Need help understanding your mortgage? It may be on the way from the Consumer Financial Protection Bureau. (Photo Credit: CC BY-ND/David White/Seek4Media)

In 1975, Congress passed the Home Mortgage Disclosure Act, which required mortgage lenders to fully report all public loan data. While this and other consumer-friendly provisions relating to mortgages have been in effect for more than 30 years, the recent U.S. subprime mortgage crisis illustrated that additional regulation may be necessary. Hence, the soon-to-be-activated Consumer Financial Protection Bureau plans to debut a new version of the standard mortgage disclosure form that should make things easier for homebuyers to understand.

New mortgage disclosure form a ‘key priority’

The Wall Street Journal reports that the new mortgage disclosure form is a “key priority” of the Consumer Financial Protection Bureau, a Dodd-Frank organization that will begin operations on July 21.

Mortgage forms currently consist of copious amounts of paper documenting all aspects of the mortgage agreement in Byzantine detail. Borrowing costs and other fees connected to the closing of the loan are buried in a sea of provisions. These book-like forms were created under the auspices of 1968′s Truth in Lending Act and the Real Estate Settlement Procedures Act of 1974. If the CFPB has its way, mortgage disclosure forms will become much more user-friendly.

“We will be looking at our first (mortgage form) prototypes,” White House adviser and possible CFPB chairwoman Elizabeth Warren told Dow Jones Newswires.

Housing industry has opposed simpler forms before

Elizabeth Warren sided with scores of consumer advocates when she announced the CFPB’s intentions to simplify mortgage disclosure forms. However, various members of Congress and the housing industry have opposed similar attempts in the past to improve the readability of mortgage papers so that consumers can understand the exact costs associated with their mortgage loans. It remains to be seen whether Warren, or whomever officially accedes to the top CFPB post, will have as much success against the housing industry as the organization has had thus far with the credit card industry.

Sources

Home Mortgage Disclosure Act of 1975

Wall Street Journal

You should understand your mortgage

Don't get lost in the hype critics spread about payday loans and APR. (Photo Credit: CC BY-SA/Brian Robert Marshall/Geograph)

A payday loan is a simple product that fills a specific financial niche for consumers who need quick cash but find themselves unable to obtain it via a traditional bank. Payday loans typically come to term after two weeks, and payment plus convenience fee is due at that time – usually on the consumer’s next payday – in a lump sum. The federal Truth in Lending Act of 1968 (TILA) requires that loan fees be expressed in terms of an annual percentage rate (APR), so payday lenders are required to list a loan APR for customers. As Louisville, Ky., Consumer Financial Services Association chapter spokesman Kevin Borland pointed out to the Lexington Herald-Leader in a Jan. 18 letter to the editor, this has caused no small amount of confusion for critics of the payday lending industry.

What the media doesn’t understand about APR and payday loans

Responding to a Jan. 4 editorial entitled “Put interest cap on payday loans,” Borland points to the media’s rampant payday lending confusion:

“Placing an annual percentage rate (APR) cap on a financial product with a two-week term is tantamount to charging a yearly rate for a night’s stay at a hotel. APRs are designed for mortgages and auto loans — not short-term credit,” he says.

Yet TILA requires an APR to be listed for payday loans and installment loans. Regarding payday loans, more specific payday lending laws don’t even allow for interest rates, says Borland. Thus, payday loans are fee based – it’s the only way such businesses can keep their doors open, and people have proven they’re willing to pay a premium for emergency cash.

Full disclosure

While payday loan companies clearly disclose what products cost, opponents continue to distort the truth, says Borland. While a two-week payday loan would reach a triple-digit APR if a consumer took out one loan and continued to pay a fee on that loan every two weeks for a whole year, laws in Kentucky and many other states forbid such loan renewal.

Learn the truth about payday loans

The truth of how payday loans work on a statistical level has been studied at some length over the past decade. Rather than leaping to conclusions about “massive” APR numbers, critics would do well to read the evidence against high-cost theory with payday loans firsthand.

