Relegating Consumer Protection To The Shadows

The Department of the Treasury released its report on Asset Management and Insurance, which follows on the heels of its report on the capital markets. The latest report calls for replacing the term “shadow banking” with “market based finance.” (63) The term “shadow banking” reflected a belief that there was a less regulated sector of the financial services industry that operated in the shadows of heavily regulated financial services sectors like banking.

While innocent enough as a matter of nomenclature, retiring “shadow banking” reflects the Trump Administration’s desire to reduce regulation across the financial services industry and to put an end to any negative connotations that the term shadow banking carries. The report makes this crystal clear:  “Applying the term “shadow banking” to registered investment companies is particularly inappropriate as the word “shadow” could be interpreted as implying insufficient regulatory oversight, or disclosure.” (63)

Given that the Trump Administration is focused on rolling back many of the provisions of Dodd-Frank, it is worth reviewing the changes that this report advocates. I focus here on how the report seeks to limit the regulatory oversight role of the Consumer Financial Protection Bureau:

Title X of Dodd-Frank expressly excludes the “business of insurance” from the list of financial products and services within the CFPB’s jurisdiction. Dodd-Frank also prohibits the CFPB from exercising enforcement authority over “a person regulated by a State insurance regulator.” A “person” is defined to be “any person that is engaged in the business of insurance and subject to regulation by any State insurance regulator, but only to the extent that such person acts in such capacity.”

There are, however, a limited number of exceptions where the CFPB may exercise its authority over the business of insurance and persons regulated by state insurance regulators:

• If an insurer offers a financial product or service to the extent that the insurer is engaged in the offering or provision of a consumer financial product or service (e.g., debt protection contracts that are administered by insurers on behalf of a bank); To supervise and enforce violations of federal consumer laws (e.g., violations of the Real Estate Settlement Procedures Act that relate to insurers);

• If persons knowingly or recklessly provide substantial assistance in an Unfair, Deceptive, or Abusive Acts and Practices (UDAAP) violation (i.e., if an insurer knowingly or recklessly supports a covered person or service provider in violation of the UDAAP provisions of Dodd-Frank); or

• To request information from a person regulated by a state insurance regulator in connection with the CFPB’s rulemaking, investigative, subpoena, or hearing powers.

Despite the general exclusions, these statutory exceptions create considerable uncertainty concerning what the CFPB can examine or regulate. Insurers are concerned that, if the CFPB interprets the exceptions broadly, it could potentially regulate insurers or the business of insurance in a manner more expansive than the statutory exceptions intend. Such regulatory actions could also be duplicative of actions undertaken by state insurance regulators.

Recommendations

Treasury recommends that Congress clarify the “business of insurance” exception to ensure that the CFPB does not engage in the oversight of activities already monitored by state insurance regulators. (108-09)

This recommendation seeks to further reduce consumer protection in the financial services industry. Republicans have been quite open with this goal, so there is really nothing hypocritical about this recommendation. It is just a bad one. There have been a lot of abusive debt protection contracts like credit life insurance products that are priced way higher than comparable life insurance products. Blocking the CFPB from regulating in this area will be bad news for consumers.

 

Reverse Mortgage Drawbacks

photo by www.aag.com

US News and World Report quoted me in 6 Drawbacks of Reverse Mortgages. It opens,

For some seniors, reverse mortgages represent a financial lifeline. They are a way to tap into home equity and pay the bills when meager savings won’t do the job. Others view this financial product with suspicion and point to stories of seniors losing their homes because of the fine print in the paperwork.

Amy Ford, senior director of home equity initiatives and social accountability for the National Council on Aging, says regulatory changes were made in recent years to eliminate many of the horror stories associated with reverse mortgages gone wrong. Home equity conversion mortgages – as reverse mortgages through the Federal Housing Administration are known – now incorporate many consumer protections. These help seniors ensure they can afford the loan and are aware of its potential consequences.

