Is it Literally Impossible to Pay Off a Title Loan?

I recently published a law review article entitled Grand Theft Auto Loans with Ozy Adams.  It discusses title lending based upon data collected by the State of New Mexico.  This article cover a tremendous amount of ground, but as these things tend to go, I have now heard of two critical topics we should ahve discussed but didn't. 

We do discuss how the loans are almost always interest-only and can only be paid off all at once, not in installments.  We also talka bout how these loans are also typically entirely asset-based, meaning that if a customer has no income at all, she can still take out a large title loan. We also discuss repo rates per loan (between 5% and 22%),  repo rates per customer (between 20 and 70%), total vehicles lost once reclamation is taken into account per customer (between 13% and 60%), interest rates for title loans (most commonly 300% per annum or 25% per month), percentage of auto value lenders will lend on (25-40%), and amount returned to customer from sale proceeds after repossession and sale (next to nothing once the fees are racked up). 

The Bully Model of Consumer Finance and Litigation

There's a fearful symmetry in the consumer finance world. It's a symmetry of bullies between overreaching financial institutions and plaintiff strike suits, as in both, litigation costs present a ceiling, under which there's a license to overreach. 

What does a bully do?  A bully looks and acts tough and claims things to which s/he isn't legally entitled. But as we all know, if you push back against a bully, the bully is likely to back down; the bully doesn't actually want a fight. We see the bully model of consumer finance and the bully model of plaintiff litigation all too frequently. There's no sense, however, that we'd be better off eliminating both. Instead, interest groups look to eliminate one or the other, when the larger problem is in our adjudicative system, which imposes significant costs and delays substantive rulings. 

Reputational Sanctions in an Age of Internet Manipulation?

A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.  

This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things. 

The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

Bankruptcy Immigrants

Fascinating story in the Guardian about Irish debtors temporarily moving to the UK in order to gain access to more favorable bankruptcy law.  I guess the Brit's have a more lenient version of 522(b)(3) or a looser good faith filing doctrine/plan approval/discharge requirement.  I wonder how long this sort of international loophole will remain open within the EU.  I wouldn't be surprised to see a lot of Spanish immigrants to the UK between more favorable bankruptcy law (although Spain recently liberalized its bankruptcy law) and the Spanish economy.    

HMS RadLAX

I've posted my thoughts on RadLAX over at Dealbook (along with another column on Dewey if you'd like to check that out too). In short, I noticed Justice Scalia's fascination with cannons too.

Can(n)onading Radlax

As Stephen noted, the Supreme Court has decided the RadLAX case. Although I suspect I won't be the only Credit Slips blogger to comment on the case, I had a few thoughts on the interpretive methods instead of the result. In a short opinion, the Court reached the correct results in what was an easy case. Stephen is absolutely right to describe the lower courts who reached contrary conclusions as "aggressively wrong."

For nonspecialists, bankruptcy experts will excuse a bit of background on the case, which revolved around the right of a creditor to "credit bid" in an asset sale as part of a chapter 11 plan. Outside of bankruptcy, at a foreclosure sale for example, the creditor can simply bid the amount of their debt. If the bank is owed $100,000, it can simply bid the $100,000 debt at the foreclosure sale. Anyone else who wants the property must bid more than $100,000, in cash, thereby paying the bank in full.

As Expected

The Supreme Court has affirmed the 7th Circuit in RadLAX. I'm sure Adam, I, and others will have more comments to follow. The 8-0 decision certainly makes me feel a bit more comfortable about those old posts arguing that the 3d Cir. was aggressively wrong.

Chapter 13 Disparities: This Time with a Map

A few weeks ago, I put up a post describing the states with the highest and lowest per capita bankruptcy rates by chapter of the Bankruptcy Code. A closely related data point is which states have the highest percentage of bankruptcies that are chapter 13s. States with a high per capita rate of chapter 13s not surprisingly are the same states that tend to have the highest percentage of banrkuptcies that are chapter 13s.

Anyway, my point is that I made a map. Actually, I had to make the map of chapter 13 filing percentages for another purpose, and I thought maybe some other persons might have a use for it. So here it is. You are welcome to use it. If you want to download it, be sure to click on it so that a larger version opens up in a pop-up window. If you do use it, all I ask is that you attribute it back to Credit Slips and me.

Freep, froop, frop . . . No, It's Pottow!

Credit Slips alumni John Pottow sent me an op-ed from Freep.com. Being an idiot, it took me a while to figure out that this was the Detroit Free Press. John takes on the huge trading loss at J.P. Morgan and the continued need to regulate financial hedging at U.S. banks (no matter what Jamie Dimon says). Check it out.

What Is Private Equity?

The Presidential campaign's focus on Mitt Romney's record at Bain Capital suffers from a confusion about what private equity is. Steven Rattner starts to lay this out in a NYT column, but I think the issue could still benefit from some clarification.

Madoff and Trustee Incentives

We've been pretty quiet about Madoff on this blog, so I think it's time for a few words on the matter. I want to quickly recap two critical decisions in the case and then raise the issue of the alignment of incentives between the trustee and the Madoff victims.

