“….. and you can trust me, or my name ain’t Nathan Arizona!” How to avoid interest rate markups in Auto Loans

In the movie Raising Arizona (which I wholeheartedly recommend, by the way) one of the main characters is a furniture salesman who ends every ad with the tag line “you can trust me on that, or my name ain’t Nathan Arizona!” Which is cute, until you find out that his name really is NOT Nathan Arizona.  Which brings us to this week’s news out of the CFPB (Consumer Financial Protection Bureau) in Washington.

The CFPB issued a bulletin this week, warning banks and auto-finance companies that they must stop the practice of issuing loan interest markups in a racist manner.  The markup that the CFPB is referring to is when the finance company jacks up the buyer’s interest rate (or authorizes the dealership to do so) over-and-above the rate that the buyer qualifies for.  The transaction happens like this: You walk into the dealership and pick out a car.  After you settle on a price, the salesman tells you how sweet the deal is and how they are going to ‘take care of you.’  Then, they lead you to an office, where you sit down with the F & I (Financial & Insurance) officer to work out the loan that will allow you to buy the car. (for a great explanation of F&I officers and what their mission really is, go to the Consumer Rights Law Blog

However, instead of giving you the lowest interest rate that you should get, they trick you into thinking that your credit isn’t so good and charge you a higher interest rate than what the finance company requires them to. (this way, they make more money.  That is becuase, the lender that is financing the loan has offered the dealership a slice of the extra money that they are able to fool you into paying over the life of the loan) 

You think that they will pull your credit and use your score to figure out how to charge you the lowest interest rate that they can, in order to save you money.  Not so, says the CFPB.  It seems that the banks have been pulling a fast one and adding points to the loans of CERTAIN borrowers.  Those borrowers have been overwhelmingly African American and Latino.  “There oughtta be a law!” you say? Well…….there IS a law! It’s called the Equal Credit Opportunity Act (ECOA), which basically says that it is unlawful to use certain non credit-related factors (such as the color of someone’s skin) to determine whether or not to extend credit (or when making up the terms of that credit).

With the announcement yesterday, the CFPB is sending a shot across the bow of the lenders that are under its jurisdiction.  The message is that the CFPB is going to be watching how they lend. (whether that watch-dogging is going to include a review of past loans; and whether the CFPB is going to start suing lenders who continue to misbehave – only time will tell)

What can you do to protect yourself if you are going to buy a car?  (Even if you are not likely to be discriminated against, you certainly want to make sure that nobody makes money by giving you an interest rate that is higher than the rate that you deserve)  Ask some very pointed questions of the F&I officer, while he is explaining the terms of your loan (and right after you say “No thanks, I DON’T want an extended warranty!”):

1. What is my credit score? Consumer Courage is always telling people to pull their own credit report and try to improve the score, a few months before you try to borrow money.  But, many car purchases happen, because the old jalopy has broken and you don’t have months to shop around.  Just because you really need a car, doesn’t mean that you can’t ask the F&I guy to explain your own credit score to you.
2. What is the lowest interest rate that I qualify for? If they don’t give you a straight answer to this question, they’re lying! Banks and finance companies decide what kind of interest rate to give you, based on the risk that you might stop paying them at some point. That risk depends on many factors (how many times you’ve been late; what your income is; what your credit score is, etc.) It’s not so important that you understand just HOW the financial model that they use to determine your interest rate works.  It IS important to know that they actually have a model. Somewhere, there is an equation that they will use to figure out what interest rate to charge you.  You want the lowest rate, right? So, ask for it!
3. Is there an ‘interest rate markup’ on my loan?  If the first two questions didn’t get results, this one surely will. 

Make sure and write the name of the person you talk to and his/her answers down, while you are in their office (in case – heaven forbid – you find out later that they weren’t exactly honest with you) 

There are many other concerns to buying car, certainly. But, don’t make the mistake of letting your guard down, as soon as you have a price.  You are going to between 3 and 5 years to pay the loan back.  You might as well get the best deal that you can.  You can trust me……..or my name ain’t Nathan Wiseman!  (Actually, that’s my middle name. But, you get the point)

Posted by: Mark Nathan Wiseman

‘What’s in YOUR wallet?’ (er……Credit Report)?

