Citi will voluntarily end a practice that enables banks to charge customers repeatedly for overdraft protection. Image: CC TheTruthAbout/Flickr

In a rare case of voluntary consumer protection in the financial industry, Citi announced that it will change the way it clears checks in order to minimize overdraft protection charges. Financial reform restricts banks from providing overdraft protection for debit cards unless customers opt in, but the rules don’t apply to checking accounts. On Monday Citi said it will curtail the practice of milking overdraft fees from checking accounts by processing smaller checks first.

How banks milk checking account overdraft fees

Citi will start processing checks written for smaller amounts first as of July 25. Before it announced the change, Citi, like most major banks, processed larger checks first in order to increase the likelihood of multiple overdraft charges on checking accounts. Consumer advocates have long denounced the practice, but the banks commonly spin their deceit as a benefit to customers. According to banks, processing larger checks first ensures that high priority bills such as mortgages are paid on time. In reality, the practice works in reverse. For example, if a bank customer has a $100 checking balance and writes checks for $90, $25 and $15, the bank will clear the $90 check first. This leaves a $10 balance, which enables the bank to charge overdraft fees as high as $39 for both the $25 and $15 checks — an extra $78 in ill-gotten gains. As of July 25, Citi will clear the $25 and $15 checks first and only be able to gouge the customer once, instead of twice.

Few consumers are opting in

New financial reform laws passed in 2010 require banks to get permission from customers before enrolling them in debit overdraft loan programs. But according to Consumer Reports, banks have adopted misleading “opt-in” marketing strategies promoting expensive overdraft loans while failing to mention lower-cost alternatives that are available. Citi and Bank of America decided to eliminate debit overdraft protection altogether. Now they decline uncovered transactions at no cost, allow customers to link their checking account to savings, or offer an overdraft line of credit. A Consumer Reports poll found that only 22 percent of debit card holders have opted into overdraft loan programs. The poll also found that 70 percent of consumers would also like to have a choice about overdraft protection for checking accounts. Thirty eight percent of respondents said they would opt out if allowed to do so.

Expect creative customer gouging to continue

In 2009, banks penalized customers with overdraft protection on debit cards to the tune of about $20 billion. Banks collected another $12 billion from overdraft fees on checking accounts. Bank lobbyists managed to get voluntary overdraft loan programs for checking accounts exempted from financial reform, but the FDIC is considering an opt-in requirement at smaller state chartered banks for overdraft coverage on paper checks and electronic payments. Consumers Union, the non-profit publisher of Consumer Reports, is urging the FDIC to require all banks to get consent before before charging customers for checking account coverage. If the FDIC goes along, consumers can expect banks, including Citi and Bank of America, to create other charges such as increasing monthly checking account fees.  When regulators respond, banks will find other ways to make money for nothing.

Sources

Associated Press

Consumer Reports

New York Times

The long-awaited release of discount window data by the Federal Reserve illustrates the global impact of Wall Street bank failures. Image: CC laura padgett/Flickr

To prevent going belly-up during the financial crisis, anonymous banks lined up at the Federal Reserve’s discount window for cheap loans. Last week the Supreme Court ruled in favor of a Freedom of Information Act request that the Fed had to reveal which banks borrowed from the discount window and how much was loaned. Data unveiled by the Fed Thursday shed light on how Wall Street’s meltdown spread damage around the globe.

Fed bails out the world’s banks

The discount window was created by the Fed a century ago to help healthy banks caught in a cash crunch with short-term loans. Due to the stigma in financial circles associated having to stand before the Fed with hat in hand, the identities of the borrowers have always been kept secret. But the Fed was forced to make the data public by the Supreme Court after it ruled in favor of a Freedom of Information Act request filed by Bloomberg and Fox Business. When the Fed finally released the data Thursday, any concern about a negative stigma may have been alleviated by the fact that just about every bank in the world had to stand in line at the discount window as the global financial system teetered on the brink of collapse. More than 25,000 pages of documents show the Fed lent as much as $110 billion through the discount window in one day as the financial crisis peaked.

Surprise! European banks were biggest borrowers

Wall Street banks have taken most of the flak for government bailouts during the financial crisis. But data released by the Fed revealed that European banks were among the biggest borrowers at the discount window. On Oct. 29, 2008, Belgian-French bank Dexia borrowed $26.5 billion and Dublin-based bank Depfa, owned by German mortgage lender Hypo Real Estate, borrowed $24.6 billion. The discount window also made multi-billion-dollar loans to other European banks including Austria’s Erste Group, Bank of Scotland and France’s Societe Generale. On this side of the pond, before it became the biggest bank failure in history, Washington Mutual borrowed $2 billion on Thursday, Sept. 18, 2008, to get through the weekend. When that loan was due Monday, Wamu took a $2 billion overnight loan and kept taking another $2 billion every night until it was taken over by J.P. Morgan Chase on Thursday, Sept. 25, 2008.

Data shows global extent of financial crisis

When the collapse of Lehman Brothers in September 2008 triggered the financial crisis, the global economy went into a tailspin, the financial system froze and banks around the world begged the Fed for help. The release of the discount window data shows just how bad the damage was and how quickly it spread. During testimony to a congressional panel investigating the financial crisis in November 2009, Fed chairman Ben Bernanke said of all the banks lined up at the discount window, only one was not at risk of total collapse. The Dodd-Frank financial reform bill passed in 2010 removes confidentiality from discount window lending, but not until two years have passed from the time the loans are made — about the same period it took the courts to force the Fed to do it this time.

Sources

Fox Business

Wall Street Journal

Reuters

Wells Fargo and other banks are ending debit rewards programs as financial reform efforts are eating into their bottom line. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

The costs of financial reform are adding up as a potential curb on interchange fees is causing banks to cancel debit card reward programs. Financial reform legislation has caused ripple effects, and the effort to legislate fairer conditions for consumers is leading to more restrictive conditions for consumers. Lawmakers are beginning to balk at the high cost of such laws.

Interchange fee cap may deprive consumers in effort to protect them

The proposed cap on interchange fees or “swipe fees,” which merchants must pay banks to complete debit card transactions, has already led to major banks trying to save money any way possible. Free checking programs and debit card rewards have landed on the chopping block. JP Morgan Chase ended its debit card rewards program and more are following suit, according to CNN. Wells Fargo subsidiary Wachovia has stopped offering debit rewards to new customers, and Wells Fargo will do likewise on April 15. Citibank recently disclosed that the bank is “in the process of evaluating potential changes,” which means it is likely going to cut debit rewards programs for customers as well.

