Here in the United States there are 21 states that end in the letter “a”. But you probably already knew that…
The CFPB, through its implementation of Dodd-Frank, is regulating consumer finance transactions in all the states, and it is not only interested in the residential lending business. It is also ruling on student loans, credit cards, pawn shops…As a result of the financial crisis and tight margins, banks have had little choice but to focus on clients who can generate better revenue, so emphasis has moved to more affluent and business customers. Banks have closed branches to cut costs and requirements for getting credit have increased in many areas. So in many areas, if someone needs a loan, what do they do?
Some go to pawnshops, and those firms have only been too happy to step into the lending vacuum. Pawnshops have always been considered fringe financial operations, but with television shows now about the industry they are considered more mainstream. Now some pawnshops are apparently branching out into other areas of financial services including credit cards, check cashing, prepaid debit cards, bill paying and even text alerts on balances. Everyone knows the basic model of a pawn shop is to take personal collateral (like my beer can collection!) at a steep discount against monies loaned – at interest rates of up to 25% per month.
Fewer may know that the loan amount is calculated by assessing what the collateral can be sold for, taking into account depreciation, marketability and the likelihood the person will return (or if they will simply abandon the article). The goal of the pawnshop is not to sell the collateral, but rather to have the customer come back and retrieve it after paying off the loan. The collateral can be sold if payment isn’t made, but the pawn shop generally prefers not to have to do that because the alternative is usually more lucrative. In addition to all of this, pawn brokers don’t report defaulted loans on a customer’s credit report, which is an advantage to some borrowers. Because their primary business is to lend money against collateral, pawn brokers see themselves more as a service provider than a cash source. That makes sense when you consider the pawn broker’s goal is to have customers regularly come into the pawn shop, regularly borrow and regularly repay any monies borrowed.
Unlike mortgage banking, where numbers are dipping, the credit crisis has led to an increase in the number of operations by 56% from some 6,400 in 2007 to around 10,000 in 2012. This growth and the high interest rates charged on loans have also increased attention by the CFPB. Regulators are concerned nonbank lenders like pawnshops and payday loan operators are exploiting the non-banked and may not be following stringent enough lending rules. Regulators want to be sure customers with weaker credit histories that are unable to get approved for an account at a regular bank are being treated fairly when they use alternate channels.
And many in more “mainstream” lending businesses (although pawn shops have been around longer than mortgage bankers have) don’t think that they should be offering products like prepaid cards, credit and debit cards and other mainstream bank products. Or course, non-depository mortgage banks can’t offer these either. We will see where the CFPB takes this, using the sometimes vague direction from Dodd-Frank.
On September 19th the CFPB and the OCC announced dual enforcement actions against a national bank to resolve allegations that the bank engaged in the unfair and deceptive marketing, the sale, and billing of “add-on products” across multiple consumer products. The OCC then announced a separate order that resolves claims related to the bank’s non-home loan debt collection litigation practices and compliance with the SCRA. Buckley Sandler wrote, “Under the CFPB’s consent order (http://files.consumerfinance.gov/f/201309_cfpb_jpmc_consent-order.pdf), the bank will pay a $20 million penalty to resolve allegations that over a seven year period ending in March 2012, the bank, through its vendor, enrolled customers in credit monitoring and identify theft products, and charged some customers for these products without or before having received written authorization to perform the monitoring services.” The CFPB order requires the bank to make restitutions to its customers, and requires enhancements to their compliance. Under the OCC’s action, the bank agreed to pay a $60 million penalty. Ouch. JP Morgan Chase & Co…..er….I mean “The bank” responded with its own press release (http://investor.shareholder.com/jpmorganchase/releasedetail.cfm?ReleaseID=791797) which reaffirms its commitment to holding its vendors to high standards.
Regarding last week’s observation by a reader that perhaps the Bankrate rates weren’t quite accurate, I received a few notes. “I worked for a mortgage banker that advertised heavily on Bankrate. The company’s policy was to advertise rates that were lower, sometimes far lower, than what was on the rate sheet. The loan officers were informed, via email, of the rates we were advertising on Bankrate and how they compared to our real rates. The loan officers were instructed to do whatever it took not to lock at the “Bankrate rate,” a rate at which we’d break even or lose money. Few if any borrowers ever got the advertised rate (never saw it happen), and the company was successful in locking enough customers to keep the advertising profitable despite the bait and switch (you pay every time a borrower clicks on your ad). I believe this is how many lenders on Bankrate operate, though there are exceptions – think major brands or fully automated lenders – that seem to advertise honest rates.
“This is by no means a new problem. See this link from 2006: http://activerain.com/blogsview/299062/bankrate-com-settles-bait-and-switch-lawsuit?sub_category=consumer. Today, Bankrate tries to police deceptive advertising in two ways. The first is mystery shoppers. If a lender fails to honor the advertised rate for a mystery shopper, the lender will get suspended from Bankrate. However, these people are forced to follow an obvious script and the loan officers are trained to recognize it. My company was always successful at dealing with mystery shoppers and was never suspended, and I would imagine this is a typical experience. Second, Bankrate encourages lenders to sync up their pricing engine, which would theoretically eliminate the ability to lie. However, it does not force them, and my company uploaded its rates via a spreadsheet, filling in the lowest rates that we thought we could get away with.
