CFPB Sues Corinthian Colleges for Harmful and Illegal Predatory Lending Practices

On September 16th the Consumer Financial Protection Bureau announced that it is suing Corinthian Colleges over illegal predatory lending and debt collection practices. The CFPB’s lawsuit provides clear evidence that Corinthian used bogus job placement claims to induce students to enroll and take out costly private loans – loans the company knew most students would be unable to repay.  The lawsuit demands an end to these practices, and forgiveness of more than 130,000 private loans made to students since July 2011, including more than $500 million in outstanding debt.

Given the overwhelming evidence that students enrolled and took on debts based on the corporation’s false and misleading claims, AFR members, including TICAS and NCLC, have welcomed the lawsuit. We have also wondered why federal loans to these students should not also be forgiven – something that would require action by the Department of Education.

With more than 100 campuses across the country, Corinthian is one of the largest for-profit, post-secondary education companies in the U.S.  The CFPB’s investigation found that the school was making false and deceptive representations about career opportunities which led students to enroll and take out private loans with high interest rates. After loans were originated, the school was using illegal tactics to collect on those loans while students were still in school.

The Bureau’s complaint against Corinthian details a number of remarkably abusive practices, including:

  • Corinthian’s business model has been to target vulnerable potential student prospects, and mislead them both about the school and about the loans. A 2011 survey of campus operations showed that over 57% of students had household incomes of $19,000 or less, while 35% had household incomes of $10,000 or less.
  • Under federal law, for-profit colleges cannot receive more than 90% of their revenue from U.S. Department of Education aid. In order to meet this requirement and continue to operate off of DOE revenue, the school deliberately inflated tuition prices to exceed federal loan and grant limits, which created a “funding gap” so that students had to take out private loans. Corinthian then steered students toward private loans to fill gap that the school essentially created. These private loans, known as Genesis loans, added significantly to students’ debt burdens.
  • In marketing these private loans, Corinthian did not tell students that the college had a financial interest in them, when in fact it did. Corinthian then took aggressive action to collect on the loans, including pulling students out of class to publicly shame them for not paying back loans.
  • The loans had extremely high interest rates. In 2011 interest rates for Genesis loans were 14.9% with an origination fee of 6%, while interest rates for federal student loans were 3.4% to 6.8%, with a 1% origination fee.  Corinthian continued to make these high-cost loans even though it knew that most students would have no way to repay them.  To date, more than 60% of students with Genesis loans have defaulted on them within three years.
  • Corinthian lied about its job placement rate, in order to maintain accreditation and eligibility for Title IV aid, and induce students to enroll and take out its private loans. The college cited these falsely reported their job placement rates in marketing materials and in documents submitted to accreditors. At a Decatur, GA campus, school employees created fake employers and reported students as having been placed with them, increasing placements rates substantially. Corinthian also paid employers to temporarily hire graduates, with one campus organizing a company to employ graduates for two days at a health fair, and then counting those students as “placed” in order to increase placement rates.
  • Corinthian misrepresented how well students would do after graduating from its program to entice students into enrolling and incurring debt. The college trained its admissions representatives to pressure students who were also parents by telling them that enrolling in a program was their best or only chance to help their children. It also trained admissions representatives to falsely tell prospective students that classroom seats might not be available in the future, pressuring students to sign up immediately for classes and take on Genesis loans.

The CFPB Has Been Hard at Work Protecting Servicemembers and Veterans

The Dodd-Frank Act of 2010 gave the new Consumer Financial Protection Bureau (CFPB) a special mandate to go after fraudsters who prey on members of the military, taking advantage of many servicemembers’ financial inexperience and frequent relocations, among other points of vulnerability. The agency created an Office of Servicemember Affairs to focus on this piece of work. 

In just three years since the agency has been up and running, the CFPB’s Office of Servicemember Affairs has racked up an impressive record of achievement:

  • In July 2014, as a result of a lawsuit filed by the CFPB and 13 state Attorneys General, service members won $92 million in refunds over the sale of computers, videogame consoles, televisions, and other expensive electronic products by a company, Rome Finance, which had concealed illegally high finance charges by artificially inflating the price of the goods.
  • In June 2013, the Consumer Bureau ordered U.S. Bank to refund $6.5 million to service members who had been cheated by a deceptive auto loan program. The bank had drawn active-duty soldiers to its Military Installment Loans and Educational Services program while purposefully hiding fees and payment schedules.
  • Just last month, the CFPB shut down an exploitative fee scam by USA Discounters, a retail chain located outside many military bases. The company was forced to return $350,000 to servicemembers who had been tricked into paying fees for legal protections they already had and for certain services that the company failed to provide.

