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Value of college questioned with high loans and unemployment

Peter Stone — Mon, 06 Jun 2011 23:26:21 +0000

More people question whether the cost of college is worth it, and there are compelling arguments on both sides. Image from Wikimedia Commons.

The past few months have featured a lot of coverage about the booming levels of student loans. Unlike other installment loans, there’s no way to discharge the debt, and many students are left holding the bag with fewer opportunities for decent employment. Many are questioning whether college is worth it.

College not worth it, says wide swaths of media

One may notice that similar columns appear on various news and opinion sites bearing a headline implying “College is not worth it” and some that assert the opposite. Billionaire Peter Thiel controversially offered anyone willing to drop out of or forgo college a personal loan from him of $100,000 to start a business. One of the people who took Thiel’s offer wrote a column for CNN stating college wasn’t worth it because it stifled entrepreneurial innovation. The author of a recent column on the Reuters website, John Wasik, contends that because tuition has risen 467 percent since 1986 whileinflation rose 106 percent, the cost of college may not be worth it because real wages are not keeping pace with inflation.

College pays off, but for whom?

College, though, does pay off for some people. In fact, the student loans pay particularly well for some people. The government, according to the Wall Street Journal, makes more money on student loans that are defaulted on than on loans that are paid religiously. Current estimates are that 85 percent of all defaulted students loans will end up being collected. Not only that, but the government expects to collect up to $1.22 on every dollar of student loans that are outstanding and in default. Credit card companies, by comparison, usually make about 10 percent of all defaulted debts back. The reason is that defaulting on student loans is different from other kinds of loans. The typical personal loan from a bank can be discharged in bankruptcy, and a house or car can be repossessed.

Average experience says college worth it

Going by the numbers, there appears to be a real incentive to attending a four-year institution and emerging with a bachelor’s degree. According to the Bureau of Labor Statistics, the college educated have an unemployment rate of 4.5 percent as of May of 2011. Those with only a high school diploma have an unemployment rate of 9.5 percent. According to the U.S. Census, men with a high school diploma or equivalency in 2009 earned on average $36,332 and women earned $22,868. Men with a bachelor’s degree earned, on average, $70,568 and women with a bachelor’s earned $42,128 on average, per year.

Sources

Reuters

Bureau of Labor Statistics on Unemployment

Census page on income (requires Microsoft Excel to download tables)

Strategic defaults starting to decline slightly

Peter Stone — Tue, 31 May 2011 22:39:45 +0000

The number of people entering into strategic default has decreased slightly. Photo Credit: Gentle/Wikimedia Commons/CC-BY-SA

Over the past few years, the term “strategic default” has entered into the national consciousness. People who owe more on a mortgage than the home is worth simply stop paying and walk away because it isn’t worth the trouble. This practice had begun to increase since the 2008 housing crash, but now the tide is starting to recede, if only slightly.

Credit bureaus and banks getting wise

Banks, loan lenders and credit bureaus have been perturbed by the rise in the number of strategic defaults on mortgages in the past few years. Borrowers that owe more on a mortgage than the house is actually worth will default on their mortgage when the value of the home has dropped so low that it no longer makes any sense to continue. In order to ferret out which consumers were defaulting because the cruelty of circumstances left them unable to make payments from the ones who were just giving up, Fair Isaac and Company, one of the main credit rating agencies in the United States, devised a way to find out which troubled homeowners are likely to engage in strategic default. According to the Chicago Tribune, an estimated 35 percent of all mortgage defaults were strategic in September 2010.

New car and cards a dead giveaway

People who strategically default usually will use available lines of credit just before walking away from the mortgage. New credit cards will be opened up, personal loans taken out to finance the move and new cars will be purchased. Then the underwater homeowner walks. FICO is also working with loan lenders and banks to help them identify potential defaulters before they walk. However, according to SmartMoney, the number of people walking away when it suits them is dropping. It is estimated by the University of Chicago Booth School of Business that strategic defaults dropped to 30 percent in March of this year, down from 37 percent in January. JPMorgan Chase analysts, according to Mortgage Wire, found that the overall rate was decreasing.

