Government in your checkbook, part 1

From Exaniner.com (7/14/09)
By Meghan Brennan, Oklahoma City Personal Finance Examiner

On June 30, 2009, the Obama administration released a proposal for a new regulatory agency over ALL “financial products and services,” private banks AND credit unions AND credit card companies AND any business which involves itself with any financial product, called the Consumer Financial Protection Agency. Among the many powers given to this agency in this 152 page proposal are powers of arbitration of disputes, regulatory powers including setting product guides, fees, and benefits, the power to issue orders, guides, and create new laws as well as their enforcement, and the compensation of private financial employees “who deals or communicates directly with a consumer in the provision of a consumer financial product or service.” (For more information on CFPA, visit www.oba.com or http://www.mondaq.com/article.asp?articleid=82816)

As a consumer of financial products as well as a member of the financial community, these proposals appear Orwellian. As the proposal currently reads, the ‘private’ part of ‘private bank’ and the ‘independent’ of ‘in dependant credit union’ will be dissolved. Products will be standardized, as will interest rates (so that all products are “fair,” a determination to be made by the agency). Financial institutions will be required to offer products and services to persons who have been determined to be high risk and abusive. The definition of “financial institution” as stated in the proposal is very broad. It appears to cover credit reporting agencies, prepaid card vendors (like GreenDot and the Walmart Money Card), traditional banks and credit unions, credit cards, credit collections agencies, mortgage brokers, title and appraisal agencies, pay day loan companies, and student loan institutions.

In Part 1 of my examination of the CFPA, I will be looking at debit card disputes.

There has been a huge out cry about government getting between “you and your doctor,” when realistically the insurance company already occupies that position, but nothing has been said about the government getting into your checking account.

That’s right.

The government is going to be looking at your daily spending.

Every day, many private employees review reports which involve looking at the transactions in customer’s accounts and tracking consumer spending. Generally this is to ensure that fraud is not occurring, either against or enacted by customers. Each financial institution employee is required to sign confidentiality clauses to protect the information of the customer and information of the institution. In the last few years, there have been breeches of this and similar contracts by private institution employees as well as employees of the government, one of which happened in south Oklahoma and was reported by the bank involved when it discovered the fraud. Statistically, the financial services is huge. The number of individuals engaging in this activity in last two years is less than 30 people, until you include inadvertent breeches (the most famous of which was a laptop with confidential information being stolen. The majority of those compromises were done by persons not directly involved in the financial industry), but the number of people affected is enormous. The government is proposing to increase the number of people who have access to private and confidential information in order to keep that information confidential.

The Consumer Financial Protection Agency is to be headed by a board of five people, who as the Oklahoma Banking Association points out, may not have “any knowledge about the manner in which any type of financial institution actually works or functions.” The requirement to be appointed to this board are that the members be US citizens and “who have a strong competencies [sic] and experiences related to consumer financial products or services” [§ 1012 (a)(1)(A) and (B)]. Four of the five members will be Presidential appointees and reliant on Senate approval. So every four years, the regulations on the banking industry will change.

Let me give you a scenario to show how this could potentially affect you:

You go online and check your statement. You’re overdrawn but are not at your overdraft limit. You look at the recent transactions and don’t recognize them. You call your bank and tell the customer service rep who answers that you think someone has stolen your debit card information.

As it is right now, many banks have internal fraud teams (mentioned above) who have been monitoring your account and have been monitoring your account since it opened. They noticed the transactions as unusual activity and put a hold on your debit card.The customer service rep tells you that your debit card has been placed on hold and goes over the transactions with you until you get to the last one you remember. At that point, they cancel the card. They confirm that you are in physical possession of your card, find out if you recently ordered a card one or were up for a replacement due to the expiration date. Some banks may require a written statement at this point because of what the rep is about to say, many will not.

