July 22, 2014

Borrowers Beware

The subprime mortgage bubble that exploded in 2008, causing bailouts of banks and automakers alike, should have taught us something about irresponsible lending and unaffordable loans. But, another bubble of similar substance is about to burst next. Consumer advocates like the lawyers at Kemnitzer, Barron & Krieg, have cautioned for years that the subprime auto lending bubble is just as fragile in the aggregate as home loans were a decade ago.

In an excellent article this week, New York Times writers Jessica Silver-Greenberg and Michael Corkery report, "Auto loans to people with tarnished credit have risen more than 130 percent in the five years since the immediate aftermath of the financial crisis, with roughly one in four new auto loans last year going to borrowers considered subprime — people with credit scores at or below 640." That overall lending pattern is just not sustainable.
High interest rates and excessive loan periods mean that people who are most desperate for inexpensive transportation are least able to obtain it. They end up having to make loan payments long after the life of the car. They get saddled with repair costs, even while they are still trying to pay off the purchase price. They lose the equity they have in the vehicle when they fall behind and the car or truck is repossessed. And then their credit sinks lower in a downward spiral.

Used car dealers employ a wide variety of deceptive practices including the hard sell, bait and switch advertising, and sometimes outright forgery. Sad to say, many used car dealers, who know they can't get a loan funded by a responsible bank, falsify the credit application. Unscrupulous car dealers convince prospective purchasers to sign a credit app in blank, and they fill it in after the fact. Sometimes buyers allow themselves to be duped into exaggerating their income. Fudging on income is always a bad idea. An accurate credit application should be a reflection of the borrower's ability to repay the loan.

Generally, a lender does not offer the dealer a single interest rate, but rather a range called the "spread." If the dealer can get the buyer to agree to the higher end of the spread, the dealer keeps all or some of the yield spread premium. The buyer is never told that the dealer pocketed the markup.

Another common practice is called a yo-yo, where the dealer allows the buyer to take delivery, conditioned on the loan documents being approved; and when the bank balks, the buyer is called back to "re-sign" a contract with less favorable terms. This may include a higher downpayment, or a longer period of repayment, or other deceptive practices imbedded in the fine print. In the worst cases, a car dealer has already sold the trade-in vehicle and the buyer feels he or she has no choice but to sign off on the new deal. This is illegal in California, and yet many consumers report significant bullying at this stage of the process.

What is driving this new interest in subprime lending? The same thing that drove the mortgage crisis before. Wall Street financing has replaced the local bank, whose loan officers had a personal relationship with the borrowers they served. That sounds almost quaint in this economic climate, like something out of "the olden days." Now, automotive debt is bundled, securitized, and sold to Wall Street investors and private equity companies, who neither know or care whether the borrower has the ability to repay the loan.

The investigative journalists for the New York Times poured over masses of documents and court filings, and in a sober comment, found "echos of the mortgage boom." On the grand scale we should hope that financial institutions come to their senses, or the subprime auto finance industry will reverberate with echos from the bursting bubble of the mortgage bust. The hedge funds are already taking notice, but taxpayers are in no mood to help banks this time, and any echo of a bailout may fall on deaf ears.

Meanwhile, consumers with subprime credit are getting taken for a ride, with higher payments for lower quality cars. It's time for a new twist on the old phrase to urge the car buying public: Borrower Beware.

June 19, 2014

Credit Discrimination Is a Civil Rights Matter

As the country celebrates the 50th anniversary of the Civil Rights Act of 1964, the legacy of the Civil Rights Movement surfaces again for debate. Most Americans agree that the progress of the 1960s is far from complete. UCLA Professor Emeritus, Jack Rothman, stated this week in an excellent HuffPost piece entitled Civil Rights Need Economic Rights, "The clash between American's declared values of fairness and justice and the functioning of its contentious and uncaring economic system is a potent deterrent to racial progress. We are simply out of alignment as a nation. For the fight for racial equality is hopeless without an all-out fight for economic equality. The country stands in need of a new civil rights transformation -- this time taking aim to upend the broader system of unfairness."

toni%20morrison.jpgPoliticians, academics and advocates alike, including that icon of the Civil Rights Movement, Representative John Lewis (D., Georgia), have long argued that economic justice is the new battleground of the civil rights movement. It is a human rights issue for the 21st century.