Consequences of default

Fannie Mae conducted a survey some time ago that found 27 percent of respondents, according to the Chicago Tribune, found the idea of strategic default acceptable. Consulting agencies began springing up that would advise consumers about how and when to default to their best advantage, such as the website YouWalkAway.com, according to Forbes. Yet people who do strategic default face potentially stiff penalties, according to MarketWatch. Credit scores can lose up to 200 points, leading to a host of other consequences. Landlords and insurers may be less willing to rent to or insure someone who has defaulted, and Fannie Mae has declared that it will not insure a new mortgage for someone who has strategically defaulted. It is estimated that 42 percent of all homes are “underwater,” or worth less than the amount of money owed on the mortgage.

Sources

Personal loans to attend for-profit schools can be risky

Peter Stone — Mon, 23 May 2011 20:35:54 +0000

A college education is a wonderful thing, but be sure to check out for-profit colleges thoroughly before taking out massive personal loans to attend. Image from Wikimedia Commons.

Potential students should be cautious if considering going to a for-profit, private college. Though college is usually worth taking out some personal loans to fund, the for-profit schools have higher default rates and are often at odds with state authorities. Some schools are worth it, but people should do their homework before attending.

The Donald may come under The Indictment

It was recently ann0unced that the New York Attorney General was beginning an inquiry concerning five companies that operate private, for-profit universities, according to CNN. One of the schools involved is the former Trump University, the small for-profit college launched by Donald Trump several years ago. The organization had to rename itself the Trump Entrepreneur Initiative after the New York Department of Education said it couldn’t call itself a school. The four other companies are, according to the New York Times, the Career Education Corporation, Corinthian Colleges, Bridgepoint Education and Lincoln Educational Services. No charges are being filed just yet, but these corporations and the schools they operate are being investigated.

Latest brouhaha between schools and states

State governments and the federal government are beginning to come down on for-profit universities, and some former students are not thrilled. Donald Trump is currently being sued in California by students of the now Trump Entrepreneur Initiative because they say they were misled. Corinthian’s colleges are also under investigation in Massachusetts, California, Florida and Georgia, according to Reuters. The Massachusetts Attorney General, according to the Boston Globe, is also investigating Apollo Group, the company that runs the University of Phoenix, as well as the Kaplan Career Institute, which is operated by the Washington Post Company. Smaller private colleges can be less stable than their megacorporate counterparts, as well. For instance, Alpine College in Spokane, Wash., recently closed its doors permanently in the middle of a term, leaving students holding the bag for thousands in personal loans and no degree to show for it.

Difficult to afford and impossible to pay for

One of the considerations one must make in choosing a university is cost. For-profit, private colleges can be incredibly expensive. In 2009, 15.2 percent of students who attended a for-profit college defaulted on their loans within a year, nearly twice the 7.3 percent of public university students who defaulted in the same period, according to Reuters. Private, not-for-profit schools had a default rate of 4.3 percent. For-profit college students also account for about half of student loan defaults overall. Many people have accused for-profit universities of fraudulent advertising and of not preparing students well enough for the job market, thus making it harder for them to meet their loan obligations. The Department of Education is currently trying to institute a rule that would deny federal loans to students attending a school with a 35 percent default rate or higher.

Sources

Reuters on for profit default rates

New York Times

Reuters on for profit school investigations

Boston Globe

Senate wants 401(k) accounts off-limits as personal loan funds

Peter Stone — Wed, 18 May 2011 22:19:05 +0000

The United States Senate doesn't want people using their 401(k) accounts as a piggy banks. Image from Wikimedia Commons.

The United States Senate is currently considering a bill that would prevent people from using their 401(k) funds as a source for personal loans. The new legislation that is being put forth would potentially put a limit on how many times a person can draw from retirement accounts before retirement.

Retirement accounts are not piggy banks

A bill is going before the Senate that would put a permanent cap on the number of times a person can legally draw on 401(k) or other IRA funds before retirement, according to BusinessWeek. Senators Herb Kohl (D-WI) and Mike Enzi (R-WY) are proposing the bill to limit withdrawals from 401(k) and other retirement funds in order to keep people from draining retirement accounts and jeopardizing their futures because of a temporary shortfall. Senator Kohl was quoted as saying that a retirement account is not intended for use as “a piggy bank.” The bill is called the “SEAL 401(k) Savings Act.”

