postings by Adam Levitin

Operation Choke Point Hysteria: Are Choke Point's Critics Responsible for the Account Closings?

posted by Adam Levitin

At today's House Judiciary Committee hearing on Operation Choke Point it seemed that Choke Point's critics are conflating a fairly narrow DOJ civil investigation with separate general guidance given by prudential regulators.  In particular, Rep. Issa attempted to tie them together by noting that the DOJ referenced such guidance in its Choke Point subpoenas, but that's quite different than actually bringing a civil action on such a basis (or on the basis of "reputational risk"), which the DOJ has not done.  

There is a serious issue regarding the bank regulators' use of "guidance" to set policy. Guidance is usually informal and formally non-binding, but woe to the bank that does not comply--regulators have a lot of off-the-radar ways to make a bank's life miserable.  This isn't a Choke Point issue--this is a general problem that prudential bank regulation just doesn't fit within the administrative law paradigm.  There are lots of reasons it doesn't and perhaps shouldn't, but when it is discovered by people from outside of the banking world, it seems quite shocking, even though this is how bank regulation has always been done in living memory:  a small amount of formal rule-making and a lot of informal regulatory guidance.  By the same token, however, compliance with informal guidance is enforced informally, through the supervisory process, not through civil actions, precisely because the informal guidance is not actionable.  Yet, that is what Choke Point critics contend is being done--that DOJ is using civil actions to enforce informal guidance.  

I don't think that's correct (or at least it hasn't been shown).  But the conflation of DOJ action with prudential regulatory guidance may be creating the very problem Choke Point's critics fear.  

Bank compliance officers may be hearing what Choke Point critics are saying and believing it and acting on it.  If compliance officers believe that the DOJ will come after any bank that serves the high-risk industries identified by the FDIC or FinCEN, not just those that knowingly facilitate or wilfully ignore fraud, they will respond accordingly.  The safe thing to do in the compliance world is to follow the herd and avoid risks.  The attack on Operation Choke Point may well have spooked banks' compliance officers, who'd aren't going to parse through the technical distinctions involved.  

What matters is not what the DOJ actually does, but what compliance officers think the DOJ is doing, and they're likely to head the loudest voice in the room, that of Choke Point's critics.  So to the extent that we are having account terminations increasing after word got out of Operation Choke Point it might be because of Choke Point's critics' conflation of a narrowly tailored civil investigation with broad prudential guidance.  Ironically, we may have a self-fulfilling hysteria whipped up by Choke Point critics, who shoot first and ask questions later.  

Operation Choke Point: Payday Lending, Porn Stars, and the ACH System

posted by Adam Levitin

Pop quiz:  what do payday lenders have in common with on-line gun shops, escort services, pornography websites, on-line gambling and the purveyors of drug paraphrenalia or racist materials?  

You can read my testimony for this Thursday's House Judiciary Committee, Subcommittee on Regulatory Reform, Commercial, and Antitrust Law's hearing on Operation Choke Pointo find out. Or you can just keep reading here.  

Continue reading "Operation Choke Point: Payday Lending, Porn Stars, and the ACH System" »

Can Argentina Not Pay Yet Not Default? Perhaps. And Maybe There's Still a Route to NY State Court...

posted by Adam Levitin
A footnote to Mark's recent post on Argentina's remaining options got me thinking about what an Event of Default actually is under the exchange bond indenture. From a reasonably quick look at the (lengthy) documents, I think there might be a non-default route open to Argentina, and possibly also a procedural route to getting the pari passu clause interpretation in front of a New York State court. The exchange bond indenture para. 3.1 obligates the Republic to pay principal and interest "to the Trustee". The Republic is not obligated to pay the bondholders directly. That's the trustee's duty, if it is paid by the Republic, although the Republic has the option of directly paying the bondholders. Now, there is language in the Prospectus Supplement (page S-67) that:
Notwithstanding the foregoing, Argentina's obligations to make payments of principal and interest on the New Securities shall not have been satisfied until such payments are received by registered holders of the New Securities.
However, when one looks at the Indenture, this language appears only in the form of the debt security itself (exhibit C-2), not in the actual Indenture. The context of the language makes clear that it is an anti-mailbox rule provision making the obligation discharged upon receipt, not mailing because the preceding sentence explains that Argentina has the option of either paying the trustee or paying the registered noteholders directly. The "shall not have been satisfied" language immediately follows the direct payment option, which indicates that its purpose is to prevent Argentina from claiming that its obligation was discharged by putting the check in the mail. The "shall not have been satisfied" language does not apply when Argentina pays the trustee itself, which is the obligation in paragraph 3.1 of the Indenture.

Continue reading "Can Argentina Not Pay Yet Not Default? Perhaps. And Maybe There's Still a Route to NY State Court..." »

Consumer Finance Movie: Spent: Looking for Change

posted by Adam Levitin
I just saw Spent: Looking for Change, a documentary about the financial challenges of the unbanked. The film was funded by American Express, but there is no marketing of Amex products in the film. (Amex does offer one of the best non-DDA account options for the unbanked, however.) You can watch the movie for free on YouTube. The movie really puts a human face on the problems of the unbanked. It doesn't get into solutions (that would take a Peter Jackson trilogy), but it does a great job of setting forth what life is like for the unbanked. Highly recommended.

Does Bad Research Beat No Research? Durbin Amendment Data

posted by Adam Levitin

Todd Zywicki, Geoff Manne and Julian Morris have an article on the effect of the Durbin Amendment.  Sigh.  No surprises here.  Zywicki et al. are making claims beyond what their data can support and in fact directly contradicted by their own data, which shows that some of the "effects" of Durbin preceded the enactment and effective date of the Amendment.   

Continue reading "Does Bad Research Beat No Research? Durbin Amendment Data" »

Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court?

posted by Adam Levitin

Did Law v. Siegel Sound the Death Knell for the Equity Powers of the Bankruptcy Court?  Mark Berman thinks so.  I'm skeptical (fuller version of my argument here).  But it depends what we mean when we refer to "equity", which is often used as a rubric for an array of different non-Code practices.  More complete coverage at the Harvard Law School Bankruptcy Roundtable.