Source

Lexington Herald-Leader

APR explanations in animated form

Payday loans have clearer terms than credit cards. Image from Wikimedia Commons.

Stereotypes exist about many things, including lenders and borrowers of payday loans. A lot of people have the idea that the people who borrow money from such lenders don’t know what they are getting into. Allegations are often made of undisclosed terms and deceptive advertising. However, like most stereotypes, they aren’t reflected in reality.

Terms of payday loans must be disclosed

Any loan lender, including a lender of payday loans, has to disclose the terms of the loan up front. It is mandated by a law called the Truth In Lending Act, which was passed in 1968. In fact, if a person walks into any garden variety payday loan store, chances are that the rates, fees and terms will be displayed prominently in the lobby. The trade groups that payday loan and cash advance lenders belong to all have a code of standards referred to as “Best Practices.” Those standards include disclosing all terms up front and full compliance with the Truth In Lending Act. These Best Practices are mandated by the Community Financial Services Association of America, the Online Lenders Alliance and the Financial Service Centers of America.

Studies disprove stereotypes

Not only do terms have to be disclosed, but studies indicate that payday loan customers knew exactly what they were doing. Even as early as 2001, studies of short term loan customers revealed that the stereotypes didn’t hold up. One study found that of the payday loan store customers surveyed, 95.7 percent knew what the finance charges on their loans were. Of those same customers,  78 percent remembered receiving disclosure of the APR. A person can’t be fooled by what they actually know.

Hysterical claims never hold up

Though social crusaders often mean well enough, the facts can sometimes be omitted to make people out to be victims for the sake of being sensational. The hype often doesn’t live up to reality. You can read more in the Payday Loan Facts and Statistics Report on Personal Money Market.

The debate about payday loans should be informed by reliable and complete statistical information. Image: Thinkstock

Payday lending is a hot-button issue. Consumer Focus released a study saying the number of payday loans borrowed in the United Kingdom has quadrupled in the last four years. Montana’s I-164 initiative seeks to limit payday lending, and Arizona’s “Operation Sunset” ended all payday lending within the state on June 30. Federally, S.3245, the Payday Lending Limitation Act of 2010, seeks to extend the Truth In Lending Act to cap all payday loans at 36 percent interest.

Understanding payday loan statistics

Understanding the payday loan industry and its customers is complicated by ubiquitous inaccurate and conflicting data. A recent report by Personal Money Market that compiles more than two dozen studies on the industry reveals that many commonly held beliefs are not supported by the numbers. For example, the average payday loan customer makes $47,260 per year and has been working for the same employer at least four years. More than 95 percent of borrowers confirm they understand the finance charges on these loans, while only 20 percent of credit card customers say they are able to comprehend their credit card agreements, according to a creditcards.com analysis.

The numbers behind short term credit

Studies by groups ranging from the Federal Reserve of New York State to our company, Personal Money Market, found that 11 percent to 20 percent of applications in brick-and-mortar stores and up to 99 percent of online applications are rejected. Still, one of every five payday loans is written off as a default. The profit margin for most payday lenders is between 8 percent and 10 percent, compared to the 12 percent profit of J.P. Morgan and 27 percent profit Goldman Sachs reported to the Securities and Exchange Commission in April.

Attempting to inform the discussion

A careful and informed discussion of the issues surrounding short-term credit and payday lending has been lacking. With pending legislation in the Senate, 15 states that ban payday lending altogether and several states considering limitations, accurate statistics are vital.

A full copy of the report is available at http://personalmoneystore.com/payday-lending-statistics/

The Capital One class action lawsuit, revived on appeal, accuses the credit card company of deceptive lending and unfair competition. Flickr photo.

Raising credit card interest rates on customers without telling them has gotten Capital One in trouble, again. A class action lawsuit accusing Capital One of violating the Truth in Lending Act by raising credit card interest rates without warning was dismissed by a federal judge earlier. But the 9th Circuit reinstated the Capital one class action lawsuit July 22. New credit card rules enacted earlier this year make arbitrary interest rate increases illegal.