Nearly a third of account holders borrow

By the end of 2010, almost 28 percent of all people who had some sort of 401(k) or similar account had an outstanding loan they took from the account, according to a study by Aon Corp, and the average balance was $7,860. Aon Corp also found that of the people who took out installment loans from their retirement funds, 58 percent had at least two outstanding loans. Aon also found that close to 70 percent of people who borrow from retirement accounts default. Fidelity Investments, according to USA Today, found that about 22.5 percent of 401(k) account holders with Fidelity had a loan balance outstanding at the end of 2010. This indicates that between one-fifth and one-third of people who have a 401(k) or other type of retirement account end up having to use it as a source of emergency funds.

Retirement becoming more daunting

The prospect of being able to retire one day, and to do so with confidence, is becoming more daunting for many people. Social Security, Medicare and Medicaid are typically pillars of security for retirees because portions of their paychecks have been going toward these programs for decades. However, it is becoming apparent that these entitlement programs may not be the guarantee they once were. Social Security is on track to becoming insolvent, and the Social Security Administration would need to raise $6.5 trillion to become totally solvent again, according to CNN. The Social Security Trust Fund is set to be depleted sometime within the next 25 years according to many estimates, and current Social Security payroll taxes won’t cover all outlays.

Sources

BusinessWeek

Students have a hard time paying off personal loans

Peter Stone — Wed, 04 May 2011 22:34:06 +0000

It is getting harder for people to pay off student debts. Image from Wikimedia Commons.

It is getting harder for students to make payments on the loans they borrowed to pay for an education. The default rate on students’ personal loans is rising nationwide, and lenders, including the federal government, are not forgiving despite a tough economic climate.

Loan payments not as expensive as having to lawyer up

The U.S. government and other parties are becoming far more likely to sue someone who has defaulted on a personal loan obligation for education, according to USA Today. Some student loans are so far gone that the account has to be referred to the Department of Justice to collect, and the number of loans handed over to the government’s lawyers is going up. In 2006, 918 student loans in default were given to Justice attorneys to begin lawsuits. In 2010, that number increased to 5,393. A monthly loan payment can be expensive but not as expensive as having to hire a lawyer to fight off a lawsuit, and student loans cannot be discharged in a bankruptcy.

Worth of college being debated

Because most students must borrow money to afford a college education, some are questioning whether a it is worth the trouble and cost. One in four people making payments on student loans are having trouble making their payments, according to the Los Angeles Times, and a college degree is not a guarantee that a person won’t wind up living paycheck to paycheck. As of the year 2008, two thirds of all students left college with some debt, and the average amount of student debt was $23,200. The total amount of all student debt in the United States is expected to reach $1 trillion during 2011, according to MSNBC, and there are whispers that student loans are the next bubble due to burst. About 7 percent of all student loans are reported to be in default, and because student loans can’t be discharged in bankruptcy, delinquent loans will perpetually harm a credit score.

Good news on the horizon

Students about to graduate may have an easier time getting hired out of college, according to CNBC. The National Association of Colleges and Employers reported recently that businesses were more likely to hire recent college graduates this year than in a similar survey from last year. The NACE reported an anticipated 19.3 expected increase in hiring for spring of 2011 and a 13.5 percent increase anticipated in the fall of 2011. Granted, any actual increases in hiring remain to be seen, but there are some indications that some people will have an easier time getting hired upon graduation.

Sources

Los Angeles Times

CNBC

Banks will not raise ATM fees too high for now

Peter Stone — Tue, 03 May 2011 20:51:39 +0000

ATM fees may not be climbing too much higher, at least for now. Image from Wikimedia Commons.

JPMorgan Chase is bringing an end to its higher ATM fee test run. Chase began a pilot program some time ago where out-of-network ATM transaction fees for non-Chase customers were raised to $4 and $5 in some areas as a test. The high fees just so happened to not be very popular with consumers.

