While regulators and banks have taken steps to curb some of the most reckless lending practices, consumers still face hurdles as they manage their debt, namely higher fees and interest rates on some products. Here are five troublesome trends in lending, and how you can protect yourself:
More interest on credit cards: According to the Federal Reserve, the average cardholder was paying 13% in interest in May, up from 12% a year earlier. Interest rates will likely rise as banks adjust to new regulations that could crimp fee revenue.
New laws went into effect Aug. 20 that require banks to provide notice 45 days before raising interest rates. Cardholders can opt out of increases and keep their current rates, but they must pay off their balances within five years and can't make more purchases on their cards. Banks will face another slew of new regulations in February.
The most damaging provision for banks relates to fees charged when customers go over their credit limits. These fees will be banned unless "the consumer has expressly elected to permit the creditor" to allow extensions of credit above the limit.
Banks will need to make up lost fee revenue by keeping rates higher. Credit card lenders including JPMorgan Chase (JPM) - Get Report (Stock Quote: JPM) and Bank of America (BAC) - Get Report (Stock Quote: BAC) have reacted by moving some fixed-rate cards toward variable-rates based on rate spreads above the prime rate. Wells Fargo (WFC) - Get Report (Stock Quote: WFC) said that it "may make interest rate and fee adjustments if appropriate."
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report Consumers should pay attention to the fine print in their bills, which will soon include some useful information, such as how long it would take to pay a balance if only minimum payments are made.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get ReportChecking account overdraft fees on the rise: Credit and debit card use worldwide grew 11% last year and 15% in 2007, according to a new report from Capgemini, the Royal Bank of Scotland and the European Financial Management & Marketing Association. The growing use of debit cards, in particular, has made it easier for customers to overdraw their checking accounts.
While banks and credit unions offer a variety of overdraft protection options, the recent trend has been for institutions to automatically cover overdrafts with small loans that charge high fees. The median overdraft fee was $27, according to a report issued by the Federal Deposit Insurance Corp. in November.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report Almost half of the overdrafts took place at stores and ATMs, the report says. In most cases, the customer wasn't warned before they exceeded their balances. Going over by even a few cents can trigger a penalty.
U.S. Rep. Carolyn Maloney, a Democrat from New York, introduced a bill in March that would require consumers to agree to overdraft protection before it's imposed and allow them to cancel transactions without penalty. Banks would be required to warn consumers if a debit card transaction would cause them to overdraw their accounts. The proposal is being discussed in committee.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report In the meantime, find out your bank's overdraft policies. You might be able to opt out of overdraft coverage or use your savings account as a backup instead of a loan. Half the banks surveyed by the FDIC charge nothing for this service.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get ReportMortgage loan origination fees: Lenders charged $1,692 in origination fees, on average, on loans issued in 2008, according to the Mortgage Bankers Association. Sometimes they're referred to as underwriting or processing fees, but they typically provide additional profit to the lending institution, as well as an additional commission to the loan officer.
Unlike application fees, appraisal costs and charges for credit checks, origination fees are murky. Some lenders charge them, some don't.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get ReportReverse mortgage scams on the rise: Reverse mortgages allow people 62 and older to borrow against the value of their homes to raise cash. The loan doesn't need to be repaid until the borrower moves out, sells the property or dies.
During the 12 months through October 2008, the Federal Housing Administration backed 112,000 reverse mortgages. That's up from 76,282 during the same period through October 2006. The FHA insures most reverse mortgages issued in the U.S.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report Scams involving reverse mortgages are becoming more frequent. The FDIC cited reports of "companies attempting to sell questionable home repairs or investments in connection with a reverse mortgage." There have been companies that charge fees to provide information on reverse mortgages that's available for free through the Department of Housing and Urban Development.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report When considering a reverse mortgage, check with a few lenders and review what's available, then discuss the alternatives with a HUD-approved housing counselor. Depending on the borrower's income and the amount of cash he needs, a home equity line of credit might be a better choice.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get ReportKickbacks continue with car loans: To help sell cars, most auto dealers will arrange financing, usually offering a few options with different lenders. The problem is that lenders often pay dealers bigger commissions for offering loans with higher interest rates. That encourages dealers to arbitrarily add points to the rate a borrower qualifies for based on his credit score, according to the nonprofit Center for Responsible Lending.
A questionable practice known as "loan packing," when a dealer bundles an attractive financing plan with costly items such as extended service plans, also remains a problem, according to the organization. Consumers must also watch out for "yo-yo financing," when a buyer signs a conditional sales contract based on a certain rate and takes the car home only to have the financing fall through, forcing the customer to renegotiate the rate.
(JPM) - Get Report (BAC) - Get Report (WFC) - Get Report Rosemary Shahan, founder of Consumers for Auto Reliability and Safety, recommends that consumers steer clear of dealer financing entirely. If you plan to borrow through a dealer, your negotiations should focus on the car's total price instead of your ideal monthly payment, which creates more potential for dealers to manipulate loan terms.
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