Deceptive mortgages and financial products

In this report: Overview

This article was featured in the July 2009 issue of Consumer Reports magazine.

Last reviewed: July 2009

VIEWPOINT

THE CONSUMERS UNION PERSPECTIVE

Here, a monthly perspective from Consumers Union on the latest challenges—and possible solutions—facing U.S. consumers today. See archived letters.

This article is the archived version of a report that appeared in the July 2009 Consumer Reports magazine.

Stop credit gotchas

Lousy loan
Vernon Frontz almost lost his home after he was persuaded to refinance.
Photograph by Pete Winkel

Two years ago, a mortgage company approached Vernon Frontz, then 91, with a deal: It pledged to lower his monthly payments, he says, from just over $900 to around $600. The savings sounded good to Frontz, who lives on a fixed income. But the new loan was fraught with fees and gotchas and almost caused him to lose the Atlanta cape he has lived in for 44 years. "I was blindsided," Frontz says.

The 40-year adjustable rate loan had an interest-only pay option. The minimum payment didn't cover the interest, so the loan balance went up, not down, each month. Frontz owed more after a year of payments than he did at the start. Refinancing to a traditional loan would have earned him a prepayment penalty. Frontz's lawyer ultimately got him a more suitable loan that enabled him to keep the house.

Financial products like Frontz's loan aren't just bad for borrowers. They cripple neighborhoods, shrink tax bases, and weaken the economy. The current system doesn't protect consumers from suspect terms or traps hidden in the fine print.

A better way

Effective protection requires a single, federal agency that would identify and ban products and features that create an undue risk to consumers. (Regulation of financial services is now spread among agencies, none of which puts the consumer first.) The Senate is considering a bill that would create the Financial Product Safety Commission. Unlike current regulators, it would get no funding from the financial industry. The commission would be charged with eliminating harmful credit and banking products and monitoring emerging practices to stop bad ones before they take hold.

States need more authority to act, too. Federal preemption has compromised the ability of states to enforce their consumer protection laws against national banks and discourages states from developing creative solutions to financial abuses they discover in their own neighborhoods. A strong concurrent role for state law and state agencies is essential to provide more and earlier enforcement of existing standards. Learn more about these issues at www.DefendYourDollars.org/topic/bailout.