Monday, January 30, 2012

US: Cleaning up the Mortgage Registration System

If you want to understand why the current financial crisis remains unresolved, you need look no further than the article by Hernando de Soto in today’s Financial Times. Mr. de Soto is author of The Mystery of Capital, where he showed that by documenting the community-based agreement on who owned what, it was possible to provide collateral to the poor—and thus allow the poor and marginalized communities to borrow money from banks, for the first time.

In the FT article, Mr. de Soto explains that the problem is that “To regain its vitality, western capitalism must bring under the rule of law and public memory hundreds of trillions of dollars now swirling mindlessly out of control in the obscure world of financial innovation.” More precisely, it is a matter of formally documenting the trillions in loans that were made by lenders to homeowners.

Those loans were recorded in a system known as MERS, the mortgage electronic registration system established in 2004 by private sector lenders to formally record residential mortgage loans to homeowners. This was long before the explosion of securitization. Unfortunately MERS has never worked perfectly. Safe and Fair Blog estimates that for every home loan under foreclosure, the borrower has a 50:50 chance of being able to prove that the holder of the mortgage loan is not the lender of record – and therefore the lender lacks the legal authority to foreclose on the loan and evict the homeowner from her or his house. Safe and Fair Blog does not recommend such a tactic. Certainly the homeowner knows that she or he took on a loan and that s/he has a moral responsibility to repay the debt. However the failure of a privately-owned debt registration system in the U.S. should not be allowed to imperil the global financial system.

This is not, strictly speaking, an issue of consumer protection and financial literacy. However the failure of the MERS to work properly undermines the financial vitality of tens of millions of financial consumers by destroying the financial markets that financed their homes. The vagaries of MERS thus impede the ability of homeowners to sell their primary financial assets (their homes) and move to a part of the country where jobs are plentiful and their skills are in scarce demand.

Part of President Obama’s State of the Union speech should surely have been to clean up this badly working mortgage registration system – and allow the U.S. economy to get back on its feet. The question is ... why hasn't this been done by now?

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Sunday, January 29, 2012

US vs. UK: Crack Down on Bad Behavior or Just Ban the Products?

Over the last week, both the U.S. and the U.K. have moved to protect consumers of financial services. In his State of the Union address on January 24, 2012, President Obama highlighted the appointment of Richard Cordray as the new head of the Financial Consumer Protection Bureau. However the U.S. President went further and announced the creation of a new Financial Crimes Unit, consisting of federal prosecutors and leading state attorneys general with the mandate to “expand our investigations into the abusive lending and packaging of risky mortgages that led to the housing crisis." 

The special unit has no fewer than five co-chairs. They are:
  1. Eric Schneiderman, Attorney General of New York State,
  2. John Walsh, Attorney General of the District of Colorado,
  3. Robert Khuzami, Director of Enforcement for the Securities and Exchange Commission,
  4. Tony West, Assistant Attorney General for the Civil Division of the US Department of Justice and
  5. Lanny Breuer, Assistant Attorney General for the Criminal Division of the Department of Justice.

Not all analysts welcomed the move, citing concerns over the Financial Fraud Task Force. Despite – or perhaps because of -- representatives from more than 20 federal agencies and 94 U.S. attorneys offices, in two years the Financial Fraud Task Force resulted in no major successes. Among the banks that had wrongfully foreclosed upon homeowners, not one of the CEOs was held accountable for their actions.

Safe and Fair Finance Blog takes a different view. Much has changed since 2009. President Obama and other politicians have come to recognize that the 2008 financial crisis was also a crisis of fairness. It showed that ordinary people – those who work two or three jobs just to pay the bills – have little chance of winning a battle with financial institutions. It showed that ordinary consumers are befuddled by confusing financial products and smooth-talking sales personnel. It showed the unfairness of the current financial system.  Safe and Fair Finance Blog therefore welcomes the creation of a special unit with strong teeth and encourages the five co-chairs to do all necessary to improve the fairness of U.S. financial system.

Change is also afoot in the United Kingdom. As noted in his interview last week with the Financial Times, the head of the new investor protection and markets watchdog, Martin Wheatley, explained that the 2008 crisis changed the way financial regulators think about consumers of financial services. Mr. Wheatley noted that in the past the regulators had thought of consumers as homines economici. The regulators relied on game theory and assumed that all agents (a.k.a. consumers) would behave rationally and use optimal reason. No longer. The new approach is to allow the Financial Conduct Authority to “step into their [consumers'] footprints.”

Mr. Wheatley points out that, “Faced with complex decisions or too much information, they [consumers] default…They hide behind credit rating agencies or behind the promises that are given to them by the salesperson.” The decision then is to allow the new financial conduct regulator to explicitly ban – or at least limit the sale of – financial products that could harm consumers.

Now we need to wait and see.  Is the U.S. approach of cracking down on bad behavior effective? Or would it be better to follow the U.K. and simply ban the sale of harmful financial products, as if they were toasters? Keep posted for updates.