“For the most part, that’s what I believe is happening in Bankrate, and from what I’ve seen it happens anywhere that rates are openly advertised. This includes places like Zillow that do force you to sync up your pricing engine – there are ways to game that too, and they’re not hard to figure out. I believe that if push came to shove, lenders who are cheating on Bankrate would be dead to rights if a regulator looked into the matter – there’s simply too much evidence. It’d be a little harder to nail a lender for fraudulent advertising on Zillow, though not much harder. The cheating is bad for consumers, and no doubt it’s frustrating for lenders who play it straight, but the cheaters are playing a very, very dangerous game given the current regulatory environment.”
Lenders offering point banks, or anything thinly disguised as one, are dwindling in number. But John H. writes, “I am writing from an employer’s perspective, in reference to the CFPB, Castle & Cooke, LO compensation enforcement action. When we lose a prospective LO hire to an entity that is offering its originators illegal incentive compensation, we always challenge the LO on the riskiness and propriety of their employment decision. The response from the LO, in all cases, is frustrating and discouraging as they willing adapt the ‘Sergeant Schultz’ mind-set of conscious avoidance of the facts and willful blindness of the truth; despite the peril they can personally face for accepting an employer’s representations as to the legality of their comp plan. The LOs need to clearly understand that they personally can face serious consequences for not doing their due diligence when signing on to companies that are offering incentive compensation schemes. Once the LO is forced to evolve their mind-set, the entire competitive landscape will change for the better. Our documented belief is that individual LOs have liability for accepting non-compliant compensation incentives. “…The regulations apply to both payors and payees – no person can pay, and no originator can receive any direct or indirect compensation that varies with the terms of loan, other than loan principal…” And remedies include, “…Loan originators who accept non-compliant compensation are liable up to a maximum of the greater of actual damages or 3 times the total direct and indirect compensation, plus costs and attorney’s fees…”
I sat in on two good QM presentations last week. It is such a narrow box. Once again, the intentions are good, but it is easy to see that the unintended consequences of QM will be confused LOs, lenders bogged down with the nervousness of future liabilities and class-action-happy lawyers years down the road, and the continued limiting of credit to certain classes of borrowers. And many small lenders are “throwing in the towel” and joining larger firms with established compliance departments.
Along those lines, Tim K. writes, “Rob, I understand the additional issues created when a broker is looking at a) remaining a broker, b) obtaining a warehouse line to go correspondent, or c) joining another entity. The problems are: 1. if I remain a broker utilizing the same model as today in January the CFPB is effectively shutting my doors. We have an average loan amount of $125,000 and depending on the other fees that will be included in the 3% cap we will not be able to effectively keep our doors open. In markets that the average loan amount is in excess of $200,000+ I can see that this is much less an issue. 2. On turning to mini-corr there have been several discussions on this topic already but one that is not being bantered about is the end cost to the consumer. I am finding that the average cost for doing nothing more than what is already being done is between $500 and $1,000 per loan. It adds some additional risks but the price ultimately will be paid for by the end user – the consumer. 3. The costs of joining another entity after all things are considered again range in the $750-1,500 per loan (administrative fees and the additional SRP rebates paid to the entity that are tacked on to the rate sheets) True, it frees me up from some administrative work but I find the cost objectionable for both myself and my customer. After all of the effort, the additional cost and the increased bureaucracy my question to the CFPB is, ‘How is the consumer safer?’ Maybe we should be asking the consumer if they feel $1,000 safer.”
And this one: “Given Dodd-Frank’s laws, doesn’t the CFPB allow pricing difference by channel? Look at banks – their online and retail rates vary. Rate can also vary by online channel (website versus lead posting on Bankrate). The CFPB allows that LO pay can vary by lead source, right? Or am I off base now (the rules change so fast, and so many times)?” Editor’s note: yes, to the best of my knowledge, the CFPB has not forbidden different pricing based on channel – certainly it realizes that different channels offer different cost structures to investors, and those, in turn, cause different pricing.
(Warning: Parental discretion advised. R-rated, and tasteless. You are forewarned.)
A guy goes into the Post Office in Houston to apply for a job. The interviewer asks him, “Are you allergic to anything?” He replies, “Yes, caffeine. I can’t drink coffee.”
“Ok, have you ever been in the military service?”
“Yes,” he says, “I was in for one tour.”
The interviewer says, “That will give you 5 extra points toward employment.” Then he asks, “Are you disabled in any way?”
The guy says, “Yes. A bomb exploded near me and I lost both my testicles.”
The interviewer grimaces and then says, “Disabled in your country’s service! Well that qualifies for extra bonus points. Okay. Looking at the regulations you have got enough points for me to hire you right now.”
He continued, “Our normal hours are from 8AM to 4PM. You can start tomorrow at 10AM, and plan on starting at 10 every day.”
The guy is puzzled and asks, “If the work hours are from 8AM to 4PM, why don’t you want me here until 10?”
“This is a government job”, the interviewer says. “For the first two hours, we just stand around drinking coffee and scratching our balls…no point in you coming in for that.”
Rob Copyright 2013 Chrisman LLC. All rights reserved. Occasional paid job listings do appear. This report or any portion hereof may not be reprinted, sold or redistributed without the written consent of Rob Chrisman.)