Winning settlements with lawbreakers is just part of what the Office of Servicemember Affairs does. For a more comprehensive summary of its work, check out AFR’s new fact sheet, “The CFPB is Standing up for Servicemembers and Veterans.”

Big Finance’s Ploy to Keep Consumers in the Dark

The Consumer Financial Protection Bureau recently announced a plan to significantly expand the information that consumers can choose to make public when they file complaints. The bureau currently takes complaints involving credit cards, student loans, mortgages and checking accounts (among other financial products and services), posting a record of the company name and complaint category in each case. If the new plan goes forward, its public database will begin to include individual stories as well, minus identifying information.

The financial industry has let us know just how much it dislikes this proposal: enough to misrepresent it through and through.

The bureau has plainly said that it will continue forwarding every complaint to the appropriate company and giving the company 15 days to respond before a complaint is published. In addition, the bureau is now proposing to give both parties a chance to tell their stories, with the company’s account posted directly alongside the consumer’s.

You would never know this, however, from the massive media campaign launched on Monday by the Financial Services Roundtable, the trade association of the nation’s biggest banks, insurance, asset management, finance and credit card companies. In a blitz of public statements, blog posts, social media messages and attack ads on the walls of the Washington Metro system, the Roundtable paints a menacing picture of “bureaucrats” posting baseless complaints and giving companies “little opportunity to respond,” so that, as Roundtable CEO Tim Pawlenty wrongly put it, people see “only one side of the story.” The Roundtable has created an entire mini-website based on this falsehood.

What’s going on here? Were Pawlenty & Co. in such a rush to denounce the proposal that they forgot to read it? More likely, they’re playing fast and loose with the truth because they would rather not come right out and say that what they really object to is the whole idea of a public database where people can learn about specific consumer grievances and how they’ve been addressed by the companies the Roundtable represents.

The Consumer Bureau (the target of this and many previous industry attacks) is the agency originally proposed by Elizabeth Warren in 2007, and formally established by the Dodd-Frank financial reform law of 2010. Its mission is to bring basic standards of safety and transparency to a market that had become notorious for its abusive practices – practices that imposed huge hidden costs on consumers, besides contributing to the financial crisis of 2008 and the economic meltdown that followed.

The complaint system provides the bureau with valuable real-world insights to apply in its rule-making, supervision and enforcement. By making some of the data public, the bureau hopes to empower consumers and, at the same time, to inspire companies to seriously investigate and respond to complaints, since it would be impractical for the bureau to investigate them all. (There were 113,000 filed last year.)

That system is already making a difference. The bureau’s Office of Consumer Response has received more than 400,000 complaints since it got up and running in 2012. More than 30,000 consumers have gotten monetary relief. Tens of thousands more cases have been resolved by other forms of remedial action.

But the complaint database has the potential to be far more effective if, as consumer groups have long urged, it includes a record of the specific problems that consumers have encountered, and the specific ways in which companies have dealt with those problems. This additional information will make it easier for consumers to spread the word about unfair practices, to compare competing companies and products, and to avoid dangers and pitfalls. It will help spur a virtuous cycle in which more people decide to use the system, and their contributions make it more useful still.

Financial companies also stand to benefit from the ability to compare their experiences with those of competitors, spot opportunities for improvement, and correct problems before they get out of control, the way bad mortgage lending did in the runup to the financial crisis.

For now, though, the industry seems to be stuck on a course of no-holds-barred opposition, and willing to traffic in multiple untruths in service of the cause. The Roundtable would have us believe, for example, that the “vast majority” of complaints filed with the bureau are totally unfounded and thus unworthy of publication. Its evidence? The fact that 70 percent of last year’s complaints “were closed with a simple explanation or clarification.”

Several large factual problems lurk inside this assertion. First of all, a “simple explanation or clarification” can be just what a consumer wants and needs; take the case of someone struggling with a mortgage and trying to find out what can be done to avoid foreclosure.

The use of the word “closed” is misleading in its own right. As the Consumer Bureau admits, its ability to follow up on individual complaints is limited. Cases can be closed without any investigation or adjudication by the agency; and they can be closed with a simple explanation or clarification essentially because that’s what the company saw fit to do. By no means does “closed” equate with resolved, as the industry implies.

Legitimate issues are often raised in complaints even if they involve no clear violation of law. The bureau has already drawn on the complaint database to identify worrisome patterns of conduct in credit card, debt collection, mortgage servicing and other areas, sometimes leading to proposals for new rules or procedures to make the financial marketplace safer.

In its ads, the Roundtable suggests that there is something extraordinary or unprecedented about having a government agency publish consumer complaints. That, too, is inaccurate; the Consumer Bureau is proposing a system that resembles, among other existing databases, one on product safety maintained by the Consumer Product Safety Commission.