Larry Summers' Attempt to Rewrite Cramdown History

posted by Adam Levitin

Larry Summers has a very interesting book review of Atif Mian and Amir Sufi's book House of Debt in the Financial Times. What's particularly interesting about the book review is not so much what Summers has to say about Mian and Sufi, as his attempt to rewrite history. Summers is trying to cast himself as having been on the right (but losing) side of the cramdown debate. His prooftext is a February 2008 op-ed he wrote in the Financial Times in his role as a private citizen. 

The FT op-ed was, admittedly, supportive of cramdown. But that's not the whole story. If anything, the FT op-ed was the outlier, because whatever Larry Summers was writing in the FT, it wasn't what he was doing in DC once he was in the Obama Administration.

Let's make no bones about it.  Larry Summers was not a proponent of cramdown.  At best, he was not an active opponent, but cramdown was not something Summers pushed for.  Maybe we can say that "Larry Summers was for cramdown before he was against it." 

Continue reading "Larry Summers' Attempt to Rewrite Cramdown History" »

Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)

posted by Adam Levitin

I just read Jennifer Taub's outstanding book Other People's Houses, which is a history of mortgage deregulation and the financial crisis. The book makes a nice compliment to Kathleen Engel and Patricia McCoy's fantasticThe Subprime Virus. Both books tell the story of deregulation of the mortgage (and banking) market and the results, but in very different styles. What particularly amazed me about Taub's book was that she structured it around the story of the Nobelmans and American Savings Bank.

The Nobelmans?  American Savings Bank? Who on earth are they? They're the named parties in the 1993 Supreme Court case of Nobelman v. American Savings Bank, which is the decision that prohibited cramdown in Chapter 13 bankruptcy. Taub uses the Nobelmans and American Savings Banks' stories to structure a history of financial deregulation in the 1980s and how it produced (or really deepened) the S&L crisis and laid the groundwork for the housing bubble in the 2000s.

Continue reading "Book Review: Jennifer Taub's Other People's Houses (Highly Recommended)" »

Siphoning Value through Captives: Private Equity and Securitization

posted by Adam Levitin

Yves Smith has a fascinating post about how private equity firms (which, as she notes in the comments is largely a polite rebranding of "leveraged buyout firms") charge fees for services provided by captive affiliates to their portfolio companies.  On some level none of it is anything so new--part of the LBO game has always been to suck out fees and dividends from the target company, while gambling that the target would be able to service the debt incurred for its acquisition.  Even if the target goes bankrupt, the LBO sponsor may have still made money because of the fees and dividends. 

What I thought was really interesting here was to see the parallel with the private-label mortgage securitization market.  

Continue reading "Siphoning Value through Captives: Private Equity and Securitization" »

Regulation of Financial Politics

posted by Adam Levitin

I have a multi-book review essay on the financial crisis that is now out in the Harvard Law Review. Sadly, Timothy Geithner went to print to late for me to include his book. James Kwak has written a nice response to my essay here.   

Faith-Based Markets

posted by Adam Levitin

Paul Krugman has a column today about the blind, fundamentalist faith in efficient markets.  This is a phenomenon that Stephen Lubben and I have been discussing recently (did Krugman just preempt our paper idea?), as we've both encountered it in the financial regulatory policy debate: 

  • The Chapter 14 proposal that would resolve large financial institutions in bankruptcy takes it as a matter of faith that there would be sufficient private DIP financing available to resolve, say, JPMorgan Chase. I don't know how much would be needed, but it would be a multiple of the largest private DIP loans to date:  $10B for Energy Future Holding and $8B for Lyondell Chemical.  Where would the, perhaps $100B needed for a megabank come from?  Well, not from that megabank...  But don't worry, the market will provide.
  • Housing finance reform proposals that would either total privatize the housing market (the House Republican solution) or privatize 10% of the market (the Johnson-Crapo bill in the Senate).  We could have a completely private housing finance system.  But don't be surprised when home prices drop precipitously.  There just isn't enough private risk-capital willing to assume credit risk on housing to finance the whole market. It's not clear to me that there's enough private risk-capital willing to assume the credit risk on 10% of the market, and if there isn't it is going to result in at least a 50 basis point increase across the board, and much higher price increases for riskier borrower.  But don't worry about these details.  The market will provide. 

So here's the inconvenient paradox of market fundamentalism:  the idea that the free market can be directed. Either the market is free or it will follow direction, but it's not going to do both. Markets do what markets want.  

Continue reading "Faith-Based Markets" »

Who Knew Google Was a Credit Reporting Agency?

posted by Adam Levitin

You thought that Google was just a search engine.  It turns out that Google is also a credit reporting agency.  The octopus has a 9th tentacle.  Didn't see that coming. (I guess that makes it a Googlepus...) That's the implication of the European Court of Justice's ruling ordering Google to take down links to the advertisements to a foreclosure sale from 16 years ago.  

The commentary on the ECJ's Google ruling has focused on the ECJ classifying Google as a data processor, but I think the credit reporting part of the decision may be just as significant. The ruling looks a lot less radical when understood from the credit reporting perspective, although it remains a problematic ruling because it is not limited to such a context.  

Continue reading "Who Knew Google Was a Credit Reporting Agency? " »

Consumer Arbitration: Taking Stock

posted by Adam Levitin

I have an op-ed in today's American Banker on the supposed efficiency and fairness of binding mandatory arbitration.  We've given arbitration occasional coverage on the Slips over the years, but it's never been a major focus of our posting, in part because it isn't inherently a credit issue. Instead, the fight over arbitration is another chapter in the fight over whether public services should be privatized.  It's worth noting, however, in the time since our coverage began (not to take any credit for it), the needle has moved a bit on binding mandatory arbitration in consumer contracts--both ways.  

