CFPB Takes Steps to Stop Debt Trap, But More Is Needed

Earlier this month, the Consumer Financial Protection Bureau (CFPB) took the first step toward ending the debt trap by finalizing new consumer protections for shorter-term loans where consumers must repay all or most of the debt at once, including payday and auto title loans, and longer-term loans with balloon payments.

The CFPB’s new rule addresses some of the worst excesses of these loans, in states that allow them, by requiring lenders to establish a borrower’s ability to repay the loan before making the loan. In a news release praising the proposed rule as an important first step to stop the debt trap, CFA outlined additional actions that are needed from the Bureau, Congress, and state legislatures to more fully protect consumers.

• Having recognized in the proposed rule that longer term installment loans are also problematic, the CFPB should adopt a rule addressing the problems with longer term installment loans as quickly as possible.
• While Congress did not grant the CFPB the authority to establish interest rate caps, Congress itself can and should extend the interest rate cap of 36 percent that is in place for active-duty servicemembers to all consumers.
• The 15 states plus the District of Columbia that have established interest rate caps of approximately 36 percent need to maintain and vigorously enforce those rate caps, while states that have not yet acted should adopt a rate cap.
• State Attorneys General and state regulators should use their enforcement authority under the Dodd Frank Act to aggressively enforce the new consumer protections for payday and auto title loans.

“The rule is an important first step and will benefit some consumers who need relief the most, but a great deal of work is still needed to ensure that American families are no longer ensnared in the debt trap of high interest, abusive loans,” said CFA Director of Advocacy Outreach Michael Best in a press release.

Proper Oversight Needed to Deliver on Autonomous Vehicles’ Potential Benefits

The Senate Commerce Committee reported out legislation earlier this month, S. 1885, the “American Vision for Safer Transportation through Advancement of Revolutionary Technologies (or AV START) Act,” which would lay the ground work for the introduction of self-driving cars to American markets and roadways. As Senators contemplate the merits and drawbacks of autonomous vehicles, CFA has offered a word of caution, suggesting that autonomous vehicles (AVs) have the potential to save thousands of lives, but only if Congress insists on proper oversight.

In a statement on the AV START Act, CFA Director of Public Affairs Jack Gillis put forth a number of issues that Congress must address before allowing self-driving cars on American roads. In particular, he cautioned against introducing hundreds of thousands of vehicles into the market prior to establishing specific performance standards for this extraordinarily complex technology.

Even before these new, more complex vehicles are brought to market, recall rates are already very high, Gillis noted. For each of the past three years, three times as many vehicles have been recalled as have been sold. “While these recalls have mainly been mechanically related, the combination of sophisticated computerization with mechanical safety features will only increase the potential for problems. As these new technologies are introduced, we need more, not less, regulatory oversight,” he explained.

Gillis suggested that any reasonable oversight would include occupant safety requirements for AV passengers, public access to the data associated with AV operations (especially in accident and accident avoidance situations), as well as increased funding for the National Highway Traffic Safety Administration (NHTSA) and a requirement that NHTSA establish a specialized AV department, with highly trained and experienced staff, to oversee AV standards.

“While we are confident that the car and technology companies are on the cusp of nearly unimaginable advancements in safety, doing so without specific oversight and standards could, ironically, be a safety hazard,” Gillis concluded. “Congress must establish a safe roadmap to the successful introduction of AVs to fulfill the AV’s potential for a dramatic reduction in the tragic toll that automobiles take on America’s public health.”

House Panel Votes To Weaken Investor Protections

In a legislative mark-up last week covering a wide range of bills, the House Financial Services Committee voted to weaken protections for investors who turn to financial professionals for investment advice and roll back other protections necessary to ensure the integrity, transparency, and stability of our financial markets. CFA wrote to the Committee in advance of the mark-up urging no votes on six of the most harmful investment-related measures, all of which were adopted.

Among the bills adopted during the mark-up was a bill sponsored by Rep. Ann Wagner (R-MO) that would repeal the Department of Labor’s rule requiring all financial professionals to act in their customers’ best interests when providing retirement investment advice. In its place, H.R. 3857, the “Protect Advice for Small Savers Act” (or PASS Act), proposes a watered down, disclosure-based standard for all securities and insurance recommendations. While it purports to impose a “best interest” standard, it doesn’t actually require advisers to seek to do what is best for their customers, nor does it require them to eliminate, or even appropriately manage, practices that encourage and reward harmful advice.

“Few bills would do more harm to average, financially unsophisticated investors than H.R. 3857, the cynically misnamed ‘Protect Advice for Small Savers Act,’” said CFA Director of Investor Protection Barbara Roper. “The only thing this bill protects is the ability of brokers and insurance agents to profit unfairly at their customers’ expense.” The good news is that the bill was adopted on a party-line vote, signaling that it could face difficulties in the Senate.

Other bills adopted in the mark-up, some with significant Democratic support, would:

• undermine Securities and Exchange Commission (SEC) oversight of credit rating agencies (H.R. 3911);
• create a new exemption for micro-cap offerings that is so devoid of investor protections it is all but certain to become an avenue for affinity fraud (H.R. 2201);
• adopt a statutory definition for “accredited investors” based on an approach that has been shown to be entirely inadequate in identifying a class of investors capable of fending for themselves without the protections afforded in the public markets (H.R. 1585);
• double the time in which small public companies could avoid adopting requirements designed to ensure that they have appropriate controls in place to prevent financial reporting fraud and errors (H.R. 1645); and
• limit the ability of the SEC to appropriately oversee algorithmic traders by denying the agency access to “source code” without first getting a subpoena (H.R. 3948).

Large Auto Insurers Charge Certain Women Higher Rates Than Men

Female motorists with perfect driving records often pay significantly more for auto insurance than male drivers even when their driving records and other characteristics insurers use to price auto insurance are identical, according to new research released last week by CFA.

In ten cities studied, CFA found that 40- and 60-year old women with perfect driving records were charged more than men for basic coverage nearly twice as often as men were charged the higher rate. Premiums were lower for 20-year old women than for 20-year old men most of the time; however, GEICO charged young female drivers more than young male drivers in nine of ten cities.

“It is widely believed that male drivers, especially young male drivers, cause more, and costlier, accidents,” said CFA Director of Insurance J. Robert Hunter. “State insurance commissioners should insist that auto insurers explain why they usually charge middle-aged and older women higher rates than men.”

CFA noted that in more than two-thirds of the tests it conducted, at least one company treated female drivers as being higher risk than males while another company deemed them lower risks than their male counterparts. Among 40-year-old drivers in Tampa, for example, Allstate charged the female driver 21 percent less than the male driver, while Progressive charged her 32 percent more.

“This makes no sense,” Hunter said.  “If these large insurance companies are abiding by actuarial principles, you would not find one insurer granting a 21 percent price break for female drivers while another company sees a need for a 32 percent surcharge on those same drivers.  What this really tells us,” Hunter added, “is that either some companies are ignoring the data or gender is not a good indicator of risk and should not be used.”

“Every state but New Hampshire requires drivers, regardless of their sex, to buy auto insurance, so regulators and lawmakers have a special obligation to make sure coverage is priced fairly,” said CFA insurance consultant Douglas Heller, who conducted the study with CFA Research Advocate Michelle Styczynski. “What we have found is that insurance companies punish female drivers with perfect records more often than men, and far more often than we expected. We also found that the insurance companies’ use of sex as a rating factor does not seem to reveal much in the way of a consistent risk assessment, and regulators should reconsider allowing companies to continue using it at all.”