The financial industry will probably not stir a great wave of public sympathy with its attacks on this proposal. Then again, public sympathy is not what it’s after. The sympathy it seeks is from lawmakers and regulators, and we can be sure it has other techniques – both cruder and more artful – for reaching them. We’re talking about an industry that (as documented in a new report from Americans for Financial Reform) spends about $1.5 million a day on campaign contributions and lobbying, leaving aside the cost of such ancillary activities as the Roundtable’s ad campaign.

So we can depend on the financial lobby to go all-out in its effort to derail the Consumer Bureau’s plan. That means that others must work equally hard to keep this worthy proposal on track.

- Jim Lardner

Originally published on USNews.com

Fresh Evidence of the Political Power of Money

The proverb says that “money talks,” and it is widely assumed that financial companies make campaign contributions and spend money on lobbying in the expectation of exerting influence. But are their expectations fulfilled?

Building on previous studies of the corrupting power of money, a new research paper by Maria M. Correia, an assistant professor of accounting at the London Business School, finds a strong correlation between a financial company’s political expenditures and the frequency of accounting fraud enforcement actions taken against that company by the Securities and Exchange Commission (SEC).

Correia looked at some 4,000 cases in which companies had to correct their financial statements (an event that often triggers an SEC investigation) between 1996 and 2006. Her study showed that politically connected firms, as reflected by their PAC contributions and lobbying expenditures, were significantly less likely to be singled out for enforcement actions, and, when prosecuted, faced lower penalties.

Companies that made a point of contributing to elected officials with potential influence over the SEC (such as the members or, better still, the chairpersons of congressional oversight committees) were even less likely to face an enforcement action or penalty. An extra $1 million spent in PAC contributions over the previous five years correlated with a sharp reduction in the probability of an enforcement action, from 8.58% to 3.43%.

In one of her most remarkable conclusions, Correa found that a $100,000 increase in PAC contributions over a five-year period was associated with an 11% decrease in monetary penalties imposed by the SEC. The average penalty levied by the SEC during the time studied by Correia was slightly more than $20 million. By spending an additional $100,000 in contributions, then, a company could save a few million dollars – a remarkable return on investment.

Judging by their actions, financial firms appear to think political spending is worthwhile. In all, during the current election cycle, Wall Street banks and financial interests have spent more than $800 million on lobbying and campaign contributions, according to a recent AFR analysis. That works out to about $1.5 million a day.

From Correia’s research, we are increasingly confident that the industry’s money does indeed buy it influence, and that its influence can improve the corporate bottom line. We also know, more surely than ever, that the rest of us have a large stake in continuing to push for limits on the role of money in politics, and in keeping close watch over the triangle of relationships involving Congress, the regulators, and the regulated.

 – Alec Lee

See Big Connection Between Campaign Contributions and Lack of SEC Prosecutions

Paying Off for Consumers – the CFPB Is Getting the Job Done

Getting credit card companies to cough up more than $1.8 billion in refunds to consumers they had cheated. Directing mortgage lenders to limit charges and stop making loans that borrowers can’t afford. Cracking down on “last dollar” scams that collect up-front fees from financially desperate people for help that is never actually delivered. Establishing a consumer complaint database to track financial market trends and help consumers get individual problems addressed

All that and more is the doing, so far, of the Consumer Financial Protection Bureau, which was created just four years ago by the Dodd-Frank financial reform law, and could not begin to wield its authority until a year after that.

The idea for such an agency was put forward in 2007 by then-professor (now Senator) Elizabeth Warren. At the time, as she pointed out, consumer protection in the financial marketplace was a responsibility scattered across multiple agencies, and treated by none as a priority. Key regulators lost sight not only of consumer safety but of systemic safety too, tolerating and even encouraging many of the reckless and deceptive practices that fueled the financial and economic meltdown of 2008.

The big banks and financial companies opposed the bureau as a concept, and they don’t much care for the reality, either. From the start, the bureau has been the target of ferocious attacks from industry lobbyists and their too many friends on Capitol Hill, who have concocted a series of bogus controversies in an effort to depict the agency as out of control.

What it all boils down to is that, unlike some of the watchdogs the financial industry has faced in the past, the bureau has been energetically doing the job it was meant to do: bringing basic standards of safety and transparency to the markets for credit cards, mortgages, student loans, auto loans, checking accounts, debt collection and other common financial products and services.

The bureau has the authority to write rules, supervise a broad range of financial companies, carry out enforcement actions, educate consumers and analyze relevant patterns of industry behavior. In its work to date, it has made fruitful use of all these powers.