"Racism" and "discrimination" are highly charged words. But what is racism, exactly, and why does it harm all races, not just the minority? Nobel Laureate, Toni Morrison, answered that question brilliantly in a classic 1993 interview which you can listen to here.

The National Consumer Law Center (NCLC) is a non-profit organization that advances fairness in the marketplace - including the financial marketplace - for all Americans. After documenting that access to financial products remains unequal, NCLC advocates argue that, "In addition to perpetuating historical discrimination against minority groups, credit discrimination destroys the financial well-being of its victims. Without access to reasonably priced credit, it becomes measurably more difficult to achieve homeownership and build assets, pay for college education or vocational training, or even buy a reliable car for transportation to work." You can read more about NCLC's work for economic justice on its website here.

Californians have the protection of several state laws, in addition to Federal laws, that grant rights and enhanced remedies to people of color and other vulnerable segments of the population. The California state civil rights act is commonly called the "Unruh Act." This and other consumer protection statutes are powerful tools in the effort to obtain economic justice for all.

June 8, 2014

Students Deserve a Fair Shot

Few people in America know more about student debt than Elizabeth Warren does. Before being elected to the Senate from Massachusetts, she was a professor teaching bankruptcy law at Harvard Law School, and has written books on financial literacy, such as "The Two Income Trap." Now Senator Warren is writing legislation to improve the situation.

Commencement speakers may spout cliches and optimism, with their gushing words of advice. But the reality is not abstract or philosophical. Debt is real.

Americans collectively owe about a trillion dollars in student loan debt. It is hard even to grasp what that figure means, but it is useful to note that about 40 million current and former students carry some part of that crushing debt load. Student loan debt follows the borrowers for much of their lives, affecting their credit for years after graduation, affecting where they live, and even affecting what jobs they can take. obamawarren.jpg It is not just a personal hardship, but a national tragedy when students cannot afford to take an entry level job, apprenticeship, or intern opportunity in the very field they incurred debt in order to train for.

Democrats, lead by Senator Elizabeth Warren and supported by the Obama administration, have come up with the best practical solution offered in many years. The Warren proposal would allow students and alums the opportunity to refinance that debt at lower interest rates those commonly available for other types of loans. "When interest rates are low, homeowners, businesses and even municipalities refinance their debt. But right now the government doesn't offer a refinancing option to students," Senator Warren explained. "Allowing students to refinance their loans would help give them a fair shot at an affordable education." This kind of relief is long overdue, and could go far to help students and former students get their credit life back on track.

In a familiar refrain Warren said, "Student loan debt is a real and growing crisis that is crushing young people and dragging down our economy." That sounds familiar. What is new is that the government is stepping in. The student loan refinance proposal is part of a coordinated congressional agenda that Democrats label "A Fair Shot." Meanwhile, President Obama is not waiting for Congress to act. He is issuing a partial fix by executive order today, directing the secretary of education to ensure that certain federal student loans be capped at 10 percent of the borrower's monthly incomes. Hopefully, election year politics will encourage bipartisan support rather than partisan debate. You can read more about the Warren proposal here and more about Obama's executive action here.

June 6, 2014

California Lemon Law and the "Serious Bodily Injury" Standard

There is no doubt that General Motors' botched handling of defective ignition switches was callous and incompetent. Engineers knew of the problem as early as 2004. The recall debacle has rippled through the company. To her credit, this week the new CEO of General Motors, Mary Barra, announced that 15 employees, many of them executives, have been fired over their poor handling of the situation. mary%20barra.jpg Consumer advocates are watching closely to see whether this action is an effective means of changing the corporate culture at GM, or just another desperate effort at damage control.

