Consumer Credit Protection

Background

The Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. enforces most federal laws that protect consumers when they apply for and obtain creditTax credits directly reduce the amount of taxes owed. . These include:

  • the Equal CreditTax credits directly reduce the amount of taxes owed. Opportunity Act, which protects consumers from discriminatory creditTax credits directly reduce the amount of taxes owed. practices, including age discrimination;
  • the Fair CreditTax credits directly reduce the amount of taxes owed. Billing Act, which protects consumers in billing disputes;
  • the Fair CreditTax credits directly reduce the amount of taxes owed. Reporting Act, which grants consumers access to, and input into, their creditTax credits directly reduce the amount of taxes owed. files;
  • the Fair Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. Collection Practices Act, which protects consumers from unscrupulous and unreasonable tactics of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection agencies, including law firms and lawyers that regularly engage in the collection of debts, but does not safeguard against the in-house collection activities ofADLs or Activities of Daily Living are the basic tasks of everyday life, such as eating, bathing, dressing, toileting, and transferring. IADLs or Instrumental Activities of Daily Living are activities related to independent living and include preparing meals, managing money, shopping for… the original creditor; and
  • the Truth in Lending Act, which requires accurate disclosure of a loan’s annual percentage rate (APR) and the total dollar amount of the finance charge.

CreditTax credits directly reduce the amount of taxes owed. scores are increasingly used to evaluate consumer creditTax credits directly reduce the amount of taxes owed. risk. They are also a significant factor in determining whether a consumer obtains creditTax credits directly reduce the amount of taxes owed. , how much creditTax credits directly reduce the amount of taxes owed. is made available, and under what terms. Industry sources estimate that creditTax credits directly reduce the amount of taxes owed. scores are a determining factor in 90 percent of all consumer creditTax credits directly reduce the amount of taxes owed. decisions in the U.S.

The Fair and Accurate CreditTax credits directly reduce the amount of taxes owed. Transactions Act of 2003 allows consumers to obtain one free copy of their creditTax credits directly reduce the amount of taxes owed. report every year from each of the three national creditTax credits directly reduce the amount of taxes owed. bureaus. Most recently, the Economic Growth, Regulatory Reform, and Consumer Protection Act of 2018 allows consumers to freeze or unfreeze their creditTax credits directly reduce the amount of taxes owed. reports for free at any time to block lenders’ access in cases of inaccuracy or identity theft, or because they want to as a means of protecting against identity theft and the opening of accounts in their name.

Consumers are generally knowledgeable about how creditTax credits directly reduce the amount of taxes owed. scores are used. But not all are aware the scores are used to measure the risk of loan repayment. Consumers must be able to ensure their creditTax credits directly reduce the amount of taxes owed. reports are accurate. In 2016, 91 million items on creditTax credits directly reduce the amount of taxes owed. reports were disputed by consumers, according to an investigation by the Senate Commerce Committee.

Informational creditTax credits directly reduce the amount of taxes owed. scores are often available for free on creditTax credits directly reduce the amount of taxes owed. card statements, on banking apps, and through various online financial management tools. While these scores give a general sense of a customer’s creditworthiness, they do not reflect the actual score that is obtained when a borrower applies for a loan and therefore cannot be used to negotiate a better rate. Actual scores will vary based on the particular creditTax credits directly reduce the amount of taxes owed. bureau whose data was used to compute the score, the specific scoring algorithm, and different weighting factors based on the type of loan that is sought. For example, a score generated for a creditTax credits directly reduce the amount of taxes owed. card application will differ from the score for an auto loan or a mortgage. Consumers should interpret these informational scores with caution.

Not all creditors report data to creditTax credits directly reduce the amount of taxes owed. -reporting agencies. Additionally, in some cases, only negative information may be reported in a creditTax credits directly reduce the amount of taxes owed. file—such as an unpaid phone bill—while positive information is not included. As a result, not all relevant creditTax credits directly reduce the amount of taxes owed. information may be included in the reports.

Alternative financial services—the alternative financial services industry includes payday lenders, pawnbrokers, car-title lenders, rent-to-own stores, and tax preparation companies that make loans on the basis of anticipated tax refunds. It is a major source of creditTax credits directly reduce the amount of taxes owed. services for:

  • consumers with low and moderate incomes,
  • residents of neighborhoods with high concentrations of historically disadvantaged racial and ethnic groups, and
  • people with heavy debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. burdens or less favorable creditTax credits directly reduce the amount of taxes owed. histories.

