The CFPB Stands Up to Banks' Overblown Financial Firepower

Sep 7, 2011Bryce Covert

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

Republicans claim that allowing Richard Cordray to head the CFPB imbues him with too much power, ignoring the immense influence on the other side of the equation.

This week's credit check: The 10 Republicans blocking Richard Cordray's nomination have received over $31 million in campaign cash from the financial sector. The median American family saw yearly earnings fall $5,261 over the past decade.

The least remarkable part of yesterday's Senate Banking Committee hearing on Richard Cordray, President Obama's nominee to head the new Consumer Financial Protection Bureau (CFPB), was Cordray's testimony itself. In fact, Republicans made it clear that his credentials are not what's up for debate. Sen. Bob Corker (R-TN) called a recent meeting with him "pleasant" and Sen. Richard Shelby (R-AL) said he has a "good background." Rather, they want to debate whether his post should exist at all. Their reasoning? That having one person in charge of this new watchdog will imbue Cordray with far too much power. As Shelby put it, "No one person should have so much unfettered power over the American people."

But what of the power of the opposition, the banks themselves, who stand to have new oversight and regulation from someone on the side of the average consumer? If we're going to talk about power imbalances, we might want to look at what the financial sector can marshal against the American people. Elizabeth Warren herself, the originator of the idea for the CFPB, estimates that it will police a $3 trillion consumer financial services industry. And Wall Street, along with its other corporate counterparts, is doing pretty well compared to the rest of us. Corporate profits have taken in 88 percent of the raise in national income since the recovery began, while household incomes only took in 1 percent.

It's not just profits banks wield in this fight, however. That money can easily turn into lobbying and campaign contributions. As Ari Berman reported in June, "According to the Center for Responsive Politics, 156 groups -- the vast majority representing corporate interests -- lobbied the government about the CFPB in the second half of 2010 and the first quarter of 2011. The list ranged from JPMorgan Chase to McDonald's." The Chamber of Commerce even has an entire division devoted to fighting Dodd-Frank, and it spent $17 million on federal lobbying in the first quarter of this year with a dozen lobbyists focused on just the CFPB.

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Individual Republican Senators are also getting lavish gifts from the financial sector while opposing its newest regulator. The 10 Republican members of the Senate Banking Committee, who signed a letter to Obama in May demanding debilitating changes to the CFPB before any candidate can be confirmed, have received over $31 million in campaign cash from the financial sector during their time in Congress. Meanwhile, Sen. Shelby himself has taken $6.2 million from the financial sector, including about $1 million from commercial banks. His top career donors include JP Morgan ($140,771), Citigroup ($109,199), and Goldman Sachs ($67.600).

Compare all that financial firepower to what's going on for everyday Americans. A new report from the Pew Charitable Trusts shows that nearly one in three Americans who grew up middle-class has fallen out of that group. It's not hard to see why so many people are moving down the ladder when wages have been heading in the same direction. While the financial sector is bringing in $3 trillion, the median American family saw yearly earnings fall $5,261 over the past decade, from $52,388 in 2000 to $47,127 in 2010.

Things are even worse for low-income families. Over the past 10 years, the percentage of children living in poverty has soared, increasing by 18 percent, or 2.4 million more, from 2000-2009. These children and their families are set to fall on even harder times, as states slash vital services to balance their budgets. They face the loss of unemployment benefits, income tax credits, and cash assistance, among other safety net supports.

Those who find themselves in such financial hardship have one place to turn when they can't make ends meet: debt. Credit card companies already employ a variety of tactics to entice middle-class families into debt and keep them there. But those tactics will be under strict scrutiny if the CFPB has its full powers. Low-income families often find themselves prey to unregulated non-banks like payday lenders and check cashers, but those will also come under the supervision of the Bureau.

The CFPB isn't taking on dictatorial powers. It's standing up to the formidable forces preying upon struggling American consumers.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Unemployed and Taking on Debt to Stay Afloat? Don’t Expect to Get a Job

Aug 31, 2011Bryce Covert

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

Anyone can lose their job and fall behind on bills in this economy. But now that may keep them from finding new employment.

This week's credit check: Six out of 10 employers use credit reports to vet job applicants. More than 20 million Americans may have material errors on their credit reports.

There are about 14 million people unemployed in this country, and 6.2 million of them have been unemployed for more than 27 weeks. Where should they turn when they've lost a steady paycheck, but still have to keep up with bills such as mortgage payments, student loans, and the basics like rent and food? With no money coming in, many understandably have to turn to debt.