“It’s a magic credit line,” says Jane Bryant Quinn, AARP Bulletin personal finance expert, when asked why people would want a reverse mortgage. “It increases every year at the same rate as the interest you pay.” She recommends that seniors consider taking out a HECM line of credit and then borrowing against it sparingly. That way, retirees have protection against inflation and a source of income in the event of a down market.

Despite their appealing benefits, some financial experts urge caution. “I wouldn’t say there is no place for reverse mortgages,” says Ian Atkins, financial analyst for Fit Small Business. “But that doesn’t make a reverse mortgage a good option for everyone.”

Here are six drawbacks to reverse mortgage products.

1. Not every reverse mortgage has the protections of a HECM. While HECMs are the dominant player in the reverfederally insured

consumer proptection

se mortgage market, seniors could end up with a different product. Atkins says single purpose reverse mortgages are backed by a state or non-profit to allow seniors to tap home equity for a specific purpose, such as making home repairs or paying taxes. There are also proprietary reverse mortgages, sometimes called jumbo reverse mortgages, available to those who want a loan that exceeds the HECM limits.

These proprietary reverse mortgages make up a small portion of the market, but come with the most risk. They aren’t federally insured and don’t have the same consumer protections as a HECM.

A reverse mortgage can be a lifesaver for people with lots of home equity, but not much else.

“Another common issue with [proprietary] reverse mortgages is cross-selling,” Atkins says. “Even though it may not be legal, some companies will want to push investments, annuities, life insurance, home improvements and any other number of products on their borrowers.”

2. Other people in the house may lose their home if you move. HECMs are structured in such a way that once a borrower passes away or moves out, the balance on the loan becomes due. In the past, some reverse mortgages were taken out in one person’s name and the non-borrowing spouse’s name was removed from the title. When the borrowing spouse died or moved to a nursing home, the remaining husband or wife often needed to sell the house to pay off the loan.

“There are now some protections for those who were removed from titles,” Ford says. However, the protections extended to non-borrowing spouses do not apply to others who may be living in the house.

A disabled child, roommate or other relative could wind up without a place to live if you take out a reverse mortgage, can no longer remain in the home and don’t have cash to pay off the balance. “If it’s a tenant, you might not care,” says David Reiss, a professor at Brooklyn Law School and author at REFinBlog.com. “But if it’s your nephew, you may care.”

3. Your kids might be forced to sell the family home. If you’re hoping to pass your home on to your children, a reverse mortgage can make that difficult. Unless they have cash available to pay off the loan, families may find they have no choice but to sell once you’re gone.

That isn’t necessarily a reason to rule out a reverse mortgage, but Ford encourages parents to discuss their plans with family members. Everyone with a stake in the home – either emotional or financial – should understand what happens to the property once the borrower can no longer live there.

4. The mortgage balance might be due early if you have trouble paying your property taxes, insurance or homeowners association fees. Reiss says the marketing for some reverse mortgages can make seniors feel like the product is a cure-all for money problems. “There’s this promise that reverse mortgages will take care of your finances,” he says. “What they don’t mention is that your mortgage doesn’t cover your property taxes.”

If a borrower fails to pay taxes, maintain insurance or keep current with homeowners association dues, the lender can step in. Ford says many companies will try to work with a borrower to address the situation. However, repeated missed payments could result in the loan being revoked.

Financial counseling requirements for HECMs are designed to prevent these scenarios. Quinn says some companies will take additional precautions if warranted. “If the lender thinks there’s a risk you’ll run out of cash, it will set aside part of the loan for future taxes and insurance,” she says.

5. Fees can be high. The Consumer Financial Protection Bureau notes reverse mortgages are often more expensive than other home loans. “Don’t just assume that because it’s marketed to seniors without a lot of money, that it is the most cost-efficient way of solving your [financial] problem,” Reiss says. Depending on your needs, a traditional line of credit or other loan product may be a cheaper option.

Properly Insuring a Home

hands-and-house

Realtor.com quoted me in 3 Types of Insurance You Need to Buy a Home (and 4 You Don’t). It reads, in part,

When you buy a home, you will be showered with offers to buy insurance—and not just one type, but many types. Such awesome deals! So which ones do you really need?

