limited to just one consumer financial product, credit cards.
Open Season on Homeowners
A case coming out of California, Peng v. Chase Home Finance LLC et al., California Courts of Appeal Second App. Dist., Div. 8, April 8th, 2014, has attracted a lot of attention in the blogosphere. This is particularly notable because this case is not to be published in the official reports and thus has no precedential value. Judge Rubin’s dissent has attracted much of the attention. It opens,
The promissory note signed by appellants Jeffry and Grace Peng obligated them to repay their home loan. In August 2007, Freddie Mac acquired the promissory note from Chase. Based on Freddie Mac owning the note, appellants seek to amend their complaint to allege Chase did not have authority to enforce the promissory note or to foreclose on their home, but the majority rejects appellants’ proposed amendment. Relying on case law rebuffing a homeowner’s challenge to a creditor-beneficiary’s authority to foreclose, the majority notes that courts have traditionally reasoned that the homeowner’s challenge is futile because, even if successful, the homeowner “merely substitute[s] one creditor for another, without changing [the homeowner’s] obligations under the note.” (Fontenot v. Wells Fargo Bank, N.A. (2011) 198 Cal.App.4th 256, 271.) The only party prejudiced by an illegitimate creditor-beneficiary’s enforcement of the homeowner’s debt, courts have reasoned, is the bona fide creditor-beneficiary, not the homeowner.
Such reasoning troubles me. I wonder whether the law would apply the same reasoning if we were dealing with debtors other than homeowners. I wonder how most of us would react if, for example, a third-party purporting to act for one’s credit card company knocked on one’s door, demanding we pay our credit card’s monthly statement to the third party. Could we insist that the third party prove it owned our credit card debt? By the reasoning of Fontenot and similar cases, we could not because, after all, we owe the debt to someone, and the only truly aggrieved party if we paid the wrong party would, according to those cases, be our credit card company. I doubt anyone would stand for such a thing. (Dissent, 1)
The dissent’s concern is justified. As Professor Whitman has recently noted on the Dirt Listserv and elsewhere, it is a “bizarre notion that anyone can foreclose a mortgage without showing that they have the right to enforce the note.” He also notes that the majority (and even the dissent) in Peng confuse ownership of the note with the right to enforce it. Until courts fully understand how the UCC governs the enforcement of notes, one should worry that some state court judges might declare an open season on homeowners as the majority does here in Peng.
Reiss on Paying off Underwater Mortgages
MainStreet.com quoted me in What Bills Should You Pay First? It reads in part,
Consumers started prioritizing their mortgage payments ahead of their credit card payments as of September 2013, according to a new TransUnion study.
This reverses a trend that began in September 2008 when the mortgage crisis drove consumers to pay their credit cards bills ahead of mortgages. Consumers have placed an emphasis on paying their auto loans before their mortgages and credit card payments by a wide margin – since at least 2003, TransUnion said. The study obtained anonymous consumer information from December 2002 through December 2012, and each monthly sample included about 2.5 million consumers.
* * *
Many consumers were faced with devaluing home prices and chose to preserve their credit line, said David Reiss, professor of law at Brooklyn Law School in New York.
“The underwater mortgage may have seemed like a sinkhole when prices were dropping and putting limited funds into it might have seemed like throwing good money after bad,” he said. “When a household’s income can’t cover all of its expenses, it has to prioritize its payments. If the mortgage is underwater, it may make sense to use those limited funds to protect assets that are integral to daily living and wage earning like an auto or to focus on tools like credit cards that may have some use going forward, if there is still any available credit left.”
Homeowners have reversed that logic with the rebound of housing prices, Reiss said.”If homeowners have equity in their home from those rising prices, prioritizing the mortgage protects that equity and keeps the household in the house to boot,” he said. “Not everyone makes such a calculation, but many do.”
