Your paycheck doesn’t stretch far enough, and the stock market routinely clobbers your retirement account. You may not feel financially secure, but in many ways your money is a lot safer than it was a decade ago.
The financial crisis of 2008 and the subsequent recession prompted a bunch of reforms that are helping you keep more of your hard-earned cash, even if you’re not always aware of the safeguards.
Here are five of the most important changes:
1. It’s harder to get a mortgage you can’t afford.
In 2006, all you needed to get a home loan was a pulse — and sometimes you didn’t need that. One type of mortgage fraud was the “air loan,” where brokers invented properties and borrowers.
The mortgages that real people got were often unsustainable. In the go-go 2000s, mortgage brokers and other lending professionals earned more if they steered you into risky loans with payments that exploded upward after the teaser rate expired.
These days, most loans are made using “ability to pay” rules that require lenders to make sure you can afford the mortgage you’re getting. It’s more paperwork, because lenders have to document your income, assets and other debts — but that’s the way banks made loans in the old days.
“It’s absolutely a throwback to much of the lending that occurred before the explosion of subprime lending,” says Yana Miles, policy counsel for the Center for Responsible Lending.
2. Credit card issuers can’t change your rate on a whim.
Before the Credit Card Act of 2009, credit card companies could change your rate for any reason or no reason. One way they did this was known as “universal default,” which meant that if you missed a payment on any of your credit accounts, your rate could skyrocket on all of your accounts, even if you were up-to-date on the others.
The act killed universal default and allowed issuers to raise rates on existing balances only if the borrower misses two consecutive payments. Carrying a credit card balance still isn’t wise, but at least you won’t face a huge rate hike if you pay on time.
3. ‘Bounce protection’ has (mostly) bounced.
Banks made billions with “bounce protection” or “courtesy overdraft” that approved ATM and debit card transactions when customers didn’t have enough money in their accounts. People often didn’t realize they’d been signed up for this “service” until they were charged $25 to $35 for each overdraft transaction.
“That allows you to pay $38 for a $3 cup of coffee,” says Ed Mierzwinski, consumer program director for the U.S. PIRG, a consumer advocate.
Now banks are required to ask if you want to sign up for this coverage. When offered a choice, most people wisely say, “no thanks.” A better option: Keep track of your balance and consider true overdraft protection that’s tied to a savings or credit account. (Here’s a look at typical overdraft options at big banks and credit unions.)
4. Predatory colleges have been put on notice.
Corinthian Colleges was one of the largest for-profit education chains with its Everest, Heald and WyoTech brands. But regulators say it advertised programs it didn’t offer, faked job placement rates and used illegal debt collection practices.
Now, to maintain access to the federal loans and grants they need to function, for-profit schools must prove that their average graduate’s student loan payment eats up less than 20% of discretionary income, or 8% of total earnings.
On Feb. 8, the Department of Education announced it would create a new Student Aid Enforcement Unit to more quickly investigate complaints of illegal conduct by schools receiving financial aid.
Will this prevent people from taking on egregious debt for overpriced, sometimes useless degrees? Of course not. But it has signaled to the for-profit colleges that the Wild West days are over, and they will increasingly be held accountable for the promises they make.
5. Someone is listening.
Consumer protection used to be scattered among a bunch of federal agencies that rarely treated it as a priority. If you had a problem with a credit bureau, for example, you could file a complaint with the Federal Trade Commission — but you couldn’t expect a response. FTC warns on its site that it can’t resolve individual complaints.
The Consumer Financial Protection Bureau, by contrast, can and does respond to individuals. And the bureau takes enforcement actions based on those complaints.
“In just a few years, the CFPB has already returned over $11 billion to families who were cheated by big banks and other financial institutions,” says Sen. Elizabeth Warren, D-Massachusetts, who helped set up the bureau. “That’s government that works for the American people.”
The CFPB has returned $3.45 billion in restitution and $7.75 billion in principal reductions, canceled debts and other relief to affected individuals.
“We’ve got an agency that’s squarely focused on consumers and being really serious not just about compliance with the law, but with the spirit of the law,” says Lauren Saunders, associate director of the National Consumer Law Center. “People can make a complaint, and it doesn’t just go into a black hole.”
We can’t go backward
The fact that the CFPB takes action has made it many enemies. Many banks, lenders and big Wall Street investors would love to see it go away, so they can get back to making money on the backs of outmatched consumers.
They know that no matter how smart you are, or how well-educated about money, you can still be outwitted and duped by companies that put profits over treating people fairly.
So we need to remain vigilant, both in our own personal finances and in protecting these advances. As memories of the 2008 financial crisis and recession fade, you’ll hear more about how these reforms weren’t necessary.
The reforms were essential, and it’s up to us to make sure our lawmakers and regulators remember that.
Image via iStock.