In the mortgage market, for example, the bureau has issued rules that discourage high fees and deceptively structured loans, in addition to requiring verification of every borrower’s ability to repay before a loan can be issued. Its new rules, which took effect in January, hold the potential to help save borrowers and the economy from another wave of dangerous and unsustainable lending.

The bureau has also taken a number of noteworthy enforcement actions, producing refunds and fines of more than $4.8 billion so far. These actions, often coming on the heels of multi-agency investigations, have targeted illegal kickbacks for mortgage referrals, unfair billing practices and deceptive telemarketing and sales tactics, among other offenses. More than 15 million consumers have received some restitution, while countless others have benefited from settlement provisions requiring companies to change their practices and from the deterrent effect of serious enforcement.

Another important bureau accomplishment has been to create a complaint system and database where consumers can go with problems involving credit cardsstudent loansbank accounts and servicesdebt collection and more. The agency’s Office of Consumer Response has already received more than 400,000 consumer complaints. Besides helping consumers get monetary relief (such as refunded fees) and non-monetary relief (such as errors fixed on credit reports or an end to harassing phone calls from debt collectors), the complaint system provides the bureau with a reservoir of precious information. Complaints can help highlight repeat problems or law-breaking, and identify important gaps in consumer understanding, letting the agency know where it needs to focus its educational, supervisory, enforcement or rulemaking efforts to improve specific markets, products or practices. Members of the public can use the complaint data both to evaluate different companies and to find out if their personal experiences reflect a wider pattern.

By law, the Consumer Financial Protection Bureau has a special duty to protect seniors, students and military personnel. In its efforts to fulfill that mandate, the bureau has released important reports on student lending and set up an online tool called “Paying for College,” which makes it easier for people to compare financial aid options and figure out a successful repayment strategy. Its Office of Older Americans has gone after scammers who prey on senior citizens. Its Office of Servicemember Affairs has worked with other agencies to add extra protections for military personnel in rules and enforcement actions involving mortgages, payday loans, student loans and debt collection.

In its short life, the bureau has already done much to vindicate the trust of the hundreds of consumer, civil rights, labor, faith and other groups that banded together to insist that such an agency be part of the Dodd-Frank package. But it’s just a start. Plenty of important work lies ahead on payday loans, student loans, prepaid cards and debt collection, among other trouble zones of the financial marketplace. And as the agency takes on industry self-interest in these areas, it will continue to face intense opposition from those in the financial world and from legislators under their sway.

new poll commissioned by Americans for Financial Reform and the Center for Responsible Lending shows overwhelming, bipartisan support for the concept of an agency focused on protecting financial consumers and cracking down on deceptive and abusive practices.

Now it’s important to raise public awareness of this still-young agency, so more people can benefit from its complaint system, educational tools and other resources – and so the voices of the many who value the bureau’s work can continue to be louder than the voices of the few who want it to go away.

- Rebecca Thiess

Originally published on USNews.com

CFPB Brings Action Against ACE Cash Express for Bullying Borrowers Into Borrowing Again

The CFPB has announced an action against ACE Cash Express for pushing borrowers into cycles of debt, and using harassment and false threats of criminal prosecution to do so. ACE is one of the largest payday lenders in the U.S., marketing loans and related services both online and through 1,500 retail storefronts in 36 states and the District of Columbia. Specifically, the CFPB found that ACE was guilty of:

  • Threatening to sue or prosecute consumers who did not make payments, using legal jargon even though the company did not actually sue for non-payment of debts.
  • Threatening to charge extra fees and report consumers to credit reporting agencies, even though as a matter of corporate policy ACE debt collectors could not do either of those things.
  • Harassing consumers with collection calls in an abusive manner, and calling consumers’ employers and relatives to share details about their debts.

The harassing coercion tactics used by ACE resulted in cash-strapped consumers being bullied into cycles of debt.  A striking graphic uncovered by the CFPB in the investigation, and made public, makes clear that this was deliberate company policy.  The graphic, which was a part of ACE’s training manual, puts application for a new short term loan as the step after collection efforts on the previous loan.

ACE Debt Cycle

With its outrageous conduct (and its training manual), ACE Cash Express provides a fresh reminder of why the CFPB needs to write strong rules to end payday lending abuses.

-  Rebecca Thiess

See CFPB announcement and consent order.

The CFPB at Three: A Child Prodigy

(By Ed Mierzwinski, USPIRG) The Consumer Financial Protection Bureau (CFPB) turned just three years old Monday, July 21st, but when you look at its massive and compelling body of work, you must wonder: Are watchdog years like plain old dog years? Is the CFPB now a full-sized, 21-year-old adult?

The answer is no, not yet. The CFPB is still growing and developing and adding programs and projects. The CFPB is, however, at three years old, certainly a child prodigy.