Capital One class action lawsuit

The Capital One class action lawsuit accuses the credit card company of unfair competition and deceptive lending for raising  credit card interest rates without giving consumers “clear and conspicuous” warnings. The Courthouse News Service reports that after having the credit card for three and a half years and complying with the terms of the contract, lead plaintiff Raquel Rubio claimed her credit card interest rate suddenly more than doubled.

Capital One reserves the right to deceive you

Rubio sued Capital One for breach of contract, violation of the Truth In Lending Act and unfair competition. A federal judge dismissed the class action, ruling that Capital One satisfies its obligation to be clear and truthful by stating that the rates and fees were subject to change. Capital One reserved the right to “amend or change any part of your Agreement, including periodic rates and other charges, or add or remove requirements … at any time.”

Capital One buries deception in fine print

The Capital One class action lawsuit was revived on appeal. A three-judge panel ruled that Capital One can’t represent that the rates are “fixed” if they are not. Reuters reports that Rubio had accepted a February 2004 mail solicitation from Capital One that offered a credit card with a 6.99 percent rate on balance transfers and purchases. The solicitation included a required table that said in 10-point type that the rate could rise if Rubio missed a payment, exceeded her credit limit or had a payment returned. But in eight-point type on the same page, it also said terms were “subject to change,” and a cardholder agreement that Rubio received the next month said Capital One could “amend or change any part” of her agreement “at any time.” Capital One raised Rubio’s rate in August 2007 to 15.99 percent though she had not triggered any of the conditions warranting a hike.

Notifications of increases in interest rates are at issue in front of the Supreme Court. Image: Flickr / epicharmus / CC-BY

The U.S. Supreme court has announced that it will consider a case involving credit cards. McCoy v. Chase Manhattan Bank, USA, will be heard by the Supreme Court during its next session, which begins in October. The case is a class-action suit that alleges credit card companies cannot retroactively increase the interest rate on a card without notification. Chase bank claims that because the increase is in the initial cardholder agreement, the rate increase did come with notification.

The case of the credit card holder

In McCoy v. Chase Manhattan Bank, James A. McCoy is claiming that Chase Manhattan violated the law when it raised his credit card interest rate. McCoy was late with his payment on the credit card, and Chase retroactively increased his interest rate on all transactions for the month. Though McCoy had agreed to this interest rate increase when signing the cardholder agreement, the bank did not notify him before the rate increase went into effect. McCoy claims that this modification was illegal under the new Truth in Lending Act.

The case of the credit card issuer

Chase Manhattan Bank, who appealed this case to the Supreme Court, claims the company complied with the Truth in Lending Act. The TILA does require that these short term lenders deliver written notice of changes in the interest rates on cards. Chase bank points to one provision that excepts items previously agreed to in the cardholder agreement. In short, the debate comes down to the “natural” interpretation of the Truth in Lending Act provision versus the ambiguity of the language in the law.

Late payments on credit cards

The initial event that led to the McCoy v. Chase Manhattan Bank case was, in the end, in response to a late payment on a credit card. The Truth in Lending Act aims to make the unsecured loan companies that offer credit cards more transparent in what they are charging consumers. Many Americans are relying on credit cards and short term loans to make ends meet. The agreements for these credit cards are often very extensive and difficult to understand. So what do you think: Should credit card companies be required to notify the card holders of every change they have already agreed to, or is the responsibility to read the agreement on the cardholder?

Not today, Mr. ATM – payday loans keep doors open for consumers when it comes to avoiding overdraft. (Photo: Flickr)

The UK Office of Fair Trading’s recent decision not to enforce a more stringent cap upon payday loans should prove to be a boon to both consumers and the short term loans industry. A press release by UK payday loans company Speed-e-Loans CEO Gary Miller-Cheevers welcomes the decision the OFT reached upon completing its “High-Cost Credit Review,” which the office defines as “financial products including home credit, short-term small sum lending such as payday loans, pawnbroking and rent-to-buy retail credit.” However, as both the Office of Fair Trading and most proponents of payday loans point out, “high cost” is a relative term, as credit-constrained consumers who use payday loans often do so to avoid a more expensive alternative like checking account overdraft.