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Payday Lending and the FTC Credit Practices Rule

posted by Adam Levitin

Why doesn’t payday lending violate the FTC’s Credit Practices Rule (16 C.F.R. 444.2)?  That’s what I’m trying to figure out.  

The Credit Practices Rule prohibits taking or receiving directly or indirectly an assignment of wages in most circumstances.  (None of the exceptions appear applicable to the payday lending context.) The FTC has gone after some payday lenders for taking a formal direct assignment of wages, but that's an usual term for payday loans. Rather, I'm more interested in the question of an indirect wage assignment. I think there's a pretty good case that a payday loan is an indirect assignment of wages:

  • A payday loan is called a “payday loan”—it’s designed to ensure repayment from the borrower’s wages;
  • the loan’s maturity is usually designed to match with pay periods;
  • usually the only “underwriting” is verification of the borrower’s employment;
  • the loan is “secured’ with either a post-dated check or authorization for an ACH debit with the date set for…payday.  

That sure looks to me like an indirect assignment of wages—the loan is designed to enable the lender to be repaid from the borrower’s wages without having to go to court and get a judgment and a garnishment order (i.e., a judicial wage assignment).  

I’m curious to hear readers thoughts on whether this sounds right or whether I’m missing something.  Please limit comments to the legal interpretation issue—I’m not looking to open a discussion on the merits of payday lending, just to understand if it violates the FTC Credit Practices Rule or if not, why not.  

Legal Notice. Read Carefully: Your Rights May Be Affected

posted by Adam Levitin

In light of General Mills policy of claiming that its binding mandatory arbitration requirement (with class action waiver) applies to anyone who purchases its products, including via third-party vendors, I have decided, to post the following legal notice, applicable to all persons, everywhere:     

By permitting, allowing, or suffering me to purchase any of your products or services, whether directly from you or indirectly through dealers, vendors, agents, or other third-parties, you agree to irrevocably surrender all rights to compel me to arbitration or to waive my rights to proceed against you as a member of a class action.  In order to make this provision effective and allow effective vindication of my rights, you also agree to irrevocably surrender all rights to compel arbitration and to prevent class actions against all other purchasers of your products and services.  You also agree to cover all of my costs associated with bringing an action, including attorneys' fees and any damages awarded against me, irrespective of the outcome of the action. 

Is General Mills notice any more effective than mine?  I don't see why it would be.  Let's get this long-range battle of the forms on! 

It's My Fault You Can't Get a Mortgage

posted by Adam Levitin

Can’t get a mortgage?  Turns out it’s my fault.  As in mine, personally.  Yup.  That’s the claim in a Housing Wire written by right-wing banking analyst R. Christopher Whalen.  Here is Whalen’s argument in a nutshell:  

Servicing regulations make banks really reluctant to deal with anyone but very good credit borrowers because it takes so long to foreclose on anyone anymore.  Servicing regulations are so onerous because of an article Tara Twomey and I wrote on mortgage servicing that said that servicers were doing bad things. The problem (in Whalen's view) is that Tara and I had it totally wrong.

I'm flattered that Whalen credits the article with having inspired all of the subsequent foreclosure regulation, but it would be nice if Whalen would accurately characterize the article. (Has he even read it?)  It would also be nice if Whalen would acknowledge that servicers have done an awful lot of bad things over the past several years, which might just possibily have something to do with the current regulatory enviornment for servicing. But such an admission that might get in the way of Whalen grinding his political axe (two legs good, regulation ba-a-a-d).

Continue reading "It's My Fault You Can't Get a Mortgage" »

Bitcoin Tax Ruling

posted by Adam Levitin

The IRS has spoken:  Bitcoins are property, not currency.  This was hardly a surprise, but it has some important implication that tells us a lot about what it takes to make a currency work.  


For a payments geek, the real lesson from the IRS Bitcoin ruling is that for a currency--or any payment system--to work, its units must be completely fungible.  One reason dollars work really well as a currency is that one $20 bill is entirely fungible with another $20 bill.  This means that when I pay, I don't have to make a decision about which $20 bill to use (unless I have some idiosyncratic attachment to the crisp ones or the like). It means that when I accept a payment, I don't care which $20 bill I am given, in part because I know that my ability to spend that $20 bill will not depend on which $20 bill it is.  If payment were in, say, camels, then it would probably matter a great deal which camel were tendered.  Camels aren't fungible. And we know that's not going to make for a very good payment system. 

So what does this have to do with Bitcoin?  

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The Politics of Financial Regulation and the Regulation of Financial Politics

posted by Adam Levitin

I have an new article, The Politics of Financial Regulation and the Regulation of Financial Politics, forthcoming in the Harvard Law ReviewThe article is a multi-book review essay that serves as a launching pad for a discussion about the role of politics in financial regulation. The basic point is that the real issue in financial regulation is one of neutralizing or harnessing politics. Without addressing the political problem in financial regulation, regulatory reforms will be incomplete and unsustainable.

Why Do Community Banks Carry Water for the Megabanks?

posted by Adam Levitin

A phenomenon that has puzzled me for the last several years is why community banks consistently carry water for the megabanks on regulatory reform issues.  I'm hoping that readers might be able to shine some light on this issue.

Continue reading "Why Do Community Banks Carry Water for the Megabanks?" »

New Harvard Law School Bankruptcy Roundtable Blog

posted by Adam Levitin

Harvard Law School's Bankruptcy Roundtable, a dialogue between academics and practitioners, is now in the blogosphere!  The Roundtable has launched with a number of very substantive posts by Douglas Baird and Anthony Casey; Judge Sontchi; Thomas Jackson and David Skeel; Nelly Alemeida; and Marshal Huebner and Hilary Dengel.  I know that we academics benefit a lot from discussions with practitioners. (I hope, but am not entirely sure, that the benefits are mutual...)  

Highly recommended.  