Costs of financial reform adding up

A recent estimate by the Government Accountability Office placed a price tag of $1 billion per year on the Dodd Frank Act, or the financial reform bill, according to USA Today. The creation of a totally new agency, the Consumer Financial Protection Bureau, has already caused controversy and infighting among lawmakers. The GAO estimated that federal agencies would need to hire more than 2,000 people to enforce the laws, including any the CFPB would be enforcing. Congressional Republicans have been openly critical of the agency, which some assert has too much authority. The special adviser to the president in charge of setting up the agency, Elizabeth Warren, has defended the agency, saying that the “Wall Street behemoths” that created the need for the agency should be targets, not the CFPB, according to Bloomberg. The agency will have oversight of consumer financial products from personal loans to credit cards, when it starts operations later this year.

Consumers may end up not using credit at all

The aim of financial reform laws is to prohibit trickery by financial institutions and make the use of credit safer for consumers. That is a noble aim, but it seems to be having a chilling effect on financial institutions. Debit card rewards and free checking are falling by the wayside, but banks cannot impose fees with impunity. Loan credit is likely to get tighter, though that also means banks and lenders cannot gouge customers out of the blue. However, the debate is going to be whether the loss of convenience is worth it.

Sources

CNN

USA Today

Bloomberg

Consumers fed up with bailouts, bonuses and bogus fees are switching to local banks and credit unions by the millions. Image: CC bk1bennett/Flickr

Wall Street banks watched their customers jump ship by the millions in 2010. Community banks and credit unions have watched their clientele grow as consumers disgusted with bailouts, big bonuses and deceptive fees move their money. A driving force behind the movement is the “Move Your Money” project, a campaign that assists consumers who want to divest from Wall Street and invest in local financial institutions.

Big bank defections a growing trend

Wall Street banks, in a game of cat and mouse with regulators, are devising creative new ways to gouge consumers as traditionally abusive practices are outlawed by financial reform. Big banks bet that their customers are too lazy, busy or negligent to notice they are getting nickeled and dimed into giving up dollars. For example, many banks that can no longer charge usurious overdraft fees have discontinued free checking. Carly Fried at MoneyWatch reports that in a recent presentation to shareholders, a Chase executive boasted of making about $1 billion simply by converting 8 million free checking accounts into a revenue stream generating $10 to $12 in monthly fees. But that windfall could be short-lived. The largest banks lost more than 4 million accounts last year. According to the research firm Moebs Services, 7 million to 9 million more accounts could move to community banks and credit unions in 2011.

The Move Your Money campaign

Consumers who question the new checking account fees are often told by their banks that the government forced it to take such action. What they should know is that 65 percent of banks in the U.S. still offer free checking despite the Dodd-Frank bill. The easiest way to find those financial institutions is at moveyourmoneyproject.org. Move Your Money is a campaign organized by Arianna Huffington. The Move Your Money website search tool locates the closest local community banks and credit unions simply by typing in a zip code. After Huffington appeared on CNN to promote the website in January last year, 80,000 people used it to find a local financial institution. In the past year moveyourmoneyproject.org has been getting up to 45,000 page views a day.

Closing a bank account

For consumers thinking about moving their money, closing a bank account should be done carefully. Open an account at your new financial institution first, then make sure all your checks have cleared. Physically go to your bank to close your accounts, but call before you leave to learn about its policies about closing accounts. Some banks will try to ding you one last time with a hefty fee. Be sure to go before 3 p.m. on a weekday so the staff has plenty of time to complete your request. Bring two forms of identification, including a photo I.D. Don’t leave without the balance of your accounts. If the bank can transfer the funds electronically, have it do so. If not, take the money with a cashier’s check or cash.

Sources

Huffington Post

Christian Science Monitor

CBS MoneyWatch

ehow.com

The Supreme Court has legally bound the Fed to reveal which banks took discount loans during the financial crisis and how much they borrowed. Image: CC rpongsaj/Flickr

The Federal Reserve is being forced to release details about emergency loans made to Wall Street banks during the financial crisis of 2008. The Supreme Court on Monday sided with a reporter from Bloomberg News who sued to force the Fed to reveal the Wall Street banks that borrowed from a lending program called the “discount window.” Monday’s Supreme Court ruling adds discount window data to information about six other bank bailout programs Congress required the Fed to disclose in December.

Opening the discount window

The Dodd-Frank financial reform bill required The Fed to reveaal details about the $3.5 trillion Wall Street bank bailout of 2008; however, information about the discount window was not part of that disclosure. Using the Freedom of Information Act, Bloomberg News filed a request for discount window data in 2008 and the Fed said no. In 2009 a trial court ruled in Bloomberg’s favor and the Fed appealed. A federal appeals court upheld the ruling, which was appealed by the Clearing House Association, a trade group that represents 10 of the largest banks in the U.S. Monday’s Supreme Court decision upholds the ruling once again, which requires the Fed to release details about the discount window within five days. It is the first time the Fed will release confidential information about the discount window since the program began in 1913.

Looking through the discount window

During the financial crisis, the Fed reduced the discount rate, lowered the primary credit rate and extended the maximum term from overnight to ninety days in the discount window. The documents that must be released include the names of banks and the amounts borrowed through the discount window in April and May, 2008. As the financial services industry trumpets its government-backed return to profitability for investors, the discount window data could embarrass some of the biggest Wall Street banks. If the public knows how much Wall Street had to depend on government bailouts to survive the financial crisis, it might affect investor perception about the leadership of the banks that needed help and how that could affect their future financial condition.

Wall Street wins when losing, again

There may have been something about the discount window loans made in April and May 2008 that Wall Street desperately wanted to keep secret. The Clearing House Association said releasing discount window data would make banks think twice about seeking government bailouts in the future. But even though the Supreme Court upheld Bloomberg’s case, Wall Street lawyers managed to delay the release of discount window data for more that two years. The Dodd-Frank financial reform bill requires the Fed to release data on discount window loans made after July 21, 2010, but only after a two year grace period.

