Chalk one up for consumers! The California Supreme Court unanimously held that interest rates may render a consumer loan unconscionable even in the absence of a statutory interest rate cap. http://www.courts.ca.gov/opinions/documents/S241434.PDF. The ruling has also been covered in the LA Times and the American Banker. This allows courts to take into account the facts and equities of each case, and not simply rely on a statutory rate. The Court and the Amicus Brief filed by the consumer advocacy organizations cited Embracing Unconscionability’s Safety Net Function, 58 ALA. L. REV. 73-117 (https://papers.ssrn.com/sol3/papers.cfm?abstract_id=1270836) in understanding the contract doctrine of unconsionability’s historical roots in courts of equity.
Professor Amy J. Schmitz joined forces with other consumer law experts Prof. Pamela Foohey of Indiana University Maurer School of Law and Prof. Angela Littwin of University of Texas School of Law to serve as the primary drafters of a response to the Consumer Financial Protection Bureau (CFPB)’s request for information regarding the CFPB’s reporting practices of consumer complaint information. The response explains how publicly releasing information about consumer complaints is essential to the CFPB’s primary purpose of ensuring that “markets for financial products and services are fair, transparent, and competitive.” The response primarily focuses on the benefits of the CFPB’s public consumer complaint database. The response also details the benefits of adding more data to the database, of continuing to publish reports based on complaint data, of publishing more tailored reports based on the complaint data, and of evaluating the design of the online interfaces through which consumers lodge complaints and access the database. These improvements will further enhance the operation of a fair, transparent, and efficient marketplace. The response has been submitted to the CFPB, but is also available to the public at https://papers.ssrn.com/sol3/papers.cfm?abstract_id=3190797.”
Section 601 of Public Law No. 115-174 amends the Truth in Lending Act by prohibiting a private student loan lender from declaring a default or accelerating a debt against a student loan borrower on the basis of the co-signer’s bankruptcy or death. A second provision releases the co-signer’s obligation upon the student’s death. Nonetheless, these protections only apply to loans extended after November 20, 2018. In addition, the protections do not apply to private student loans consolidating other private student loans or to spouse co-signers where the spouse’s signature is needed to perfect the security interest in a loan.
Under another provision, students who successfully complete a loan rehabilitation program may request that negative credit reporting information about a private student loan be excluded from the consumer’s report. A loan rehabilitation program is one where the student makes a number of consecutive on-time payments on the loan.
Despite this, one should be aware that private student loan lenders are not required to offer a loan rehabilitation program and there are no specific standards for such a program. In fact, the lender apparently is not even required to help remove the default in the student’s credit file even when the student completes the program and requests the changes in the student’s credit report.
At the same time, the rehabilitation program adds an additional risk for students. If a student begins making payments under such a program after the statute of limitations has run on the private student loan, then the payments may revive the limitations period. This means that the student could again be subject to a collection lawsuit.
Recently, I was asked by WalletHub to comment on cash back credit cards. The post should be forthcoming on the WalletHub site. Nonetheless, I am also sharing my insights here:
• Should everyone have at least one cash back credit card?
Not necessarily. For starters, consumers should always “shop around” and compare credit cards, and be sure to understand what they are getting themselves into before signing up. One resource consumers my find helpful is on the CFPB credit card agreement webpage. Furthermore, cash back may not be the most important feature for all consumers. Consumers need to consider their own situations and interests. Once again, the CFPB provides excellent resources on credit card features. Consumers also may not all qualify for the same types of credit cards, and should be sure that they are in a position to pay off credit card debt in a timely and prudent manner. Anyone interested in finding out more about credit scores should check out CFPB’s “How do I get and keep a good credit score?”
• What are the biggest mistakes that people make when shopping for a cash back credit card?
First, some consumers may take on another credit card without truly considering whether they should open themselves up to greater spending power, and falling behind on bills. Second, credit card offers may be confusing with respect to annual fees. For example, some credit card offers include a waiver of the annual fee for the first year, thus lulling consumers into ignoring that fee in their decision-making. However, consumers are usually dismayed when the fee kicks in and dissipates any benefit of “cash back.” At the same time, consumers may not be able to cancel the card at that time due to the debt they have incurred or the “hit” they would take on their credit scores for canceling a card so quickly. Third, consumers often fail to read the rules and restrictions on earning cash back. For example, some cards offer elevated cash back for certain categories of purchases, but then restrict what qualifies for that category. Take the example of “3% cash back on fuel purchases” – with the caveat that fuel purchases from stations that are linked to grocery stores do not qualify (a very common restriction). Similarly, “big box” and “warehouse” stores may not qualify for elevated cash back on “grocery” purchases. Again, it is important to read the fine print of any credit card agreement. Fourth, credit card offers may restrict consumers’ redemptions. Does the offer allow consumers to redeem cash back at any time and in any amount, or does the offer require that consumers wait until they have accumulated a certain cash back sum? Does the offer allow consumers to get a check in the mail, or only a statement credit? These are just some of the questions to ask and consider.