Everything You Wanted to Know about CLOs, But Were Afraid to Ask

posted by Adam Levitin

Well, not exactly. But for anyone who is interested, here is my written Congressional testimony for a House Financial Services Committee, Subcommittee on Capital Markets and GSEs hearing on "The Dodd-Frank Act's Impact on Asset-Backed Securities".  If you've been dying to understand the Volcker Rule's impact on ABS and on CLOs in particular, then this testimony is for you! 

Four main points of interests to non-technical readers: 

(1) The loan/security distinction regarding CLOs (securitizations of high yield corporate loan syndication interests) seems silly, but it's also really hard to say what makes a CLO different from a hedge fund.  

(2) The ultimate Volcker Rule concern about any type of ownership interest in an investment fund (be it a hedge fund, a private equity fund, a CLO, or any other type of ABS) is that there will be an implicit guarantee and we'll have deposit insurance funding a bailout of an uninsured, speculative investment fund, like we had with the SIVs. 

(3) skin-in-the-game credit risk retention for securitizations is unlikely to work when dealing with too-big-to-fail institutions.  If downside is socialized, credit risk retention won't align incentives of securitizers and investors.

 (4) The SEC needs to start taking its systemic stability mandate seriously. You're not just an investor protection shop any more SEC! 

Arbitration Agreements and Class Action Waivers: Dropbox

posted by Adam Levitin

It's hardly news that arbitration agreements are used to effectuate class action waivers.  The Supreme Court has blessed the comandeering of a federal policy favoring enforcement of forum selection clauses to limit types of proceedings, including those that have nothing to do with forum and are necessary for effective vindication of small value claims.  

While arbitration ageements have been a particular problem in consumer finance, they also appear in things like telecom agreements, and now, to my chagrin, for Dropbox, a popular free cloud storage service. Dropbox announced a change in its terms of service that includes an arbitration clause.

Continue reading "Arbitration Agreements and Class Action Waivers: Dropbox" »

The Public Option in Banking

posted by Adam Levitin

The postal banking idea has been getting a lot of attention.  See, e.g., here (David Dayen) and here (Elizabeth Warren). Yet, the more I think about it, the more I wonder if the postal part of the idea is actually convoluting things. The point of postal banking proposals is not any particular connection with the post office. Instead, these are proposals for a public option in banking.  I think it would be helpful to reframe the discussion in these terms, and not have it tie up with post office issues.  What follows is a sort of tenative case for a public option in banking plus some thoughts of what it might look like, including a right of first refusal for public capital (a put up or shut up provision). 

Continue reading "The Public Option in Banking" »

Postal Banking

posted by Adam Levitin

I've got an op-ed about postal banking in today's American Banker.  Basic point:  there's a tension between doing postal banking to generate revenue for the Post Office and doing postal banking for financial inclusion.  But it's an idea worth exploring.

A Lawyer and Partner, and Also Bankrupt...for reasons that have nothing to do with being a non-equity partner...

posted by Adam Levitin

It's all the rage these days to beat up on law school as a bad investment and to moan about the economic travails of the legal profession.  There are some reasonable critiques that can be leveled at the shape of legal education and its costs and there are clearly important changes going on in the economics of the legal profession.  But in a NY Times column, James Stewart has tried to connect these important issues with the sad story of the bankruptcy of Gregory Owens, a former equity partner in Dewey LeBoeuf who is now a non-equity service partner at White & Case.

Owens has filed for bankruptcy and for Stewart, Owen's case is informative about "why law school applications are plunging and [why] there’s widespread malaise in many big law firms".  There’s just one problem.  Owen's case has no connection with either of these things.  Owens’ story is one of the expenses of divorce.  It is not a tale of legal education debt.  And it is only a story of the changes in the legal economy to the extent that Owens’ problem is that he’s earning only $375,000, not $3.75 million.  If Stewart weren’t so eager to get his licks in on the law school economy, he might see that there’s a very different story here.

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Data Breaches: Target, Neiman Marcus

posted by Adam Levitin

Let's be really clear about what most identity theft is about:  it's about payments data.  Identity theft is first and foremost a payments fraud problem. We don't know all of the details about what happened at Target and Neiman Marcus, but there's a really obvious weakspot in the US payments infrastructure that should be corrected, irrespective of whether it would have prevented the Target and Neiman Marcus breaches:  the use of two-factor authentication, namely chip-and-PIN cards, which are standard outside the US and have been effective in reducing fraud.  

Why don't we have chip & PIN here? Because the banks don't want to pay for it because they don't bear most of the fraud costs. The banks/payment networks are the least cost avoider of identity theft, but because merchants are eating most of the fraud costs, the banks have instead have opted for a complex set of security standards for merchants (PCI Security Standards) that are of dubious effectiveness. 

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The Behavioral Economics of Bitcoin

posted by Adam Levitin

I'm going to wade into unchartered Slips waters today and head into Bitcoinland. I've been trying to understand Bitcoin from a payment systems perspective, where it has an interesting problem and solution:  double spending.  The lesson in all of this is how Bitcoin has a sort of built in seniorage--payments are never free. Currently Bitcoin builds in its costs through inflation, which is not particularly transparent, but that will ultimately change to being more transparent--and salient-- transaction fees. By disguising its costs through inflation, rather than through direct fees, Bitcoin effectively incentivizes greater consumer use of the system, much as credit card usage is incentivized through no-surcharge rules preventing merchants from passing on the cost of credit card usage to consumers. 

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How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit?

posted by Adam Levitin

        One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers. There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. I've blogged on aspect of QM before (herehere, herehereherehere, here, and here). Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. (I note that all of this is my tentative readings of the statute; we really don’t know how courts will interpret it, and others may see better readings than I do now.) 

        Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 18 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years.  Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. I invite those who would calculate this differently to weigh in in the comments—it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis.

        Ultimately, I don't think ATR liability really matters in terms of availability of credit. What matters is the lack of liquidity--meaning a secondary market--in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.

        Because this post is REALLY long (the Mother of All QM Posts), here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):

Continue reading "How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit? " »

Payday Regulation and Financial Security

posted by Adam Levitin

The payday loan industry is running scared these days; the industry definitely feels that it is in the CFPB's cross-hairs. Accordingly, it is not surprising to see the industry trumpeting a new poll of payday borrowers' attitudes about the payday experience. 