Sources

New York Times

Bloomberg

Business Insider

Big business wants financial reform - with some caveats. (Photo Credit: CC BY-ND/Adam Benforado/The Situationist)

On July 21, 2011, the Consumer Financial Protection Bureau is scheduled to officially begin living up to its mandate as the United States’ regulatory body for consumer finance companies. The impending change recently prompted business groups to send the Obama administration a “wish list” letter that expresses what they think the CFPB should do first, reports CNN Money. While focusing on bank regulation is considered a top priority, the notion of the CFPB proposing new financial reform before confirming a director is unpopular.

Confirm a CFPB director now, says big business

Harvard University professor and Obama administration adviser Elizabeth Warren originally conceived the idea for the Consumer Financial Protection Bureau, and she has been considered the most likely candidate to direct the bureau. However, Warren’s strong stance for the consumer and against the machinations of Wall Street make her an uncertain choice for confirmation, according to Sen. Christopher Dodd (D-Conn.), a co-founder of the Dodd-Frank Wall Street Reform Act. This has delayed the confirmation process, but it has not kept Warren from the difficult work of staffing the agency and meeting with bank executives, lobbyists, chambers of commerce, consumer groups and high-profile investors.

“They were wary, but polite, and quite surprised,” Warren said Monday of the meetings. “Some were sure I’d walk in with blood dripping from my fangs.”

What big business wants

In order to avoid burdensome or regulatory duplication, business groups are clamoring for the CFPB to approach banking and finance regulation with laser-like precision. Jess Sharp, director of the U.S. Chamber of Commerce Center for Capital Markets Competitiveness, told CNN that Dodd-Frank is too ambiguous as it stands. The Consumer Financial Protection Bureau must do more.

“Targeted regulation to weed out bad actors is good for consumers, but there’s huge and ambiguous authority granted under Dodd-Frank,” Sharp said. “That can lead to huge regulatory burdens for Main Street businesses.”

Specifically, Dodd-Frank would empower the CFPB to supervise consumer finance companies that aren’t traditional banks, like short term loan companies. However, in the letter to the Obama administration, business groups frown upon such an idea.

“Deferring an expansion of supervision and examination requirements would allow businesses to devote resources to job creation rather than save them to cover what might well be unnecessary regulatory compliance costs,” the letter reads.

Praise for credit card companies

While the U.S. mortgage industry still needs repair, Warren praised the credit card industry for taking proactive measures to improve its relationship with consumers, writes Credit Card Studio. Further CFPB regulation may not be necessary.

“The data we have assembled indicates that much of the industry has gone further than the law requires in curbing repricing and over-limit fees,” Warren said. “Leaders in the industry deserve credit for moving in the right direction.”

Sources

AdvisorOne

CNN Money

Credit Card Studio

The CFPB: Arresting the development of a new financial meltdown

The 2012 budget could possibly strip financing from financial reform regulations. Image: Flickr / MoneyBlogNewz / CC-BY

The Commodity Futures Trading Commission and Securities and Exchange Commission are supposed to be the financial police officers of the economy. The 2010 Dodd-Frank Act was meant to increase the power of these agencies to protect consumers and keep an eye on Wall Street. The funding to carry out these tasks, however, is caught in the cross hairs of the Congressional budget fight.

Policing the financial system

The 2010 Dodd-Frank Act was intended to increase oversight of the financial system to prevent another collapse. Both agencies have requested increased funding in order to carry out these new responsibilities. In 2010, the Securities and Exchange Commission received $1.1 billion in funding. For fiscal year 2012, the two agencies have requested several hundred million more in funding in order to hire more than 1,000 new staffers.

Obama’s proposed increase in funding

In the initial 2012 budget President Obama proposed, the CFTC and SEC were set to receive additional funding, mostly from fees on the trades. The $583 trillion derivatives market would end up paying $117 million in per-trade fees each year in order to fund additional oversight. The federal government would also be responsible for an additional $300 million in oversight funding to the agencies.

Comprehensive budget strips funding

Though Obama’s proposed budget fully funds both regulatory agencies, the comprehensive budget Republicans have proposed not only strips that funding, it reduces funding of the agencies further. A House panel is scheduled to hold hearings on the cost of implementing Dodd-Frank regulations on March 30, but by then the budget could be set. If the current Republican-supported comprehensive budget bill passes, the CFTC would need to reduce its staff by more than 200, and the SEC would need to cap the number of experts hired. Legislators say the fear is that “overly strict implementation” of financial regulation will harm the ongoing economic recovery.

Sources

CNN Money
Wall Street Journal
Washington Independent
Reuters

MoneyBlogNewz/Flickr.com/CC-BY

A Goldman Sachs Facebook investment of $450 million was the biggest news on Wall Street Monday. The Goldman Sachs Facebook deal, plus an additional $50 million investment from a Russian firm, has given Facebook an implied market value of $50 billion. Goldman’s investment makes it a front runner to manage a Facebook IPO that most analysts consider imminent.

The Goldman Sachs Facebook deal

The Goldman Sachs investment gives the social networking phenom more implied market value than eBay, Yahoo and Time Warner. Digital Sky Technologies, a Russian investment firm, added $50 million to its stake in Facebook. In 2009 DST paid $200 million for a 2 percent stake in Facebook, and by buying shares from Facebook employees is reported to have increased its stake to about 10 percent. Facebook, still a private company, doesn’t disclose finances, but it’s apparent the company has no need to borrow money.  Facebook’s 2010 revenues were reported to be approaching $2 billion. The social networking site overtook Google as the most visited website in the U.S. last year.

Goldman hustles to outrun Volker rule

The Facebook investment has provided analysts with clues about Goldman Sachs’ private equity strategy in the wake of the Dodd-Frank financial reform bill. The “Volker rule” is part of the financial reform that bill limits the investments Wall Street banks can make with their own money. Financial reform legislation gives the banks several years to comply with the new regulations. The Goldman Sachs Facebook deal indicates that the firm is taking advantage of that grace period to make lucrative private equity deals with its $900 billion balance sheet. Goldman is also recruiting wealthy clients to pour up to $1.5 billion into Facebook.

