Tag Archives: interest rate

Reiss on Payday Lending Regs

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CRM Buyer quoted me in CFPB May Rein In Payday Lending. The story opens,

The Consumer Financial Protection Bureau is considering various approaches to reforming the payday loan industry, The Wall Street Journal reported on Sunday.

The bureau is concerned about the short-term, high-rate debt consumers take on, sources said.

States typically have been responsible for regulating payday loan company practices. If the CFPB should take action, it would be the first time federal regulations were applied to this niche in the financial sector.

Consumer advocates have long been calling for some restraints to be imposed on providers of these loans. Interest rates tend to be astronomical, and borrowers frequently are unable to repay the loans within the prescribed time period. What happens more often than not is that they roll their loans into the next pay period, committing to a never-ending series of high-interest, short-term contracts.

The CFPB reportedly is considering approval of a “vanilla” type of short-term loan with underwriting criteria that would establish whether the borrower actually would be able to repay it — an approach similar to the mortgage qualification requirements put in place after the financial crash.

That is not the only model reportedly under consideration, however, and the CFPB might waive such underwriting requirements for borrowers who don’t tap payday advance loans very often, the Journal reported.

Pushback can be expected from the industry, which has been under fire for years. The payday lenders’ argument is straightforward: With so many Americans living from paycheck to paycheck, their services are necessary to meet emergencies.

Defanging the Predator

“There is clearly a demand for payday lending by unbanked consumers who have needs for short-term credit but do not have access to credit cards, home equity loans or other loan products,” said David Reiss, professor of law at Brooklyn Law School.

“At the same time, payday lending repayment terms are often seen as onerous and predatory, with annual interest rates that run in the hundreds of percent and with many customers stuck in a cycle where they roll over their high cost debt from one month to the next, accruing more interest and fees along the way,” he told CRM Buyer.

Given the mission of the Consumer Financial Protection Bureau, Reiss said, it is natural for it to attempt to develop a regulatory structure for the industry that would allow it to function — but not extract predatory profits from its customers.

Reiss on Refinancing

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MainStreet quoted me in Fed’s End to Quantitative Easing Will Affect How You Invest and Buy a House. It reads in part,

The Federal Reserve’s decision to end its bond buying program after six years to help boost the economy is a sign that more recovery and growth will occur. So what does the typical American on Main Street need to know?

While the Fed did not indicate a timeline for when interest rates will rise, consumers should be prepared and “see the writing on the wall” since variable rates such as credit cards, adjustable rate mortgages and home equity loans will start to rise slowly and gradually, said Bankrate.com chief financial analyst Greg McBride, CFA.

“The low interest rates will come to an end,” he said. “Consumers should pay down debt while the rates are low rather than contend with it once rates move up.”

Mortgage rates will remain low but will fluctuate according to global risks, not because of any actions taken by the Fed, said Ernie Goss, a professor of economics at Creighton University in Omaha. Consumers should expect rates for short term rates such as auto loans to rise “ever so slightly” between now and July 2015, he said.

The good news about rising interest rates is that savers will begin earning more on their nest eggs, but the increase could be offset by a higher cost of borrowing and could discourage people from getting loans and spending, said Gail Cunningham, a spokesperson for the National Foundation for Credit Counseling, a Washington, D.C. non-profit organization.

“If mortgage rates rise, consumers with variable rate mortgages will see their monthly payments go up, putting a dent in the amount they have available for disposable spending,” she said.

Even if mortgage rates do increase, consumers need to consider the costs of refinancing before they embark on the process, said David Reiss, a law professor at the Brooklyn Law School in New York. Homeowners need to determine how long they plan to live in their home and if the cost of refinancing outweighs the lower monthly payments.

“If you are not sure that you will be there for a few years at least, the cost of refinancing may be more than the amount you save in decreased interest payments,” he said. “How many years will it take you to recoup that cost in reduced interest rate payments?”

Reiss on Home Mortgage Disclosure Act Proposed Rulemaking

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I have submitted a Comment on Home Mortgage Disclosure Act Proposed Rulemaking to the Consumer Financial Protection Bureau.  Basically, I argue

The Consumer Financial Protection Bureau’s Home Mortgage Disclosure Act proposed rulemaking (proposed Aug. 29, 2014) is a reasonable one.  It increases the amount of information that is to be collected about important consumer products, such as reverse mortgages.  It also increases the amount of important information it collects about all mortgages.  At the same time, it releases lenders from having to determine borrowers’ intentions about how they will use their loan proceeds, something that can be hard to do and to document well.  Finally, while the proposed rule raises some privacy concerns, the CFPB can address them.

 

Why We Need The CFPB

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Judge Illston (N.D. CA.) has preliminarily approved a settlement of a class action in Jordan et al. v. Paul Financial LLC et al., No. 3:07-cv-04496 (June 14, 2013). The class action arises from lender practices during the Subprime Boom of the early 2000s.  The class is composed of

All individuals who within the four-year period preceding the filing of Plaintiffs’ original complaint through the date that notice is mailed to the Class (the “Class Period”), obtained an Option ARM loan from Paul Financial, LLC that either (a) was secured by real property located in the State of California, or (b) was secured by real property located outside the State of California where the loan was approved in or disseminated from California, which loan had the following characteristics: (i) the yearly numerical interest rate listed on page one of the Note is 3.0% or less; (ii) in the section entitled “Interest,” the Promissory Note states that this rate “may” instead of “will” or “shall” change, (e.g., “The interest rate I will pay may change”); (iii) the yearly numerical interest rate listed on page one of the Note was only effective through the due date for the first monthly payment and then adjusted to a rate which is the sum of an “index” and “margin;” and (iv) the Note does not contain any statement that paying the amount listed as the “initial monthly payment(s),” will definitely result in negative amortization or deferred interest. (2)

Of the problems alleged by the lead plaintiffs and given credibility by the judge’s order, the most disturbing is that the lender described a rate that was fixed for only one month as a “yearly” one. It is hard to see how consumers can parse the language of a mortgage note on their own, especially in California where borrowers typically are not represented by counsel in a residential real estate transaction.

Many commentators claim that more disclosure and financial education are all that are necessary to ensure that consumers have access to credit on reasonable terms.  But residential finance transactions are too complex under the best of circumstances. And they  become just plain abusive when lenders describe an interest rate that adjusts after one month as “fixed.”  And they become too predatory when an interest rate that adjusts monthly is described as a “yearly” one.

This case, arising from lender behavior during the Boom, reminds us why we now have the Consumer Financial Protection Bureau, post-Bust.  When pundits inevitably claim that even reasonable consumer protection regulation initiatives are too paternalistic and too restrictive of credit, let’s remind them of this case and the many others like it.