The Center for Public Integrity

The Consumer Financial Protection Bureau (CFPB) today indicated that it is focusing on debt collectors, auto-title lenders, consumer credit bureaus and prepaid card issuers as it prepares to take up its new regulatory powers.

A Debt Deception series of stories published by iWatch News is examining challenges facing the CFPB as it tries to rein in abusive and predatory lending practices that make it difficult for consumers to get out of debt. 

Last month, the iWatch News project investigated how unregulated credit bureaus largely determine whether most Americans can qualify for mortgages, car loans, insurance, credit cards and other financial transactions. Some payday lenders, also now unregulated by the federal government, have affiliated with Indian tribes to claim sovereign immunity from lawsuits and regulation. But auto loans – typically the second-biggest debt held by most Americans – are specifically exempt from any CFPB regulation because of heavy lobbying by car dealers.

The Dodd-Frank financial reform law gave the CFPB authority to oversee how large banks, thrifts and credit unions comply with federal consumer regulations, as well as supervision of residential mortgage brokers and servicers, private education lenders and payday lenders. But for other financial services, the CFPB can regulate only those that are “a larger participant” as defined by the agency.

As finance companies that make loans to plaintiffs grow in power and reach, lawyers should advise their clients on the risks involved with borrowing, the ethics committee of the New York City bar association says in a new opinion.

“This is a kind of stop, look, and investigate directive,” Seth Schwartz, chairman of the bar’s ethics committee, told iWatch News. “Don’t assume that the borrowing is some kind of routine thing – check it out.”

The opinion, which is likely to influence how other legal professional organizations answer ethical questions about betting on lawsuits, also requires lawyers to check with clients before disclosing confidential information to lenders. But it doesn’t stop attorneys from accepting referral fees from lenders, even though Schwartz said in an interview that it would be hard for a lawyer who did so to “maintain objectivity.”

The opinion comes several months after an investigation by iWatch News and the New York Times that found that lawsuit funders charge interest rates that often exceed 100 percent to people who need help making ends meet while they await the resolution of a personal injury lawsuit.

The high cost of borrowing means that many plaintiffs owe three or four times what they initially borrowed to the finance company. In some instances, plaintiffs have owed the lender their entire recovery.

The companies say they must charge high prices because betting on lawsuits is very risky. They say that the money they lend is not a loan, and thus not subject to laws in many states that forbid high-cost lending, because the money doesn’t have to be paid back if the client loses the case.

Over the past six months, iWatch News has published a series of investigative stories in our Debt Deception series about abusive lending practices and the efforts of some lenders to avoid government oversight.

We’ve written about auto lenders that jack up interest rates without customer knowledge.

We’ve reported on payday lenders that are setting up shop on tribal lands to escape federal oversight.

Most recently, we investigated credit unions that are getting into the high-cost payday lending business.

Now, we want to hear your stories. Have you borrowed money only to learn later that the terms were different than you first thought? Or did a lender take advantage of you in some other way?

Your answers will help inform our reporting at an important time. Next month, a new federal agency with broad powers to regulate the consumer finance market will open its doors. The Consumer Financial Protection Bureau promises to be a “cop on the beat” looking out for the best interest of consumers. But there’s much we don’t know about the new agency. What will be its first priorities? Will it challenge banks on practices sanctioned by other regulators? Who will head it up?

Most importantly, we want to know if it will address lending problems reported by consumers like you. Please take a few minutes to fill out our short survey.

More than 500 credit unions now offer payday loans, at a cost to customers that ranges from reasonable to exorbitant.

Where can a consumer find information on financial decision-making? It turns out the federal government has more than 50 financial literacy programs spread across 20 different agencies.

The Government Accountability Office said the multitude of programs and administrators increased the likelihood for fragmentation and duplication. Even if the intent was to let each agency focus its financial literacy programs on a specific population, it opens the door for inefficiency, redundancy and lack of coordination.

For example, the Dodd-Frank Act established a financial education office within the newly created Bureau of Consumer Financial Protection to help consumers get information on financial counseling, long-term savings strategies and credit products. But these duties are very similar to an already existing agency, the Office of Financial Education and Financial Access, at the Department of Treasury.

Treasury also acknowledged that there is no estimate of the total federal spending for financial education programs.

Information about the effectiveness of these programs and strategies is almost non-existent, GAO said. Some federal programs, like the FDIC’s Money Smart, include an evaluation component as part of the program, but many do not.

Despite the challenges, GAO emphasized the need for continued financial education.

“The recent financial crisis revealed that many borrowers likely did not fully understand the risks associated with alternative mortgage products, resulting in substantial increases in defaults and foreclosures that continue to expose borrowers to financial risk and be a drag on the economy today,” the GAO report said.

When Congress blocked a new consumer agency from overseeing loans made by auto dealers last summer, it also gave an old agency – the Federal Trade Commission – enhanced powers to stop predatory auto loans.

At a public meeting today in Detroit, the FTC turned its attention to some of the problems spotlighted in the Center for Public Integrity’s investigation of how auto dealers borrowed financing techniques from the playbook used by mortgage lenders.

“The dealer has a significant amount of influence over the terms and availability of credit” for car buyers, especially those with low credit scores, Chris Kukla of the Center for Responsible Lending told the meeting. The pro-consumer group surveyed 1,000 consumers and found 85 percent of them did not know auto dealers could charge a higher interest rate than what they qualified for, he said.

“The interest rate is supposed to compensate for the risk that each individual risk presents for that lender,” Kukla said. “We saw this in the mortgage markets. When you build compensation into the interest rate, it’s impossible for the consumer to know what part of my rate is for the risk, and what part of my rate is for compensation.”

Auto dealer David Westcott, president of Westcott Buick GMC Suzuki, said about 70 percent of his customers finance car purchases through his dealership, and most are knowledgeable buyers. “Consumers are much more informed, not only about the car but about the entire process, than they were 10 or 15 years ago,” he told the meeting.

Consumer advocates hope that the FTC will use its new powers to crack down on abusive behavior after years of doing little or nothing. Under the sweeping Dodd-Frank financial reform law, the FTC will be able to expedite rulemaking when it comes to auto loans.