The rep says, “Ok. I’ve completed the fraudulent activity report on your card ending in 1111. Funds will be returned to your account while we investigate this fraud and all overdraft fees will be returned. We recommend filing a police report as soon as possible, as well as checking any other accounts you may have, and placing a fraud alert on your credit report to ensure that your personal information is not being used.” The rep offers to order a new card for you to pick up at a bank location if you are not comfortable with the card being sent to your mailbox, to give you information and step by step instructions to further protect your identity.

If the CFPA passes, there are going to be more layers of bureaucracy. If banks are allowed to keep their internal fraud teams, these teams may not be allowed to place holds on your debit card without managerial approval. As the proposal is written, this appears unlikely- private banks and credit unions will apparently be policed by an outside agency which may or may not have the ability to block your card. If a customer service rep cancels the card, that agency may think that the rep was ‘unfair’ and reactivate the card, especially if (and this happens often internally) the rep hasn’t completed documentation when the agency reviews the card account.

The second potential problem is the dispute process, explicitly mentioned in the proposal. I am most familiar with Visa’s dispute process, since they are the backers of most debit cards I’ve dealt with. Visa has a 60 to 90 day return period on disputes. I will outline the dispute process in a later story, but the basic timeline is this: 1) bank forwards dispute to Visa, 2) Visa reviews and forwards to individual merchants, 3) merchants have a period of time to provide information regarding the disputed charges including video, receipts, and invoices to Visa and any police agency the customer may have engaged. At this point, 4) Visa confirms that these transactions were fraudulent by verifying information with what’s on file at the reporting bank. Once confirmed, Visa will require that 5) the merchants return that money to the victimized customer. If the merchant is unable to do so, Visa will provide for the customer. In personal bank accounts, banks are guaranteed either that Visa or the merchant will be paying them back for a temporary loan so that they can return your balance to what it was before the fraud occurred. In credit card situations, the money that has been stolen is technically the credit card company’s but it was stolen in the name of the customer. These charges can stay on the card until the end of the dispute process. If they do stay on the card, they are usually put in suspension so that they do not accrue interest and there are no fines for not paying them.

If the government takes over disputes, the turn around time will most certainly change. So far, I haven’t found anything indicating how the government intends to change the dispute process other than it will change. If the dispute process is treated the same way that collections on FDIC insurance is treated, the repayment to banks will be very slow, disputes will go through three or more approval processes, and banks may not be willing to issue immediate returns until turn around time is resolved.

The last major potential problem is re issuance of a debit card. Since the CFPA is to have control over products and services, they will be changing the requirements for issuance of debit cards, spending cards, and all other services. Since a person has been victimized, it may be considered too much of a risk to issue a card immediately or may require the completion of the dispute process to ensure that fraud has actually taken place, depending on how much risk the agency is willing to endorse.

Now to the good news. Yes, there is actually good news. Since CFPA will have regulatory and reporting powers over ALL financial services and products, it is possible that the customer service rep will be able to place a fraud alert for you, since credit reporting is a financial service; the rep may be able to review all your debit cards with you, since the CFPA will have access to ALL financial products. Forgery and fraud reports, currently reported to and handled by the FBI, will most likely be transferred to the CFPA. This means that these reports should be all in house; if someone starts writing fraudulent cashier’s checks apparently from Summit Bank of Maine and deposited in New Mexico, Summit Bank of Maine and neighboring financial communities won’t have as long of a delay in the report of those forged items. Bigger patterns may become evident (who deposits forged items for example) and lead to greater arrests. Persons who abuse accounts after CFPA is passed may finally have the incentive to use their accounts responsibly (abuse would be kiting, having an overdrawn account for a majority of the time, forging items for deposit to their account, continually writing intentionally bad checks, and similar behaviors). CFPA may also make it easier for banks and credit unions to expand to areas which are “under served.” And the best thing of all, in my opinion anyway, is an institution which will regulate payday loan providers and enforce usury law laws so when you are done paying back the $9,000 loan for your car, you haven’t repaid $18,000.

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