But taking on debt -- and being unable to pay it back, or pay back any of the debt they may have took on when things looked better and they had a job -- could be the exact thing that keeps the unemployed from becoming re-employed. In a massive Catch-22, many employers are looking to credit reports when they do background checks on prospective employees, and a bad mark due to an unpaid medical bill or lapsed student loan payment could make the difference in getting the job. In 2010, The Wall Street Journal reported that more employers are relying on these checks before making hires. Nothing has changed in the intervening year -- except perhaps that the problem is getting worse. Marketplace recently told the story of Sarah Sholar, just one of those employees with bad credit who has been turned down by prospective employers. "I can't pay my student loans because I don't have a job," she told them. "I can't get a job because I can't pay my student loans."

The companies in charge of reporting on consumer credit records are extremely opaque and have little oversight. Some studies found that 25 percent of credit scores -- based on credit reports -- have errors in them. More than 20 million Americans may have material errors on their credit reports. And good luck trying to fix errors -- or to even figure out how these scores are calculated. Both will lead you down a labyrinthine path.

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But it's not just consumers who get suckered by reporting agencies. As Amy Traub wrote in The American Prospect, "Credit checks have been aggressively marketed to employers by for-profit credit bureaus," but "[t]he only available rigorous study of employment credit checks concluded that there's no correlation between credit history and job performance." Even those who are concerned about whether to trust a new employee with fiduciary responsibilities may not learn much from a credit report when trying economic times have landed even the most responsible people in difficulty. On top of this, because African Americans and Hispanics, for a variety of reasons, disproportionately have low credit scores, they can be excluded from jobs that run credit checks, leaving the door open for discrimination charges. In fact, as Traub points out, Bank of America was found to have discriminated against African Americans in just this manner in 2010, and there's such a case pending against Kaplan Higher Education Corporation.

So why have the credit reporting agencies pushed employers so hard to use this information? There's good money in credit reporting, and the business segment growing fastest is consumer reporting. About 600 credit reporting agencies, along with 4,500 credit collections agencies, generate annual revenue of $20 billion in the U.S. The top four reporting agencies -- Equifax, TransUnion, FICO, and Experian -- bring in $1.8 billion, $1.2 billion, $744 million, and $282 million in annual sales, respectively.

But the larger problem with this practice is that it is based off the tired assumption that getting into debt is a reflection of bad character, not the inevitable result of a bad economy coupled with tricks and traps employed by banks to keep consumers in debt. The WSJ article explains that the rise in employers who check credit reports for prospective employees is due to concerns "about rising rates of employee theft and fiduciary issues" and that "[c]ompanies say the financial information can offer insight into a candidate's level of responsibility." But in reality, anyone can lose their job these days and fall behind on bills. Many people were seduced into subprime products before the boom without fully understanding the traps they were getting into. And long before that, wages were falling for the past three decades, so families have had less and less to spend on basics like food and shelter -- leading to the need to take on debt to plug the gaps.

The stigma around being in debt is unfair at any time, but is even more distressing when the economy has landed so many in financial disaster. If these very financial difficulties then keep people from getting the jobs that can help pull them out of the morass, there will be no lifeline left.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Recession Has Lit the Fuse on Explosive Student Debt

Aug 24, 2011Bryce Covert

Troubling long-term trends have gotten even worse as schools, government, and families cut back and student loans skyrocket.

This week's credit check: Average student debt can spiral up to $100,000 with interest and late payments. Room and board charges at colleges have doubled in actual dollars since 1982.

Troubling long-term trends have gotten even worse as schools, government, and families cut back and student loans skyrocket.

This week's credit check: Average student debt can spiral up to $100,000 with interest and late payments. Room and board charges at colleges have doubled in actual dollars since 1982.

It's no great secret that student loan debt is exploding. The total amount is set to top $1 trillion, more than total credit card debt. But accompanying that post-recession surge in student debt (as all other consumer debt is being paid down) is a surge in delinquencies. As The Wall Street Journal reports, "In the second quarter, 11.2% of student loans were more than 90 days past due and the rate was steadily rising, according to data from the Federal Reserve Bank of New York. Only credit cards had a higher rate of delinquency -- 12.2% -- but those numbers have been on a steady decline for the past four quarters."