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Tuesday, January 17, 2012

BELARUS: Using Safe and Fair Finance to Reduce Social Dependence

The problems of weak consumer protection and financial literacy are also felt in Belarus, a country of 9.5 million people that lies between Poland at the west and Russia at the east.

As noted on January 5, 2012 in, the National Bank is concerned that recent increases in the refinancing rate that it provides to commercial banks will cause interest rates on consumer loans to rise. Deputy Chairman Sergei Dubkov warned that this increase will “make it impossible for most borrowers to fulfill their obligations to banks."

To soften the blow, the National Bank plans to try to improve consumer protection in financial services. Part of the problem, noted Mr. Dubkov, is that the law on advertising of banking services does not require full disclosure of the total interest rate of a consumer loan. The National Bank has proposed draft amendments to make information on banking services clear, simple and easy to understand.

The National Bank is also looking at international approaches on financial consumer protection. It plans to create a call center for consumer complaints and is working with the banking association to create a financial ombudsman service. The objective of financial ombudsman would be three-fold: (1) resolve consumer disputes with financial institutions (2) improve financial literacy of consumers and (3) promote consumer confidence in the national banking system.

Emphasizing the need for Belarusian consumers to take an active role in managing their personal finances, Mr. Dubkov complained that "ignorance and recklessness" flourish in Belarusian society. He emphasized that households should take responsibility for planning their budget. “Cultivating social dependence is a road to nowhere," exhorted Mr. Dubkov.

Safe and Fair Finance Blog supports the work of the Belarusian authorities to strengthen consumer protection and financial literacy. Finding an effective system of redress of consumer disputes with financial institutions is “where the rubber hits the road” and should be tackled in every country, regardless of the level of financial market development. Requiring that banks make consumer information clear and easy to understand is also important. In addition, the authorities may wish to test (through consumer surveys or focus groups) how easily consumers understand the information in the new disclosure statements issued by banks.
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Monday, January 16, 2012

EUROPEAN UNION: Better Consumer Credit Disclosure is Needed

While consumer finance practices are improving in Europe, they still have a long way to go. notes that in a September 2011 survey of the 27 European Union countries plus Iceland and Norway, two-thirds of 242 banks (and another 320 intermediaries) failed to meet the EU requirements on consumer credit disclosure. Every country except four (Bulgaria, Greece, Iceland and Ireland) reported problems in banks failing to meet the minimum standards of EU consumer law.

In the UK, the Office of Fair Trading found that in a sample of 47 websites of credit providers targeting sub-prime or “non-status” consumers, 38 failed to comply with EU law. The failure rate was still higher in Spain where the National Institute for Consumer Protection discovered that 29 out of 29 credit websites failed the test.

The most common violations were failure to disclose the annual percentage rate (APR) on credit and indicate if interest rates were fixed or variable. Also inaccurate was information on requirements to obtain personal insurance as collateral for the consumer credit.

To date, the names of the offending banks have not been publicly released.

However the European Commission’s own website provides additional detail. It notes that of the 562 websites that were checked, the most common problems regarding consumer credit were three-fold:

1)       Missing information in advertising: Advertising on 46% of websites did not include some of the standard information required by the Consumer Credit Directive, specifically, the annual percentage rate of charge (APR), information on whether charges on obligatory ancillary services (such as insurance) were included in the total cost, and the length of time for which the credit agreement was valid.

2)      Missing key information on offers: 43% of websites failed to give full information about the total cost, in particular the type of interest rate (fixed, variable or a combination of both) and detail about extra costs related to the credit, such as an arrangement fee.

3)      Misleading presentation of the costs: 20% of websites gave misleading information about the way the price is calculated or the total cost for consumer credits where insurance is obligatory.

In the coming months, the national enforcement authorities have been asked to contact the financial institutions and request clarifications or corrections to the websites, under penalty of legal action leading to possible fines or closure of the institutions’ websites. The national authorities have also been requested to report back to the European Commission by the autumn of 2012 on the actions taken. The Commission will thereafter report publicly on the results.

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Saturday, January 14, 2012

THAILAND: New Financial Consumer Protection Center

Financial products have become increasingly complex and difficult for consumers to understand. While most work has been done in developed countries, emerging markets are also taking steps to help financial consumers. On January 13, 2012, the Bank of Thailand announced the creation of a special center – the Financial Consumer Protection Center (FCC) – to help financial consumers in Thailand.

The FCC will operate as a “one stop” shop for consumer complaints about the services of financial institutions under the Bank of Thailand’s supervision as well as the securities operations of the Bank of Thailand itself. In addition, the FCC has a financial education role with three objectives: (1) equip consumers with financial knowledge in order to raise awareness and understanding of their rights and responsibilities, (2) avoid becoming victims of financial fraud, and (3) enable consumers to make informed decisions about financial products and services.