Consumers not amused by high ATM fees

In February of this year, JPMorgan Chase announced that it was going to start testing a new fee structure for non-Chase members that used Chase ATMs. The new fees were instituted in Texas and Illinois, according to CNN. Chase maintains one of the largest ATM networks in the country, and was trying to get people to pay a little more for the convenience of using that network. So the large nationwide bank raised its fees on a trial basis to $4 in Ill., and to $5 in Texas. The Chase network comprises more than 16,000 ATMs nationwide, and there is a reasonable expectation that people should pay to use such a large network. However, people in those states were not amused.

Chase canceling program

JPMorgan Chase is canceling the higher fees. Though Chase does maintain the second largest ATM network in the nation and about 25 percent of all Chase ATMs are in those states, according to USA Today, people stopped using Chase ATMs if an ATM with lower fees or one in their network was nearby. Chase will revert to the standard $3 fee. The nationwide average fee at automatic teller machines, according to MSN, was $2.11 in January. The city that had the highest fees on average as of November was Seattle, Wash., according to the New York Times, and the city with the lowest ATM fees was Cleveland, Ohio. ATM fees have been going up, as financial reform laws have been restricting certain types of fee-assessment practices at banks.

Fewer people after loan capital

Though banks are just as willing to lend consumer loans, there are fewer people lining up to apply for them. The Federal Reserve has noted looser lending criteria for consumer loans such as credit cards, installment loans and other types of personal loans, but demand has been down for some time, according to the Wall Street Journal. If people don’t feel as secure in employment, they are less likely to want to go into debt. Interest earnings for major banking institutions has been declining for months, as fewer consumers are interested in going into more debt after the nightmare of the past few years.

Sources

Strategic defaulters more likely to be financially educated

Peter Stone — Mon, 25 Apr 2011 16:55:20 +0000

The people who strategically default may be doing so because of their financial savvy. Photo Credit: Kelseyman749/Flickr.com/CC-BY

People who engage in “strategic default,” purposely defaulting on a mortgage when it’s no longer worth the effort, may be more financially astute than other homeowners in default. A recent study indicates that strategic defaulters have higher credit scores than people who stick out a bad mortgage. However, there are not many people who engage in the practice.

Higher credit scores among those who default on purpose

A recent study by Fair Isaac And Company (FICO) found that homeowners who engage in a practice called “strategic default” usually have higher credit scores than normal defaulters, according to USA Today. FICO found that people who strategically defaulted on their mortgages usually had most other aspects of their personal finances in order and took steps to protect themselves. For instance, only 10 percent of strategic defaulters had maxed out their credit cards and usually would open card accounts with new companies before defaulting. That way, they didn’t have to worry about having to get bad credit loans when a default showed up on their credit report.

Many disapprove of the practice

Not everyone approves of the practice of strategic default. A survey by legal website FindLaw, according to NASDAQ, found that six of 10 people surveyed did not approve of strategic default. However, 34 percent of respondents said that default was acceptable if the mortgage was underwater. People 65 and older were more accepting than those aged 35 to 44, who were the least accepting of strategic default. Strategic default makes sense from a business perspective. Homes are assets, and it doesn’t make sense to pay more for an asset than it is worth on the market. However, people often feel a moral obligation to meet commitments such as making payments on a mortgage, car or personal loans of any sort.

Foreclosures slowing

The rate of foreclosure slowed during the first few months of 2011, according to CNN. RealtyTrac announced that in the first quarter of this year, it observed 681,000 filings, which includes foreclosure filings, evictions and realty auction notices. RealtyTrac also observed 215,046 homes that had to be vacated by the residents. A filing doesn’t mean a family has been kicked out, only that a notice has been filed. Both figures were reduced from last year. Overall filings fell 27 percent from 2010, and evictions fell by 17 percent. Strategic default has increased during the recession, but is only estimated to have made up 35 percent of all foreclosures overall.