The rise in student borrowing is a longtime trend, but things have clearly gotten worse in the recession. A lot of it is because of decisions schools are making. In a recent Atlantic Monthly article, Andrew Hacker and Claudia Dreifus explain that higher tuition -- paid for by student loans -- "keeps most colleges going." Private colleges Loyola University and Franklin Pierce see 77 and 85 percent of students enroll with loans, respectively. Historically black colleges, which tend to have lower endowments and a poorer population, are closer to 90 percent. Part of this, they report, is not because the actual education is more costly, but because "room and board charges have doubled in actual dollars since 1982 to enhance campus life." That's a long-term trend. But part of it is unique to the recession: As endowments tanked, priorities changed. They note:

Recent actions by Dartmouth and Williams, two wealthy schools, convey a lot about academic priorities. In the past, both schools announced that anyone they accepted would be able to enroll without having to take out loans. That is, the colleges would ensure all the aid that was needed to make attendance possible... That was before 2008. But when Dartmouth and Williams' endowments tanked, hard decisions had to be made. Among the first was telling their needy students they would henceforward have to borrow.

The government has taken much the same tack in looking at its own shrunken budget post-recession. Back in March, President Obama proposed a budget that ended an experiment that gave Pell Grants for summer courses and eliminated a subsidy for paying interest on student loans for grad students. His plan was better than the GOP's, which wanted to cut the maximum Pell Grant payment by $845, end funding to other aid programs, and kill AmeriCorps. This comes on top of a longtime trend in which student debt has come to replace grants. As Roosevelt Institute Fellow Dorian Warren reminded his host Melissa Harris-Perry on MSNBC, "When we were in college, Melissa, Pell Grants paid almost half our college in the 90s. Now Pell Grants barely cover a quarter. It's all student loans." Grants used to cover two-thirds of financing an education; now two-thirds comes from loans. Post-recession, the government is looking to shrink that even more.

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Families have also reacted to the recession by, understandably, socking less away for college and pitching in less for tuition. As Hacker and Dreifus note, "Fully two-thirds of our undergraduates have gone into debt, many from middle class families, who in the past paid for much of college from savings." Those savings have likely dried up. A typical family spent only about $2,055 on education last year. Only half of freshmen entering college said their parents had put anything aside for their education, and of those who had, half had saved less than $20,000.

With so many sources of aid pulling away either out of necessity or stupidity, students are left hanging at just the time they need more help. The College Board puts average debt at $27,650, but that figure can spiral up to $100,000 due to interest and late payment penalties, which are even more likely in a recession. This is on top of the bleak job market graduating students face. The New York Times writes, "The median starting salary for students graduating from four-year colleges in 2009 and 2010 was $27,000, down from $30,000 for those who entered the work force in 2006 to 2008... Among the members of the class of 2010, just 56 percent had held at least one job by this spring, when the survey was conducted. That compares with 90 percent of graduates from the classes of 2006 and 2007." It's hard to pay student loans when you don't have a job.

And don't forget, this debt isn't going anywhere, no matter how little students are able to pay it back. Unlike almost all other forms of consumer debt, student loans can't be discharged. Barmak Nassirian of the American Association of College Registrars and Admissions Officers told Hacker and Dreifus, "You will be hounded for life... They will garnish your wages. They will intercept your tax refunds. You become ineligible for federal employment." They can also dock Social Security checks when you retire, he adds. No matter when the economy finally pulls out of this stagnation, students will still be saddled with a heavy load.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Consumers Don't Want More Debt, They Want Jobs and Decent Wages

Aug 17, 2011Bryce Covert

Americans are focused on paying back their debts while they worry about finding jobs and bringing home enough money to pay the bills.

This week's credit check: Consumer spending accounts for 70% of the US economy. Household debt is currently 90% of GDP.

Americans are focused on paying back their debts while they worry about finding jobs and bringing home enough money to pay the bills.

This week's credit check: Consumer spending accounts for 70% of the US economy. Household debt is currently 90% of GDP.

There seems to be a Catch-22 right now that has a lot of people worried: consumers are feeling reluctant to spend and more inclined to save because the economy is so crappy, yet we need consumer spending to ramp up to stop it from sucking. Consumer spending, after all, accounts for 70% of the economy. Without that part humming smoothly, it'll be hard to get the whole system back to full working order. But according to economists at JPMorgan, household purchases dropped in June for the third consecutive month, the first time that's happened outside a recession since 1959 (all adjusted for inflation) -- although retail sales rose .5% in July.

So why won't Americans go out and spend their money like true patriots? Because a lot of them are focused on paying down the debt they racked up in the run up to the recession. The rate of borrowers 90 or more days late on credit card payments just fell to 0.6%, the lowest in 17 years. Total outstanding revolving credit card debt was down 4.6% during the first half of the year compared to the same period a year before. Consumers spent $72 billion more paying down credit card debts than buying things in 2009 and 2010. Clearly we have put a high premium on breaking free from credit card debts and avoiding the high interest rates and fees associated with being behind.