Goldman eyes coveted Facebook IPO

Facebook is currently being investigated by the Securities and Exchange Commission for private trading of the company’s shares on the secondary market. Last year Facebook cracked down on employees who were selling their shares as the company’s implied value skyrocketed. SEC rules limit private companies to 499 shareholders. When Facebook hits 500 shareholders it must register its shares and make its finances public. The Goldman Sachs Facebook deal could force Facebook into an IPO. As a shareholder in Facebook, Goldman is now positioned to underwrite a Facebook IPO, which would generate huge fees for the bank and a financial windfall for its clients.

Sources

New York Times

Financial Times

PC World

Credit Karma is one of many sites emerging on the web supported by advertising that allows users to access credit score information for free. Vramak/Flickr photo.

Credit Karma is one of many websites that have emerged offering free credit scores. Learning your credit score is easier now, thanks to the financial reform bill signed into law this month. Financial reform legislation, otherwise known as the Dodd-Frank Wall Street Reform and Consumer Protection Act, requires lenders to show you the credit reports they used to turn you down. But you can keep that from happening by knowing your credit score beforehand and taking steps toward credit repair. Websites like Credit Karma offer to make your credit score available for free anytime, as often as you want to check on it.

Credit Karma service supported by advertising

Credit Karma is a free service supported by advertising. That makes it different from most websites that offer free credit information and then try to lure you into paying for your credit score. Consumer Commentary reports that Credit.com offers a similar free service. Among their differences, Credit Karma evaluates more categories than credit.com when assigning users their credit grade. However, credit.com offers a range for several different types of credit scores. Credit Karma only offers one score directly from one of the reporting bureaus that isn’t a FICO Score.

Is Credit Karma enough for credit repair?

When it comes to credit repair, the usefulness of the credit score available from Credit Karma is questioned by some. At mymoneyblog.com, there’s a catch: it’s not a real FICO score. Your credit score from Credit Karma is a “FICO clone” with a range from 300 to 900. FICO scores range from 300 to 850. Credit Karma, which says it pulls data from Experian, Equifax and Transunion, doesn’t say which bureau supplied the data your credit score is based upon. Plus, you only get your credit score, not who’s pulling your credit, how often they are doing it or information about your existing credit lines.

Are free credit scores really free?

Objections aside, Credit Karma and credit.com appear to be extremely helpful for building, maintaining and repairing credit. Giving up some personal information in exchange for useful credit data is much better for most people than paying $89.95 a year for FICO’s Score Watch. Free credit information is also available at the government-sponsored credit site AnnualCreditReport.com. The site will not give you a numeric credit score, but it will deliver a detailed rundown of factors that affect your credit score. Stay away from sites like creditreport.com and freecreditreport.com. They say you can sign up for free, but after seven days they start billing your credit card $14.95 per month until you make them stop.

Get professional credit repair help

Speak to a professional today and take proactive steps to repair your credit. For a FREE credit consultation, call 1-877-563-2076.

Elizabeth Warren, left, a candidate to lead the Consumer Financial Protection Bureau, has spoken out against access to short term credit like payday loans. Keith Ellison/Flickr photo.

Those who have benefited from easy access to short term credit like payday loans should be interested in the financial reform bill that was just signed into law this week. A controversial aspect of the law is the formation of the Consumer Financial Protection Bureau (CFPB). A fight is brewing in Congress over who will lead the CFPB. Liberals want President Obama to nominate Elizabeth Warren. Conservatives are adamantly opposed to Warren, saying that she would impose rules that limit the availability of credit, especially credit banks refuse to provide, like payday loans and instant cash advances.

Protecting consumers from easy access to credit

The Consumer Financial Protection Bureau will have the independent power to write and enforce rules about how loans are offered, from the type of mortgage you can get to the fees you pay on your credit cards. The Wall Street Journal reports that the agency will be able to enforce its rules against any bank with more than $10 billion in assets, as well as all large mortgage lenders, student loan lenders and payday loan companies. It will have an army of examiners in the field. Administration officials thought the concept would be so popular with the public that it would make the entire financial overhaul easier to pass. But Republicans went on the attack, saying it would create an ungovernable bureaucracy and restrict easy access to credit.

Payday loan opponent is front-runner to lead agency

Elizabeth Warren is a front-runner to lead the Consumer Financial Protection Bureau. She is a Harvard University law professor who has spoken out publicly against the payday advance industry. She first proposed an office to protect ordinary borrowers and savers in a journal article three years ago. The Washington Post reports that shortly before the financial reform bill was signed into law on July 21, Warren made an early exit from a Congressional hearing about the $700 billion financial bailout that she is helping to oversee because she got called to the White House for a meeting. She later attended the financial reform bill signing ceremony with the President. Then she went out to lunch with Valerie Jarrett, Obama’s trusted adviser.

Warren’s views on credit call confirmation into question

The buzz over Elizabeth Warret’s nomination is turning into a political fight. USA Today reports that Democratic Sen. Christopher Dodd of Connecticut, the Senate Banking Chairman and co-author of the financial reform bill, said there were “serious questions” about whether Warren was confirmable. Warren has been outspoken in her opposition to short term credit options like easy payday loans. Charles Calomiris, finance professor at Columbia University, told USA Today that “What we need really is someone not just with impeccable credentials as a passionate advocate for consumers, but also someone who deeply understands the logic of consumer finance. Elizabeth Warren does not qualify.”

Flickr/moneyblognewz/CC-BY

A Wall Street Reform bill was signed into law by President Obama Wednesday. The financial reform bill is described as the most sweeping financial industry reform legislation since the Great Depression. At the signing ceremony for the financial reform bill after months of debate, Obama called Wall Street reform “the strongest consumer financial protections in history.” Republicans called the bill a permanent Wall Street bailout that would hurt small community banks and send jobs overseas.

Financial reform bill finally becomes law

Two years after runaway Wall Street greed nearly collapsed the U.S. economy, the president signed the bill after months of debate. Politico reports that Democrats hoped to produce a strong bipartisan financial reform bill, but in the end it barely passed in the Senate with a handful of Republican votes. Most Republicans argued the bill failed to address the root cause of the 2008 financial crisis: the lending policies at mortgage giants Fannie Mae and Freddie Mac. Republicans also said the bill would force financial firms to move jobs overseas to avoid stricter oversight.