Sources

NASDAQ

Credit card use declining as more people turn to cash

Peter Stone — Tue, 19 Apr 2011 16:46:45 +0000

Credit card use continues to decline. Photo Credit: MoneyBlogNewz/Flickr.com/CC-BY

Use of credit cards is beginning to trail off as more people start preferring to use cash. Fewer people are willing to go into debt and less willing to borrow money for purchases by using a credit card. Card use has been declining for some time, and higher interest rates and fees make credit cards less attractive to the cost conscious.

Major credit bureau notes decline in credit card use

Credit bureau TransUnion has noted a decline in the use of general purpose credit cards, according to Daily Finance. The credit rating bureau asserted in a recently released study that nearly 8 million people quit using a general purpose credit card, the kind normally issued by a bank. The number of people who either don’t have or don’t use a credit card now is more than 78 million, according to TransUnion. TransUnion also noted that credit card delinquencies declined by 9.8 percent during the third quarter of 2010. TransUnion credit rating bureau compiles data used in determining a persons’ credit score.

Federal Reserve notes less credit card use

TransUnion also noted that consumers were still using other forms of credit, such as installment loans, despite the drop in credit card use. The Federal Reserve, according to the Wall Street Journal, observed that credit card use was still declining in February of 2011, but non-revolving credit use was increasing. Revolving credit use, or bank-extended lines of credit and credit cards, declined by $2.71 billion during February 2011. Revolving credit use has only risen once since 2008. Non-revolving credit, or non-mortgage consumer loans such as auto loans or personal loans, increased by more than $10 billion during the month of February. The increase was likely driven by auto sales, which have been increasing steadily for the past few months. The Federal Reserve data indicates that TransUnion’s assessment of declining use of credit cards and continued use of other forms of credit is plausible.

Interest rates and fees on the rise

Because of the Credit Card Accountability, Responsibility and Disclosure Act (the CARD Act), banks have stricter rules about how they can change interest rates. The rates are not capped, according to Fox News, but the card issuing institution is prohibited from raising interest rates without a certain amount of notice. The average interest rate on credit cards is beginning to slowly rise along with the number of memberships fees that banks are charging customers.

Sources

Daily Finance

TransUnion

Fox News

14 banks ordered to pay homeowners back for bad foreclosures

Peter Stone — Wed, 13 Apr 2011 20:39:26 +0000

14 financial institutions have been ordered to pay back any homeowners that were wrongfully foreclosed upon in the robosigning scandal. Photo Credit: respres/Flickr/CC-BY

Federal authorities have ordered more than a dozen large financial institutions to compensate homeowners who were victims of fraudulent foreclosures. The number of homes that were foreclosed because of robosigning have not been totaled up, and the owners of those improperly foreclosed homes will be paid for their anguish.

Largest banks in the nation to pay the price of incompetence

Federal regulators recently reached a settlement with the financial institutions involved in the robosigning scandal, in which foreclosure proceedings were improperly started against homeowners because bank officers could not be bothered to do their due diligence on the paperwork regarding the state of the homeowners’ personal loans. Part of the settlement agreement, according to Reuters, is that any homeowners who were wrongly foreclosed on have to be repaid by the bank that did it. There were 14 companies in all, according to USA Today, including lending companies Ally Financial, Aurora Bank, EverBank, HSBC, Sovereign Bank, SunTrust Banks, MetLife Bank, OneWest Bank, PNC, U.S. Bank, Wells Fargo, Bank of America, JPMorgan Chase, Citigroup and subsidiary Citibank. Loan servicing companies MERSCORP and Lender Processing Services have also been ordered to pay back improper foreclosures. Affected homeowners will likely be contacted by these institutions in the near future to make arrangements.

Total fallout to be determined

It isn’t known yet how many people will be recompensed or how much in fines lenders will have to pay. Some government officials have been recommending up to $20 billion in fines be levied against the financial institutions involved. To further add to the headaches of these institutions, this is only from the settlement with the Federal Reserve, the Office of Thrift Supervision and the Office of the Comptroller of the Currency. Other settlements with other federal agencies are still pending as well as every state attorney general in the nation.