The use of the alternative financial services (AFS) transactional and loan products is increasing among U.S. households. In its 2015 survey of unbanked and underbanked households, the Federal Deposit Insurance Corporation (FDIC) found that one in four households had used at least one AFS product in the prior year. Generally, the industry lies outside the system of federally insured traditional financial lenders. Its fees are often many times higher than those of traditional lenders. The deceptive and unfair lending practices often associated with the industry include exceedingly high interest rates, prepayment penalties, packing expensive creditTax credits directly reduce the amount of taxes owed. insurance onto loans, and allowing multiple rollovers.

According to the 2013 Federal Reserve Board Survey of Consumer Finances, 7 percent of all families did not have a transaction (checking, savings, or money market) account. And of families headed by people age 50 and older 8 percent did not—this is approximately 4.1 million older families.

Some companies have begun offering pension advances. A pensioner receives a lump-sum loan in exchange for the pensioner’s future pension payments. The payments also include fees related to the loan. A related product, the pension investment, bundles advance pension payments in exchange for an up-front lump-sum investment. Federal law does not explicitly regulate either pension advances or pension investments. General protections against unfair, deceptive, or abusive acts and practices may apply to these financial products (see also Chapter 4 – Savings and Retirement Security, Established Employer-Provided Retirement Plans).

High-cost lenderstwelve million Americans take out payday loans each year, spending more than $7 billion on loan fees alone. Payday loans usually require borrowers to pay off the loan at their next paycheck. These high-cost loan products churn consumers through a cycle of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. , collecting high fees for extended periods. For example, a 2014 Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ( CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ) study found that four out of five payday loans are rolled over or renewed within 14 days. Further, the majority of payday loans are made to borrowers who renew their loans so many times that they end up paying more in fees than the amount of money they originally borrowed. Roughly half of all loans are made to borrowers in the course of loan sequences lasting ten or more loans in a row. The study also looked at payday borrowers who are paid on a monthly basis and found one out of five remained in debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. for the entire year of the study. Payday borrowers who fall into this category include many older Americans or disability recipients receiving Supplemental Security IncomeThe SSI program was designed to reduce poverty by providing basic cash support to people with low income and assets below certain thresholds who are aged, blind, or disabled.  and Social Security Disability.

This can result in long-term harms such as increased difficulty paying bills, delayed medical spending, involuntary bank account closure, and increased likelihood of filing for bankruptcy.

In addition to taking out loans at the thousands of payday loan storefronts, other struggling borrowers take out car-title loans—pledging their car’s title as collateral—or turn to expensive online lenders, and similarly end up in debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. traps. The CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. found that approximately one in five car title loan borrowers loses the car to repossession, and one in four online payday loan borrowers ultimately ends up with closed bank accounts.

Nearly all states have usury and small-loan laws that limit the interest rates lenders can charge, but most exempt payday lenders from these limits. Typically, states have capped small-loan rates at 24 percent to 48 percent APR and have required installment repayment schedules.

Fifteen states and the District of Columbia have enacted laws to reduce the high costs and long-term adverse effects of payday loans by effectively enforcing rate limits of about 36 percent APR or less. Other states have enacted more limited reforms that limit the payday loan cycle of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. .

The Defense Authorization Act of 2007 includes a provision capping the interest rate on payday loans to military personnel at 36 percent. As a result, active military personnel and their families generally cannot receive payday or car-title loans. Support for the law was based on a Department of Defense finding that payday loans were hurting military preparedness. In 2015, the Department closed loopholes under this law to better protect military borrowers. In 2017, the CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. issued a final rule governing many types of high-cost loans, but the rule has been delayed and may ultimately be revisited.

Platform lenders—peer-to-peer and other lending platforms connect individual borrowers with lenders and investors. Borrowers seek out alternatives to traditional loans while maintaining low interest rates. Healthy returns attract the investors. These platforms appeal to investors by advertising attractive returns in a low-interest-rate environment. Peer-to-peer platforms attract borrowers interested in obtaining loans they may not be able to obtain otherwise, for purposes as varied as consolidating debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. , paying off medical bills, and covering small business expenses by advertising an alternative to traditional loans from banks or other depository institutions with low fixed rates.

Peer-to-peer lending platforms are loosely regulated. They are not generally required to evaluate a borrower’s ability to repay a loan. Some lending platforms equate the ability to deduct payments directly from a borrower’s bank accounts with the ability of a borrower to repay a loan. However, this practice is not necessarily indicative of a borrower’s ability to repay a loan, as borrowers may be required to take on additional loans to cover any shortfalls generated by such withdrawals.