Signing ceremony guest list

At the signing ceremony for the financial reform bill, Obama was flanked by the senators who authored the bill: Congressman Barney Frank of Massachusetts and Senator Chris Dodd of Connecticut, as well as others from Congress who contributed to the reform efforts. But the Washington Post reports that the people who werent’ there speak volumes about the bill. Among those who did not receive a signing ceremony invitation were Wall Street titans James Gorman of Morgan Stanley, Lloyd Blankfein of Goldman Sachs, John Stumpf of Wells Fargo and Jamie Dimon of J.P. Morgan Chase.

Wall Street reform – with a catch

During the ceremony, Obama challenged criticism from Republicans and Wall Street. He described Wall Street reform as a triumph for consumers and a necessity for business, saying the financial system “only works – our markets are only free – when there are clear rules and basic safeguards that prevent abuse, that check excess, that ensure that it is more profitable to play by the rules than to game the system.” The president also said that the meat of the financial reform bill will be left to regulators and that Wall Street greed will still have wiggle room to maneuver. Plus, several parts of the legislation won’t take effect for a year or more as regulators implement new rules.

Republicans call financial reform a Wall Street bailout

The financial reform bill overcame strenuous opposition from Republicans, who charged that by targeting Wall Street greed, it did not address the root problems that caused the meltdown. CBS News reports that in a statement following the signing, House Republican leader John Boehner (who did not receive a signing ceremony invitation) said the bill “provides permanent bailouts for his Wall Street allies at the expense of community banks and small businesses around the country, while doing nothing to reform Fannie Mae and Freddie Mac, the government mortgage companies that triggered the financial meltdown by giving too many high-risk loans to people who couldn’t afford them.”

Though this bill may not be perfect, not many tears are expected to be shed for Wall Street. Image from Wikimedia Commons.

The United States Senate has officially passed the Wall Street reform bill.  The Senate voted to quash debate and discussion earlier today, in order to move it to a vote.  It was expected to pass, as 50 of the required 51 votes were already pledged.  The final tally was a sweeping victory for the bill, passing 60 to 39.  The bill will now go to the President’s desk.  President Obama is expected to make the decision to sign or veto the bill by sometime next week.

Wall Street reform bill finally passes

Earlier today, the United States Senate voted to stop all discussion over the Wall Street reform bill and bring it to a vote.  The measure to kill debate, according to CNN Money, passed 60 to 38.  The final vote began minutes later.  The financial reform legislation has been floundering for over a year, as it was introduced in 2009.  The bill needed some key Senate Republicans to offer their support for it in exchange for alterations.  However, the bill still has staunch Republican opposition in both houses.

What the bill will do

The bill is largely aimed at Wall Street.  It prevents some complex trades, and certain bets on securities, derivatives,  and debt bundle packages.  The Wall Street reform bill also creates mandatory middle men, so firms are more insulated from each other.  The bill will also create an advisory board that will step in and decide what will happen to enormous firms on the edge of failure. The bill also creates a consumer financial protection agency, which will aim to shore up mortgage loans, credit cards, and other consumer lending such as payday loans.  The Consumer Financial Protection Bureau will be part of the Federal Reserve.

The critics have their say

According to the Wall Street Journal, the economists they surveyed were split down the middle whether they would have voted for it.  A slight majority believed it will have only minor effects.  House Minority Leader John Boehner (R – OH) has already called for its repeal, and Senate Minority Leader Mitch McConnell (R-KY) says it will “stifle growth and kill jobs.” The bill also grants a minor oversight of the Federal Reserve (audits allowed only after emergency loans are made, excluding monetary policy) and don’t address Fannie Mae and Freddie Mac at all.

Further Reading:

CNN on the bill passing: http://money.cnn.com/2010/07/15/news/economy/Wall_Street_reform_bill_vote/index.htm

CNN on the bill’s effects: http://money.cnn.com/2010/06/25/news/economy/whats_in_the_reform_bill/index.htm?postversion=2010063018

Wall Street Journal: http://online.wsj.com/article/SB10001424052748703722804575369050948609966.html

No credit check payday loans critical as credit dries up

In the world of credit and lending, remarks by Federal Reserve Governor Elizabeth Duke have made a lot of headlines. Duke said that bank lending that shriveled during the recession continues to decline. She said it will take years for bank lending to recover from the financial crisis — even though banks, bailed out by the government, are raking in profits once again.

Banks rake in profits while consumers struggle

The ability to get easy instant cash for an emergency has never been more important. Lending by banks contracts further as the financial crisis slowly recovers. ABC News reports that Duke, a former banker, said that in April and May, total loans held by commercial banks shrank at an estimated 7.75 percent rate. She said bankers tell her that anxiety about financial reform and stricter government oversight is holding back lending. Shrinking availability of credit is also due to a weaker demand for credit as consumers, left broke by the recession, don’t spend, and small businesses that can’t get bank loans get hit the hardest.

Banks try, but can’t compete against direct payday lenders

Banks remain coldblooded in their pursuit of profits. As they pull back lending, they try to grab business away from short term lenders. The FDIC started a program called the Small Dollar Loan Pilot Program to do that. But as it turns out, Tom Brown at seekingalpha.com reports that the FDIC’s product fails as a replacement for payday loans. Approval usually takes 24 hours, for instance — sometimes too late to serve the very pressing needs of most payday borrowers. And the lender is required to pull a credit report.

Instant cash when you need it most

All that payday lenders online usually require, by contrast, are ID, checking account info and employment verification. And most important, payday lenders put the money in your bank account immediately. So the payday loan alternative the FDIC has dreamed up misrepresents itself.

The responsible, sensible payday loan solution

Payday lenders are getting targeted by politicians, with encouragement from banks, for providing a valuable financial service, economically. Brown cites this example:

Suppose I’m a cash-strapped consumer and my $100 utility bill is due tomorrow. I can either a) pay the bill late and incur a late fee of, say, $20, b) intentionally write a bad check and be hit with NSF charge of $29 (and break the law, to boot), or c) visit a payday lender and borrow the $100 with a promise to repay $115 next pay period.

What will you do?

Financial reform legislation agreed upon by congressional negotiators this week establishes a new consumer protection agency to consolidate oversight of credit and lending. Flickr photo.