The CFPB was established as an integral part of the Wall Street Reform and Consumer Protection Act enacted in 2010 to fix the mess created when banks ran amok, resulting in the Great Recession that began with the September 2008 economic collapse.

It is the nation’s first financial agency with just one job, protecting consumers. It’s also the first federal agency with authority over the full financial marketplace, so consumers are protected whether they shop at a bank, non-bank mortgage company or payday lender, or are harmed by credit bureau mistakes or debt collector abuses. It even has special offices to protect older Americans, servicemembers (and veterans) and students.

In poll after poll (new Lake poll for PIRG-backed Americans for Financial Reform), the American people overwhelmingly support the CFPB and ongoing Wall Street oversight. Nevertheless, the CFPB remains subject to withering attacks from the financial industry whose tricks and traps led our economy into collapse.

After you take a look at some of its successes and some of its work in progress, we think you’ll agree: the idea of the CFPB needs no defense, only more defenders.

The CFPB is protecting credit card customers: It has ordered five of the nation’s six biggest credit card companies — Capital One, Discover, American Express, Bank of America and JP Morgan Chase — to return a total of $1.5 billion dollars directly to the consumers they ripped off with fraudulently-marketed, junky add-on products. And in June, it ordered GE Capital (now Synchrony) to refund more than $225 million for illegal and discriminatory credit card practices (CFPB Enforcement blog page).

The CFPB is helping with complaints: The CFPB has established a Public Consumer Complaint Databasethat is already the nation’s largest collection of financial complaints, with more than 400,000 complaints about banks, credit bureaus, credit cards, debt collectors, private student lenders and mortgage companies received so far. Just last week, the CFPB proposed(and seeks comments for 30 days) an important enhancement to the database: By posting narrative contextual details of consumer stories, it will be easier for bank examiners, researchers, other consumers and even financial firms themselves to determine whether bad practices are isolated or common.

The CFPB is protecting students from unfair practices: Earlier this year, the CFPB filed a lawsuit against the for-profit college ITT Educational Services, arguing that they engaged in predatory student lending practices that push students into high-cost private student loans that inevitably will default. The CFPB has also investigated the growing use of high-fee debit cards to disburse student loans, and issued “Know Before You Owe” tools for student consumers.

The CFPB is helping stop fraud against servicemembers, veterans and their families:The CFPB’s Office of Servicemember Affairs targets financial frauds and scams aimed at military families and veterans. Sadly, it’s a big problem. In November, the CFPB obtained $14 million in servicemember refunds from Cash America, a payday lender that violated the Military Lending Act.

The CFPB is reining in debt collector abuses: As a 21st century, data-driven agency, the CFPB is keenly aware that debt collection complaints have rapidly eclipsed all others in its complaint database. Consequently it is looking very closely at debt collector practices. This month, the CFPB fined payday lender Ace Cash Express $5 million and ordered it to return an additional $5 million to its customers for illegal debt collection tactics. It also filed a lawsuit against a “debt collection lawsuit mill” for using “illegal tactics to intimidate consumers into paying debts they may not owe.”

The CFPB is forcing credit bureaus to do a better job: The often-lethargic credit bureaus are responding to the recommendations in the CFPB’s comprehensive report on the industry. In particular, the so-called Big Three bureaus — Experian, Equifax and Trans Union — have agreed to share full consumer complaint files with creditors during reinvestigations, instead of merely converting the details into a 2-digit code meaning, for example, “Consumer says not my account.” Without the details, how could the creditor determine whether the consumer had a valid dispute?

The CFPB is listening to consumers: In addition to taking consumer complaints, the CFPB is urging consumers to simply tell their financial stories, good or bad (Watch videos of stories or tell your own story here). The CFPB is helping consumers with its “Ask CFPB” tool. It’s been on the road all over the country, to hear from consumers and small bankers in the communities where they live and work, from El Paso and Long Beach to Des Moines, from Boston to Itta Bena, Mississippi.

Over the next six months, the CFPB is expected to take major steps in three important areas where powerful industry forces may challenge it. But already, the House of Representatives has passed appropriations amendments designed to eliminate the CFPB’s independent funding. No other bank regulator is subject to the politicized appropriations process, for good reason. Earlier this year, theHouse passed a broader package designed to cripple the bureau.

The same lobbies that supported rolling back the CFPB’s independence are expected to oppose its pending efforts to protect consumers.

Soon, the CFPB is expected to propose rules regulating the exploding prepaid card market. Credit cards are heavily regulated, with debit cards, payroll cards and gift cards somewhat regulated, but the rapidly-growing general purpose prepaid card market is generally not regulated at all. The CFPB is also expected to propose rules governing high-cost, short-term payday loans that some, but not all, states have regulated. Finally, the CFPB was tasked by Congress to investigate whether small-print binding arbitration clauses in “take-it-or-leave-it” financial contracts encourage companies to ignore the law, because their customers cannot take them to court. If it so finds, the CFPB is authorized to ban or regulate the clauses.