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But we have a long way to go. There's still a lot of debt hanging over consumers. In 1990, household debt was about 60% of GDP; in 2000, it was less than 70%. But right now it's at 90% -- better than the first quarter of 2009, when it was 99.5%, but still leaving plenty more room to deleverage.

Beyond high debt loads, consumers are also pretty freaked out by current economic signs. In the first weeks of August, consumer sentiment fell to the lowest level since 1980, when the country was in a recession (and we're technically not in one right now). What's getting them down? High unemployment, stagnant wages, and the ridiculous debate in Congress over the debt ceiling. Their top worries are about the difficulties they face in bringing money home -- and how little Congress seems poised to do about fixing their problems. Little wonder that when we're not sure we're going to have a job, let alone make enough to pay the pills, Americans are wary of splurging.

The Fed seems to have been hoping that it could goose consumers into taking on more debt to go buy things by announcing last week that it was going to keep credit cheap. But consumers aren't asking for more debt to help them spend. They're asking for more jobs and decent wages. After being admonished time and again for "recklessly" racking up debts in the run up to the financial crisis, now they're being admonished for not taking on enough debt. Rather than trying to find ways to make us borrow, maybe it would be better for everyone if we were simply employed and paid well for the work we're doing.

Bryce Covert is Assistant Editor at New Deal 2.0.

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How S&P’s Downgrade Could Deal a Blow to Consumers

Aug 10, 2011Bryce Covert

If interest rates rise across the board, credit card users will feel some of the heaviest effects.

This week's credit check: Banks borrow money at .75% interest. The average credit card interest rate is almost 15%.

If interest rates rise across the board, credit card users will feel some of the heaviest effects.

This week's credit check: Banks borrow money at .75% interest. The average credit card interest rate is almost 15%.

After months of brinkmanship and showmanship over raising the debt ceiling, the deed was finally done at the eleventh hour. Unfortunately, S&P still wasn't convinced. Citing the broken politics on display as Republicans held the debt ceiling hostage, it downgraded the U.S.'s debt to AA+ from AAA for the first time ever.

So far, not much has seemed to change. The markets reacted by jumping out of stocks and buying up Treasuries, keeping their interest rate low, even though those Treasuries were the very things downgraded. Many were also bracing for a rise in the prime rate, but so far no dramatic changes seem to have taken place. The prime rate is the rate banks give to their most creditworthy customers and against which rates for the rest of us are set, which is in turn based off of the fed funds rate, set by the Federal Reserve -- the interest rate that banks pay to borrow money from each other. Banks are currently borrowing their money for next to nothing (.75%) and charging the most creditworthy customers (usually large corporations) 3.25%. For credit card borrowers, the average interest rate is currently about 15%. (Pretty easy to see how much it rises the further down the food chain you go.) But so far interest rates are falling after the downgrade. The rate for a 30-year fixed mortgage is down to 4.39%. And there was more good news out of the Fed's very pessimistic report yesterday: it's planning to keep the target federal funds rate close to zero, as it has been, which helps keep the prime rate low.

But all of this could change if the downgrade leads to higher interest rates on Treasuries, which is a pretty logical reaction to S&P declaring them riskier investments. If the U.S. ends up having to pay more interest on its debt, interest rates are likely to rise across the board, and that could push up the prime rate. If that rate goes up, credit card rates are almost sure to skyrocket. Some are predicting that this is the way things will go. "Eventually the downgrade will catch up with Uncle Sam, and consumers and businesses will also pay higher rates," Greg McBride, senior financial analyst for Bankrate.com, told the Washington Post.

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And as Beverly Blair Harzog noted, the CARD Act is unlikely to be helpful in shielding borrowers from interest rate hikes. She writes:

Even if you've had your card less than a year, when your rate is tied to an index, such as the prime rate, your bank doesn't even have to send you a 45-day advance notice.

But what if you've had your card for more than a year? Your interest rate is fair game... The industry gets spooked easily whenever anything threatens revenue. It's possible that banks will raise interest rates even higher than the increase associated with the prime rate.

Oh, you'll get the highly-touted 45 days' notice, but your new, higher rate will be applied to purchases on the 15th day after the notice is mailed to you. You get 45 days before you have to begin paying the new rate.

The silver lining is for savers, not borrowers. If interest rates rise for Treasuries, banks will have to offer higher interest rates for products like CDs and savings accounts to compete. Otherwise, consumers can simply move their money to Treasuries to get a nice return. And Americans are working hard to move from borrowing to saving. We spent more paying down credit card debts than buying things in 2009 and 2010 -- by $72 billion.