A financial reform bill agreement by congressional negotiators was announced Friday. The House and Senate will vote on it next week. If it passes, the financial reform bill changes most of the rules that form the relationship between financial institutions and consumers. Some call the financial reform bill a big win for consumers. Others call the bill a big shaft for consumers.

A new consumer protection agency

The financial reform bill gives consumers a brand new agency to watch out for their interests. The Consumer Financial Protection Bureau will write rules and monitor loan products to keep consumers safe. Business Week reports that Democrats defeated Republican efforts to scale back the powers of the proposed consumer agency. But the financial reform bill sets up an autonomous bureau with independent funding. It will be part of the Federal Reserve and has the power to write and enforce rules banning abusive practices in credit-card and mortgage lending.

Fiduciary standards hurt consumers?

A provision in the financial reform bill that requires brokers to abide by a fiduciary standard when they give investment advice has those in that industry crying foul.David Loeper of Forbes says that part of the financial reform bill will hurt the protection of consumers. He says that because the bill requires brokers to be held to a fiduciary standard enforced by the Securities and Exchange Commission, just as investment advisers are today. According to Loeper, that means consumers won’t be able to tell the difference between brokers and investment advisers. Apparently he thinks that being able to trust both species equally isn’t such a good thing.

Consumer agency consolidates oversight

The financial reform bill’s Bureau of Consumer Financial Protection would consolidate oversight of a wide variety of financial products, including mortgages, credit cards and payday loans. ABC News reports that responsibility for these areas is currently scattered across a variety of government agencies. Experts say that creating a single supervisor will help make financial products easier to understand and not take unfair advantage of borrowers.

Consumer protection leadership

The consumer Financial Protection Bureau was designed by Elizabeth Warren, a Harvard Professor who  is chairwoman of the congressional oversight panel for the Troubled Asset Relief Program (TARP), the $700 billion government bailout of the financial industry. Democratic Senator Sherrod Brown of Ohio told Business week that he “would love” to see Warren appointed to head the agency. Brown also said he knew a lot of people who would not love to see Warren in charge.

Don’t mess with Elizabeth Warren

Warren, who specializes in bankruptcy and consumer law, called for regulations to limit credit-card contracts to a short, easy-to-read document, curb bank overdraft fees and make online credit scores free. In an interview with USA Today she said:

“I discovered the extent to which the business model of selling debt to middle-class families has changed over the past 20 years. The credit card companies and other lenders moved to a tricks and traps pricing model. The fees, the interest rate hikes and all the other surprises in the fine print have left families increasingly vulnerable. I watched hardworking, play-by-the-rules middle-class families collapse financially, and that led me to study the consumer credit market and eventually to the idea behind the consumer financial protection agency.”

New mortgage rules designed to protect consumers and prevent another financial crisis are being debated in Congress this week and being aggressively fought by lending industry lobbyists. Flickr photo.

The U.S. House and Senate will start on refining mortgage legislation Tuesday. The legislation would enforce the biggest overhaul to mortgage lending rules in decades. The mortgage legislation, part of the financial reform bill, is intended to end the risky lending practices blamed for causing the financial crisis. Mortgage industry lobbyists are working overtime to take the teeth out of provisions that would protect consumers and limit the industry’s ability to find loopholes in underwriting standards.

Mortgage rules to prevent another financial crisis

Proposed changes to mortgage lending rules include new rules for loan repayment, the ability to sue your lender for fraud or poorly underwritten mortgages, revised appraisal rules and rules about how much risk lenders must share on the loans they sell to investors. Housing Watch reports that most of these rules will affect how expensive mortgages will be and what types of mortgages will be offered by lenders. One of the key new rules mortgage industry lobbyists want to undermine requires lenders to hold a 5 percent stake in loans that are bundled and sold with other loans. Those bundles are the mortgage-backed securities that imploded and caused the financial disaster.

Will mortgage lenders behave?

With mortgage legislation that requires lenders to hold a stake, the idea is that they will act more professionally with their underwriting. When lenders sold their risk along with their loans, they were very careless and handed out many loans that were destined for default. The Wall Street Journal reports that mortgage industry lobbyists want to exempt mortgages from the 5 percent risk-retention requirement if the loans fully document a borrower’s income and assets and don’t include interest-only payments, negative amortization or balloon payments. Exempt loans would also have to cap certain mortgage-origination fees at 3 percent of the loan.

More expensive mortgages with new rules?

Banks say new mortgage lending rules about risk retention will make mortgages more expensive for consumers because banks will be required to hold more capital, a challenge for smaller lenders. But Housing Watch said consumer groups support “encouraging the market” to sell safer products. New mortgage lending rules will make more paperwork for borrowers, but they already push a lot of paper trying to get loans in today’s constricted credit markets. More diligence from banks about verifying a borrower’s income to prevent default should be good for everyone.

Protecting borrowers from predators

New mortgage lending rules also include compensation guidelines that prevent lenders from making more money by making riskier loans. This provision of the financial reform bill would bar lender-paid commissions based on the rate or type of loan. The Wall Street Journal reports that brokers say that the rule would make it harder for them to compete with banks, reduce competition and raise costs for consumers. Consumer advocates say the changes will make it easier for borrowers to shop for loans and compare prices. Barry Zigas, director of housing policy for the Consumer Federation of America told the Journal that the new provisions will shift the burden of proof “from the consumers having to protect themselves from unreasonable fees to the providers of services justifying their costs.”

Saving mortgage lenders from themselves

Other new mortgage rules that industry lobbyists are fighting include limiting the fees mortgage lenders charge if a borrower refinances the loan or pays it off early. They also don’t like the rule that requires them to prove that it is in the borrower’s best interest to finance a loan, instead of just pushing a new loan to benefit from additional fees or commissions. Finally, mortgage lenders don’t want borrowers to be able to sue them if they violate the new mortgage rules. Industry lobbyists say this would make buying mortgages too risky for investors.

Illinois Senator Dick Durbin (Photo: Wikipedia)

Former White House Press Secretary and current Fox News commentator Dana Perino warns consumers that there’s trouble brewing in Congress. This trouble could make debit card purchases significantly more expensive. To be more accurate, it will actually affect nearly all consumer purchases and debit card interchange fees will be the cause, claims Perino.