Payday loans: A valid option in the marketplace

While payday loans may not be perfect for all consumers, those who have difficulty obtaining emergency credit via other means found the service most invaluable, said Miller-Cheevers. The OFT’s review unearthed few complaints regarding such short term loans. In fact, the majority of customers surveyed in the High Cost Credit Review found that UK payday loans agencies tended to be sympathetic if they made late payments due to continued financial difficulties. The companies proved willing and able to work with customers to mutual satisfaction.

Miller-Cheevers takes exception to ‘high cost credit’ tag

Beyond the relative definitions of “cheap” versus “expensive,” Miller-Cheevers pointed to the advantage payday loans have over bank overdraft protection: payday loans are cheaper. “Our typical APR is 2,334 percent,” he said (Editor’s Note: In the U.S., payday loans are typically offered at much lower APRs). “This sounds horrendous. However, you have to bear in mind that this is the annual rate someone is charged, and payday loans are not designed for long term borrowing. It’s a bit like buying sausages in a supermarket and the price being shown per ton!”

The APR mismatch

Miller-Cheevers’ Speed-e-Loans company charges about 1 percent per day plus a fee of £4.95 for 20-day payday loans. For the purposes of U.S. conversion, one British pound sterling is approximately $1.48. Thus, a £100 payday loan taken for 20 days would cost about £25.94. Similar to the rules U.S. payday loans companies must follow as prescribed by the Truth in Lending Act, UK payday loans outlets must publicize the APR, which in this example would be 2,686. Again, remember, the relative cost here should be compared with an equivalent alternative, such as overdraft protection.

How do Speed-e-Loans payday loans compare with overdraft?

Four High Street banks and their overall charges for a £100 over the same period of time are compared on the Speed-e-Loans website. Bank rate samples were taken in November 2009. At Alliance Leicester, a £100 checking overdraft would accrue a £100 charge (that’s £5 per day over 20 days). Thus, a £200 total charge would be the final result. At Halifax bank, the cost is the same. NatWest would charge £210 total (up to £90 for returned items, £20 per month overdraft fee). Lloyds TSB charges £300 (£20/day for 10 days; 20 days would of course be worse).

Then there are Speed-e-Loans payday loans. For a £100 payday loan, the total amount a consumer would pay back in 20 days is £125.94. The UK Office of Fair Trading can see that this option can easily be less expensive for consumers. In America, the same holds true for payday loans.

Sources:

BigNews.biz

Difference Between

Payday loans: Avoid overdraft, even when abroad:

It doesn't take much detective work to discover the payday loan truth. (Photo: ThinkStock)

In the financial news industry, the media will periodically run an anti-payday loan story in which the same talking points are used. In the case of a recent Lansing State Journal article entitled “Going with payday loans might not be worth fees,” those talking points include 391 percent annual interest and varying levels of state regulation. As we’ll see, these are instances of politically convenient bullet points that fail to address the full reality of taking out a payday loan.

A payday loan in Michigan is not an annual loan

For consumer convenience, the Truth in Lending Act (a federal law) requires that all consumer loans – including payday loans – clearly advertise the annual percentage rate (APR) charged. For an annual loan, this is useful. However, while a payday loan is a consumer loan, it is not an annual loan. In Michigan, the average fee (interest) charged per $100 on a two-week payday loan is about $15. That’s 15 percent, or $15 dollars above the principal loan amount. The Journal reporter admits that the payday loan in Michigan ranges in term from as little as seven days to as many as 31 depending upon the lender, although two weeks is standard. Does that sound like an annual loan to you? If it were, you’d be paying 391 APR in interest. For a two-week payday loan, $15 is 15 percent interest paid.

Some lenders charge more than others

The Lansing State Journal is right to advise consumers to “be careful.” Researching the best lender rates ahead of time makes sense and is advised by any pro-payday loan group worth its salt, including the Community Financial Services Association. While some lenders charge $15 per $100 loaned, others may charge more. It varies by lender, and regulations vary by state.

