A consortium of consumer groups led by the National Consumer Law Center submitted a detailed comment letter to the Consumer Financial Protection Bureau. It’s a wish list of sorts, a round-up of shady business models and practices that part unsuspecting Americans from their money.
The letter focuses on nonbank financial products and services — things like prepaid debit cards, payday lenders and check-cashing operations and credit reporting bureaus. Right now, these types of businesses and their offerings are regulated under a patchwork of state rules, if they’re even regulated at all. The full letter can be read here.
Read on for an overview of the types of abuses consumer advocates are calling on the CFPB to police. And tell us in the comments what you think the new agency should crack down on?
Check-cashing operations: These companies often set up shop in poor neighborhoods to target people outside the financial mainstream — people who can least afford the high fees they charge. In addition, these often unsophisticated customers are targeted with deceptive pitches for other high-priced products and services like exorbitant payday loans or fee-laden prepaid cards. Some even use a legal loophole to obtain customers’ government benefit payments — and then make them pay to access those funds.
Prepaid debit cards: We’ve pointed out before that while prepaid credit cards are marketed as an alternative financial solution for the unbanked, these products tend to be more expensive and less secure than ordinary deposit accounts at a bank or credit union. Some cards offer credit features that can result in the cardholder being charged high overdraft fees and still do little or nothing to build a legitimate credit history.
Collection agencies: Third-party companies that buy charged-off balances from creditors for pennies on the dollar and attempt to collect on them have a reputation tarnished by abuses. The letter points out that these companies will often try to collect without verifying that the information they have is correct — or if the person they’re hounding even owes the debt at all. Some have even filed lawsuits and failed to inform the debtor, a practice known as “sewer service.”
Debt settlement: For-profit debt settlement companies are almost always worthless, the comment letter says. Debtors get duped into paying upfront for relief that never comes. These consumers wind up even deeper in debt than they started out and are still hounded by bill collectors and have only blemished credit to show for their mistake. A recent FTC ruling put a stop to some abuses, but operators are already exploiting the loopholes to prey on desperate consumers.
Car loans: Buyers often don’t know that the interest rate they’re paying on their car loan is hiked up by the dealer so they can pocket some extra profit. During the financing process, buyers are often encouraged to roll the cost of other high-priced services of little value like window etching, further inflating the interest they have to pay. Dealers are also all-too-willing to roll negative equity from a trade-in into a new loan, saddling the consumer with even more debt.