The Bank notes that about 2,600 consumer complaints are filed annually, with up to 91 percent of the cases solved according to the Bank’s statistics. The most common complaints concern scams related to call centers and debt restructuring.

The FCC has set itself ambitious customer service targets, with complaints to be addressed within 15 days (versus 30 days in the past) although complex complaints may take more time, according to the FCC. Consumers will have access to three ways of contacting the FCC: (1) a telephone hotline, (2) email submissions and (3) postal services.

For financial education, the FCC plans to join forces with the Ministry of Finance, the Securities and Exchange Commission, the Stock Exchange of Thailand, the Thai Bankers' Association as well as the media.

Safe and Fair Finance Blog strongly welcomes this action by the Bank of Thailand and recommends that the complaint data be carefully analyzed – and the analysis published. Such data can provide valuable insight into the sources of the troubles for financial consumers. The issues might include not only fraudulent practices but also cases where consumers could not obtain enough information to make informed decisions — or where the information was too complicated to be easily understood. Where consumer complaint data is published in the media, the data brings the additional benefit of helping industry associations and consumer organizations focus their efforts related to consumer protection.
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Avoiding Overindebtedness through Consumer Info

Throughout the world, the microfinance sector is plagued by high levels of indebtedness as households rack up loan after loan from lenders. The common explanation is that lenders lack adequate information to assess borrowers’ financial situations. A less benign interpretation is that financial institutions deliberately engage in predatory lending practices, trapping poor consumers in a spiral of debt from which they can never emerge. In a webinar this week sponsored by the Consultative Group to Assist the Poor, Juan Izaguirre from the World Bank argues that this complex problem may have a simple solution—give consumers enough information to make informed decisions. He notes that in country after country, from Azerbaijan to Malawi to Nicaragua, consumers cannot obtain a copy of their loan agreement until after they have signed it or the disclosure they do receive is too obtuse to be understood or allow comparison with other financial services. Giving consumers the information they need may be the cheapest and most efficient solution. 

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Monday, January 9, 2012

Can Richard Cordray clean up Abusive Practices by US Financial Institutions? Here are his plans

On January 5, 2012, Richard Cordray was appointed Director of the US Consumer Financial Protection Bureau, created under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. In his formal remarks, Mr. Cordray explained his focus. He noted that consumers need: (1) better information about the costs and risks of borrowing, (2) to be able to comparison shop for a good deal, and (3) the peace of mind that comes from knowing that the deal they were promised is the deal they are actually getting, not just tomorrow, but next month and next year as well. Consumers also deserve to have someone who will stand on their side, who will protect them against fraud, and who will ensure they are treated fairly in the financial marketplace.

He also noted that the role of the CFPB will be to: (1) collect stories and complaints regarding actions of financial institutions and (2) enforce provisions of financial legislation regarding non-bank financial institutions, such as payday lenders, mortgage servicers, mortgage originators (including mortgage brokers) and private student lenders.

In a TV interview with MSNBC, Mr. Cordray provided additional insight into his new job. He explained that the role of the CFPB will be two-fold: (1) examine financial institutions (i.e. conduct on-site supervision with his staff) and (2) enforce the law through the courts and through administrative procedures.

The appointment was made as a recess appointment, that is, while Congress is on recess over the New Year. The occasion provided a humorous view on the ways in which the US government is run, compliments of The Daily Show with Jon Stewart.
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Welcome to Safe and Fair Finance Blog

Each year, an estimated 150 million new consumers join the global economy. For most, using formal financial services is a new activity for themselves, their family members and their immediate circle of friends.

In the developing world, most will find the experience frightening. Some will also find it hazardous to their health. A loan of $100 can become an insufferable debt of $1,000. At the same time, $100 in savings can be lost in fees and charges, or simply lost in the bank’s computer system. A deposit of $10,000 may become an invitation for a visit from the local mafia. Mandatory motor liability insurance may be just another excuse for a tax or a bribe. Private pension funds are no more than a fantasy.

Even in industrialized economies, the fine print of legal documents can confuse all but professional lawyers and accountants. Particularly in low-income communities but also in the affluent neighborhoods, the attraction of low interest rates has led many to ignore the risks involved in mortgages that would re-price at full market rates or convert from foreign to local currency at the whim of the lender. With one in five subprime loans causing borrowers to lose their homes in the US, no community can consider itself immune from the risks of weak consumer protection and financial literacy.

The objective of this blog is to help policy-makers worldwide find solutions that both benefit financial consumers and strengthen financial institutions. The solutions involve all stakeholders—not just government authorities, but also financial industry associations, consumer organizations, academic institutions and the media. The approach is to take the lessons from the world’s best research and look for ways to applying it in each country. It means also contributing to the global dialogue on financial regulation and building a network of like-minded professionals.

The objective is summarized just seven words … safe and fair financial services for all.
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