But with wages and income falling after the recession, it will be more difficult to make that switch. Instead, as consumers most need to fall back on credit cards to struggle through tough times, they may find themselves paying even more to do so. All because our political parties are so dysfunctional that they inspire little confidence in anyone.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Welcome to the (Wageless) Recovery

Aug 4, 2011Bryce Covert

On top of high unemployment, we're suffering from a drop in wages in the aftermath of the recession.

This week's credit check: Wage growth fell from 3.8% in May 2007 to 1.8% in May 2011. Wage growth over the past decade was below Great Depression levels.

On top of high unemployment, we're suffering from a drop in wages in the aftermath of the recession.

This week's credit check: Wage growth fell from 3.8% in May 2007 to 1.8% in May 2011. Wage growth over the past decade was below Great Depression levels.

It was a year ago this week that Treasury Secretary Tim Geithner welcomed America to its recovery. "We suffered a terrible blow, but we are coming back," he assured us, and he had a lot of "good news to report": businesses in a "strong financial position," banks "strong and more competitive," and American families saving more. But that last point may tell a slightly different story. While corporations are seeing nice profits again and banks are back to their usual wheeling and dealing, Americans are still scrimping and saving, even a year later. This recovery period hasn't felt like a recovery for the average worker, who is still struggling desperately to make ends meet. And beyond the fact that this is clearly a jobless recovery, another reason all of us are still wounded from the crash is that this is also a wageless recovery.

An analysis from the Economic Policy Institute shows that we're not just suffering from high unemployment in the aftermath of the recession. We're also experiencing falling pay for those who are lucky enough to have work. It reports that "wage growth has tumbled in the recession and its aftermath, falling from an annual growth rate of 3.8% in May 2007 to a rate of 1.8% in May 2011." Even the employed are worse off, bringing in less pay for their work.

And wages were pathetic even before the crash. While there are many parallels between our era and the Great Depression, that time period beats us in wage growth. As Jed Graham puts it, "Over the past decade, real private-sector wage growth has scraped bottom at 4%, just below the 5% increase from 1929 to 1939, government data show." So as wages fall after the Great Recession, they come on top of the fact that we had less to begin with heading into the financial crisis than people living under Hoover.

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Fittingly, then, income is also falling during the "recovery." Total income was down about 15% between 2007 and 2009.  New tax data that came out yesterday showed that in 2009, average income fell 6.1% to $54,283, losing $3,516 since 2008. That's the lowest level since 1997.

All of this comes on top of the trillions in wealth Americans lost in the crash -- little of which has been recouped. According to figures from the Federal Reserve, US household wealth fell by about $16.4 trillion of net worth from just before the recession to the worst of it in the beginning of 2009. Since then, Americans have regained only a little more than half of that, or $8.7 trillion. That stands in contrast to GDP, which has regained all of its losses. The picture is far, far bleaker for people of color. According to Census Bureau data, the median wealth for Hispanic households fell by 66% from 2005 to 2009 and by 53% for African Americans.

If wages continue to stall and unemployment remains outrageously high, we'll likely stay in this weak "recovery." When asked what's holding back the US economy, Deutsche Bank economist Carl Riccadonna responded, "It's the weakness in consumer spending." Workers spending their hard-earned paychecks (aka consumer spending) accounts for 70% of our economy.

As millions continue to look for work and employed workers bring less home, Americans should be able to turn to a government increasing job growth and promoting wages. But with unionization down and the government fixated on austerity, few are championing the needs of workers. Where will they turn instead when in need of cash to pay for the basics? Credit card companies, who will be glad to lend them money for outrageous fees and interest rates.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Higher Profits and Lower Wages are No Mistake

Jul 27, 2011Bryce Covert

Businesses have found ways to squeeze workers and boost the bottom line.

This week's credit check: Profit margins for the S&P 500 have increased by 1.3% from 2000-2007. 53% of workers recently reported taking on new roles, while only 7% got a bonus or a raise.

Businesses have found ways to squeeze workers and boost the bottom line.

This week's credit check: Profit margins for the S&P 500 have increased by 1.3% from 2000-2007. 53% of workers recently reported taking on new roles, while only 7% got a bonus or a raise.

I recently pointed out that the so-called recovery is mostly a corporate recovery, while the average American is actually faring worse in terms of income. It turns out that this is no accident. Corporate profits are up, in many cases, because wages are down.

In its July 11 edition of its Eyes On The Market investor report, JP Morgan reports that profit margins for the S&P 500 have increased by 1.3% from 2000-2007. This is a level "not seen in decades." How has this amazing feat been accomplished? The report puts it plainly: "reductions in wages and benefits explain the majority of the net improvement in margins." And as Zaid Jilani notes at ThinkProgress, "[T]he JP Morgan report explains this behavior taking place between 2000 and 2007, meaning that it began long before the Great Recession." He also points out that this section ends with the statement, "US labor compensation is now at a 50-year low relative to both company sales and US GDP." USA! USA!