Termination is a severe reprimand. But is even this remedial action enough to comfort those scores of suffering families whose loved ones were killed or injured in accidents caused by defects that could have been prevented? What may be a ripple for a corporation is a tsunami of pain for human beings. It is hard to imagine the devastating feeling of a driver whose loved one is killed in the passenger seat. Then add arrest to that agony. Consider the case of a Texas woman, Candice Anderson, who pleaded guilty to negligent homicide of her fiance under these circumstances. She has now learned that the faulty ignition components in the Saturn Ion she was driving caused the fatal crash for which she took the blame. Meanwhile she lives with a felony on her record and a hole in her heart. You can read the story of this tragedy here.

The California lemon law, commonly known as the Song-Beverly Act, is one of the strongest in the country. In addition to the remedies it provides to consumers themselves, the Song-Beverly Act is a legislative attempt to use the law of warranty to improve the safety of vehicles on California highways. Even though it provides actual damages in the event of an accident resulting in personal injury, the idea behind the law is to prevent that fatal outcome by forcing manufacturers to act responsibly before tragedy strikes.

To that end, the California lemon law sets an easier standard for consumers to meet when the defect could result in serious injury. The California version of the lemon law was amended to add that liability is triggered when: "The same nonconformity results in a condition that is likely to cause death or serious bodily injury if the vehicle is driven and the nonconformity has been subject to repair two or more times by the manufacturer or its agents, and the buyer or lessee has at least once directly notified the manufacturer of the need for the repair of the nonconformity." For example, in proving the manufacturer has not repaired a vehicle within a reasonable time under warranty, the consumer need only show he or she had taken it in for repairs twice for certain components like brakes or steering.

One of the problems with the GM ignition switch was that it was not just about a simple switch, which sounds trivial on its face. The ignition switch on the steering column of the Chevrolet Cobalt, Ion and other compacts was so poorly designed that it easily slipped out of the run position, causing engines to stall. A faulty ignition switch could cause overall loss of power to the vehicle that rendered aspects of the brakes and steering system inoperative as well.

For other answers to common questions about the California Lemon law click here

June 3, 2014

Fake Debt Collectors

Borrowing and lending used to be so straightforward. A consumer borrowed money from a bank and paid that bank back on agreed-upon terms. If the consumer did not pay it back on time, the bank might hire a debt collector to assure payment of the amount owed to the bank.

Times have changed. In today's financial marketplace, banks often sell bundles of consumer debt to other financial institutions, for a portion of the amount owed, and the collectors get to keep what they are able to collect for themselves. These "downstream" debt collectors call and cajole consumers, or send endless streams of mail threatening damage to credit and other negative consequences.

check.jpgThe source of the debt may be as simple as a credit card account with a single bank, or as complicated as a jigsaw of hospitals and medical service providers. Unscrupulous entities may sell the same debt twice. Or criminals may get hold of a contact list of account holders and try to collect debt that they don't even own.

Suddenly, the bills and phone calls can come from multiple strangers. It is easy for borrowers to get confused as to whom they should pay. That is when fake debt collectors see an opportunity to profit and steal.

In the economic recession of the last decade, these deceptive practices have skyrocketed. The Federal Trade Commission received many complaints about debt collection abuse. The Consumer Financial Protection Bureau heard about the problem as well. Both agencies are studying debt collection abuse within their regulatory authority.

The FTC advises that consumer take a number of steps if you are being dunned by a company you don't recognize or have never done business with.

1. Ask the caller for his name, company, street address, and telephone number.
2. Tell the caller that you refuse to discuss any debt until you get a written "validation notice." The notice must include the amount of the debt, the name of the creditor you owe, and your rights under the federal Fair Debt Collection Practices Act.
3. If a caller refuses to give you all of this information, do not pay! Paying a fake debt collector will not always make them go away. They may make up another debt to try to get more money from you.
4. Stop speaking with the caller.
5. If you have the caller's address, send a letter demanding that the caller stop contacting you, and keep a copy for your files. By law, real debt collectors must stop calling you if you ask them to in writing.
6. Do not give the caller personal financial or other sensitive information.
7. Never give out or confirm personal financial or other sensitive information like your bank account or credit card to a stranger over the phone
8. Never give out your Social Security number unless you know whom you're dealing with.
9. Contact your creditor. If the debt is legitimate – but you think the collector may not be – contact your creditor about the calls. Share the information you have about the suspicious calls and find out who, if anyone, the creditor has authorized to collect the debt.