Three thoughts about this poll.  First, the value of the information it contains often seems quite limited by the nature of the questions and the respondents.  

Second, even if the poll really supports the interpretation put forth by the payday industry--that most payday consumers like the product--it hardly addresses whether payday loans should be regulated. At best, the poll suggests that banning payday products outright without reasonable short-term small-dollar (STSD) credit alternatives would leave some unmet consumer demand. The regulatory issue with payday loans is not just a binary regulate or not question. Instead, there are a number of regulatory options that would limit the features of payday loans that are particularly problematic, namely rollovers and refinancings that turn payday loans from being short-term to longer-term.

Third, the whole debate about STSD credit regulation kind of misses the point, however, which is why so many consumers are likely to turn to relatively expensive forms of STSD credit. The demand for STSD credit appears to be largely a function of middle and working class financial insecurity. That's the real issue that needs to be addressed.  I flesh these points out in more detail below.

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Detroit: Eligibility and Pensions

posted by Adam Levitin

Two big rulings in Detroit's Chapter 9 bankruptcy today:  first that Detroit is eligible for Chapter 9 and second that it may impair its pension obligations in bankruptcy.  Both rulings were delivered orally from the bench and transcripts aren't yet available, so it's hard to really parse them other than through selected quotations in the media. With that major caveat, here are my initial thoughts on each issue in turn:

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Securitization, Foreclosure, and the Uncertainty of Mortgage Title

posted by Adam Levitin

I've got a new article out in the Duke Law Journal entitled The Paper Chase:  Securitization, Foreclosure, and the Uncertainty of Mortgage Title.  The article is about the confusion securitization has caused in foreclosure cases because of the shift in legal methods for mortgage transfer and title that accompanied securitization. 

The Paper Chase is not exactly a short article, but if you're the type that's into reading about UCC Article 3 vs. Article 9 transfer methods for notes and MERS, then this piece is for you. There's a lot of technical stuff in the article, but there's also a discussion of the political economy of mortgage title and transfer law, and some thoughts on how to fix the legal mess we currently have.  Abstract is below the break:

Continue reading "Securitization, Foreclosure, and the Uncertainty of Mortgage Title" »

QM Isn't "Plain Vanilla"

posted by Adam Levitin

The American Banker's lead article today is about how the Qualified Mortgage (QM) concept is really an enactment of the "plain vanilla" mortgage provision that the White House had unsuccessfully pushed to have included in what become the Dodd-Frank Act. That's just wrong. 

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NY State No-Surcharge Law Unconstitutional

posted by Adam Levitin

Judge Rakoff issued an opinion today holding that the New York state credit card no-surcharge law violates the First Amendment of the US Constitution because a "surcharge" and a "discount" are two ways of expressing the same thing, and the state of NY cannot direct merchants which of those two ways of expression to use.  I'm a little skeptical of some of Rakoff's authority--he cites a couple of papers by some Levitin character (here and here), but the opinion is classic Rakoff:  "Alice in Wonderland has nothing on section 518 of the New York General Business Law."  

This ruling has real significance in the event that the settlement in the multi-district credit card interchange litigation (MDL 1720) is ultimately approved because while that settlement amends card network association rules to permit surcharging in certain circumstances, surcharging remains impossible in 11 or so states that have no-surcharge laws.  If the NY statute is unconstitutional, it's hard to fathom how other states' no-surcharge statutes would be too.  Of course, we'll have to see what happens on appeal. 

Housing Finance Reform: the Role of the PLS Market

posted by Adam Levitin

I testified on housing finance reform today before Senate Banking. It was a strange experience being in the Hart and Dirksen Senate Office Buildings with the shutdown. The halls were eerily empty. Fortunately, the Senate Banking Committee is continuing to do the people's business.

My testimony focused on the ability of the private label securitization market to support the US housing finance system. Short answer is I'm skeptical that it can support more than a fraction of the market, and even to do that will require significant reforms, particularly focused on the duties and incentives of trustees and servicers.

Yves Smith has a generous and thoughtful write-up of the issue.  My testimony is here.  

QM and Nonjudicial Foreclosures

posted by Adam Levitin

The Dodd-Frank Act provides that failure to verify a borrower's ability to pay on a home mortgage entitles the borrower to a "asset a a matter of defense by recoupment or set off". 15 USC 1640(k). 

It's not clear me how this provision will play out in the context of nonjudicial foreclosures.  Does the ability to "assert a a matter of defense by recoupment or set off" enable borrowers to turn all nonjudicial foreclosures into judicial foreclosures? I don't know how one raises a defense or setoff to a nonjudicial foreclosure sale.  And if the foreclosure is nonjudicial, is the debtor's filing in court truly a defense?  Wouldn't it have to be a claim?  If so, would it create federal jurisdiction on federal question grounds?  Maybe the answer is to read 15 USC 1640(k) not as authorizing two types of defenses--recoupment and set off--but instead as authorizing either a defense (recoupment) and a claim (or counterclaim) for set off.

It's not clear to me exactly what was intended, but I have a lot of trouble seeing how 15 USC 1640(k) is going to work with nonjudicial foreclosure.  While I'm very skeptical about the strength of the remedy for violating the ability to pay requirement, I wonder 15 USC 1640(k) will herald greater judicialization (and possibly federalization) of foreclosures.

I'd love to hear thoughts on how 15 USC 1640(k) is likely to play out.

Is Federal Preemption Assignable?

posted by Adam Levitin

Gretchen Morgenson had an interesting column today about judicial frustration with banks.  One of the opinions she references is a recent order by Judge William Young (Dist. Mass.) in a predatory lending suit.  The defendant Wells Fargo, as successor in interest to the lender, Wachovia FSB, argued that the state law causes of action on which the suit were based were preempted by a federal statute that governs federal savings banks.  Judge Young agreed, but ordered that:

Wells Fargo, within 30 days of the date of this order, shall submit a corporate resolution bearing the signature of its president and a majority of its board of directors that it stands behind the conduct of its skilled attorneys and wishes to avail itself of the technical preemption defense to defeat [the plaintiff homeowner's] claim.

In other words, the Judge wants to make sure that Wells CEO and board are aware of how it is evading liability.  This isn't the first time Judge Young has expressed his frustration with the mortgage industry. He authored one of the most colorful (and apt) descriptions of MERS:  the "wikipedia of land registration systems." Alas, as in this case, it was all in dicta. 

Putting aside the optics, I think there's an interesting legal issue possibly raised by the present case, Henning v. Wachovia:  does federal preemption under the Home Owners Loan Act (HOLA) apply to a mortgage that was made by Wachovia FSB, but is now owned by Wells Fargo, N.A.?  HOLA preemption only applies to federal savings and loans, not to national banks. So if a federal S&L makes a loan and holds it on balance sheet, it would seem clear that HOLA preemption would be relevant. But what if that federal S&L sold the loan to, say, me? Could I invoke HOLA preemption? That is, does HOLA preemption travel with the loan or is it personal to the federal S&L? 

I've got to think that the answer is that preemption is not assignable, but the law here is not as clear as it might be. The reason I think it has to be non-assignable is that it can produce a regulatory vacuum of preemption without regulation and because were preemption assignable, we'd face a problem of preemption laundering. I've written about this, at length, in an article considering, among other things, whether preemption rights travel with a loan when it is securitized (and is no longer held by a federally chartered depository of some sort, but by a state law entity, such as a trust). 

It was not clear to me from Judge Young's order whether the loan is currently owned by Wells Fargo directly or whether it is still held by Wachovia FSB as a Wells Fargo subsidiary or by some other entity. As far as I can tell, however, Wachovia FSB no longer exists.  The OCC's list of federal savings associations, as of August 31, 2013, does not lit a Wachovia FSB.  Therefore, it would seem that the loan is not currently owned by any entity that is regulated by HOLA and therefore entitled to HOLA preemption. 

There may still be a timing issue--is HOLA preemption determined at the time the cause of action arises or at the time litigation is brought or at the time of the decision?  I don't know what, if any, law exists on this.  Again, however, I don't know all of the facts of the case; I don't know if the attorneys for the plaintiff raised the question of whether Wells Fargo gets HOLA preemption via Wachovia, and don't know whether the issue is waived if they did not raise it. Preemption aside, it will be interesting to see how the order to the Wells Fargo board plays out.  

Is This Normal? Can I Get a Meeting with the Attorney General?

posted by Adam Levitin

I'm floored that Attorney General Eric Holder was willing to take a private meeting with JPMorgan Chase CEO Jaimie Dimon while the bank is under criminal investigation and negotiating an enormous civil (and possibly criminal) settlement.  I can't recall something like this meeting happening before. There's not anything illegal about such a meeting, but the optics are really bad and underscore the privileged position of the too-big-to-fail banks.  

Yes, perhaps the AG should have some level of involvement in a multi-billion dollar settlement, but I would be quite surprised if he was very hands on with it, and meeting personally with Dimon certainly adds a explicit political flavor to the settlement discussions.   And it shows the special solicitious treatment and access that Dimon and JPM and other too-big-to-fail banks receive in DC.  

Who else is able to call up the AG and just get a meeting like that when their firm is under criminal investigation?  Do other citizens get talk things through mano-a-mano with the AG himself? That Dimon even thought to initiate direct contact with Holder suggests that he has no sense of his place in society--or perhaps that he in fact does.  Bottom line is that Dimon (and JPM) shouldn't get any more special treatment than any other citizen, but it sure looks like he did. 

Follow the Money: Payday Laundry Edition

posted by Adam Levitin

Gretchen Morgenson is asking some interesting questions about where the money comes to fund predatory loans. The issue boils down to this:  the most questionable consumer is not done by depositories.  It's done by finance companies or (prior to 2008) by mortgage banks.  That means that these lenders need another source of funding for their loans. That could be their investors' equity, but more typically it is via lines of credit from other financial institutions. Absent lines of credit from large financial institutions, the amount of high-risk lending done in the US would likely be substantially less.

I hope that bank regulators (and Congress) start asking why banks are willing to fund loans that they aren't willing to make directly themselves because of reputational concerns. The current situation looks a lot like a rent-a-BIN variation:  instead of the bank providing the front to avoid usury laws or to enable MC/Visa card issuance, here we have the rent-a-finance-company situation, with the banks basically undertaking predatory lending behind the mask of the finance companies. Specifically, it sure looks as if NY banks were financing on-line payday lenders that made loans to NY residents at rates that violated the NY usury laws. (Let me emphasize that the issue here is not whether payday loans are good or bad--that's a separate discussion--but simply whether the NY usury laws were violated.)

It's hard to believe that the banks didn't know that the on-line loans were being made into NY. While there is a legal question about whether the on-line lenders are subject to the NY usury law, this was a risk the banks seem to have been willing to accept.  I don't know if that's enough to rise to the level to justify charges like aiding-and-abetting or conspiracy or the like (does Destro bear guilt for COBRA's actions?), but it's hard to call it anything other than payday loan laundering. 

The Two-Year Tuition Fallacy and Other Confusion in Legal Education Reform

posted by Adam Levitin

Even the President has now weighed in about the cost of legal education, thus elevating the profile of the debate about the "dual crises" of legal education:  costs and job placement.

Let me put aside all of the possible criticisms one might make of the President weighing in on this matter and focus on one pernicious fallacy:  that reducing law school to two years would result in a corresponding reduction in the cost of legal education.  Let's call this the 2+0 approach, as opposed to the traditional 3+0 approach. There might be good pedagogical reasons for reducing law school to two years.  I personally don't think that's the case, although I do think law schools need to think more systematically about the content of legal education. 