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Another way companies are squeezing workers to boost profits? The Great American Speedup. Catherine Rampell reports in the NYTimes that hours worked have outpaced household income for traditional families. So even though median wages for two-parent families have grown 23% since 1975, the hours they worked over the course of a year have grown by 26%. This is part of the trend Mother Jones spotted just this month: Americans overall are working harder without getting more pay. The article reports, "Americans now put in an average of 122 more hours per year than Brits, and 378 hours (nearly 10 weeks!) more than Germans." Meanwhile, the Wall Street Journal picked up on a recent Spherion Staffing survey that showed workers taking on more tasks during the recession without anything in return. In the survey, 53% of workers reported taking on new roles, while only 7% said they got a bonus or a raise. Even if this practice began before the recession, the dismal job market isn't giving workers any leverage to protest when companies drop more work into their laps with no compensation.

It comes as no shock, then, that the IMF's annual assessment of the US economy highlighted how difficult the recovery has been for consumers. On the one hand, it notes, "Financial conditions have improved, particularly for large firms that face favorable bond financing terms... On the bright side, exports and the performance of businesses and the financial sector have improved significantly." But on the other, "Housing and labor markets have been the weakest links," and "the current recovery has been held back by significant adverse feedback loops between housing, consumption, and employment." In other words, Wall Street's humming along while consumers struggle through.

Despite all of these odds, Americans are trying desperately to get away from credit card debt. Although credit cards have acted as a safety net for families with stagnating wages, in the wake of the credit bubble burst we're paying more toward our bills than new purchases. A new report out today from TransUnion finds that consumers have spent $72 billion more from 2009-2010 on paying down their credit card debt than buying stuff. Compare that to the fact that between 2004 and 2008, we were spending $2.1 billion more on purchases than on bill payments. This is good news, but these efforts are going to be for naught if wages and employment don't rise. With income barely coming in, consumers will have no where to turn but debt.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Troops Fighting Wars Abroad, Fighting Banks at Home

Jul 13, 2011Bryce Covert

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Protecting service members from predatory lending at home is the least we can do to thank them for protecting our interests overseas.

This week's credit check: Most service members make less than $31,000 a year. Payday lending can cost military families over $80 million in fees each year.

Our military takes good care of its troops. As Nicholas Kristof pointed out in a recent column, it gives them access to excellent health care, provides superb child care to enlisted parents, and invests in service members' education. "[I]t does more to provide equal opportunity to working-class families -- especially to blacks -- than just about any social program," he says. "It has been an escalator of social mobility in American society because it invests in soldiers and gives them skills and opportunities." Those risking their lives in the line of duty deserve such treatment. They also deserve support once they return home.

But that's not what awaits them. Instead, they often find themselves victim to predatory lending. Service members, in fact, rate financial stresses as second only to work and career.

The most egregious case surfaced earlier this year when it was revealed that JP Morgan Chase and Bank of America had violated the Servicemembers Civil Relief Act by improperly foreclosing on almost 50 active duty military families. Under the SCRA, active duty troops are protected from suits such as foreclosure so that they don't have to worry about financial troubles at home while serving their country. On top of this, it was revealed that JP Morgan overcharged 4,000 military families on their mortgages. Troops can have their mortgage interest rates lowered to 6% under the SCRA, but Marine Capt. Jonathan Rowles brought to light the fact that his family was being overcharged at rates above 9 or 10 percent and then hounded by debt collectors for the extra amount they didn't owe, up to $15,000.

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But these aren't the only abuses they face. A 2006 report by the Department of Defense found, "Predatory lending practices are prevalent and target military personnel, either through proximity and prevalence around military installations, or through the use of affinity marketing techniques, particularly on-line," including payday loans, car title loans, tax refund anticipation loans, and rent-to-own operations. The report describes how military personnel are perfect targets for predatory lenders, who make loans based on income but not on the long-term ability to pay. In fact, 48% of enlisted service members are under 25, making them less experienced and less likely to have savings; they are away from any family that might be able to help out with financial troubles; they're paid regularly and aren't likely to lose their jobs; they're geographically concentrated; and there's even a military policy explicitly stating that they must pay their debts. On top of this, their pay isn't very high: most make less than $31,000 a year. It may be little wonder, then, that in 2005 active-duty military personnel were three times more likely than civilians to take out a payday loan. In fact, payday lending cost military families over $80 million in fees each year.