We would add two things to the FTC's good comments. First, pull your own personal credit report. You are entitled to get one per year for free, by going to the official website for one of the Big Three agencies - Experian, Transunion, or Equifax. Secondly, if you still don't know why this entity continues to contact you about a debt you don't think you owe, or if you are sued by a company you have never heard of, you may need to seek legal advice.

May 21, 2014

National Association of Consumer Advocates Blasts Lawmakers Criticism of CFPB

[The National Association of Consumer Advocates (NACA) has issued the following statement in response to the May 21, 2014 House Financial Services Subcommittee on Financial Institutions and Consumer Credit hearing, which NACA notes is misleadingly entitled “Legislative Proposals to Improve Transparency and Accountability at the CFPB.” NACA is a nonprofit association of consumer advocates and attorney members who represent hundreds of thousands of consumers victimized by fraudulent, abusive and predatory business practices. As an organization fully committed to promoting justice for consumers, NACA’s members and their clients are actively engaged in promoting a fair and open marketplace that forcefully protects the rights of consumers, particularly those of modest means. www.naca.net]images.jpg


Today's hearing has nothing to do with improving the Consumer Financial Protection Bureau's (“CFPB”) "transparency and accountability." The real purpose of today’s House event is to merely, once again offer a package of bills designed to undermine and cripple CFPB.

NACA strongly opposes all eleven of the damaging legislative proposals being considered by the Committee. These bills would only make it harder for the CFPB to ensure a fair marketplace for consumers. Among all of these cynically anti-consumer provisions, we need to take particular note of the Orwellian named, “Bureau Arbitration Fairness Act” which would roll back the CFPB’s explicit authority to issue a rule to limit or prohibit pre-dispute binding mandatory (or forced) arbitration provided in Section 1028 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The bill removes CFPB’s right to protect consumers from the predatory practice of forced arbitration before the Bureau even has a chance to fully review the issue.

A top CFPB priority is to protect American consumers from unfair, deceptive, and abusive financial products. Few practices are as abusive, unfair, and deceptive as the widespread use of forced arbitration clauses buried in the fine print of most consumer contracts, including credit cards, student loans, debt settlement, credit repair, auto financing, and payday loans. Forced arbitration clauses eliminate Americans’ access to the courts, forcing them instead into a rigged and secretive system set up by corporations to favor corporations.

The CFPB released preliminary data on December 12, 2013 on forced arbitration that supports what consumers’ experiences have long proven. Due to the high prevalence of forced arbitration clauses and class action bans, corporations are shielded from being held accountable for bad behavior. Meanwhile, consumers are unable to seek redress for the harm.

“In the Dodd-Frank Act, Congress recognized the need to provide a fair and open financial marketplace for consumers by authorizing the CFPB to study, and if needed, restrict the use of forced arbitration,” said Ellen Taverna, NACA’s Legislative Director. “The CFPB must be able to retain this important responsibility.”

The “Bureau Arbitration Fairness Act” should not be confused with the Arbitration Fairness Act of 2013(“AFA,” H.R. 1844/S. 878), introduced by Rep. Hank Johnson (D-GA) and Senator Franken (D-MN), which would create actual fairness for consumers and workers by preventing the use forced arbitration clauses in consumer, employment and antitrust agreements. The AFA restores the balance between individuals and powerful corporate interests by reinstating American’s ability to choose to hold corporations accountable for wrongdoing in a courtroom or in arbitration.


For more information, you can contact: Ellen Taverna

May 16, 2014

Government Tells General Motors: "Sorry" Is Not Good Enough

A record $35,000,000 fine for General Motors' unreasonable delay in addressing ignition switch problems sends a message to management, i.e., merely saying, "I'm sorry," is not good enough. The fine is the maximum currently allowed under federal law. Last month GM's newly appointed chief executive Mary T. Barra (pictured here) had apologized on behalf of General Motors in congressional hearings for more than a decade of lapses and inaction in responding to serious allegations of safety defects involving great bodily harm. mary-barra-mdn.jpg

Chevrolet Cobalts, Saturn Ions and other similar vehicles had been installed with faulty ignition switches, which are at the center of the controversy. Specifically, the defective component had a tendency to turn itself off if it was jostled or weighed down, thereby shutting down the engine entirely. When that happened, the loss of power in turn disabled air bags, power steering and brakes. One minuter the driver might be going 65 mph on the freeway; the next minute, the car came to a horrifying halt. For years GM and other manufacturers shrugged loss of power off vaguely as a mere "driveability" problem. But the instant malfunction has been linked to at least 13 deaths and 32 crashes. Those reports are likely just the tip of the iceberg, since cars with such defects are actually unsafe to drive.