Here's the problem:  most law school's budgets are taken up by fixed and semi-variable costs. Totally variable costs are a small part of law school budgets. That means that in the short-term, law schools simply cannot reduce their revenue (mainly tuition and endowment income) and still operate in the black. Schools cannot simply cut the salaries and benefits of tenured faculty, nor can they meaningfully reduce the costs of maintaining and operating their physical plants. This means that if law school went from 3 years to 2 years, law schools would still have expenses based on being 3-year schools. That would necessitate maintaining total tuition revenue equal to 3-years. That could be done by either increasing annual tuition or by increasing class size. The former would mean that students would still be paying for 3 years and getting 2 years of education, while the latter would flood the job market with lawyers who would still have significant debt burdens. 

Continue reading "The Two-Year Tuition Fallacy and Other Confusion in Legal Education Reform" »

Detroit Institute of Art Collection--Available to Creditors?

posted by Adam Levitin

I have a piece on Salon about whether creditors should be able to force the liquidation of the Detroit Institute of Arts collection.  The DIA collection is apparently municipal property, although the DIA is an independent non-profit entity that basically operates the collection. Some of the highlights of the collection, such as Diego Rivera's amazing murals inspired by the Ford River Rouge plant are physically part of the DIA building (I'm not sure who owns the building). 

The legal issue about the DIA collection is sort of the twin of the pension issue:  both are about the ability of the states to order the bankruptcy process. The pension issue about about states' ability to specify the treatment of liabilities in bankruptcy, while the DIA collection is about states' ability to specify the treatment of assets in bankruptcy.  

Continue reading "Detroit Institute of Art Collection--Available to Creditors?" »

Why Is the Fed Chairman a Bank Regulator (or an Economist)?

posted by Adam Levitin

The NY Times has a pretty significant error in its reporting on the Summers vs. Yellen Fed Chair race. It says that Yellen was the head of the Federal Reserve Bank of San Francisco, which was Countrywide's regulator. That's wrong. FRBSF was never Countrywide's primary regulator. That was the OCC and then OTS. The regional Feds are not anyone's primary regulator, not least as they are private entities, not government agencies. They arguably have a secondary quasi-regulatory role, but that's it. They are not the same as the Board of Governors of the Federal Reserve System, which is a federal regulator. Yellen really can't be tagged with any of the blame for Countrywide, at least based on what's reported. The NYT should correct this point, which comes off as a bit of a smear on Yellen.

Continue reading "Why Is the Fed Chairman a Bank Regulator (or an Economist)?" »

Chapter 9 Hysteria in the Wall Street Journal

posted by Adam Levitin

The Wall Street Journal ran a column on municipal bankruptcy that is straight out of fantasyland. According to the WSJ, if municipalities are not able to shed their pensions in bankruptcy, the result will be a stampede of bankruptcy filings as cities file in order to stiff their bondholders. 

This argument is demonstrably wrong for two reasons. First, as bankruptcy law has been practiced for the last 80 years, pensions are inviolable in Chapter 9, yet we have never seen more than a handful of Chapter 9 filings.  To be sure, we don't have any legal rulings prior to the current spate of filings on the issue one way or another, but the understood practice is that pensions are unassailable in Chapter 9. I cannot find a record of any municipal bankruptcy filing since the 1930s that has resulted in an impairment of a pension plan, while many have impaired bondholders. Yet only a handful of municipalities have ever filed. That alone should show beyond any doubt how silly the WSJ argument is.  (I'll stay away from speculating on why it took such a preposterous position, but one will note, below, that the WSJ seems to see the issue as being about unions, rather than about pensions.)

Second, chapter 9 bankruptcy isn't very useful for municipalities hellbent on stiffing their bondholders. This is because most municipal bond debt is not unsecured general obligation bonds. Instead it is either secured debt or revenue bonds, which are functionally secured. Thus Detroit has about $6.4 billion in revenue bonds, but only $650 million in general obligation bonds. I can't say how representative this particular debt mix is, but the tsuris that attends a municipal bankruptcy filing surely isn't worthwhile to Detroit just to slough off $650 million in debt when total obligations are some $18 billion. 

Continue reading "Chapter 9 Hysteria in the Wall Street Journal" »

Call for Papers: 2013 Conference on Public Pension Funds

posted by Adam Levitin

Call for Papers – 2013 Conference on Public Pension Funds

Sponsored by the Federal Reserve Bank of Cleveland

The Federal Reserve Bank of Cleveland invites the submission of research- and policy-oriented papers for the 2013 Conference on Public Pension Funds to be held on November 21-22, 2013 in Cleveland, Ohio. The objective of this one and a half day conference is to highlight research and encourage a dialogue on the economic and financial market impacts of the fiscal burden on state and local governments resulting from underfunded public pension plans. To explore this topic, the conference will focus on three major themes:

  • The challenges state and local governments face in restoring balance in the funding of public pension plans
  • The impact of economic conditions, financial market volatility, and low interest rates on public pension plan investment portfolios
  • The ambiguity and evolution of the current legal environment regarding public pension reform

The conference will feature research and policy sessions including both presentations and discussion panels on related agenda topics.

Continue reading "Call for Papers: 2013 Conference on Public Pension Funds" »

The Rule of Law in the Financial System

posted by Adam Levitin

Felix Salmon has a depressing blog post about the Fab Tourre verdict and a criminal conviction in another Goldman Sachs-related case.  Felix concludes, "I’m increasingly coming to the conclusion that America’s system of jurisprudence simply isn’t up to the task of holding banks and bankers accountable for their actions." 

Felix's observation underscores that we cannot and will not see sufficient and durable financial regulatory reform without political reform. This core Brandeisian insight (e.g., Other People's Money) has been lost during the course of the 20th century and its turn to technocratic financial regulation. (Add two parts capital and one part co-cos, mix with risk retention requirements and garnish with macroprudential regulation...) Notice that the one piece of the Dodd-Frank Act that changed the politics of financial regulation--the CFPB--is also where the pushback has been the strongest.  We need to stop seeing financial regulation as a matter of technocracy and start seeing it as a matter of political importance of the first order.  At stake is nothing less than the rule of law. 

