CFPB Urged to Close Loopholes in Payday, Car Title Rule

Representatives of leading consumer, community, religious and civil rights organizations, including Consumer Federation of America, issued a joint statement last week, urging the Consumer Financial Protection Bureau (CFPB) to close some “concerning loopholes” in the payday and car title loan rule proposals that could allow lenders to continue making harmful loans.

The groups praised the Bureau for releasing a strong proposed payday and car title lending rule based on the “common sense principle” that lenders should be required to determine whether or not a consumer has the ability to repay a loan without hardship or re-borrowing—a requirement that will stop the debt trap of unaffordable loans.  “While we are encouraged by the direction the CFPB has taken in its proposed rule, we urge additional changes to protect consumers,” the groups wrote.

Currently, the CFPB is proposing to exclude up to six balloon-payment loans per year from the ability to repay standard.  Other proposed exemptions focus on loans with low interest rates and low default rates – appropriate standards – but also permit some forms of installment loans with high origination fees.  The groups called for these exemptions to be removed from the final rule. They also highlighted as concerns the discretion the CFPB is giving lenders to determine the income necessary to meet basic expenses and the possibility that CFPB will allow lenders to rely on their ability to seize payments from borrowers’ bank accounts, minimizing default rates, as evidence of borrowers’ ability to repay going forward.

“The Bureau’s proposed rule represents a critical first step to protecting the millions of consumers that struggle with high-cost debt trap credit products,” the groups wrote.  “A generally applicable ability to repay requirement is the cornerstone of this effort.  The CFPB has rightly rejected a purely income-based exemption from the ability to repay rule. We now urge the Bureau to consider the impact of the remaining exemptions and take the necessary steps to close those loopholes and protect consumers.”

Auto Insurers Raise Rates on Lower Income Good Drivers

Auto insurance premiums often rise dramatically for good drivers as a result of insurance companies’ consideration of personal characteristics related to customers’ economic status, according to new research released this week by CFA.  CFA analyzed minimum limits liability premiums quoted to men and women in 15 cities by five of the nation’s largest auto insurers and found that premiums jumped by an average of 59 percent, or $681 annually, when characteristics of the drivers were changed to reflect a lower economic status.

“Insurance companies should judge you on how you drive, not who you are,” said CFA Director of Insurance and former Texas Insurance Commissioner J. Robert Hunter in a press release. “Insurance companies are penalizing good drivers by hundreds and sometimes thousands of dollars each year based on economic and social status, and the end result is that the poor pay more, much more.”

CFA tested the impact of the following five factors commonly used by insurers to price auto insurance: level of education; occupation; homeownership status; ownership of a car during prior six months; and marital status. The report found that drivers with the exact same driving record and living at the same address pay higher premiums 92 percent of the time if they have a high school degree and a blue collar or hourly job, rent their home, have not owned a car (and had no auto insurance) for the past six months, and are unmarried. Each of these are associated with lower economic status.

According to a recent national poll conducted by ORC International for CFA, most Americans believe that auto insurance premiums should be tied to policyholders’ moving violations (84 percent) and traffic accidents caused (83 percent). In contrast, few Americans believe it is fair for insurance companies to use personal economic factors, such as level of education (29 percent), marital status (32 percent), and occupation (35 percent), in setting insurance premiums.  “The American people don’t like the idea of insurance companies using personal and economic factors to set premiums, even though most people don’t realize how much of an impact these non-driving characteristics have on the price they pay for coverage,” said the study’s co-author Doug Heller.

Based on the report’s findings, CFA called on states to enact legislation that emphasizes drivers’ accident and ticket records and prohibits the use of non-driving related characteristics such as those discussed in the report when setting auto insurance premiums. “Drivers are required to buy auto insurance in all states but New Hampshire regardless of their economic status, which means that it is the duty of lawmakers and regulators to protect consumers from unfair pricing practices of the insurance industry,” said Hunter.  “They have, with only a couple of exceptions, completely failed to do their duty,” he said.