Each of these projects threatens one or more powerful special interests that have long challenged the CFPB’s activities, and they are expected to escalate their attacks if the CFPB’s reforms go forward in a pro-consumer way. Consumers who depend on the CFPB to make markets work fairly, for both consumers and good actors, will need to step up and support the CFPB. After all, the idea of the CFPB needs no defense, only more defenders.

 

Originally published on US PIRG.

SunTrust Systematically Ignored Loan Modification Appeals, TARP Watchdog Finds

“SunTrust so bungled its administration of the program that many homeowners would have been exponentially better off having never applied through the bank in the first place.”

So said the Special Inspector General for TARP (SIGTARP), Christy Romero, regarding SunTrust Mortgage Inc.’s handling of dollars received through the Troubled Asset Relief Program (TARP) to go toward helping struggling homeowners.

Earlier this month, SIGTARP announced—along with the Department of Justice, the Federal Housing Finance Agency’s IG, the U.S. Attorney’s Office for the Western District of Virginia, and the U.S. Postal Inspection Service—a prosecution agreement resolving a criminal investigation into SunTrust’s administration of the Home Affordable Modification Program (HAMP). HAMP was created in 2008 as part of the Troubled Asset Relief Program (TARP), in order to help eligible homeowners with loan modifications on their home mortgage debt.

In documents that were filed along with this case, it was revealed that SunTrust, which received $4.85 billion in federal taxpayer funds through TARP, both misled mortgage servicing customers who sought mortgage relief through HAMP and failed to process HAMP applications. The company was so negligent that they put piles of unopened homeowners’ applications in a room, the floor of which actually buckled under the weight of unopened document packages.  Their practices meant that many homeowners were improperly foreclosed upon, as documents and paperwork were lost and applications were completely ignored.

The company has agreed to pay $320 million to resolve the criminal investigation into its HAMP program. Despite the egregious nature of what they did, it is worth noting that this is less than one half of one percent of its servicing portfolio (as of December 2013).Of the money SunTrust has agreed to pay:

  • $179 million will go toward restitution for borrowers to compensate for damage done by the company’s mismanagement. If more than $179 million is found to be needed, the bank has agreed to guarantee an additional $95 million for restitution on top of that.
  • $16 million will go toward forfeiture, to be available for law enforcement agencies working on waste, fraud, and abuse matters related to TARP.
  • $20 million will go to establish a fund that will be distributed to organizations that provide counseling and other services to distressed homeowners.

SunTrust is also required to implement corrective measures to prevent problems like the ones that led to this investigation, including increasing their loss mitigation staff, monitoring their mortgage modification process, and providing semi-annual reports on their compliance with this agreement.

- – Rebecca Thiess

 

The Outrageous Campaign Against “Operation Choke Point”

The job of government, some people say, is to protect life and property and maintain the rule of law, period. But even that much government may be too much for the opponents of a Justice Department initiative known as Operation Choke Point.

The idea behind Operation Choke Point is simple: stop banks and third-party payment processors from abetting fraud. Financial institutions have long been required to watch out for (and report) evidence of criminal activity. Yet they have long been tempted to look the other way, since criminals can also be highly profitable customers. (The $8.9 billion fine against BNP Paribas this week for transferring money to Sudan and other blacklisted countries is just the latest case in point.)

In recent years, scammers of many sorts have developed ways of systematically extracting money from people’s bank accounts. In doing so, they have benefited from the rise of online commerce and automatic debiting, and also, in too many cases, from the complicity of banks, which have sometimes lent a hand even when the warning signs were staring them in the face.

In April, federal prosecutors announced a settlement with Four Oaks Bank & Trust of North Carolina. Four Oaks and a Texas-based payments company had processed roughly $2.4 billion in transactions benefiting illegal payday lenders, money laundering of Internet gambling operations and, in one case, a thinly disguised online Ponzi scheme.

Four Oaks employees suspected something was amiss. One tipoff: charge reversal rates of 30 percent to 70 percent, compared to what regulators say is a normal rate of 1.5 percent. Despite complaints from attorneys general and other warning signals, however, the bank did nothing except go on taking its cut. “I’m not sure ‘don’t ask, don’t tell’ is going to be a reasonable defense,” one bank manager commented in a cautionary email that colleagues chose to ignore.

