Now that the CFPB has somebody in charge despite Republican efforts to the contrary, it can actually start getting into the business of what it was created to do: protect consumers by regulating financial products. And it just so happens that some news I read today provides a handy example for thinking about what exactly needs to be regulated.
Here’s the deal: CitiMortgage has a new program to help people pay off their mortgages more quickly. Instead of making 12 monthly payments a year, this program allows people to make 26 half-payments a year to match most people’s biweekly paycheck schedule. The result, one extra mortgage payment per year, will reduce the time it takes to pay off the mortgage, along with the total interest charged. Good deal, right? Except for the strings.
See, CitiMortgage charges $375 to set it up, then $1.50 per payment for “processing”. And what does it do with your money? It holds onto that half-payment for a couple weeks, then bundles it with the other half-payment to remit the payment in full. Yes, it floats your money for half the year. So CitiMortgage is making money on you in several ways from this scheme. No wonder people are not amused.
Is this something that should be regulated? I think two points are relevant here. First, as the article points out, it is impossible to set up such a scheme using Citi’s available bill paying tools, despite the fact that such a payment plan is not necessarily harder for banks to deal with. On the other hand, there are other ways to get the same effect, such as increasing each mortgage payment by 1/12th, and setting that up as an auto-payment. I’m not sure if Citi would allow this setup.
The second point is the feasibility of consumer choice. If you don’t like a McRib sandwich, you have little problem finding someplace else to eat. However, when it comes to mortgages, you can’t really up and take your mortgage elsewhere if you don’t like the fees. Most people, when they shop for a mortgage, are only concerned about the upfront fees and the interest rate. They don’t care much about extra fees down the line. Perhaps one of the efforts of the CFPB that has already started, that of revamping the mortgage disclosure forms, will help. But even with more disclosure, it is unlikely that people would prioritize future fees when choosing a mortgage company. Plus, those fees could change in the future. Thus, the lack of the ability for a consumer to decide they don’t like the fees and take their business elsewhere is severely hindered.
Clearly, the CFPB is going to have a lot of details to work through with regards to regulating financial products. It won’t be easy. Frankly, I’m not sure what the correct course of action would be for this CitiMortgage product. Generally, I think most people would agree that making people pay for using their own money in the manner they want is not acceptable, aside from nominal fees. Nobody likes ballooning ATM fees, or monthly fees to use a debit card, and so forth. Maybe the solution would be to prevent Citi from doing this. Or maybe the solution would be to make Citi tell its customers there are free ways to achieve the same end, and let people choose the expensive option if they really want to.
I think we are going to be hearing a lot more stories about similar products. To the extent they get publicity, I think it’s going to be good for the debate.