Consumers Know Credit Score Basics, But Information Gaps Remain

A large majority of consumers (over 80 percent) know the basic facts about credit scores, according to the sixth annual credit score survey released earlier this month by CFA and VantageScore Solutions.

The survey found, for example, that consumers know that credit scores are used by mortgage lenders (88 percent) and credit card issuers (87 percent) and that key factors used to calculate credit scores include missed payments (91 percent), personal bankruptcy (86 percent), and high credit card balances (85 percent).

Yet the survey also revealed that many consumers do not understand credit score details. The survey found, for example, that consumers greatly underestimate the cost of low credit scores. Only 22 percent know that a low score, compared to a high score, typically increases the cost of a $20,000, 60-month auto loan by more than $5,000.

“The good news is that consumers understand the basics of credit scores, such as the importance of making loan payments on time,” noted CFA’s Executive Director Stephen Brobeck in a press statement.  “The bad news is that this knowledge is limited and, each year, can cost them hundreds of dollars in fees on services and additional interest on consumer loans,” he added.

To explain both credit score basics and details, CFA and VantageScore maintain an interactive credit score quiz website (www.CreditScoreQuiz.org) that allows consumers to test their credit score knowledge by answering 12 questions.  The website provides succinct answers to these questions and additional information sources about credit scores.  It is also available in a Spanish translation.

CFA Urges FDA to Ban the Term “Natural” on Food Labels

Responding to citizen petitions urging the agency to either define or prohibit use of the term “natural” on food labels, the Food and Drug Administration (FDA) issued a request for comment on use of the term. CFA joined with a coalition of consumer and public health groups in writing to urge the FDA to reduce the consumer confusion caused by “natural” claims on food labels either by banning the claims altogether or by defining the term to incorporate and exceed the National Organic Program (NOP) standards.

According to a Consumer Reports survey, 63 percent of consumers reported that “natural” means “no toxic pesticides were used” to produce the food, and 60 percent reported that it means “no GMOs were used.” Another survey by the Hartman Group found “a significant overlap in the ways that consumers think about organic and natural.”

“These perceptions raise concerns because almost no standards apply to ‘natural’ labeling claims, whereas a robust set of rules governs organic certification,” said CFA Food Policy Director Thomas Gremillion. “The lack of standards governing ‘natural’ labeling claims has encouraged unscrupulous marketing practices and resulted in significant consumer confusion.”

CFA submitted a separate comment in which it offered an alternative approach should the FDA reject the approaches of either banning the claims or defining the terms. Specifically, if the FDA continues to allow “natural” labeling claims for products that do not meet NOP certification requirements, it should require the following disclaimer:

*“Natural” means that this product contains no artificial or synthetic ingredients. It does NOT mean that this product meets USDA National Organic Program standards related to the use of pesticides or other synthetic chemicals, irradiation, fertilizers made with synthetic ingredients, and bioengineering.

Recommendations on Commercial Facial Recognition Use Condemned

Privacy and consumer groups, including CFA, condemned the “Privacy Best Practice Recommendations for Commercial Facial Recognition Use” that emerged on June 15 from the multi-stakeholder meetings convened by the National Telecommunications and Information Administration (NTIA).

In their press release, the groups said that the recommendations are not worthy of being called “best practices” and reaffirm their decision to withdraw from the proceedings last year. “We could not reach consensus on even the most fundamental question of whether individuals should be asked for consent for their images to be collected and used for purposes of facial recognition. Under these ‘best practices,’ consumers have no say,” the groups said. They added that the recommendations “offer scant guidance for businesses and no real protection for individuals” and make “a mockery of Fair Information Practice Principles on which they claim to be grounded.”

“The result is not surprising,” says Susan Grant, CFA’s Director of Consumer Protection and Privacy. “The process was dominated by commercial interests that clearly had no intention of changing their current business practices or restricting how they use this invasive technology in the future.” CFA and the other NTIA groups noted that there was one good thing that emerged from the process: it demonstrates the need for laws and regulations to protect consumer privacy.