However, the example the Journal uses is suspect because of its lack of context. A payday loan customer named William Lee claims he had to pay back $400 for a $250 payday loan. There is no mention of whether Mr. Lee defaulted on his loan, perhaps because he borrowed more than he could afford to repay. There is also no mention of any other loan terms. As the Michigan Office of Financial and Insurance Regulation allows a maximum of $35.50 (plus a 45-cent database verification fee) charged on a $250 transaction, it seems likely that Mr. Lee either defaulted or the lender he used was operating under the radar. It’s impossible to say for certain based on the article, which makes the Lansing State Journal’s piece nothing more than an unsupported scare piece straight from the Center for Responsible Lending’s playbook.

Do your research, and don’t choose based on emotion

A payday loan can be a useful tool in the right situation. If a consumer shops for the best rate and avoids borrowing more than they can afford to repay on their next payday, there should be no trouble. Impulsive action can lead to financial ruin, whether a consumer is looking for a payday loan, a mortgage, an auto loan or a host of other things. Research lenders online, make sure you understand fees charged before you apply and let the numbers do the talking. The annual APR scare tactic the Lansing State Journal and Center for Responsible Lending use is just that.

Sources:

Lansing State Journal

Truth in Lending Act

Related Video:

Sen. Kay Hagan (NC-D) - Have John Paulson and the CRL done anything for YOU lately?

The Center for Responsible Lending recently worked hand-in-hand with North Carolina Senator Kay Hagan (D) to “help craft” the Payday Lending Limitation Act of 2010, reports the Payday Loan Industry Blog. The major purpose of this new bill, it would seem, is to change the parameters of the Truth in Lending Act (TILA). While the specifics of the bill text will not be available to the general public until it is presented to the Senate in the upcoming weeks, it appears that the Payday Lending Limitation Act of 2010 is ostensibly another attempt to blame America’s financial crisis on the payday loans industry. The bill would empower the federal government to replace state-by-state consumer lending regulation with their own highly stringent rules.

Payday Lending Limitation Act of 2010: Another CRL manifesto

The Center for Responsible Lending (CRL) is allegedly responsible for the thrust of the Payday Lending Limitation Act of 2010. For those unfamiliar, the CRL plays consumer advocacy group before the cameras and bright lights, but when it’s time to wipe of the grease paint, their truth hurts. Not only were they founded largely by Herb and Marion Sandler, who made a fortune in the sub-prime mortgage market that was largely responsible for bringing America’s economy to the brink of destruction, but there are other damning ties. Numerous connections exist between the Sandlers, the CRL, Self-Help, Inc. and affiliate Self-Help Credit Union (the latter two founded by Martin Eakes, who is also the chairman of the CRL).

In essence, affirmative action initiatives were used to strong-arm banks into writing adjustable-rate mortgages for people who were unlikely to be able to afford them. At the same time, groups like Goldman Sachs were contributing to the mortgage mess, claiming those sub-prime mortgages were a good investment to fool investors while betting against the success of those investments behind the scenes. And guess what? Hedge fund billionaire John Paulson, who is intimately involved in the recent mortgage investment scandal, was a major financial contributor to Goldman Sachs AND was one of the major founders of the Center for Responsible Lending! How credible are the Center for Responsible Lending’s claims that they want to protect the little man, in light of those heavy connections?

Skip the Payday Lending Limitation Act of 2010, Congress

Instead, investigate the Center for Responsible Lending at the same time that you go after Paulson, Goldman Sachs and everyone else associated with this greedy mortgage investment game. There is at a bare minimum suspicion by association, and there is a documented money trail. Payday lending, when used properly, is a useful venture for short-term consumer funding. Adjustable rate mortgages and unscrupulous investment companies that are betting on deceived investors to fill their coffers have no proper place in a legal, functional economy. Their avarice is a blight, and Sen. Hagan would have been better-served if she’d asked Scrooge McDuck to write the Payday Lending Limitation Act of 2010. He has more heart and care for the common man.

Related Video: