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Consumer Confidential

The rules of money are getting a makeover, and it's about time. With the implosion of the housing market, the collapse of credit, the upheaval on Wall Street, and our brush with a second Great Depression, we've all paid a high price for the abuses at the center of our economic mess.

The fallout has been painful: trillions of dollars in lost savings, 7.6 million people newly unemployed, and record-high home foreclosures and bankruptcies—a tidal wave that has yet to crest. Among those hurt most are Americans over 50, who had more to lose and have less time to recover.

How do we protect what we have left? Tougher disclosure rules for financial services are coming into effect, and a series of bills in Congress aim to curb further outrages—from exorbitant bank fees to loopholes that encourage investment rip-offs. But no matter what laws are passed, as Vanguard Group founder John Bogle likes to point out, the middlemen who handle your money will by definition subtract from your wealth. Bankers, brokers, and investment dealers understand what their role is, and as consumers we should understand ours: to stay skeptical, assert our rights, and keep as much of our own money as we can.

So don't drop your guard. As the following situations show, whether you want to shield your credit, finance a home cheaply, or buy some peace of mind for retirement, you'll run up against companies with an unfair advantage. Just remember that the first line of defense in consumer protection is a self-interested customer who's armed with the facts—in other words, you.

Credit

You shouldn't pay for a bank robbery

As many as 9 million Americans have their identities stolen each year, according to the Federal Trade Commission. And by far the most frequent financial crime resulting from the thievery is a new brand of bank robbery: crooks using stolen information to open fresh lines of credit—credit cards, car loans, even home loans. The independent Identity Theft Resource Center (ITRC) conducts an annual in-depth study of identity theft. In 2008 a record 67 percent of cases it monitored involved lenders duped into extending credit to a criminal. People 50 and older—30.5 percent of the populace—accounted for 35 percent of the victims.

The same whiz-bang technology that fosters online credit approval makes it hard to combat anyone with your Social Security number and an evil intent. "Law enforcement just isn't up to the task of handling thousands of ID-theft cases crossing hundreds of jurisdictions," says Jay Foley, director of the ITRC. "The crooks know this and exploit it."

While it's the banks that get robbed, their failure to detect fraud creates far-reaching collateral damage. In 2008, the ITRC found, it took 165 hours on average—and cost $951 for everything from attorney's fees to childcare—for individuals to undo the harm from a fraudulent loan. The crooks prey on young and old alike. Leah Beltran, 26, of Portland, Oregon, thought she had escaped disaster because she quickly notified police and canceled her credit cards after her wallet was stolen. But then came a stream of forged checks, fraudulent credit accounts, and traffic violations attributed to her. Even though Beltran and her family were the victims, the bank froze their accounts for two months while figuring things out. "The bank treated us like we were the criminals," she recalls.

That was in 2006. More than three years later, debt collectors still call in pursuit of transactions she never made.

What could banks do to protect customers? Simply put: their job. Banks are supposed to keep our money safe, not give away our credit to impostors. Here's an idea: Instead of selling us ID-theft-protection as an extra, why don't banks provide us with the shields we need for free?

Doug Johnson, a vice president at the American Bankers Association, allows that when extending credit, "certainly it's the bank's obligation to get it right." But he says getting free credit protection onto bankers' to-do list would take a competitive spark: "The cost for online banking has been driven to zero. It could be the marketplace will drive the price of that kind of protection to zero as well."

How to protect yourself now

You can eliminate the risk of con artists' opening accounts in your name by placing a security freeze on your credit reports. That'll stop any new credit from being established in your name. The service is available nationwide from the three major credit bureaus—Equifax, Experian, and TransUnion. Depending on the state, you'll typically pay $5 to $20 for each freeze—and for each thaw when you want to apply for a loan, which can take several days. Initial charges are often waived if you can show you've been a victim of identity theft. But don't wait for that.

Home Loans

Put the mortgage broker on notice

Back in 2000, at age 57, Willie Howard at long last became a homeowner. He bought a tiny house—963 square feet—in Washington, D.C., for about $108,000. A construction worker who never learned to read, Howard proved an easy touch for refinancing offers as the housing bubble inflated. By May 2005, after refinancing, he owed $137,000 on the property. By October 2006, after four more refinancings, Howard's loan balance had ballooned to $238,500. Half the increased debt came from $51,000 in points, fees, prepayment penalties, and negative amortization.

The refinancings, Howard later claimed in a civil suit, began with telephone calls from a mortgage broker promising him a lower monthly payment or a certain fixed interest rate or both. Not able to read documents himself, Howard said, he took the broker's word on what he was getting.