• Why don’t all rewards credit cards offer cash back?
“Rewards” mean different things to different consumers. Some consumers prefer to get travel points or other perks. Some consumers do not qualify for cash back cards, or may focus on low interest rates over any rewards. Again, consumers must always consider their own situations and interests. Cash back cards are not right for everyone, and the credit card market has responded.
Many students take out tens of thousands of dollars worth of student loans to pay for undergraduate college expenses. According to studentloanhero.com, the average graduate in 2016 has $37,172 in student loan debt. How many of these students understand how student loans work or what methods of collection are legal?
The National Collegiate Student Loan Trust and its debt collector, Transworld Systems, Inc., will have to pay at least $21.6 Million because of illegal debt collection practices against private student loan consumers. In addition to the monetary penalty, over 800,000 student loan cases will have to be independently audited, and the companies are prohibited from attempting to collect on any loan, which either is too old to sue over or cannot be proven is owed according to the audit. Illegal activities include: violating consumer protection laws, filing false or misleading documents, and pursuing debts that they are not legally entitled to.
What is illegal debt collection?
“Zombie Debt” is the term used for debt when it is cut off, or “killed,” by a statute of limitations. In other words, the debt is too old for enforcement. Thus, the debt is no longer owed to the lender or collectors.
Debt collection companies can purchase bundles of debt from lenders for pennies on the dollar. Then, these companies attempt to collect on as much of the debt as possible, because they are able to keep everything they collect. Further, they have not checked to determine if the debt is good or bad before they attempt collection. There are a number of reasons why, but, the point is, that they do not check to make sure.
How do I know if my debt is “Zombie Debt”?
Check the terms and conditions of your debt. The state laws applicable to your debt should be named in the terms and conditions of your loan documents. Once you determine which state, a quick google search should reveal the restrictions on collections companies.
For example, Delaware has a statute of limitations of 3 years, while South Dakota has a statute of limitations of 6 years. The statute of limitation sometimes begins when you last made a payment; other jurisdictions begin the statute of limitations several months after your last payment.
What Other Steps Can I Take to Protect Myself?
You can protect yourself from illegal debt collection practices by staying informed on how long companies can try to collect a debt; knowing what obligations you owe, and questioning notices received.
There are steps to take when choosing and paying student loans that can help protect yourself from fraudulent collectors and understand how much debt to expect.
First, use student loan calculators to understand the amount of debt and estimate how long it will take you to pay off your debt. If you are familiar with Microsoft Excel, you may download a calculator template, which will allow you to make changes and add extra payments. Thus, you can know exactly how much money you will owe at any given time and be prepared to identify any mistakes or bad collection practices.
Second, when applying for loans, check the reviews of the company making the loan or the ranking of the lender, to make sure the lender is reputable or has services and support available for borrowers. Also, feedback from customer’s interactions with a company can show how they treat their borrowers. Using a calculator, as mentioned above, helps you to know about how much money is remaining on your loan. These support features can help you figure out what discrepancies exist and why.
Third, check for news on student loan companies being accused of illegal practices and what those practices are. For example, if companies are claiming borrowers owe money they do not, and the companies are facing a lawsuit, it may be a good time to check your loan status and how much the company is claiming you owe. This can just be a simple google search for loan companies in trouble.
The biggest step anyone can take is to stay informed. When borrowing money, track your money independently. This is the same process as balancing a checkbook. Track how much you pay and include simple interest calculations, or more complex interest calculations if they are needed and you know how. Every three to six months compare your numbers with the numbers the lender is claiming and make minor adjustments (mostly to account for complex interest). This will enable you to know what questions to ask the lender to ensure no shenanigans, such as questionable fees, rate changes, or false debt claims, are occurring with respect to your loan.