Costs of mortgages to increase

Banking and real estate insiders are insisting that the new legislation and increased regulatory scrutiny will increase the costs of lending a mortgage to a prospective homeowner. New Federal Reserve rules on mortgage officer compensation, according to MarketWatch, may cut into commissions for loan officers. Mortgage brokers and loan officers at lending institutions cannot receive a commission based on the interest rate at which a mortgage is lent at any longer, which analysts predict will eat into profits. The Center for Responsible Lending, a consumer advocacy group that has endorsed reform of financial products from mortgages to payday loans, insists that costs to consumers will not go up, but decreasing revenues are usually passed to consumers in the form of increased costs.

Sources

Reuters

MarketWatch

Killing payday lending does not fight poverty

Steve Tarlow — Tue, 12 Apr 2011 20:37:44 +0000

The Anti-Poverty Coalition of Greater Dallas wants payday lending in Texas to end. (Photo Credit: CC BY-ND/Nik Hewitt/Best of Both Worlds)

Jobs fight poverty. Gainful employment grants motivated, enterprising consumers with the means to provide. Yet groups like the Anti-Poverty Coalition of Greater Dallas seem to have missed the memo, suggests the Payday Pundit. The Dallas Observer reports that the Dallas coalition is working hard to shut down personal loan and installment loan companies in Texas, as if eliminating thousands of jobs resembles a blow against poverty.

Blazing a trail out of poverty through scorched earth

Larry James, the CEO of Dallas-based non-profit CitySquare, told local media via press release that the coalition has a burning desire to find pathways out of poverty:

“The Anti-Poverty Coalition of Greater Dallas is a new coalition that seeks to move 250,000 people out of poverty permanently by 2020 by coordinating efforts to keep people from falling into poverty and increasing pathways out of poverty,” writes James.

‘A treadmill of debt’

The attack against the personal loans and installment loans industry amounts to keeping people from falling into poverty – “a treadmill of debt” – said James. Legislation such as Texas HB 410 and SB 253that bars payday lenders from being classified as credit service organizations would challenge existing zoning ordinances. By instituting a “strong zoning ordinance to decrease the clustering of payday and auto title lending stores,” the Anti-Poverty Coalition of Greater Dallas believes the shackles of poverty would lift from the wrists and ankles of the poor citizenry. Allegedly, there would be no more tears for those who were financially razed, not by bad personal spending habits and the exploitation of Wall Street, but by the so-called evils of payday lending. In truth, eliminating payday lenders limits consumer choice and costs Texas jobs, both dire consequences in light of the recession-ravaged economy.

An indirect attack, at best

Instituting zoning ordinances via HB 410 and SB 253 that would require personal loan and installment loan outlets to be at least 1,000 feet apart would only be the beginning, industry experts believe. Direct attacks against payday lenders such as demanding an untenable 36 percent APR cap have proven unpopular when it comes to battling poverty, as it would shut payday lenders down, which means people would lose their jobs.

Attacks through zoning fail to disguise the true intent of such “anti-poverty” coalitions. If groups like the Anti-Poverty Coalition of Greater Dallas took the time to understand the extant independent research that shows the connection between the absence of access to short term loans in a community and higher levels of poverty, perhaps charitable groups could find a more worthwhile target for their efforts.

Sources

Texas Secretary of State

Jobs fight poverty

Federal Reserve not planning to reign in credit supply yet

Peter Stone — Mon, 11 Apr 2011 23:27:23 +0000

Federal Reserve Vice Chair Janet Yellen has confirmed the Federal Reserve isn't going to tighten the credit supply just yet. Image from Wikimedia Commons.

The Federal Reserve has announced that it won’t be tightening the national credit supply just yet. The Federal Reserve has certain controls over the amount of available lending capital in the financial system. Fears of inflation have caused some to think the credit supply needs to be tightened, but the Fed does not think that is currently prudent.

Fed says economy is too shaky to tighten credit

Prices of consumer goods, such as food and gasoline, have begun rising recently, causing many to worry about economic inflation. This has prompted lawmakers and finance industry insiders to question whether the Federal Reserve, the key institution in setting monetary policy and controlling things like inflation, should start restricting the available credit supply. Members of the Fed, however, are convinced that the overall economy is too shaky to tighten the credit supply, according to MSNBC. At a recent speaking engagement at Yale University, Fed Vice Chair Janet Yellen said that conditions weren’t right, but the central bank would be easing off its current policy of keeping interest rates at near zero.