The FTC recently released a report about the accuracy of credit reports.  They surveyed over a thousand people and asked them to look at their credit reports to make sure that the information was accurate.  The results shed light on a legitimate way to make yourself some money.  “How?” you ask.  By checking your credit report and disputing any errors that you find.

What this probably means, is that 1 out of every 4 people who read Consumer Courage have a credit report that contains some incorrect information.  A third of THOSE people will have credit reports that have an error that are keeping them in a lower credit tier than the one that they should be in.  (in other words: almost 10% of the people who are reading this have a credit report error that will cause them to get a loan with a higher interest rate, because of a mixup on the part of the Credit Bureau!)

CHECK YOUR OWN CREDIT REPORT REGULARLY !

The Federal Government has set up a website to let you pull your credit report from agencies, themselves for free once a year.   And, there are no shortage of consumer resources for people who have questions about their credit report. Consumer Courage has a page on Credit Reports ; The National Consumer Law Center has a concise and very helpful brochure; and the Consumer Federation of America has an entire web page devoted to credit report resources. No matter the strategy, the conclusion is the same – since what’s on your credit report can harm you, get in the habit of checking it out. 

IDENTITY THEFT/FRAUD IS NOT AS RARE AS YOU THINK

As if the prospect of being forced to pay a higher interest rate on your loan (or being denied credit altogether) wasn’t bad enough, here is another reason for you to be concerned about what’s on your credit report.  There is a new study out about identity theft by Javelin Strategy & Research, entitled  “How Consumers can Protect Against Identity Fraudsters in 2013” 

The study is a great thumbnail view of the various types of fraud that we should be on the lookout for and what you might do on a daily basis to keep from becoming a victim.  Reports like this usually start out making you uncomfortable and this one is no exception.  Among some of the other scary facts about just how prevalent Identity theft is, Javelin Strategy found that:

    • Just over 5 % of U.S. adults (more than 1 in every 20 consumers!) learned in 2012 that they were victims of identity fraud;
    • Almost 1 in 4 consumers who received a data breach notification in 2012 became a fraud victim.
      • Of particular concern is that consumers who were notified that their Social Security numbers were compromised in one of these data breach incidents were 5 times more likely to be a victim of identity fraud than all other consumers and 14 times more likely to become a victim of new‐account fraud
    • Online retail fraud increased from 41% of all fraud victims in 2011 to 45% in 2012
      The news is worse for those folks who spend a lot of time on their handheld devices (tablets/iPads and phone; but especially tablets and iPads)
    • Tablet users are almost twice as likely to be victims of fraud than all other consumers (9.6% compared with 5.3%),

There are 105 million smartphone users and 42 million tablet users in the U.S. And, they are constant targets for fraud.  Why – because your tablet/iPad/phone are always connected to the web and can be compromised at any time by malware or contaminated apps that you might have downloaded.  (Not to mention the incredible risk that a public WiFi connection brings)  

    • Tablet users are more likely to be victims of fraud than all consumers (9.6% compared with 5.3%), 
    • Tablet Owners Are 80% More Likely Than All Other Consumers to Become Fraud Victims

OK, enough w/the bad news.  Here’s the good news – you can take some very simple (and free) steps to protect yourself from Identity theft!

HERE ARE A FEW WAYS TO PROTECT YOURSELF FROM IDENTITY THEFT:

  • Of course, check your credit reports and make sure that they don’t have any errors or mistakes.  Check www.annualcreditreport.com and follow their dispute process if you encounter any errors.  (although it can sometimes be frustrating to bring a dispute, it is necessary to start the process.)
  • Check your bills!  For every monthly bill that you receive that lists charges (including your utility bills) spend the time to go through each one line-by-line to make sure that there aren’t any charges there that you don’t recognize.  If there are, call the company right away and make a dispute.
    • Hint: Some scam artists will put a small charge onto a bill for the first month to make sure that it goes through.  This way, when they place a bogus charge that is for a high amount, the credit card (or utility) company can be fooled into recognizing the scammer as an ‘authorized payee’ and approve the charge.  (If the first charge from a fake company in Belarus is only for $3.89, you are much less likely to catch it)
  • If it’s wireless, it might as well be on the front page!  (OK, so maybe that’s overstating the point a little. But, still……)  If you are on a wireless network (even if it’s in your living room) resist the temptation to sign on to your bank account to see if your check has cleared; pay a bill; or conduct any official business.  If you’re at the coffee shop and want to read the paper on the web, have at it.  But, if you want to check your credit card statement, be careful.  That guy next to you who is reading ESPN might just be waiting to hack into your account.
  • How many apps do you have?  There’s an app for everything and if they have all been downloaded onto your phone, you just might have downloaded some spyware or malware that is busy hacking your info while you are sleeping.  Apple claims that the iPhone users don’t have this worry, if their phones are up-to-date.  But, you should think about some type of virus protection for your phone if your company isn’t as confident as the folks at Apple. 
  • Don’t ignore the ‘Gee, we may have left the vault door open’ letter.  This ‘data breach notification’ letter is what your lending institution is required to send you, when they determine that THEY were the victims of fraud. (By the way, this will ONLY come in the form of a letter and will NEVER be in an e-mail.  If you get an e-mail that talks about a security breach, delete it right away!) The data breach letter usually means that your information was (or could have been) stolen and that you might be the victim of identity fraud/theft. 
    • As the Javelin study shows us, 25% of the folks who have been ‘data breach’ victims were, indeed, victims of Identity theft in 2012.  In addition, if the breach involved your social security number, you were 10 times as likely to have your identity stolen!
  • What do you do, if you get the data breach letter?
    • Call each of the credit reporting agencies (the data breach letter will have their contact info) and tell them that your data has been breached.  They will send you a copy of your credit bureau to review
    • Ask them to put some type of fraud alert on your credit report.  These can be for 90 days or 7 years.
    • Consider putting a freeze on your credit report.  This will make it nearly impossible for someone else to obtain credit under your name.  (Unfortunately, it’ll make it hard for you, too.  If there’s a freeze on your credit report, creditors will only grant you credit if they can reach you on your home phone.  Instant credit – signing up for a credit card at the register to get 20% off – will be impossible)

Whatever you do, being more diligent is a good first step.

Posted by: Mark Wiseman

A Word about Credit Scores…and How to Protect Yours

As you probably know, your credit score plays a critical role in whether or not you’ll be offered credit, and if so, whether or not you’ll receive favorable terms. But did you know there a number of different scoring models? And what is ‘good’ to one lender, or for a particular type of loan, may be deemed ‘not so good’ by another. FICO is the most common scoring mechanism. FICO prepares a scoring model for each of the three major nationwide credit reporting agencies: Equifax, Experian, and Trans Union. As a general rule, these scores fall in a range from about 300 to 850. A score lower than 620 is generally considered a bad score (or what the industry refers to as a ‘poor credit risk’) While the most attractive terms (interest rates) are usually offered to consumers with scores over 720.

The Consumer Financial Protection Bureau, or CFPB, is the federal agency that will begin the oversight of the major credit bureaus in early 2013. A recent CFPB study  has found that the credit scores made available to you and I may significantly differ from the score provided to potential lenders. So even for the savvy consumer who educates herself prior to applying for credit, knowing her credit score might not tell her the whole story, if the potential lender is looking at an entirely different score.  This underscores the importance of monitoring your credit reports on a regular basis. And I do not suggest subscribing to a credit monitoring service. Do not waste your money. Most credit monitoring services are owned and/or operated by one of the ‘Big Three’ credit bureaus; and notably, most require you to sign away important legal rights when you agree to their terms of service. A lose-lose for you! You can monitor your reports FREE by obtaining a copy  from each of the ‘Big Three’ (Experian, Equifax and Trans Union) once per year.

If you discover errors, you should dispute this information right away. It is estimated that one in four reports has an error serious enough to cause a credit denial. Derogatory information on your credit report can also lead to other unsavory things, such as higher interest rates, decreased credit lines, and even employment turn downs.

And with identity theft topping the chart of consumer complaints to the Federal Trade Commission, it makes sense to be proactive. In most cases, the best thing you can do for yourself is locate a consumer-advocate or a non-profit agency to help you through the maze that is created by an error on your credit report or identity theft.  There is no shortage of good advice, if you find errors on your credit report. If you even think that you may be the victim of identity theft, don’t hesitate to get help.  The IRS has a great step-by-step resource for victims of ID theft.  In addition, there is a Non-profit agency in California, dedicated to helping victims of ID theft – no matter where they live in the U.S. – called the ID Theft Resource Center.     

 Posted by: Amy Wells