Meanwhile the National Highway Traffic Safety Administration had come under fire for not acting sooner. Serious, repeated, credible driver reports of sudden stalling incidents, along with accidents from related brake and steering malfunctions, had been the subject of complaints involving severe physical injuries. GM's bankruptcy and ensuing government bailout program wiped out certain pre-2008 claims involving some of these injuries, but the complaints kept coming. The consumer public was offended and infuriated.

Many aggrieved consumers feel justice has now finally been done, while others contend the present fine is too little, too late. While the $35 million fine is the maximum currently authorized under federal law, that penalty does not affect currently pending civil lawsuits or most future claims by private parties.

Last week, after news of the fine was released, Ms. Barra said, “We have learned a great deal from this recall." She promised that her company, "will now focus on the goal of becoming an industry leader in safety." Let's hope so.

May 14, 2014

Distracted Driving - Take Two

Multi-tasking may be a feature of American life, but our habit of trying to do three things at once is increasingly dangerous on the highway. See previous post, Death By Texting, on this blog.

Even as we struggle to read cryptic road signs, respond to brake lights ahead, decide whether we can make it through an intersection before the light turns red, navigate construction zones, signal to change lanes, turn right, turn left, or take a detour, we are assailed by random verbal and visual information as we drive. Technology tempts us to answer our cell phone, read a text message, type in a response, delete an inapt autofail, listen to news of foreign wars or health policy on the radio, select a destination on the guidance map, check for store location and hours on Yahoo, ask Siri a question, or scroll through a digital Rolodex of personal contacts. Car manufacturers don't help. Onboard computer screens - which buyers demand and for which they will pay a premium - can include features as diverse as 3-D maps, diagrams of internal vehicle components, service alerts, a personal phone contact list for dialing while driving, and many more distractions.images.jpg

And then there's Google Glass. The California Vehicle Code does not currently bar the internet eyewear explicitly, and drivers over 18 are allowed to use hands-free devices under most circumstances (V.C. 23123-24). Nonetheless, there are reports of CHP officers ticketing drivers wearing Google Glass under the law against watching a TV or video monitor while behind the wheel. That activity is not allowed, although watching a video monitor is not much different that the lawful activity of watching an ever-changing road guidance map. One driver was able to convince a Southern California judge the Google Glass features were turned off at the time she was pulled over. But, who wants to have to make that argument to a court?

The Google Glass controversy is one example of how lawmakers and law enforcement are trying to keep up with technology. The rules of the road are changing constantly. Those rules differ from state to state. Enforcement varies greatly. As the summer road trip season approaches, travelers can expect inconsistency. Drivers are wise to err on the side of caution. If in doubt about the legality of a multi-tasking activity, unplug or pull over. And meanwhile, let your passenger wear the Glass.

May 13, 2014

Sallie Mae Settles Charges of Cheating Servicemembers

The student loan megabank, Sallie Mae, and its newly formed servicing offshoot, Navient, have settled legal charges brought against them by the Justice Department, the Department of Education, and the Federal Deposit Insurance Corp. This trio of federal agencies alleged Sallie Mae has - for nearly a decade - been violating laws intended to protect members of the military who are on active duty. Under its portion of the settlement, the Justice Department will require $60 million in refunds as well as a $55,000 civil penalty. Under its part of the agreement, the FDIC will require an additional $30 million in refunds and a hefty $6.6 million in civil penalties. The Consumer Financial Protection Bureau has a separate investigation still pending, and that could result in even more restitution, fines and penalties.grad%20cap.jpg

Just what is Sallie Mae alleged to have done to deserve this regulatory wrath? Federal agency investigations uncovered evidencee that Sallie Mae and/or Navient violated a federal law that caps loan interest rates at 6% for members of the military. That law, the Servicemembers' Civil Relief Act (SCRA) recognizes that credit and debt of active service members is a matter of national security, and that servicemembers should not be subject to exhorbitant interest rates, certain late fees and harsh collection practices in a variety of credit contexts including student loans.