Unemployment too high

The Fed partially controls the supply of available credit funding for the banking system of the United States and influences the interest rates that banks charge. During a recessionary period, the Fed can lend short term loans to banks at zero or close to zero percent interest to stimulate lending. Those banks can lend that capital to consumers, as mortgages or personal loans, or to other financial institutions. There are, of course, many other facets to the Federal Reserve’s operations, but credit supply is a key function. Alternately, the Fed can cut back on the amount of available capital if it thinks price inflation is making the nation’s currency worth less than it should be. The price of commodities like oil and food is increasing, which means that $1 doesn’t go as far.

Banks also have CFPB to worry about

The Federal Reserve is going to eventually restrict the supply of credit, meaning interest rates on loans will start increasing in the next year or so, once the central bank feels confident enough about unemployment and other economic conditions. Banks will also have to follow rules from the new Consumer Financial Protection Bureau, which will levy fines for legal violations. The bureau will start operating in July, and spokesperson Elizabeth Warren has promised the first new regulations set in place by the bureau by January of 2012, according to Reuters. The CFPB is still a hotly debated issue in Congress, so the extent of its reach has yet to be determined, but a greater degree of regulation is soon to set in for the financial system.

Sources

CNBC

Reuters

Credit bureau Experian accused of fraud in California lawsuit

Peter Stone — Fri, 08 Apr 2011 17:07:58 +0000

Experian is being sued for fraud; customers say the company doesn't provide relevant information in the credit reports it provides to customers. Photo Credit: Swampyank/Wikimedia Commons/CC-BY-SA

A lawsuit has been brought against credit bureau Experian in California. Experian is one of the three main credit bureaus, along with TransUnion and Equifax, and credit ratings from those bureaus are used in creating a persons’ credit score. The plaintiffs in the suit, which may become class action, are alleging fraud.

Plaintiffs say free credit report sites give false info to consumers

Plaintiffs in the California lawsuit against credit bureau Experian are saying the bureau has defrauded. They say Experian provides misleading information on the websites where the company sells copies of credit reports, according to MSNBC. The suit claims that Experian provides the wrong score, purposefully, through FreeCreditScore.com and FreeCreditReport.com. The sites, which charge a $14.95 per month fee to users so they can monitor their credit report activity, provide the Experian PLUS score. The reason why the plaintiffs are seeking a class action status is because that isn’t the score lenders would look at if a person applied for a personal loan.

Lenders look at FICO scores

When lenders or other parties check a person’s credit score, they aren’t looking at a score that one credit bureau comes up with. Lenders look at the FICO score, or the number from the credit scoring system developed by Fair Isaac and Company. Fair Isaac scores are calculated by looking at certain data about a person and coming up with a numerical rating of that persons’ credit worthiness. Experian, Equifax and TransUnion all produce credit scores with the FICO formula, and those scores are reported to lenders. The lawsuit accuses Experian of fraud because the PLUS score is not reported to anyone and would not be considered if someone applied for a job or installment loan. The suit says Experian misled consumers by advertising worthless information for sale. Experian had to be compelled by threat of a Federal Trade Commission suit to advertise the link to the government site where consumers can request the one free report from each bureau that people are allowed by law.

States trying to get employers to mind their own business

Labor rights advocates have never been enthralled with the idea of employers checking the credit scores of potential new hires. At least half of the United States isn’t either; 49 bills in 25 states are currently before state legislatures to legally bar employers from checking credit scores of a potential new hires. Though credit bureaus that sell the reports to businesses and some businesses contend that it can catch a potential problem employee, civil rights and labor advocates insist that it is prying into an area that no employer has a right to.

Sources

Community Financial Services Association of America

USA Today

Wireless payment network to debut in Salt Lake City

Peter Stone — Thu, 07 Apr 2011 00:26:59 +0000

Salt Lake City, Utah, is going to be installing payment systems throughout the city that can take payment from customers using their smartphones. Image from Wikimedia Commons.