"The broker was just looking to maximize his money. One way to do that was to flip Mr. Howard into loan after loan, often misrepresenting the terms," argued Eric Halperin of the Center for Responsible Lending, which joined with AARP Foundation litigators to sue Howard's brokers and lenders on his behalf. "The problem with the system is that the broker had no obligation to act in Mr. Howard's best interest."

That's right: no obligation. While Howard's case ended in a settlement, and he remains in his home today, mortgage brokers in most states still have no responsibility to act in the best interest of their clients—what's known as a fiduciary duty. They get paid up front, raking in 2 to 3 percent of the home's purchase price. According to a study by the FBI, more than 63,000 mortgage fraud reports were filed in 2008, and the pace of new reports almost doubled in the first four months of 2009.

How to protect yourself now

While Congress and the Federal Reserve Board are considering eliminating some of the incentives brokers have to gouge borrowers, your best move is to hire a real-estate attorney to represent you in arranging the loan and purchase—a $500 to $2,000 expense. That's a good investment; foreclosure rates in the nine states requiring attorneys for real-estate transactions have been running at about one-fifth the national average.

To find a reputable broker, ask friends for recommendations. Pick two and interview them; ask them for three references and tell them you'll want to compare how much they stand to gain from any loan they suggest. If a broker seems unwilling, find another one. Once you have a loan approved, get the documents reviewed by your attorney.

Investing

Beware the sins of the commissioned

In 1997, after 30 years at Pacific Bell, Vikki Vargas of Tracy, California, was on her way to a comfortable retirement. Then a brain aneurysm changed everything. Vikki became cognitively impaired and stopped working. Her husband, Vince, had to quit his job as a supermarket produce manager to care for her. Fortunately, Vikki had diligently saved almost $300,000 in her 401(k) plan and also had a company pension. To make sure their savings would last, Vince turned to Sharon Kearney from SunAmerica, a unit of AIG, who had been meeting with workers at PacBell about investing for retirement.

"She said all the right things," Vince recalls. "I told her we didn't want to touch the principal; we wanted to live off the interest, whatever that would be. She said we would be okay."

What Kearney did next became the subject of a civil suit that the Vargases brought, alleging fraud and breach of fiduciary duty: she had them roll over the 401(k) into an IRA holding a high-commission variable annuity, an investment largely in stocks; and she convinced them to exchange Vikki's guaranteed lifetime pension for a lump sum of $246,000, to be invested in a high-cost mutual fund. By 2005—after fees, withdrawals, and the crash in tech stocks—the Vargases had less than half of their savings left.

Here's how things get slippery for investors, despite existing protections. Sharon Kearney was a registered principal of a broker-dealer—that is, she was a commissioned salesperson. By California law she owed a fiduciary duty to her clients; she was obligated to work in their interest and disclose what she stood to gain from any sale. The Vargases claim Kearney recommended just a few products she customarily sold.

Were those investments the best options for the Vargases? Sheryl Garrett, who runs a network of independent financial planners and testified at the trial as an expert witness for the Vargases, thinks that's preposterous. Still, in court, the case pitted the Vargases' recollections of what Kearney disclosed against Kearney's own. The jury cleared Kearney, and the Vargases are appealing the verdict.

California is one of a handful of states in which broker-dealers have a fiduciary duty. Elsewhere federally registered investment advisers are fiduciaries, but broker-dealers aren't. Muddying even this double standard, "many investment pros wear both hats," says Tom Selman, executive vice president of FINRA, the Financial Industry Regulatory Authority, which helps oversee broker-dealers. This leaves consumers to wonder, When is my trusted adviser not worth trusting?

A coalition of groups representing financial planners and investment advisers says it's time to retire that riddle. These groups would like a fiduciary duty to apply anytime any financial professional gives advice. Congress is considering a uniform standard; it remains to be seen whether this standard will match the rigors of fiduciary duty or get watered down.

How to protect yourself now

Investment peddlers often use high-pressure tactics that may start with a pitch at a free lunch or dinner seminar. To avoid investing in something that's inappropriate for you or too costly:

Be patient Don't get pressured into signing any documents without taking the time to think about the investment and getting a second opinion from a trusted friend, adviser, or lawyer.

Be informed Consider hiring a certified financial planner who is bound by a code of ethics to guide you objectively; then, purchase any recommended investments elsewhere.

Be prepared AARP and FINRA have developed a list of questions you should always ask before investing. See aarp.org/nofreelunch and click on "Free Lunch Seminars: Questions to Ask a Financial Professional."

Contributing editor Ron Burley is the author of “Unscrewed: The Consumer's Guide to Getting What You Paid For.”

Read Ron Burley's online columns here.

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