The Wall Street Journal
By: Karen Blumenthal
August 28, 2010
There is a new regulator in town. Will it make a real difference?
The newly established Consumer Financial Protection Bureau has a wide-ranging mandate and broad powers for investigating and regulating things like checking accounts, credit cards, and education and home loans.
There always is the risk that it will be ineffectual--or go too far and overregulate. To win over skeptics, it will need to get off to a fast start and show that it can avoid getting tangled up in its own red tape.
A lot has to happen first. The bureau doesn't have a director yet, and it won't open its doors until next year at the earliest. It already has a to-do list: Congress has ordered it to study reverse mortgages, private education-loan practices, why consumers who buy credit scores get numbers different from the ones lenders get and whether arbitration is the right way to settle financial disputes.
Since those issues may take years to address, the bureau might consider zeroing in on a few specific areas if it wants to make a splash right away. Here are some questionable financial-industry practices and consumer problems, gleaned from talking to consumer advocates, that could be fixed sooner rather than later:
• Address credit-report errors. When an error appears on a credit report, whether due to identity theft or a mistake, the deck can be stacked against the individual, says Gail Hillebrand, a senior attorney at Consumers Union.
If a person discovers an error and reports it, the complaint is reduced to a code and sent to the creditor--a process that credit bureaus say is more efficient and much faster than forwarding the actual details. If the lender disagrees with the coded complaint, the information stands.
Since the credit bureau doesn't play umpire, the consumer must then go directly to the lender to try to fix the problem, which can be a lesson in frustration. Beyond that, the consumer's last resort is to add a short personal statement to the credit report.
Of the 150 million free credit reports provided between December 2004 and March of this year, 11% were disputed by consumers, according to the Consumer Data Industry Association, a trade group. Errors were deleted on less than 2% of those reports.
Now that credit reports are used by lenders, insurers and employers, individuals should have a better way to get their complaints heard and resolved.
• Extend protections to all prepaid cards. Credit and debit cards come with built-in protections against fraudulent charges, but many prepaid cards don't--a growing concern because they are increasingly being used for a range of purposes, including health savings accounts, rebates, unemployment insurance and workers' compensation.
Payroll cards already have the same protection as debit cards: a $50 limit on liability if the loss or theft is reported within two days of discovery and up to $500 if it is reported within 60 days. Visa and MasterCard promise zero liability on their prepaid cards, but the National Consumer Law Center would like all prepaid cards to be covered.
Nessa Feddis, senior counsel at the American Bankers Association, questions whether that is necessary. There are few complaints about prepaid cards, she says, and someone would have to determine how mass-transit cards and Starbucks cards would be treated. "With regulations, there are unintended consequences," she says. "There are always costs."
• Keep students informed. Mark Kantrowitz, publisher of FinAid.org, a financial-aid website, urges the bureau to require lenders to tell student borrowers their loan balance at least once a quarter while they are in school instead of waiting until they are ready to graduate.
Many student loans start accruing interest as soon as they are made, even if payments don't start until after graduation. When the time comes to start paying, Mr. Kantrowitz says, many students are surprised at how much their debt has grown. Earlier communication also would help lenders keep contact information up to date, reducing the likelihood that graduates would miss initial payments, he says.
• Answer complaints. These days, when you complain about an unfair financial practice, you can't expect to get an answer. There really isn't a federal agency that responds to ordinary people on a wide range of consumer issues.
Complaints to the Federal Trade Commission, for example, are studied for patterns and go into a law-enforcement database, but consumers rarely hear back.
Ed Mierzwinski, director of the consumer program at the U.S. Public Interest Group, suggests the new bureau come up with a marketing campaign to make people aware of its presence. Then, he says, the bureau should investigate complaints it receives.
• Maintain momentum. Last year's credit-card reform act--and subsequent crackdowns on overdraft practices--have given consumer groups hope that the bureau will keep a lid on interest-rate tricks and steep bank fees. And there are plenty of other irritating practices for it to tackle, such as blank checks in credit-card bills, certificates of deposit with narrow grace periods before rolling over and credit cards with multiple interest rates.
Even cracking down on one or two things would send a message to consumers that the bureau is paying attention.