The Consumer Financial Protection Bureau (CFPB) today announced that its recent work resulted in $14 million in relief to more than 104,000 harmed consumers from January through June 2017. The Press release read in part:
“Today’s report, the 16th edition of Supervisory Highlights, covers CFPB supervision activities from January through June 2017, and shares observations in the areas of auto loan servicing, credit card account management, debt collection, deposits, mortgage origination, mortgage servicing, remittances, service providers, short-term small-dollar lending, and fair lending. Among the findings:
- Banks deceived consumers about checking account fees and overdraft coverage: One or more institutions deceived consumers by inaccurately describing when checking account service fees would be waived. One institution told consumers it would waive the fee if the customer met certain qualifications, including making 10 or more payments from the checking account during a statement cycle. In fact, only debit card purchases and debit card payments qualified toward the fee waiver. One or more institutions also misrepresented opt-in deposit overdraft services as extending to consumer payments by check, electronic funds transfers through the Automated Clearing House payment network, or recurring payments, when those transactions were not actually covered.
- Credit card companies deceived consumers about the cost and availability of pay-by-phone options: The Bureau’s examiners found that customer service representatives of at least one credit card company disclosed only costly pay-by-phone fees while omitting mention of much cheaper payment options. Failing to disclose less costly options can result in consumers being charged for services they don’t need.
- Auto lenders wrongly repossessed borrowers’ vehicles: Many auto loan servicers give borrowers options to avoid repossession of their vehicle if a loan is delinquent or in default. But the CFPB’s examiners found that one or more companies were repossessing vehicles after the repossession was supposed to be cancelled. Some lenders wrongfully listed the account as delinquent. In other instances, customer service representatives did not cancel the repossession order when feasible after borrowers made sufficient payments. Also, some repossession agents did not check the documentation beforehand to see if the repossession had been cancelled.
- Debt collectors improperly communicated about debt: Generally, debt collectors must get consent of the person owing the debt before discussing it with other parties. The Bureau’s examiners found that one or more third-party collectors did not confirm they had contacted the right person before starting collections, or wrongly attempted to collect from consumers who were not responsible for the debt. Also, one or more payday lenders, in collecting a debt, repeatedly called third parties, including personal and work references listed on the borrowers’ loan application. In some instances, even after being told to stop, these collectors called borrowers at work or asked third parties to relay messages to them. Such calls can lead to negative job consequences for the borrower, and risk improperly disclosing the default or delinquency to third parties.
- Mortgage companies failed to follow Know Before You Owe mortgage disclosure rules: CFPB examiners found that one or more companies overcharged closing fees to consumers and one or more companies wrongly charged application fees before consumers had agreed to the mortgage transaction. Examiners did find that in general, both banks and nonbanks were able to effectively implement and comply with the Know Before You Owe mortgage disclosure rule changes.
- Mortgage servicers failed to follow the Bureau’s servicing rules: Servicers are responsible for reviewing borrowers’ initial loss mitigation applications to determine what documents are missing. They must then tell borrowers what documents are missing, so that consumers can get a full evaluation of options they have available. One or more mortgage servicers offered a forbearance option to consumers to help them prevent foreclosure, but did not let the borrower know of their right to complete an application to be considered for other options. In addition, they did not exercise reasonable diligence in collecting information needed to complete the borrower’s application. Additionally, one or more servicers, through a vendor, also provided borrowers mortgage statements that failed to specifically list fees charged.
Today’s report shares information that companies can use to comply with federal consumer financial law. When CFPB examiners find problems, they alert the company and outline necessary remedies. These steps may include paying refunds or restitution, or taking actions to stop illegal practices and assure future compliance such as implementing new policies, or improving training or monitoring. When appropriate, the CFPB opens investigations for potential enforcement actions.”
For more information, see: today’s edition of Supervisory Highlights is available at: http://files.consumerfinance.gov/f/documents/201709_cfpb_Supervisory-Highlights_Issue-16.pdf
On Jan. 3, the the Consumer Financial Protection Bureau (CFPB) took action against Equifax, Inc., TransUnion, and their subsidiaries for deceiving consumers about the usefulness and actual cost of credit scores they sold to consumers. The companies also lured consumers into costly recurring payments for credit-related products with false promises. The CFPB ordered TransUnion and Equifax to truthfully represent the value of the credit scores they provide and the cost of obtaining those credit scores and other services. Additionally, TransUnion and Equifax must pay a total of more than $17.6 million in restitution to consumers, and fines totaling $5.5 million to the CFPB.
“TransUnion and Equifax deceived consumers about the usefulness of the credit scores they marketed, and lured consumers into expensive recurring payments with false promises,” said CFPB Director Richard Cordray. “Credit scores are central to a consumer’s financial life and people deserve honest and accurate information about them.”