There is some good news for our troops. In 2006, the John Warner National Defense Authorization Act was passed, making it illegal for lenders to charge military members and their families interest rates above 36%, among other helpful provisions. The Justice Department settled with a JP Morgan unit and Bank of America for $22 million over the wrongful mortgage charges and foreclosures to provide relief to more than 170 active-duty personnel. And the new cop on the beat, the Consumer Financial Protection Bureau, just announced an agreement with the Judge Advocate Generals of all military branches "to provide stronger protections for service members and their families in connection with consumer financial products and services." Protecting our troops from predatory lending is almost literally the least we can do to thank them as they come home.

Bryce Covert is Assistant Editor at New Deal 2.0.

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Who Has Actually Recovered in this Recovery?

Jul 6, 2011Bryce Covert

Money is flowing again, but it's not going to workers or household incomes.

This week's credit check: Corporate profits have taken in 88% of the raise in national income since the recovery began, while household incomes only took in 1%.

Whether or not this feels like a recovery, we're technically in one. And it's true that some money is flowing again. But where exactly is that money going? Not necessarily to those who need it.

Money is flowing again, but it's not going to workers or household incomes.

This week's credit check: Corporate profits have taken in 88% of the raise in national income since the recovery began, while household incomes only took in 1%.

Whether or not this feels like a recovery, we're technically in one. And it's true that some money is flowing again. But where exactly is that money going? Not necessarily to those who need it.

It's going to corporations. The recovery began in the second quarter of 2009, and between then and the fourth quarter of 2010 national income rose by $528 billion -- and $464 billion of that, or 88%, went to pretax corporate profits, according to economists at Northeastern University. In fact, corporate profits have been growing quite rapidly in the post-crash period. The NYTimes reported in November of 2010, "Since their cyclical low in the fourth quarter of 2008, profits have grown for seven consecutive quarters, at some of the fastest rates in history." In the third quarter of 2010, they grew at an annual rate of $1.659 trillion, the highest figure recorded in noninflation-adjusted terms.

It's going to the pocketbooks of the richest of the rich. The Guardian reports: "The globe's richest have now recouped the losses they suffered after the 2008 banking crisis. They are richer than ever, and there are more of them -- nearly 11 million -- than before the recession struck." According to the annual world wealth report by Merrill Lynch and Capgemini, the wealth of high net worth individuals -- those who have more than $1 million in free cash -- rose nearly 10% last year and surpassed 2007's peak of $40.7 trillion, topping out at $42.7 trillion. It was even better for "ultra-high net worth individuals," those with $30 million to spare, as their numbers surged by 10% and the total value of their investments rose by 11.5% to $15 trillion.

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Where is it not going? To wages and salaries. As compared to corporate profits, household incomes only saw 1% of the $528 billion in national income growth, or $7 billion. The NYTimes reports, "The share of income growth going to employee compensation was far lower than in the four other economic recoveries that have occurred over the last three decades." In fact, the Bureau of Labor Statistics reports that average real hourly earnings declined by 1.1% percent from the beginning of the recovery to May 2011. This comes on top of the fact that real wages have been faring worse in the last ten years than during the Great Depression -- incomes fell by almost five percent and wages barely budged. These facts don't escape the public. In a recent poll by Democracy Corp, 43% of likely voters said that either they or someone in their family had experienced "reduced wages, hours or benefits at work" in the last year.

As I've pointed out before, when wages fall or stagnate for the average worker, it only leads to an increased need to take on debt. The typical family spends more today on the unavoidables -- energy, housing, health care, etc. -- than a generation ago, and have taken on debt to finance it. In 2007, the typical American owed 138% of their after-tax income. Our total revolving debt now comes to $796.1 billion, and that number will only rise as less money comes into households in real wages.

Bryce Covert is Assistant Editor at New Deal 2.0.

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The CFPB is a Win for the Unbanked

Jun 29, 2011Bryce Covert

Low-income communities that turn to nontraditional banking products stand to see outrageous fees and interest rates reined in.

This week's credit check: 17 million Americans are unbanked. Using nonbank products can lead to over $1,100 in fees a year.

Low-income communities that turn to nontraditional banking products stand to see outrageous fees and interest rates reined in.

This week's credit check: 17 million Americans are unbanked. Using nonbank products can lead to over $1,100 in fees a year.

As part of its mandate, the Consumer Financial Protection Bureau will begin policing both the big banks and the shadowy world of nonbanks. That latter category will include firms like payday lenders, debt collectors, and check cashers that have gone without much oversight. The Bureau just announced that it plans to oversee six new areas -- debt collection, consumer reporting, consumer credit, money transmitting and check cashing, prepaid cards, and debt relief services -- and will be cracking down on a host of other predatory products.