The Access-to-Justice Myth

posted by Adam Levitin

Lauren blogged about a new article by Omri Ben-Shahar, who has written a number of interesting and often (deliberately) provocative articles about consumer contracts. This new article certainly fits in that vein. Its basic point is that requiring arbitration is more favorable to weaker (read poorer) consumers than allowing in-court litigation because all litigation has a regressive distributional effect:  the well-to-do are more likely to litigate and gain the benefits of litigation, while the costs are borne more generally by all consumers. Open access to courts acts as a regressive litigation tax.

There is a clear implication to Ben-Shahar's argument, namely that binding mandatory arbitration should be the favored method for resolving consumer suits. In fairness to Ben-Shahar, however, he does not make this policy prescription, and he does note that distributional concerns are not the only factor that should be considered in policy-making. Instead, his point is simply to point out that there are distributional effects from permitting access to courts. I do, however, expect to see this paper cited in the future in support of attempts to restrict consumers' access to courts, and that's unfortunate. 

I don't have any quibbles with the basic point that it is possible that access to courts could have regressive distributional effects. It's a neat theoretical observation. Still, I don't think Ben-Shahar's observation is likely to hold up as an empirical matter in many, if not most cases, however. And even if it does, I don't think Ben-Shahar has really grappled with the logic of his argument, which proves too much: it is really an argument for banning all consumer litigation. In fact, Ben-Shahar might not disagree: he's proposed as much previously. (I think Ben-Shahar's faith in the market in that article is perhaps naive, but that's another story.) 

Continue reading "The Access-to-Justice Myth" »

Real Bankruptcy Fraudsters of New Jersey?

posted by Adam Levitin

I know what I'm going to start with the next time I teach bankruptcy crimes....  

The indictment is here.

Interchange Updates: Canada, EU, and the US

posted by Adam Levitin

All's Quiet on the American Front in the interchange wars.  But there has been some action to report in Canada and the EU. In Canada, the federal Competition Tribunal dismissed the suit brought by the Canadian antitrust authority against Visa and MasterCard. Only a summary of the decision is available--the ruling is under seal.  According to the official summary, the dismissal was on the grounds that the statutory provision in question required a resale, which had not been established by the Commissioner of Competition.

But the Competition Tribunal went on to explain that in the event it was wrong about its statutory analysis, "there had been an adverse effect on competition" from no-surcharge rules. (My emphasis.) Nonetheless, the Competition Tribunal found that the proper solution to the antitrust problem is a regulatory framework, not an injunction.

So while this was a victory for MasterCard and Visa, it was a victory on technical grounds. The Canadian Competition Tribunal was clear that no-surcharge rules are anti-competitive. It'll be interesting to see if Canadian regulators or Parliament take up the implicit invitation to create a regulatory framework as we did for debit cards with the Durbin Amendment. 

Continue reading "Interchange Updates: Canada, EU, and the US" »

Chapter 9 and State Law: the Dubious Applicability of the Supremacy Clause

posted by Adam Levitin

Many commentators have assumed that the Supremacy Clause of the federal constitution settles the issue. I don't think it is so cut and dry. Bankruptcy always starts with inputs from "applicable non-bankruptcy law," which generally means state law. This is the basic holding in Butner v. US. Thus, whether a manufactured home is treated as personalty or realty in bankruptcy--critical for the question of whether a mortgage on the trailer can be crammed down in Chapter 13--depends on state law.

While the inputs to bankruptcy law are from applicable non-bankruptcy law, bankruptcy does sometimes alter non-bankruptcy rights. For example, the federal Trust Indenture Act makes bondholders' right to payment is sacrosanct outside of bankruptcy, but is trumped by federal bankruptcy law. So too are certain statutory liens arising from state (or federal) law voided per section 545.

Thus, the basic structure that everyone is used to in bankruptcy is that we start with non-bankruptcy law, but it can be trumped by bankruptcy law. But Chapter 9 is weird. While most bankruptcy lawyers approach Chapter 9 through the lens of Chapter 7/11/13 practice, I'm not sure that accurately captures what Congress was doing when it created Chapter 9. 

Continue reading "Chapter 9 and State Law: the Dubious Applicability of the Supremacy Clause" »

Detroit Automatic Stay Ruling

posted by Adam Levitin

Continuing our coverage of the Detroit bankruptcy, it's being reported that Bankruptcy Judge Rhodes has ruled that the automatic stay extends to cover the progress of the suit regarding the constitutionality of the Detroit bankruptcy filing. I haven't seen a written decision (and there isn't one on the docket yet), so with the caveat that I'm writing based on journalistic reports, here goes: 

Continue reading "Detroit Automatic Stay Ruling" »

A Counterintuitive Thought on the Value of a Law Degree

posted by Adam Levitin

If the Simkovic & McIntyre analysis of the value of a law degree is correct, there are two somewhat counterintuitive implications.  First, law schools have been massively undercharging for tuition in the past. If what is now a $150k investment produces $1M increase in income, why are law schools permitting students to capture all of that benefit? Presumably there'd still be plenty of takers for a $300k investment that produces $1M in benefits. And recall that the study is using data from 1996-2011, but that tuition in 1996 was hardly $50k/year.  

The second implication is that if Simkovic & McIntyre are correct about the system basically holding going forward, it also suggests that law schools should be raising their tuition. To the extent that it reduces enrollment, it might only boost the value of the degree by constraining the supply of lawyers. Still, I can't imagine any schools going this route (competition is apparently keeping tuition in check).  

I aslo wonder if we're seeing a bit of a behavioral economics phenomenon with the concern over law school economics:  if Simkovic & McIntyre are right and the fundamentals of the industry have not changed, what would seem to be occuring is that prospective students are facing an earnings benefit is spread out over time, but up-front costs. As there is greater uncertainty about future earnings now, the up-front costs are more salient, making a JD appear to be a less good investment even if it really remains a fundamentally sound investment for most students. 



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