Consumers are again advised to be aware of the terms when they sign up to receive a credit score or other credit-related products. All credit reports are not free, and credit scores are generally not provided free of charge directly from these companies. However, some credit card companies to provide scores to their customers without charge, and thus consumers would be wise to ask their credit card companies if they provide such information for free.
Notably, some of the nation’s largest colleges and universities continue to maintain deals with large banks that allow for the marketing of products that may not be in the best financial interests of their students and that contain costly features. Key findings from the Bureau’s report and analysis of college marketing deals for prepaid and debit accounts include:
- Dozens of bank deals with colleges fail to limit costly fees: The Bureau found that dozens of deals with banks for school-sponsored accounts, including deals at some of the nation’s largest colleges and universities, do not place limits on account fees, such as overdraft fees, out-of-network ATM fees, or other common charges. These costly fees remain a concern at dozens of campuses, even as safer and more affordable alternatives are widely available at many other schools across the county.
- Some students may pay hundreds of dollars per year in overdraft fees: College students may pay hundreds per year in overdraft fees when using student banking products. This is particularly concerning given that a growing body of evidence suggests that small financial shocks—such as a few hundred dollars— can cause significant financial hardship for students and even deter college completion. Further, the Bureau’s analysis found that fees associated with school-sponsored accounts can collectively cost a college student body hundreds of thousands of dollars per year.
- Deals provide financial benefits for banks and schools but offer few, if any, financial benefits for students: The Bureau found marketing agreements between colleges and banks often contain extensive details about how the school and the bank can profit. Contracts frequently include details on revenue sharing and other payments made in exchange for exclusive marketing access to colleges’ student population. At the same time, many of these agreements do not require banks to offer safe and affordable accounts—and may drive students to high-cost products.
- Some schools fail to disclose key details of marketing deals with banks: Most colleges were required by the Department of Education to publicly disclose marketing contracts by Sept. 1, 2016. However, the CFPB found that some agreements publicly announced by banks or colleges were not included in the Department of Education’s public database of agreements, suggesting that some schools did not submit their agreements to the Department before the agency’s disclosure website launched.
This is a good time to remind readers that the CFPB published a Safe Student Account Toolkit to help colleges evaluate whether to co-sponsor a prepaid or checking account with a financial institution. The Safe Student Account Toolkit is available at: http://files.consumerfinance.gov/f/201512_cfpb_safe-student-account-toolkit.pdf
On October 28, the Department of Education issued final regulations intended to protect student loan borrowers against school closures and fraud. To that end, the rules include significant provisions restricting school arbitration agreements; clarifying student rights to raise school fraud as a defense to loan repayment; providing automatic closed school loan discharges to certain eligible borrowers; and providing new rights for students to obtain false certification loan discharges. See https://www.gpo.gov/fdsys/pkg/FR-2016-11-01/pdf/2016-25448.pdf. Although some provisions are likely to face legal challenge, the rules generally will be effective July 1, 2017.
For those in the dispute resolution community, the provisions that may be of most interest are those limiting school arbitration and class-waiver requirements. This came in the wake of some institutions, such as Corinthian Colleges, using class action waivers and arbitration clauses to thwart actions by students for fraudulent and abusive conduct that largely pushed students into financial peril. The new rules prohibit schools participating in the federal student loan program from entering into pre-dispute arbitration agreements with students or agreements that purport to waive students’ rights to bring class actions. These limitations apply to agreements with students who have obtained Federal Direct Loans or benefited from Direct Parent PLUS Loans, and apply to claims regarding the making of the Federal Direct Loan or the provision of educational services for which the loan was obtained. This bars schools from using contract clauses or stand-alone pre-dispute agreements with students that waive students’ right to go to court or to pursue a class action over any claims that could also give rise to a “borrower defense” claim (described more fully in the new rules). The provisions also bar a school from relying on an existing pre-dispute arbitration agreement or other agreement to force an individual or class action out of court. This includes agreements entered into prior to the rule’s effective date. The school must either amend the agreement or notify the students that they will not enforce the agreement.
The rules also aim to increase transparency regarding such “borrower defense” related arbitration and litigation. If schools do engage in arbitration proceedings in a manner that is consistent with the regulations and applicable law, the rules require that these schools notify the Secretary of Education and provide disclosures. The rules similarly require that schools disclose such judicial filings and dispositions.