This is fantastic news for all consumers. I've previously written about the aggressive debt collection agency tactics that have been ramped up in the aftermath of the financial crisis, including putting people in jail. Consumer reporting -- companies in charge of credit reports -- aren't much better. Not only do many reports contain errors, it's very difficult to correct them. Both have escaped intense scrutiny, but that's about to change.

A crackdown in nonbank lending will particularly benefit lower income people and the unbanked. About 17 million Americans are considered unbanked, meaning they don't have a bank account or a relationship with another mainstream institution. Another 21 million are "underbanked" -- they have checking accounts but still often turn to nonbank services like payday lenders and check cashers. Some of these people are turned off by mainstream banking products, but many just can't afford the service charges and fees. Yet others find that their neighborhood offers few other options.

Payday lenders are one of the most expensive products marketed to the unbanked. They target people with paychecks, but unemployment checks also count -- so business is soaring. They work as a short-term loan to be paid back when the borrower gets that check. And part of why it's such a lucrative business is that the interest rates can be outrageous. When annualized, they can reach 450%. That figure doesn't even include the fees, which can be an upright hit of $45. With such a shoddy deal, you would think that these products are used as a one-time solution. But as Brad Tuttle reports, consumers often get stuck in a "vicious cycle":

First, the customer borrows to cover a financial shortfall. He pays off that loan soon after receiving a paycheck, but in the course of paying off the loan and its substantial interest, that puts the customer in a tough spot the month after the initial loan. So how does he pay the bills? By taking out another payday loan. Lather, rinse, repeat. If a borrower is late paying back a payday loan, fees kick in, making that loan harder to pay off-and increasing the chances of another financial shortfall down the line.

Check cashers may not be quite as outrageous as payday lenders, but they're not much better. The New York Times reports, "Most cashers pocket between 2 and 4 percent of each check's value, which a recent Brookings Institution study calculated could add up to $40,000 in fees over a customer's working life."

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These lenders aren't equal opportunity predators, either. They tend to target low-income people and communities of color. In fact, "[i]n these communities of color payday lenders are three times as concentrated as compared to other neighborhoods," according to a report by National People's Action. This trend is being exacerbated in the recession, as traditional banks close up shop in these areas to open their doors in wealthier ones. The New York Times reports:

In low-income areas, where the median household income was below $25,000, and in moderate-income areas, where the medium household income was between $25,000 and $50,000, the number of branches declined by 396 between 2008 and 2010. In neighborhoods where household income was above $100,000, by contrast, 82 branches were added during the same period.

As Mark T. Williams, a former bank examiner for the Federal Reserve, observes, "When a branch gets pulled out of a low- or moderate-income neighborhood, it's not as if those needs go away." They get filled by payday lenders and check cashers, who can then reap fees and interest off of these underserved communities.

Prepaid debit cards are another nonbank product that these communities can tap into, and they can be cheaper to use than payday lenders. While they're being marketed to young tweens -- a card with the faces of the Kardashian sisters was set to go to market until Connecticut AG Richard Blumenthal threatened to put the kibosh on it -- and those who have a distaste for credit cards, they're also seen as a way to get money to underserved communities, particularly the poor and the unbanked. An expected $37 billion will be loaded onto prepaid cards this year, and the total market is expected to double in size in the next three years, with an $672 billion loaded onto these cards by 2013. But as Adam Levitin notes, "prepaid debit products are often as predatory in their pricing as check-cashing outlets."

In search of evidence of that claim, Candice Choi, a reporter for the AP, spent a month without her bank and ended up racking up $93 in fees total, including $4.95 to buy a prepaid debit card upfront and $1 per swipe of the card, which would work out to $1,100 a year "just to spend my own money," as she puts it. The fees charged by these cards vary wildly, in part because there's been no oversight of the industry. A consumer can be charged for activities ranging from account activation and cash withdrawal to simply not using the card. Lack of oversight also means that they usually aren't under federal protections, including fraud and FDIC insurance. And last but not least, not only do fees vary widely, but their disclosure does as well. A report from AARP warns, "The lack of clear and concise disclosure of all fees associated with a [prepaid debit card] can result in consumers incurring fees that will rapidly drain their account balance."

For too long these industries have existed like vampires: sticking to the shadows and living off other people's welfare. But the Consumer Financial Protection Bureau is promising to shine some much needed sunlight on their activities. That will be a big win for all consumers -- and particularly for the unbanked.

Bryce Covert is Assistant Editor at New Deal 2.0.

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