Salt Lake City, Utah, will soon begin experimenting with a wireless payment system in conjunction with three wireless networks. The system, called Isis, is set to debut in 2012 and will use cellular phones to wire payments from a person’s credit or debit line with a bank.

Cell phone credit card technology takes another step forward

Several months ago, the iPhone was equipped with near field communication (NFC) technology to be used as a wireless payment system. A computer chip is installed in an iPhone that can be picked up by a reader system. The bank account or credit card account connected to the chip’s owner is then charged by merchants. One merely needs to wave their iPhone with the NFC chip, and a deduction is made from the appropriate account. Many believe this will be a great leap forward in financial technology. Because so many phones have internet access, people can already use a smartphone to do banking transfers, balance their checkbook or get online personal loans.

Wireless payment network to debut in Salt Lake

Salt Lake City, Utah, will be equipped with an NFC system, according to NPR. The public transportation system will have NFC readers and fares can be paid by waving a phone by the NFC reader. Three major wireless carriers — AT&T, T-Mobile and Verizon Wireless — are forming a partnership venture with the city using Isis, the NFC system that those carriers are using. Those carriers still have to come out with NFC equipped phones besides the iPhone. Sprint, according to BusinessWeek, is still developing its own NFC technology.

Tech not widespread enough

Critics have observed that NFC technology is not widespread enough to turn Salt Lake into the “place where you can leave your wallet at home,” as the ad campaign on the Isis company website contends. However, smartphones are beginning to become far cheaper to buy and payment technology is moving toward wireless systems.

Sources

NPR

BusinessWeek

Isis corporate site

Demand for same day loans is tremendous, FDIC says

Steve Tarlow — Wed, 30 Mar 2011 18:40:18 +0000

The Government Accountability Office says banks can't effectively offer small-dollar loans. (Photo Credit: CC BY-ND/DRScoundrels)

There is a “tremendous demand” for unsecured personal loans in the U.S., says FDIC Chairwoman Sheila Bair. This means small-dollar loans are attractive to consumers and to mainstream financial institutions like banks and credit unions. Banks have tried to get in on the same day loans origination action – but not without complications, says a Government Accountability Office report.

Payday loan alternatives – and the banks that can’t deliver them

Due to more stringent terms and fee structures, payday loan alternatives offered by most banks and credit unions are a completely different animal than personal loans from a small lending outlet. The GAO suggest that the Dodd-Frank Act and other FDIC changes in recent months may increase traditional financial institutions’ willingness to offer same day loans, but the results may not be what banks expect:

“Recent statutory and regulatory changes and FDIC initiatives may encourage more institutions to offer small-dollar loan alternatives to payday loans or expand their availability, but many consumers may still chose to use payday loans for their wide availability and relative lack of eligibility,” says the GAO report.

A two-year FDIC pilot program illustrated that without the involvement of charitable organizations or government subsidies, banks and credit unions have been unable to popularize payday loan alternatives. Extensive underwriting requirements also tended to exclude the customer base that most wanted access to personal loans.

Same day loans will not exclude you from a government job

The notion that taking out same day loans is harmful to one’s financial reputation is disproved in the Government Accountability Office report. Federal agencies like the Department of Homeland Security, Transportation Security Administration and even the Federal Bureau of Investigations put applicants through an intense employment screening process that includes a thorough financial history. Credit reports are run and other financial evaluation tools are used.

According to the GAO, screening agencies stressed that whether or not applicants to high security clearance positions had used short term loans was not a determining factor in the hiring process. The presence of risky patterns of financial behavior is important, however, which underscores the important of financial responsibility – for government employees and consumers in general. If banks and credit unions could ever free themselves from the policy maze and judge same day loan applicants over a more broad range of financial responsibility, perhaps the institutions could sell personal loans directly to consumers.

Sources

Government Accountability Office

Don’t live beyond your means, even with payday loans

More banks ending debit card rewards

Peter Stone — Tue, 29 Mar 2011 22:04:43 +0000

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