The complete provisions are lengthy, and can be reviewed in the PDF linked above from 75926 Federal Register/Vol. 81, No. 211/Tuesday, November 1, 2016/Rules and Regulations.
Meanwhile, we wait for the Consumer Financial Protection Bureau (CFPB) to issue final regulations regarding its proposal to prohibit companies from including pre-dispute arbitration clauses in agreements regarding financial products or services that prevent class action lawsuits. The proposal would open up the legal system to consumers so they could file a class action or join a class action when someone else files it. Although the proposal would allow companies to include arbitration clauses in their contracts, it would require that the clauses would have to say explicitly that they cannot be used to stop consumers from being part of a class action in court.
In 2003, Elliot Clark took out five short-term loans of $500 from payday lenders in Kansas City so he could keep up with the bills his security job simply could not cover. Clark juggled the five loans for five years, paying off a $500 loan and interest using loans he took from another payday lender. Clark ultimately received disability payments from Veterans Affairs and Social Security, and he was able to repay the debt. The interest Clark paid on the original $2500: more than $50,000.
Clark is not alone. Twelve million American adults use payday loans annually. In Missouri, borrowers received 1.87 million payday loans between October 2013 and September 2014. The average loan in Missouri during this time period was $309.64, with an interest/fee of $53.67 for a 14-day loan. The resulting average interest rate was approximately 452%.
So, how do we as Missouri consumers navigate the world of payday loans and short-term lending? This post answers: (1) how does Missouri define payday loans and (2) what traps should I avoid as a consumer of such loans?
What is a payday loan?
A payday loan is an unsecured small dollar, short-term loan. The name of the loan derives from the loan period; the typical duration of a payday loan matches the borrower’s payment schedule. In Missouri, a borrower can obtain a loan for up to $500. An initial interest rate can be set for up to 75%. The loan must be repaid 14 to 31 daysafter the borrower receives the loan.
A borrower may “renew,” or rollover the loan for an additional 14 to 31 days. To renew a loan, a borrower must:
- Make a written request to the lender
- Pay 5% of the principal amount of the loan
- Make a payment on interest and fees due at the time of renewal
The lender can also charge up to 75% in interest rate for each renewal. A borrower in Missouri can renew the loan up to 6 times.
What traps should I, the consumer, avoid?
- Do not underestimate the extremely high interest rate: A lender can charge an interest rate of 75% on the initial loan. During each renewal period, that interest rate stays the same. As mentioned above, the average annual percentage rate for a payday loan in Missouri is 452%, and with high annual percentage rates reaching 800%.
- Do not take the full amount offered: Payday lenders will frequently attempt to persuade consumers to take the full $500 loan, when a borrower only needs a fraction of that amount. Take only the amount you need to cover the immediate expenses. The extra $100 you borrow can become over $1000 that you must pay back.
- Do not be embarrassed to ask for help in understanding the contract terms: Loan language can be confusing, especially as special terms used in loan contracts are not used in everyday language. If you do not understand what annual percentage rate, renewal, or principal are, ask the employee. Make the employee explain exactly how the loan will work – go through how much you will owe at the end of the term, how much money will be owed if renew the loan, and how much interest will be paid on each loan. It is better to understand what you contract into before you sign then to be surprised in two weeks with a larger debt than you expected.
- Do not renew a payday loan: Lenders make money by collecting on interest on renewal loans. Because Missouri allows interest rates up to 75% per renewal, your interest owed will quickly become larger than the amount you originally took out. As mentioned earlier, only take out the amount you need and can afford to pay back!
- Do not take out loans from multiple locations: While it is tempting to take out a second loan from a second lender to pay the interest off a second loan, this leads to further debt. While law does not allow this type of lending, it still occurs in Missouri payday loan practice. Like Clark, borrowers become stuck juggling multiple loans and increasing interest.
Alarmingly, the Missouri laws regulating payday loans are confusing and unclear. More terrifying is the lack of guidance Missouri consumers face in navigating the maze of payday statutes. The Missouri Attorney General’s office currently does not produce a guide to short-term loans (like it does in other areas of law, such as Landlord/Tenant). The Missouri Department of Finance provides an explanation as murky and bewildering as the statute it attempts to interpret.
Ultimately, Missouri consumers must be extremely careful when taking out payday loans. The best policy individual consumers regarding payday loans may be to simply avoid at all costs.
**I would like to recognize Michael Carney, staff attorney at Mid-Missouri Legal Services, for his help in researching and understanding the Missouri statutes applicable to payday loans.