Debit card interchange fees mean fast cash for banks

Courtesy of an unheralded amendment to the financial reform law as pushed by Illinois Senator Dick Durbin, the Federal Reserve would take control of fast cash debit card interchange rates. As Dana Perino describes them, an interchange rate is “money that a retailer’s bank pays your bank when you use your credit or debit card at their store.” This money is a valuable resource to smaller financial institutions; without interchange rates, it would be difficult for these smaller banks to offer basic services to their customers.

If the Federal Reserve were to cut off the income stream, smaller banks would have no choice but to pass on the cost to customers. In many cases, this would drive them to larger, more impersonal banks that won’t have as much competition and can charge more for credit services. Consumers who balk at this will have to rely on cash, checks or fast cash short term loans for their transactions, which offer no insurance on the back end in the event of fraud.

Dick Durbin’s amendment sullies advances in financial reform

Dana Perino paints the picture for consumers on the retail end as well. Imagine what retailers will do if debit card transactions cost them more. Of course they’ll pass the cost on to customers. Some retailers do this already, but with Dick Durbin’s financial reform law amendment, it would become commonplace.  In addition, no-fee checking would more than likely disappear, along with various rewards programs as banks look to make up for income lost after the Durbin amendment.

Price controls don’t work

Price controls of this nature have not found much success, historically. The blog Wizbang uses the example of gas prices in Hawaii. Dana Perino points to Australian legislation from 2003. At that time, retailers began to charge extra for consumers paying with plastic, and the trend has continued. What Perino and many other concerned consumers are wondering is how something like the Dick Durbin amendment can sneak in without much attention, and will these consumers have to depend upon fast cash short term loans with no credit check more often.

Sources:

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The financial reform bill doesn't directly regulate payday lenders and their customers, but a consumer agency created by the bill could impose restrictions that limit access to short term credit. Flickr photo.

Payday lenders and their customers escaped regulation during the latest round of financial reform in Congress. But the payday loan as a financial reform issue isn’t going to go away. A payday loan amendment regulating the industry failed to make the financial reform bill. But a provision creating a consumer protection agency did. This consumer protection agency can regulate the payday loan industry.

Payday loan regulation is coming

Payday lenders and customers should be concerned about what may happen when the financial reform bill is ultimately passed. It includes the creation of a new Consumer Financial Protection Agency (CFPA) that will have rule-making authority and oversight of payday lenders. It could impose restrictions on payday lenders that could drive them out of business and remove access to convenient short term credit for consumers. The Michigan Messenger reports that language in both the House and Senate versions of the bill ensure that the CFPA has oversight and rule-making authority over all payday lenders. The CFPA will enforce rules against bigger lenders and the Federal Trade Commission will enforce rules against smaller lenders.

Payday interest rates misconstrued

No interest-rate or rollover caps for online payday loans with instant approval are present in either the Senate or House versions of the financial reform bill. However, the CFPA could end up considering a provision promoted by Illinois Democratic Senator Dick Durbin for capping the maximum annualized percentage rate of interest a payday lender could charge on no credit check loans at 36 percent. While a 36 percent interest rate would seem unusually high for a car loan or a mortgage loan lasting many years, it’s not enough to support small, short term loans lasting two weeks.

Cheap payday loans endangered

Direct payday lenders would not be able to make credit available to their customers if they offered 36 percent APR. The Richmond Times Dispatch reports that at 36 percent APR, the total fee charged on a $100, two-week cash advance would be $1.38. At that rate, payday advance lenders could not cover the cost of originating the instant payday loans, let alone meeting employee payroll and benefits and other fixed business expenses, like rent.

Payday loan alternatives are scarce

If payday lenders were forced out of business by regulations such as the 36 percent interest rate cap, consumers who need instant online loans for unexpected expenses would have few alternatives. The fees banks charge can make borrowing from them more expensive than getting payday loans. In fact, a study by Victor Stango, Ph.D., Associate Professor of Management at University of California, Davis, shows that that credit unions cannot offer payday loan alternatives any more cheaply than payday loan companies.

Credit unions can’t compete

The fees and convenience of payday loans were compared to credit union short-term loans in Stango’s study. His research, compiled from credit union data, the National Credit Union Administration and payday loan customer surveys, found that credit union rates are generally equal to or higher than those of traditional payday lenders, and the loans are less convenient for borrowers. Credit unions also weren’t able to compete with payday lenders on important things such as hours of operation or protection against damage to a borrower’s credit score from default.

Do payday lenders protect consumer credit?

Without payday lending, convenient access to short term credit would be scarce. Stango’s study said fewer than 6 percent of credit unions offer payday loans because most see little chance to make money on a competitively priced payday cash advance product. Plus, credit union payday loans often have total fee/interest charges that are equal to or higher than standard payday loan fees. Furthermore, application times are longer at credit unions, and default on a credit union payday loan may harm a borrower’s credit score, while default on a standard payday loan usually does not.

Will financial reform help the average consumer?

Several issues affecting everyday life are part of the financial reform bill. But what isn’t in the financial reform bill is important, too. Credit, when needed the most, was preserved after debate was rejected on an amendment regulating the pay day loans industry. And other aspects of the financial reform package may make a difference in the financial health of most Americans, including mortgage lending and debit and credit card fees.

Cheap pay day loans protected

Money lenders providing convenient access to online cash advances escaped restrictions on their business. Some politicians wanted to go after people who work for their money. The financial reform bill could have limited consumer access to same day cash advances and prohibited cash companies from offering additional products and services. Another provision forced federal regulation on the best practices of payday lenders, such as offering installment loans. Fortunately the Senate rejected the payday loan amendment.

Financial reform: debit and credit card use

Financial reform seeks to limit the fees banks charge retailers for debit card transactions. This could mean either lower prices, higher bank fees or both for consumers. The Christian Science Monitor reports that Visa and MasterCard charge retailers 1 to 2 percent of the cost of whatever people buy with their debit cards. That’s a lot more than what it costs for a computer at a bank to process the payment. The financial reform bill wants to make sure debit card fees are “reasonable and proportional to the processing costs incurred.” Or, in other words, lower. Retailers say they will pass the savings to consumers. But banks, deprived of such easy money, will probably turn the screws in other ways, such as increasing checking account fees. So it remains to be seen if the debit and credit card fee provision of the financial reform package delivers any benefits to most people.

