Interchange Evidence?

posted by Adam Levitin

Both sides in the interchange fee debate have pointed to a recent Richmond Fed study as evidence supporting their position (here and here). Frankly, it's hard to tell without agreeing on a baseline for analysis: pre-Durbin interchange fees or what the fees would have been but for Durbin or the anticipated post-Durbin drop in fees? The finding that most merchants didn't notice a change in their merchant fees (which, of course, aren't the same as interchange fees) means very different things depending on the baseline used: that Durbin is pointless, that Durbin saves merchants money, or that Durbin isn't working as intended because of a defective rulemaking by the Fed.

In the midst of the race to claim vindication based on the study, however, no one seems to have noticed that a least some of the data used in the study—which comes from a merchant survey conducted by Javelin Strategy and Research—seems a little screwy.

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It Is Very Expensive To Be Poor

posted by Pamela Foohey

How BanksCash checking fees, prepaid card fees, money transfer fees, cashier's check fees -- all together, the unbanked pay up to 10% of their income simply to use their own money. And when lower-income people face an emergency, they must turn to expensive payday loans, title loans, and tax refund loans. As Mehrsa Baradaran (University of Georgia) writes in her new book, How the Other Half Banks: Exclusion, Exploitation, and the Threat to Democracy, "indeed, it is very expensive to be poor."

How did this happen? And how might we begin to solve the problem? In her book, Baradaran details how banks and government are and always have been inextricably tied, with the government helping banks and the banks supposedly helping the public in return. But this "social contract" has eroded. The banking sector has turned away from less profitable markets, leaving people with small sums of money to deposit without a trustworthy place to stash their cash, and people in need of small sums of money to borrow nowhere to turn but fringe lenders. Moreover, these people understandably often are uncomfortable dealing with large banks. And the result is that an astonishing large chunk of the American population is unbanked or underbanked.

If the unbanked and underbanked had a trustworthy place to deposit their cash, some of the fees they pay simply to use their money would go away. This alone might allow families to stay financially afloat. Likewise, if they had the option to borrow small sums of money at reasonable rates, temporary financial emergencies may not set so many families up for a lifetime of financial failure. Which leads Baradaran to a proposal that I’m fond of (indeed, I’ve blogged about Baradaran’s thoughts on it before): postal banking.

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The Future?

posted by Stephen Lubben

2015-08-02 18.20.34Some thoughts on the 3d Circuit's recent opinion in LifeCare, which I suspect will lead to even more 363 sales, over at Dealb%k.

Just Can't Get Enough

posted by Stephen Lubben

The quest for yield and its effect on the future of chapter 11 cases, over at Dealb%k.

Advertising and Payday and Title Lending: How Do Lenders Target Borrowers?

posted by Pamela Foohey

Are bigger payday and title lending companies better for low-income borrowers than smaller companies? Jim Hawkins (Houston Law Center) takes up that question in a new article which reports the results of his study of the advertisements of payday and title loan companies with storefronts in Houston, Texas. The results are quite timely given that the Consumer Financial Protection Bureau is poised to release regulations for payday lenders. Based on Colorado's experience with payday lending reform, these regulations have the potential to increase large lenders' market share. What might be the consequences of consolidation?

Hawkins begins to answer that question by comparing big and small lenders located in Houston based on their compliance with Texas regulations, prices, use of "teaser rates," and attempts to target minorities and women through storefront and online advertising -- all of which are practices that critics of payday and title lending have identified as particularly problematic or exploitative. His results overall are mixed. For instance, larger companies in Houston are more likely to feature minorities in advertisements, and smaller companies are more likely to feature women. Perhaps the most interesting finding is that there is price competition among these companies in Houston: larger companies tend to charge higher APRs than smaller companies. Given that the CFPB regulations will not cap interest rates, might there be unintended consequences of regulations that may bolster large lenders?

Municipal Bankruptcy After Detroit

posted by Melissa Jacoby

ArrowsA new commentary stemming from my draft article Federalism Form and Function in the Detroit Bankruptcy is now posted on the Columbia Law School Blue Sky Blog. The post frames the current skirmishes over other municipalities' access to chapter 9 at least in part as a referendum on the procedural tools used by the court to supervise the Detroit bankruptcy. For two prior Credit Slips posts on the article, see here and here.