In discussing his company's role in the misconduct and ensuing settlement, Navient CEO John Remondi chalked it up to "processing errors." That plain-vanilla phrase hardly sounds like remorse. Unless its CEO takes responsibility for mishandling the collection of these student loans, the misconduct could well continue in some other form. Civil penalties are meant to have a deterrent effect, but Remondi's comment evinced a remarkably nonchalant attitude from someone facing millions of dollars in fines.

Meanwhile consumers who get billed by companies they have never heard from wonder: Just what is a "loan servicer" anyway? Previously, banks made loans, carried them on their own books, and collected the debt through their own employees. If there was an error, it was easy to trace it back to the loan origination or payment history. Today, however, few banks hold onto the loans. They have an affiliate do the processing and debt collection, or they outsource these functions entirely. In either case, the lender is responsible for the conduct of its servicing agents. Thus, Sallie Mae was on the hook here.

While active duty servicemembers are entitled to special protections under federal law, many state and some federal laws also protect civilian consumers against deceptive and predatory student loans. "The settlement comes amid increasing federal and state scrutiny of the student-loan industry," reports the Wall Street Journal. Sallie Mae is on just about consumer advocate's list of unpopular companies. Most students simply do not know their rights. But, once investigations begin to shed light on some of the collection practices its CEO dismisses as mere "processing errors," Navient and Sallie Mae might find out that they have underestimated the intelligence of the American student body.

April 22, 2014

Student Loan Co-Signer Death May Trigger Default

We have previously warned - on this blog - of the dangers of co-signing. Usually a relative or love interest asks the co-signer to simply add his or her signature to loan documents. "I just need your credit," the borrower says, "You'll never have to pay a cent." Nothing could be further from the truth. Creditworthiness is based on the borrower's ability to repay the loan. Sometimes the co-signer requirement is prompted by an aggressive car salesman or loan officer who wants to close the deal fast. The only reason an automotive dealer, mortgage company, or student lender would require a co-signer is if they doubt the borrower's ability to repay. The co-signer is taking precisely the risk the lender has declined.678948_writing_check.jpg

Girlfriends and grandparents are typical targets. Sad as it may be, the co-signer is usually trading money for love. With a sense of betrayal, it is the co-signer who gets stuck having to pay the loan or risk devastation to their credit rating.

Even if the student dies by accidental injury or unexpected illness, and even without completing his or her intended degree, the grieving co-signer could still be on the hook to repay the deceased student's loans. And the lenders are relentless.

But now, a troubling twist has come to light. A Consumer Financial Protection Bureau report prompted the New York Times proofreaders to get to work reading the fine print of private student loan contracts. The NYT investigative journalists, with the help of eagle-eyed copy editors, verified what the CFPB had uncovered, and what increasing numbers of student loan borrowers have come to regret. Death of the co-signer triggers default of the loan.

What does that mean for the primary borrower? It means the full amount of the debt immediately comes due. You can read the full story here, as well as the underlying press release and report of the Consumer Financial Protection Bureau here.

Not all lenders are eager to accelerate the debt, preferring the steady stream of repayment. Much of the reported trillion dollars in outstanding student loan debt is bundled, packaged, securitized, and sold to downstream debt collectors. Many lenders would prefer simply to keep collecting on the original terms. And in California, a new law that went into effect January 1, 2014, requires debt collectors to produce competent evidence of the original loan. Since some debt buyers just purchase a spreadsheet of borrowers and balances, the original loan docs can be hard to come by. Any student borrower who realizes a new and unfamiliar finance company is trying to collect on a student loan should seek immediate professional legal advice.

Nonetheless, this is just more bad news for students. Already grieving their loved one, who did them a favor in their time of need, they are bound to regret their original co-signer request.