There are a few that are downright essential, and others are nice but not necessary. Furthermore, others are total rip-offs to avoid at all costs.

To help you differentiate among them all, here’s a rundown of the types of insurance you’ll likely encounter on your home-buying journey and a reality check on whether you need them.

Title insurance

Do you need it? Absolutely!

Normally, this isn’t even a question because it’s almost always mandatory when you’re getting a mortgage. But if you’re paying all-cash, you have the option of skipping on title insurance. You shouldn’t.

Title insurance “ensures both the lender and the owner’s financial interests in the home are protected against loss due to title defects, liens, or other matters,” says Liane Jamason, a Realtor® and owner of the Jamason Realty Group at Smith & Associates Real Estate in Tampa, FL.

It’s especially important to get title insurance in transactions like short sales and foreclosures, which often carry the high risk of some kind of tax lien being attached to the property. Title insurance is going to safeguard against your needing to pay for liens, and will ensure the title is clear so no one down the road could claim they own the property and file a lawsuit.

If for some reason you’re dead set against getting title insurance, Jamason suggests you should at least get a lawyer to “thoroughly check the property’s history to ensure there could be no future claims to title.”

Homeowners insurance

Do you need it? You bet

Like title insurance, this is another one that’s not required if you own the house outright (you’ll need to have it with a mortgage), but this is necessary. Homeowners insurance covers you for a variety of things like fires and storms. You’ll want it even if you aren’t legally required to have it.

Eric Kossian, agency principal of InsurePro, a Washington state insurance agency, cites an example of a wealthy homeowner who had paid off his house and “figured since he had never had an insurance claim he would save himself the $700 a year in premium.” Then some kids near his home started a fire, which got out of control and burned down several houses—including his. It cost the homeowner about $450,000 in damages. Consider this a cautionary tale.

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Mortgage protection life insurance

Do you need it? Not really.

In case you die while you’re still paying off a mortgage (bummer, we know), this insurance is supposed to make sure your family is financially covered when it comes to paying your mortgage. But it’s basically pointless.

“I would say as a general rule that mortgage life insurance or mortgage protection insurance is unnecessary,” says David Reiss, a law professor specializing in real estate at Brooklyn Law School. Reiss says consumers “are generally better served by a cheap term insurance policy from a well-rated insurance company,” and “you will generally get more protection per premium dollar with a term life insurance policy.”

Umbrella insurance

Do you need it? Usually not.

Umbrella insurance is basically insurance for your insurance. It vastly expands the amount of damages your insurance will cover. But it’s not necessarily worth it.

“One common rule of thumb is that an umbrella insurance policy should equal the net worth of the insured,” Reiss says. So for the average middle-class American homeowner, Reiss notes that an umbrella policy is generally “less relevant,” probably because your regular insurance covers enough. For the rich, or those who are “reasonably expecting” a rise in income, Reiss says it can be a good idea and worth researching further.

Saving On Homeowners Insurance

Insurance Policy

Trulia quoted me in 5 Ways To Save On Homeowners Insurance. It opens,

Some basic decisions in life shouldn’t demand much debate in your mind. Behind car and life insurance, homeowners insurance is one of the biggest no-brainers. When golf ball–sized hail rips your Boca Raton, FL, roof to shreds, your dog bites a clueless runner, or someone breaks in and steals your vintage Larry Bird jersey and Grandmother’s pearl earrings, a basic homeowners insurance policy should have you covered. But as with any other form of shopping, it’s always best to look around, sniff out a good deal, and compare home insurance options. Luckily, deep discounts can be found. Here are five ways to save on your policy.