Arrow image courtesy of

How Do You C It?

posted by Bob Lawless

One of the great challenges to the bankruptcy system if not to the American way of life is those who insist on capitalizing the  letter when discussing chapters of the Bankruptcy Code. If it is "section 1129," as the Bluebook dictates, then it is "chapter 11." Both are merely designations for a portion of a statute.  The defense that is given to me is that the capitalized just looks better. Are we supposed to capitalize words now merely because the mood strikes us? Are there no rules left? The horror. The horror.

When confronted with the RaNdOm CaPiTaLiZeR CrOwd, weak-willed persons such as myself cave in a spirit of compromise and also because I am a heckuva guy. Someone stronger must oppose this tyranny.

Sovereign Debt Through the Lens of Consumer Debt

posted by Mark Weidemaier

Sovereign debt has traditionally been contrasted with corporate debt. Unlike corporations, sovereigns are immune from suit and asset seizure. Unlike corporations, sovereigns can't reliable promise a lender that it will have seniority over other lenders. Unlike corporations, sovereigns can't access bankruptcy. These and other distinctions drive much of the policy and academic thinking about sovereign debt.

But perhaps there are also lessons to be learned from consumer lending. This new paper by Susan Block-Lieb at Fordham (abstract below) suggests that consumer debt may be a more helpful analogy, one with important policy implications. In both the sovereign and consumer context, she points out, lending is primarily income- rather than asset-based. In both contexts, restructuring is difficult primarily because income-based lenders cannot easily distinguish borrowers who will not pay from those who cannot pay. And in both contexts, there are substantial and cumulative incentives towards over-borrowing and over-lending.

The shift in metaphor from corporate to consumer debt has payoffs for policy actors. Perhaps the most important is that it suggests there has been too much focus on the problems associated with debt restructuring, and not enough on the regulation of sovereign loans. Sovereign borrowers, of course, can't be regulated directly. But sovereign lenders, unlike consumer lenders, enjoy almost complete freedom from regulation. Consumer lenders operate in a thick regulatory environment--for example, in some cases a consumer lender's failure to conduct a meaningful pre-loan assessment of the borrower's ability to repay may excuse a subsequent default. By highlighting similarities to consumer debt and regulation, the paper highlights new ways to think about reform in the sovereign debt markets. That's welcome insight in a field where reformers have historically done little more than tinker with contract boilerplate.

Full abstract below the jump:

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Central Bank Alter-Ego Theory Rejected

posted by Mark Weidemaier

Fed resThis ruling, handed down today by the Second Circuit, may spell the end of one phase of the NML litigation. For some time, the plaintiffs have been trying to find a way to seize assets held by Argentina's central bank. Their latest effort sought an order declaring that Banco Central is an alter ego of Argentina, at least insofar as U.S. law is concerned. The effect of such an order would be to eliminate the bank's claim to be treated as a separate legal entity, making it liable for the government's debts. I understand that Banco Central has already moved most if not all of its assets out of the U.S., and earlier Second Circuit rulings already protect funds held at the Federal Reserve Bank of New York. But the plaintiffs could have taken the order to another country where Banco Central has assets and (conceivably) parlayed it into an order allowing them to attach bank funds. 

This was always a long shot for the plaintiffs. Even if they had gotten their requested relief, officials in other jurisdictions would not be obliged to let them seize bank funds. After today's ruling, though, the plaintiffs face additional practical and legal barriers. Their complaint alleged that Argentina effectively controlled Banco Central by determining who served as an officer of the bank, by borrowing from the bank, and by coordinating with the bank in implementing an inflationary monetary policy. The Second Circuit held that these allegations, even if true, didn't establish that the bank was the government's alter ego. The slippery slope here is fairly obvious. It is common, after all, for there to be a degree of coordination between governments and central bankers. I doubt the Second Circuit was eager to create a precedent that might imply that central bank assets in the United States are at risk. Technically, today's ruling doesn't prevent the plaintiffs from raising the alter ego theory in other jurisdictions (perhaps where the standard for alter ego liability is different). But given today's ruling I would imagine the fight will shift to other fronts.



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