Save the American Community Survey

The Credit Slips blog always has tried to offer perspectives from many different social sciences. That is why many readers may be distressed to learn of the attack on the American Community Survey (ACS). If you do not do a lot of social science work, you may not be familiar with the ACS. It is an arm of the Census Bureau that provides all sorts of information about what is happening in the United States. For example, did you know that people with a college degree live, on average, about two minutes further away from their workplace? At 30 MPH, that would be one mile further away. This small fact from the ACS, which we use as an example in our empirical methods book, might tell us a lot about the structure of cities and social stratification. And, this example is a poor one because it undersells the important data in the ACS on everything from income to drug use. I have used the ACS in my work to get information on consumer financial conditions in various states. There are all sorts of uses for these data in governmental, academic, and business circles.

Thou All-destroying But Unconquering Whale

A few quick thoughts and suggested readings on Chase's ever expanding losses from the Whale Trade.

First, if you have not been reading Lisa Pollack's Alphaville posts on this topic you really must.

Next, Krugman makes the obvious but also vital point that "invisible hand" type arguments are really pointless in the specific context of financial institutions, especially giant financial institutions. It's a point I've made before with regard to resolution, and a reason why things like the fabulous Hoover people's Chapter 14 plan is totally unmoored from reality, but it also applies equally well to pre-distress regulation.

And finally Economics of Contempt has a good post on the Volcker Rule and the Chase situation. Most importantly, the post points out the nuances in the rule that are too often ignored.

That said, let me push back on that post a bit. The author suggests that the Chase trade might not have been permissible under the VR -- despite the hedging exception -- because to get that exception you also have to have a trade that satisfies several other criteria. In hindsight it is arguable that Chase did not meet several of these requirements. But that's in hindsight. How easy would it have been for Chase to argue that these boxes had been ticked if a regulator questioned them ex ante?

Bankruptcy Court Calls

In connection with some ongoing research, I have noticed that U.S. bankruptcy courts have different approaches to informing the public about matters being taken up in open court. Many provide PDFs of court calls on their websites up to several weeks in advance (recognizing that matters settle, are postponed, or can change for other reasons). But on other bankruptcy court websites, it is difficult to find out what's happening on any given day. Might the informed readership of this blog offer reasons that courts refrain from making that information available on their websites? If you'd rather not comment directly on this post, feel free to write me privately at bankruptcyprof@gmail.com. 

Article 9 and Bankruptcy Judges

A prior post addressed a proposed amendment to Article 9's official comments stating that the date of an Article 9 filing relates back to the initial filing date even if the debtor did NOT authorize the filing at that time. This post returns to that topic for two reasons. First, although it is risky to generalize, I sense that bankruptcy judges may still be unaware of this proposed amendment. This is relevant because bankruptcy judges often are on the "front lines" of Article 9 interpretation. Second, I have heard, indirectly, that at least some people want this amendment to lend approval to some lenders' current practice to routinely file without authorization during the loan application process. In other words, the loan is likely to be given within a few days, so no harm no foul. Maybe I misheard or misunderstood?  

Storage Wars and the Credit Practices Rule

A few times I have caught Storage Wars, a television show on A&E. When storage units customers do not pay their fees, the contents are auctioned off by the storage unit company. The show follows professional treasure hunters who bid at these auctions. The catch is that the treasure hunters are purchasing the unit without full knowledge of the unit's contents. With all the drama of finding out what was behind door number three on Let's Make a Deal, viewers get to watch these treasure hunters paw through the storage unit's contents and try to profit by finding items of real value. Every now and then, an item of tremendous value might be uncovered. A few days ago, I started wondering how this was legal.

Doggie DNA Tests: Waste of Money or Legitimate Tool?

Do mutt-lovers (with admittedly too much time and money on their hands) get anything in exchange for the $75-100 they pay to find out what kind of dog they have? It depends. My advice: before ordering a doggie DNA test over the net, do lots of research. Perhaps just have the vet do it.  If you do order a test over the internet, make sure you pick one that tests for the maximum number of breeds and that gets very high marks from consumers, and carefully read the fine print. Now they tell me, the more mixed your mutt is, the less likely you are to get any info at all from the test. I’ll let you decide if the test was worth my money. Here is the dog:

Consumer Scam Review: Lower Your Interest Rate, Lower Your Credit Card Balances, and Work at Home

I have been meaning to write on several consumer scams so here are a few to avoid.

“We Can Lower Your Home Loan Interest Rate” Scams. 

We’ve all gotten the calls at home. “We can lower your interest rate.” “The banks got their bail-out, now get yours.” But imagine what it feels like if you really need that kind of help. The false hope these scams create is criminal. One of my coworkers has been going through a Chapter 13 in which her mortgage payments are really high. She got this card in the mail asking her to call 800-936-4400 and saying that they could lower her mortgage payment (currently over $1,300) to $611.01. She was very hopeful.  She called the numbers, which directed her to RMA Legal Network in Holbrook, New York, and RMA turned out to stand for Michael Alarcon. She spoke with a Bruce Thomas, a case consultant manager, who asked her for tons of very personal information. She then hung up and did a google search, which turned up a great deal of negative information on this company, including that they want $1,400 up front to even start to do a deal for you.  Red flag!