Mass-market consumer fraud, in all its forms, is a huge law enforcement problem, costing people tens of billions of dollars a year, by the FBI’s estimate. Older Americans, a prime target, are bilked out of $2.9 billion a year, according to a study by MetLife. A few weeks ago, a payment processor agreed to surrender its claim to $1.1 million in earnings from what the Federal Trade Commission said was the company’s knowing alliance with a bogus credit-card interest rate reduction service that had defrauded tens of thousands of consumers out of more than $10 million in all.

So who would object to a crackdown on this sort of scam? Who, that is, other than the scammers who are being cracked down on?

Well, the objectors turn out to be surprisingly numerous, and surprisingly righteous. Some of them, moreover, hold seats in Congress. Rep. Blaine Luetkemeyer, R-Mo., for one, just last week introducedlegislation to, in his words, “stop these backdoor efforts by government bureaucrats to blackmail and threaten businesses simply because they morally object to entire sectors of our economy.”

That is the theme of the anti-Choke Point crusaders, whose congressional spokespeople also include Sen. David Vitter, R-La., and Rep. Darrell Issa, R-Calif., chairman of the House Oversight and Government Reform Committee. Issa’s committee, in a recent report, claimed that Operation Choke Point had “forced banks to terminate relationships with a wide variety of entirely lawful and legitimate merchants.”

The committee could not, however, point to any real-life example of a bank being told to behave this way. The best evidence it could muster was a 2011 guidance memo in which the Federal Deposit Insurance Corporation (making no reference to Operation Choke Point) identified 30 lines of business, including get-rich products, drug paraphernalia and escort services, with a high potential for fraud. The point of the memo, though, was simply to highlight areas where banks and payment companies should be looking for signs of trouble – for, say, an unusually “high volume of consumer complaints” or “a large number of returns or charge backs.”

How, then, to explain the protest and indignation? One obvious factor is the political power of the financial industry. Many bankers work hard to avoid the legal and reputational problems that come from doing business with lawbreakers. Others, though, seem to angrily reject the notion that they have a responsibility to exercise due diligence; and, as often happens in Washington, the banking establishment has decided to stick up for its worst elements rather than its best. “When you become a banker, no one issues you a badge, nor are you fitted for a judicial robe,” American Bankers Association CEO Frank Keating argued in a recent Wall Street Journal op ed, summing up the “we can’t be bothered” attitude of some of his constituents and allies.

In addition to the banks and payment processers and their respective trade associations, the forces of opposition appear to include online gamblers and payday lenders. The payday lending industry has come under mounting criticism for a business model that depends on getting borrowers stuck in triple-digit-interest debt for months on end. Twenty-two states have banned or sharply limited such loans. Some lenders have responded by moving online or engaging in other subterfuges, and a crackdown on the processing of illegal payments clearly poses a threat to their ability to make loans that violate the law. (And even licensed payday lenders and money transmitters have sometimes been unable to get bank accounts; but that’s an old industry complaint – one that long predates the 2013 launch of Operation Choke Point.)

Undoubtedly, there is money to be made – campaign money – by legislators who decide to join the attack. And if some of them seem to have let their rhetoric get out of control, perhaps that can be attributed to a combination of reflexive government-bashing and the need to find moral cover for a position that would otherwise sound a lot like shilling for an especially smarmy collection of special interests.

Fortunately, this strange cause has not gained traction in the Senate, and the Justice Department appears to be standing behind the program. Two banks, Zions and PNC, have disclosed that they are currently under investigation for facilitating fraud. The Department has announced similar investigations into more than 10 additional (but as yet unnamed) banks and payment processing companies. Last week, Attorney General Eric Holder issued a statement vowing to “enforce the law against both the fraudsters who prey on consumers and the financial institutions who choose to allow these crimes to occur.”

As the Operation continues, and word gets out, most people will probably respond well to the phenomenon of Uncle Sam challenging (rather than enabling) the unlawful conduct of banks. Perhaps, in time, we will hear fewer lawmakers railing against what ought to be viewed as a normal and uncontroversial exercise of law enforcement.

 – Jim Lardner
Originally published on USNews.com

Cleaning Up the Credit Card Industry

This week marks the five-year anniversary of the passage of the CARD Act, a piece of legislation that cleaned up some of the worst tricks and traps harming consumers in the credit card marketplace. The purpose of the CARD Act was two-fold: to prohibit certain unfair and abusive practices and to increase the transparency of rates and fees associated with credit cards. Congress passed the CARD Act — also often referred to as the Credit Cardholders Bill of Rights — in May 2009 with broad bipartisan support in both chambers of Congress, but after a hard fight.

Credit card lending had always been the most profitable form of consumer lending, according to annual reports by the Federal Reserve Board. But in the 10 years leading to the CARD Act, the largest card companies ratcheted the thumbscrews down on consumers, aided by lax regulators and by a series of court decisions preempting stronger state consumer laws.