1. Shop around, then enlist help

Finding the biggest discount isn’t just for cars and airline tickets. In fact, a few phone calls and internet searches can land you some serious deals on homeowners insurance. “Start by looking to see if there are any companies that offer discounts,” says Cory Gagnon, associate financial adviser, The Beacon Group at Assante Wealth Management Ltd. in Calgary, Canada. “An insurance broker or financial planner can be very helpful in these situations as they have access to databases that allow them to source a wide variety of companies.”Then think about memberships you have — are you a veteran or AARP member? If you’ve used membership discounts for say, buying a car or booking a vacation, see if the association has discounts for homeowners insurance. Think hard about groups you’re part of: Check if your college alumni association offers discounts, or even the wholesale club you belong to (like Costco, BJ’s, or Sam’s Club).

2. Improve your home

Sometimes, Gagnon adds, little changes and improvements to your home can lead to lower premiums. “Some insurance companies offer lower rates for a variety of factors having to do with the structure and build of your home, including the type of wiring, plumbing, and structure material,” he says. “If you are in an older home, making an investment in upgrades to some of these core elements will make your home safer — for example, less threat of pipe bursts, electrical fires — and thus lower your insurance premiums with certain companies, saving you money in the long run.”

3. Know the difference between replacement cost and actual cash value

Homeowners insurance comes with options, and the best way to navigate those options is to know what they are. “One of the most important things that a homeowner should know about when shopping for [a] new or existing homeowners policy is the difference between replacement cost versus actual cash value [ACV],” explains Craig Ciotti, an insurance agent/broker with Fidishun Insurance & Financial Inc. in Yardley, PA. “Replacement cost will insure you for the cost that it would take to replace your home and all of the other personal property in it,” he says. “The other option is actual cash value. ACV is the actual value of your home and does not take into consideration zoning permits or removal of damaged property. ACV is more often used by investors and not homeowners.” If, for instance, a laptop you bought for $1,000 is stolen, with replacement cost insurance, you will get $1,000 for a new laptop. With ACV, you’ll get the current market value for the laptop — which will most likely be far less, since it has probably depreciated over time. ACV premiums generally cost less, but you’ll likely pay more out of pocket after a loss.

4. Agree to a higher deductible

As with other forms of insurance (ahem, car), you can save big on your policy if you simply increase your deductible. “This can shave a significant amount off of your annual premium, which is the good thing,” says David Reiss, professor of law and research director at the Center for Urban Business Entrepreneurship at Brooklyn Law School. “The bad thing about it is, if you have a casualty, you will be responsible for it until it reaches the higher deductible limit. Thus, you should be able to handle that additional amount before agreeing to the higher deductible. Given that your premium typically goes up when you make a claim, a silver lining of the higher deductible is that you will file fewer claims.”

Reiss on Death and Mortgages

Credit.com quoted me in What Happens to Your Mortgage After Death? It reads in part,

Death isn’t on the minds of most homeowners on closing day, naturally, unless it’s a fear of drowning in paperwork. But it’s really never too early to consider what happens to your mortgage should you pass away.

The financial obligation of a home loan does linger after death. There’s a host of scenarios regarding the mortgage’s ultimate disposition, all colored by a homeowner’s estate planning (or lack thereof) and other legal issues.

It isn’t a particularly pleasant topic, but a little bit of planning and paperwork can save your loved ones from considerable headache and hassle during an already difficult time.

“If you’re really thinking about your family’s long-term interests, purchase insurance so they can stay in your home upon your death, and have a will to make everything administratively easy,” said David Reiss, a law professor at Brooklyn Law School in New York.

Keeping the House

Nearly seven in 10 recent homebuyers are married couples, according to the National Association of Realtors, so we’ll focus on them. The co-borrowing spouse will typically be financially liable for the mortgage moving forward.

A spouse who plans to continue living in the home will need to keep current on payments. If you have a life insurance policy in play, your spouse may be able to use the payoff to keep up with or completely wipe out the mortgage balance.

Reiss recommends homeowners consider term life plans rather than actual mortgage term insurance, which can be more expensive.

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Older Homeowners

About a third of people 65 and older have a mortgage, according to the U.S. Census. For older homeowners, it’s important to talk with family members about the property’s long-term future.

Children and grandchildren may not share the same desire to keep a house in the family.

“Do you see it as something your family wants to keep?” Reiss said. “You want to make that as financially easy for them as possible.”