“We Can Reduce Your Credit Card Balances”

Forget it, it doesn’t work. If I’m wrong, tell me how and where you can get this help legitimately. If you have the time, follow the directions they leave on your phone and report back here.

Work at Home Scams

A third cousin got involved with one of these, and when I say scam, I mean Scam. Again, selling

Affidavits Are Not a Substitute for Evidence of Debt Ownership

The Tennessee Court of Appeals has issued a decision that highlights the problems facing credit card debt collectors in a post-robosigning world (see here and here). The decision reaffirms what should be a simple principle in a debt-collection lawsuit. The burden is on the debt collector to show it owns the debt and to show the consumer is liable for the amount the debt collector asserts. The debt collector's say-so is not enough.

In LVNV Funding, the consumer had opened a Sears Gold Mastercard account in 1985 and was being sued for a balance that was a little more than $15,000. He had not used the account since 2001 and thought it had been settled in 2005.

One might first think Sears was the plaintiff. It was not. Sears had sold the account to Citibank, but Citibank was not the plaintiff either as it had sold the account to Sherman Financial Group. The plaintiff was LVNV Funding, a subsidiary of Sherman Financial to which the account had been assigned.

What say?

Gretchen Morgenson, in Mortgage Unit Troubles Ally Financial explains that:

Although repurchase claimants would be considered general unsecured creditors in a ResCap bankruptcy, the put-back demands would very likely be somewhat senior to those of other unsecured creditors because of their contractual nature.

Sovereign Restructuring after NML v. Argentina: CACs Don't Make Pari Passu Go Away

A remarkable number of people are buying the creditors' argument that widespread introduction of collective action clauses (CACs) in sovereign bonds makes the debate about the pari passu clause in the Second Circuit irrelevant to the broader regime for sovereign debt restructuring. This is intuitively appealing, but totally wrong.

Debit Interchange Post-Durbin: Some Early Numbers

The Fed released some data on debit interchange fees since the Durbin Amendment went into effect (here in spreadsheet and here as a memo with more data). It's all still very early numbers, and things may well change. But so far a few noteworthy things have caught my eye:

(1) There is two-tier interchange pricing, just as I and other supporters of Durbin predicted. Big banks (>$10B in assets) have one pricing scheme and small banks, which are exempt from Durbin's "reasonable and proportionate" requirement have another. Many Durbin opponents said that there wouldn't be two-tier pricing and that Durbin would spell the ruin of small banks. So far that hasn't happened.  This won't fix our too-big-to-fail problem, but it's a small move in that direction. 

(2) The small banks are getting a leg up on the big guys in the two-tier system. Small banks are making on average 19 cents or 50bps more on every transaction than the big boys.  That breaks down to 31 cents advantage of signature and 8 cents on PIN (where the pricing was lower to begin with, making less room for differentiation). 

(3) Interchange fees for small banks haven't moved much. It's possible to have two-tier pricing with small banks still losing revenue. That doesn't seem to have happened. (It's also possible to have two-tier pricing with interchange fees continuing to rise for small banks...)

(4) The small banks' debit card transaction market share grew slightly. It's not clear to me that this is a real trend, but it's possible that this is a side-effect of the big banks like BoA clumsily trying to recapture reduced debit interchange revenue with direct consumer fees. It seems that some consumers don't take well to hidden fees being replaced with direct fees. It's still not clear how many accounts were really moved to small banks/CUs in response to BoA and the like, but that could explain the growth in debit card market share for small banks.   In any case, merchants aren't steering away from small banks as we were told they might do. (It was never clear how they would steer anyhow).

(6) There may be other, harder to measure benefits for small banks from Durbin. To the extent that it makes their deposit account/debit product more competitive, this could have spillover benefits for their other products.  The deposit account (monetizable via debit or check) is the gateway relationship.  It enables the cross-selling of other products (loans, investments, insurance). So the benefits to small banks may be more than just on the debit revenue side. 

(5) The big issuers are paying lower network fees (4 cents lower for sig, 2 cents lower for PIN), which means that small issuers are really getting a 23 cent/transaction advantage of signature and 6 cents/transaction advantage on PIN.  It's not clear, however, what the network breakdown of small issuer transaction is.  

Again, it's still early in the game. There's still the merchants' litigation challenge to the Fed's Durbin Amendment rulemaking, and we could well see a bunch of market moves. Visa seems to be trying to go back to tying credit and debit products via its network fee, and there's always the possibility of either some innovation (think mobile), a new settlement network (PayPal?), or a new entrant buying an existing player and shaking things up (Google or Apple buying MC?). 

A final thought. The more distance we get from Durbin, the more I like the amendment. It's public utility regulation: rate regulation (section 920(a)) and open access (section 920(b)). That's not a totally new move in bank regulation (think Reg Q), but it really encourages thinking of at least some banking functions as being public utility functions. There might be something to that.