Financial reform: mortgage loans

The financial reform bill could limit banks from lining their pockets when a borrower wants to pay off a mortgage early. For most mortgages, prepayment penalties would be allowed only in the first three years of the loan. For mortgages with balloon payments, prepayment penalties go away altogether. Plus, Reuters reports that the financial reform bill ends kickbacks to bankers and “liar loans,” two shady lending practices that led to so many bad mortgages in the housing bubble. Kickbacks known as “yield spread premiums” encouraged brokers to steer consumers into risky, high-interest loans even if they qualified for cheaper loans. Liar loans let consumers qualify for loans they could not possibly repay if they opted to simply state their income or other assets, rather than waiting for verification.

Financial reform: credit scores

Financial reform package provisions originally called for giving consumers free credit scores every year to go along with the three free credit reports, but this consumer benefit didn’t survive. However, the New York Times reports that an amendment requires those who use a credit score to deny credit to someone to give the score to that person free. When someone doesn’t have the best interest rate on a mortgage, credit card or auto loan, or gets stuck with a high insurance premium, they get to see the score that was used to make that judgment.

Payday loans: no credit score required

No credit check payday loans online often don’t require any sort of credit score. This is good because simply having one’s credit checked can have a bad effect on the credit score. A no credit check payday loan allows a person to get the quick cash they need without waiting for approval or damaging their credit score. Plus, the money can be in their bank account within 2 hours upon approval. Better yet, for people who may have bad credit or no credit, paying back the online cash advance on time can help raise that credit score.

People who need pay day loans are being singled out in a financial reform bill created to reign in greedy Wall Street banks. Flickr photo.

Pay day loans have been targeted by Congress in its financial reform bill. Pay day lenders wonder why a financial reform bill made to stop the crimes of filthy rich Wall Street bankers goes after a financial service that helps ordinary people. The fact that pay day loans are part of the financial reform bill shows that the cash industry is looked on with disdain by politicians, bankers and a lot of overpaid people with cushy jobs who vote. Most of the rest of us might feel the same way about pay day loans — most of the time. But if you’ve ever needed a pay day cash advance, for any good reason, you were probably glad you could get one.

Credit when you need it most

Pay day lenders have provided a lifeline to working people when no one else will. Used responsibly, pay day advances can get people out of a financial jam and  help them preserve their good credit and start building a good credit history. Greedy banks and wealthy speculators that triggered our most recent recession have made life very difficult for most Americans. They’re making it worse by ensuring that credit is nearly impossible to get for the average working person. Even in better times, the more one needs credit, the harder it is to get. People who make plenty of money to live on and then some get invited to borrow money by banks every day.

Cheap pay day loans under fire

What’s interesting about financial reform is that politicians don’t necessarily want to regulate the pay day lenders. Believe it or not, they’re going after the borrowers. Proposed federal regulation would limit consumers to six loans in a 12-month period. Another provision would require lenders to offer extended repayment plans, which they already do with installment loans. The Salt Lake Tribune reports that a counter proposal has been submitted to exempt payday lending from federal oversight, so it’s unclear whether the six-loan limit measure will succeed.

Responsible payday lending

Federal regulators want to go after pay day lenders. But the industry promotes its own best practices with the Community Financial Services Association of America. CFSA member companies are required to comply with Industry Best Practices that ensure consumer protections and responsible payday lending to all customers. Another group committed to preserving affordable access to short term credit for millions of Americans is the Online Lenders Association. Before you arrange your cash til payday loan, make sure your money lender is a member of either the CFSA or the OLA.

Responsible debt survival

If you do your homework, pay day loans can be the difference in debt survival. By planning ahead, you can be certain that you can pay your bills and pay the loan in full with your next paycheck. If that’s not possible, consider an unsecured personal loan for debt survival. An unsecured personal loan allows you to pay back your loan amount in monthly installments rather than with your next paycheck. Be sure to take advantage of the resources provided to consumers by the CFSA and the OLA. The CFSA offers helpful tips on making a budget, saving money and building credit. The OLA offers a step-by-step approach on how to use pay day loans the right way.

Are we all destined to be under a consumer protection agencies' wings? Image from Wikimedia Commons.

In the wake of the Wall Street collapse and the ongoing investigation of Goldman Sachs, there are calls for a consumer protection agency, or multiple ones. There seems to be a real need for some financial reform, but which consumer protection laws should be put forth are a point of contention.  Part of the proposed new agency would create national regulation of credit cards, payday lenders, possibly even car dealers.  Where this potential agency and the financial reform bill will go are yet to be determined.

Consumer protection agency proposals

A recent post on the NASDAQ website reported some of the proposals and arguments pursuing a consumer protection agency in Congress.  Currently, the proposed consumer financial protection agency would be an entirely new agency.  An amendment is being put forth by Senator Chris Dodd (D-CT) that would change it to a bureau within the Federal Reserve.  Senate Republicans are looking to scale back the scope and power of the proposed agency, while some Senate Democrats wish to see the agency as an entity all its own. The bill is opposed by the U.S. Chamber of Commerce.

What would be the powers?

The proposed agency would not regulate what any business or retailer that does not offer financial services may do.  In other words, if you’re on a payment plan with a doctor or lawyer for services rendered, it doesn’t cover that if you feel you’ve been bilked.  Another amendment is being sought by Sen. Sam Brownback (R – KS) that would exclude auto dealers from any regulation by the proposed consumer financial protection.

Senator Hagan goes after payday lenders

Senator Kay Hagan (D-NC) plans to offer an amendment that would place new federal regulation on payday lenders.  The amendment, which is co sponsored by Sen. Dick Durbin (D-IL) and Sen. Charles Schumer (D-NY), would limit payday lenders to making six loans a year to any one person.  She countered criticism by stating that the Federal Deposit Insurance Corporation already imposes that restriction on banks.

Other concerns

From a New York Times article, Senator Mitch McConnell (R-KY) said that the language was too ambiguous to determine just who would be caught in the net. “Financial services” is a far reaching term.  That could easily include car dealers, and restrictions could make it harder to purchase cars.   Many jewelers offer financing, and many businesses like furniture stores, guitar stores, etc.  offer layaway plans. Many other businesses, many of which are the small businesses of Main Street, could be negatively affected. Those businesses deserve freedom to thrive rather than being protected into extinction.