The card companies did a number of things. First, they increased penalties on late pays. Then they tricked more consumers into paying late by using unfair practices, such as changing due dates randomly, shortening the period between when a bill was mailed and due, and even charging late payments when a bill arrived on a Monday, but its due date was the impossible Sunday before it. They then said that higher late fee penalties weren’t enough; they imposed penalty interest rates as high as 36 percent APR on bills received as little as an hour late. This wasn’t enough. They invented “universal default”: imposing penalty rates on consumers who’d never been late, but whose credit score had dropped.

Basically, the widespread use of penalty interest rates meant that consumers often experienced a gap between the stated interest rate of a credit card at the outset and the actual cost of the card over time. Much of this was due to these “penalty” interest rates — those triggered by late payments or by going over one’s credit limit. And when penalty rates were applied, they could be applied to both new purchases and existing balances, adding significantly to the cost, and meaning that the rate increased retroactively on purchases already made.

In short, pricing was opaque and the fine print that came with cards was difficult to decipher — often leading to costs much higher than those card users anticipated.

Thanks to the CARD Act, tricks like these have significantly declined. Now, interest rates provided at the outset of receiving a credit card more accurately reflect the actual cost of the credit card. The legislation restricted the amount of upfront fees card issuers can charge, limited “back-end” penalty fees when late payments are made or credit limits exceeded, and perhaps most importantly, narrowed circumstances when issuers could raise interest rates, especially on previous balances. The act also prohibited issuers from extending credit to consumers without determining an ability to repay, determined that late fees and other penalties must be “reasonable and proportional” to the violation of the account terms, and imposed new rules to protect young consumers.

Unsurprisingly, and in spite of industry arguments during the fight over the legislation that it would only shift or increase costs for consumers, changes to the credit card marketplace have saved card users money. A lot of money. The Consumer Financial Protection Bureau found in its report on the CARD Act, which reviewed impacts of the legislation, that provisions limiting penalty fees have saved consumers $4 billion annually. Additionally, the report found that the overall cost of credit has fallen by roughly 2 percentage points. An academic study on the CARD Act found that the legislation’s limits on fees reduced borrowing costs to consumers overall by 1.7 percent a year, and had a still more dramatic impact for borrowers with lower credit scores; people with credit scores below 660 saw their borrowing costs go down by 5.5 percent. All in all, this study found an even larger impact than the CFPB report, calculating that fee reductions as a result of the CARD Act have saved consumers a whopping $12.6 billion per year.

Five years after passage of the CARD Act, the CFPB is continuing to take needed action to protect consumers from abuses that continue in this market. First, the agency is doing the important and necessary job of enforcing the CARD Act. In October 2012, the bureau took action against three American Express subsidiaries for multiple violations, including charging late fees that were unlawful under the CARD Act. Second, the agency is using its authority to stop companies from using deceptive tactics when dealing with consumers, in particular from selling abusive add-on products, such as for payment protection, which frequently provide very little, if any, actual benefit.

In April 2014 the agency reached a settlement with Bank of America around its findings that the bank misled customers regarding what they would receive if they purchased payment protection products, as well as charging them for those products without their consent. The CFPB investigation found that some consumers were actually being enrolled in payment protection plans when they were being told they were simply consenting to receive more information about the product. These payment protection products generated hundreds of millions in revenue for the bank, with many customers paying $12.99 per month for services they either thought were more robust than they actually were, or did not know they had signed up for at all. The bureau ordered the bank to pay $727 million to nearly 2 million consumers who had been subject to illegal practices.

In total, the CFPB’s actions — since it fully opened its doors only three years ago — to curb illegal and deceptive credit card practices have resulted in about $1.5 billion in restitution for roughly 10 million consumers, along with around $100 million in civil penalties paid to the CFPB. In addition, the bureau has changed practices in the marketplace. Whereas most big banks used to sell add on products, a number of them have changed their practices, thanks to the CFPB’s enforcement actions. Discover and Capitol One, for instance, were ordered by the bureau to stop their deceptive marketing practices for these products.

The CFPB is doing good work in the wake of the passage of the CARD Act to increase fairness and transparency in the credit card marketplace, but the job is not finished. Even with the CARD Act in place, it remains difficult for consumers to understand the costs of, and risks associated with, specific credit card choices, and to compare cards to each other. As Sen. Elizabeth Warren, D-Mass., has said, “our next challenges will be about further clarifying price and risk and making it easier for consumers to make direct product comparisons.” Along with further improvements in the credit card market, there is important work to be done to make sure prepaid and debit cards develop as safe and convenient products, and are not loaded up with hidden fees or gotcha credit features.

– Rebecca Thiess

Originally published on USNews.com.