A meaningful evaluation of the ability to repay a loan requires platform companies to consider the ability of borrowers to repay their loan while meeting other expenses. Peer-to-peer lending platforms use so-called black box or secret sauce algorithmsThe set of instructions used to analyze data. They are used to reveal patterns, trends, and associations and make inferences and predictions to underwrite loans and obtain leads. These can circumvent traditional underwriting best practices. Because peer-to-peer platforms rely on data brokers for referrals, borrowers may be directed to loans that generate the highest referral yield for a data broker rather than the most favorable terms for repayment of a loan.

Despite the apparent novelty of peer-to-peer lending platforms, they are essentially a rebranding of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. securitization. Rather than marketing debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. instruments primarily to institutional investors, these platforms create an online marketplace in which any individual, not just professional investors, may buy debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. instruments. It is unlikely that the majority of individual investors have the financial sophistication required to understand the risk inherent in peer-to-peer lending agreements.

The peer-to-peer lending platforms’ use of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. securitization means that they transfer risk to borrowers and lenders. In other words, such platforms do not have “skin in the game” if a loan does not perform. Additionally, because the lending platforms contract with borrowers, investors cannot directly oversee or monitor the underlying loans that make up their investment, meaning that investors are essentially relying on lending platform’s word for what constitutes different categories of risk.

Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collectiondebt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection lawsuits have increased across the country. This increase corresponds to rapidly rising debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. loads, high creditTax credits directly reduce the amount of taxes owed. card fees, and the economic downturn.

Although not all debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection practices are abusive, complaints about abusive debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection practices to state attorneys general, the Federal Trade Commission (FTC), and the CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. have exceeded those for other industries for more than 15 years. According to a recent CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. study, about one in three consumers has been contacted by a creditor or collector attempting to collect a debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. within the past year. Consumers who had been approached reported attempts to collect payment on between two and four debts, and one-third of those who had been contacted reported an attempt to collect in the wrong amount.

As debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection activities have increased, so have complaints about debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection practices. This can be tied to the growth of the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. -buying industry. Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. buyers are companies that buy large portfolios of defaulted debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. for pennies on the dollar. They can attempt to collect on questionable, stale, or discharged debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. . They generally receive little or no supporting documentation to prove a debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. is owed.

Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. buyers use practices and procedures that can lead to abusive debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection. These include filing false and fraudulent affidavits in court, knowingly suing the wrong consumer (or for the wrong amount), filing lawsuits despite the expiration of the statute of limitations, and selling or reselling disputed or discharged debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. . Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. buyers also pursue debts that were discharged in bankruptcy, that resulted from identity theft, or that belonged to a decedent.

Unfortunately, most alleged debtors do not appear in court to defend themselves. They may not receive proper notice, do not understand their legal rights, are in ill health, do not have transportation, cannot skip work, or fear going to court because they do not understand the process. The vast majority of debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection actions end in default judgments entered by the court. Often this occurs without any evidence that the alleged debtor owes the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. or that the amount claimed is valid. Typically, a debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. buyer does not even have access to the information needed to support a claim in litigation, including the contract obligating the debtor to pay, documents showing ownership of the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. , or an itemization of the amounts claimed.

CONSUMER CREDIT PROTECTION: Policy

CONSUMER CREDIT PROTECTION: Policy

Strengthening consumer protections

Consumers should have access to creditTax credits directly reduce the amount of taxes owed. on fair and reasonable terms. Regulators should eliminate unfair, deceptive, or abusive practices in the alternative financial services industry. This includes establishing reasonable interest rate ceilings for all lenders. These rates should correspond to prevailing Treasury bill rates. Alternatively, they should be based on the amount of funds borrowed and the need to maintain the availability of creditTax credits directly reduce the amount of taxes owed. for disadvantaged customers. These rates should not exempt certain industries, such as payday lenders, car title lenders, installment lenders, or refund-anticipation loan providers.

Limits should be placed on refinancing consumer loans. Rollovers should be eliminated or strictly limited. Lenders should be required to disclose that the criminal justice system cannot be used for collections. Lenders should provide consumers with a private right of action. States’ ability to cap interest rates and enforce interest rate caps on online loans should be upheld. States should require lenders to disclose the cost of refinancing compared with the cost of obtaining a separate loan. States should also limit the number of times and the frequency with which loans can be refinanced.

National banks and their subsidiaries or partners should not be allowed to make payday loans.Alternatively, loan rates could be limited. Banks and their subsidiaries and lending partners should have to comply with the laws of the state where the consumer receives the loan’s proceeds.

