New protections from financial 'gotchas' in 2015
More chip-embedded cards and higher interest rates on balances will be the developments that card users probably notice the most in 2015 -- but they're hardly the only changes the New Year has in store.
Less obvious will be a host of new rules in 2015 making it safer to use plastic and other types of consumer debt.
The U.S. Consumer Financial Protection Bureau is the lead agency in charge of guarding consumers from questionable financial practices. Founded just three-and-a-half years ago, the CFPB is still getting up to speed writing new regulations, and 2015 looks to be busy.
Here is a preview of the four biggest rule changes that are expected to impact consumer financial products in 2015.
• Payday loans, deposit advance loans. Notorious for their astronomical interest rates, payday lenders take a repayment check from you as they issue the loan, to be deposited on your next payday. Or, they siphon the funds directly from your checking account -- a practice also used by banks who offer deposit advance products.
A study by the consumer protection bureau in 2014 found that the business depends largely on repeat customers who take out costly new loans just to repay old ones. The consumer bureau does not have the power to cap rates, which is up to the states. Instead, it could target the cycle of debt, by, for example, requiring a cooling-off period between loan renewals. The wording of the rule will be key to its effectiveness, as lenders have wriggled through loopholes in the past by tweaking the terms of their loans.
• Prepaid cards. New rules published in 2014 will take effect in March, making prepaid cards safer and easier to understand. General-purpose reloadable cards have become an alternative to bank accounts for millions of households, but they lack the protections that surround bank products.
The centerpiece of the new rules is a standardized
fee disclosure form on the outside of the card's packaging -- where you can see
the fees before you buy the card. That should help people compare costs and
avoid bad deals. Prepaid cards must also provide protection against loss or
theft to customers who register their cards, and must provide redress for billing
errors and incorrect charges.
• Debt collection. Rules for debt collectors haven't changed much since Congress first wrote them in 1977. A lot has happened since then -- including email, texting and the rise of a wide-open bazaar where unpaid debts are bought and sold. Debt collectors are looking for clear-cut permission to use cellphones and email to dun debtors, and possibly social media channels as well. In return, they might be required to tell you if the debt they're calling about is too old to sue you for.
Banks' own collection workers are likely to be covered by the rules, which currently apply only to hired "third-party" collectors. Experts expect this rule to be complicated -- and controversial. Some restrictions on the use of phone technology fall under the jurisdiction of the Federal Communications Commission, and penalties for collection abuses are set by Congress, so it isn't clear how much the CFPB can do on its own.
• Overdraft protection. Bank services that let you withdraw more money than you have in your account are a very costly way to borrow. In a study released in July, the CFPB found that the typical overdraft fee of $34 amounts to an APR of 17,000 percent. And, like payday loans, many users access their overdraft coverage again and again. "Overdraft fees should not be 'gotchas' when people use their debit cards," CFPB Director Richard Cordray said in a statement announcing the study.
Rules already prohibit banks from offering coverage without an affirmative opt-in from the account holder. The trick for new regulations will be to preserve overdraft coverage as an occasional stopgap, while preventing it from draining cash for repeat users.
Other initiatives not at the rule-making stage could also bring changes for consumers down the road. For example, the CFPB is undertaking a second study on binding arbitration clauses in financial contracts, which block consumers from taking their gripes to court. The first study, released in 2014, found few people bother to bring their beef into the arbitration system, supporting charges that arbitration is designed to stifle complaints. The second study is a survey to determine how many consumers understand the rights they give up by signing an arbitration clause.
Consumer advocates hope the results lead to rules that reopen the door to the courthouse. "There could be some sort of limits on [binding arbitration], or ban it," said Ruth Susswein, deputy director of national priorities at Consumer Action, "which is certainly something we and other advocates are hoping they would do."
The agency's moves could be slowed, however, as it faces increasing friction with Congress. The new Republican majority in the Senate is expected to step up efforts to overhaul the agency's structure and funding -- moves that consumer advocates decry.
"We expect the attacks to continue," said Jim Lardner, communications director at Americans for Financial Reform. Opponents would put the CFPB's budget under control of Congress, instead of the Federal Reserve, and replace its single director with a bipartisan commission. The commission structure "is a recipe for gridlock," Lardner said, "and the financial industry would like gridlock, we think."See related: What an interest rate increase will cost cardholders
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