Policymakers should prohibit the use of the rule of 78s in calculating refunds of interest and insurance charges when a loan is repaid early. This mathematical formula results in a smaller refund to the borrower.

Regulators should provide robust oversight to ensure compliance with federal and state consumer protection laws. These include small-dollar interest rate caps, usury laws, and disclosure laws.

Regulators should curb the predatory practices of pension advance lenders and pension investment promoters. Regulators should ensure that pension advances and pension investments are covered under existing law. If that is not sufficient, new laws should be passed or existing ones strengthened.

All levels of government should protect consumers against unfair debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection practices.

Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. sellers should be required to have documentation that the alleged debtor does, in fact, owe the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. . Without this proof, they should not be allowed to sell the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. or have the right to collect the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. .

The protections of the Fair Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. Collection Practices Act (FDCPA) should be extended to creditors’ in-house collection activities.

States should strengthen the minimal federal protections in the FDCPA, Fair CreditTax credits directly reduce the amount of taxes owed. Billing Act (FCBA), and Fair CreditTax credits directly reduce the amount of taxes owed. Reporting Act (FCRA).

State and local governments should not engage in unfair debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection practices. This includes posting information about alleged debtors online through social media.

Court procedures should be updated to prohibit the entry of judgments in debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collection cases without clear, admissible evidence of the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. . Proof of assignment and an itemization of fees and interest should be required.

Debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. collectors should be required to provide actual notice to alleged debtors:

  • if a debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. is not legally collectible through court process; and
  • that a nominal payment on a debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. will revive the debt The amount of money owed by the government, which is the accumulation of all prior annual deficits. , making it legally collectible in court again.

Policymakers should strengthen lender licensing requirements.

Age and gender discrimination

The Consumer Financial Protection Bureau An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ( CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. ) should fully enforce federal nondiscrimination laws intended to decrease age and gender discrimination. These laws apply to financial institutions’ lending practices, including both whether a loan is offered, and the rate offered. These include:

  • enforcing the Equal CreditTax credits directly reduce the amount of taxes owed. Opportunity Act,
  • investigating existing creditTax credits directly reduce the amount of taxes owed. practices, and
  • ensuring the availability of commercial creditTax credits directly reduce the amount of taxes owed. for older women.

The CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. should address source of income distinctions, such as those between retirement and employment incomes, to prohibit indirect discrimination against older adults.

National banks and their subsidiaries or partners should not be allowed to make payday loans. Alternatively, loan rates could be limited. Banks and their subsidiaries and lending partners should have to comply with the laws of the state where the consumer receives the loan’s proceeds.

Policymakers should prohibit the use of the rule of 78s in calculating refunds of interest and insurance charges when a loan is repaid early. This mathematical formula results in a smaller refund to the borrower.

Platform lending

Platform lenders should protect consumers, including by:

  • evaluating whether borrowers have the ability to repay their loans,
  • creating transparency in underwriting so that investors understand how much risk they are taking on, and
  • being required to comply with the laws in their home state. This is the case even when they have a partner in another state.

Peer-to-peer lenders should retain a portion of the risk in the loans they securitize. Asset-backed security sponsors are required to retain a minimum amount of risk in the loans they make. Similar creditTax credits directly reduce the amount of taxes owed. risk retention standards should apply to peer-to-peer lending platforms.

Credit reporting

Regulators should provide for consumer protections in creditTax credits directly reduce the amount of taxes owed. reporting. This includes protections against erroneous information in creditTax credits directly reduce the amount of taxes owed. reports. Consumers should be provided greater access to creditTax credits directly reduce the amount of taxes owed. files and allowed to correct inaccurate information more easily.

Creditors who furnish customer information to creditTax credits directly reduce the amount of taxes owed. reporting agencies should provide full consumer payment information.

The CFPB An independent federal regulatory agency within the Federal Reserve System that is responsible for ensuring consumer protection in the financial marketplace by administering federal financial consumer protection laws. should vigorously enforce both the FCRA and the FCBA. Practices of creditTax credits directly reduce the amount of taxes owed. -reporting agencies need to be reformed.

CreditTax credits directly reduce the amount of taxes owed. reporting agencies and other companies that provide general creditTax credits directly reduce the amount of taxes owed. scores to consumers should disclose that these scores are strictly informational and are not used to determine creditworthiness for a particular loan.

Ideally, consumers should be able to use higher informational creditTax credits directly reduce the amount of taxes owed. scores to support their case for a lower-cost loan when applying for creditTax credits directly reduce the amount of taxes owed. .