Interesting op-ed on digital wallets by Edward Castronova and Joshua Fairfield in the NYT. I'm a little more skeptical. Thoughts follow the break.
Interesting op-ed on digital wallets by Edward Castronova and Joshua Fairfield in the NYT. I'm a little more skeptical. Thoughts follow the break.
Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP.
One of the competitors in the Great Mobile Payments Race is changing its name. Isis Wallet, a mobile payments joint venture of AT&T, Verizon, and T-Mobile is changing its name to Softcard for fairly obvious reasons. Isis Wallet operates by having the consumer store his/her payment card information on a "secure element"--tech speak for a tamper resistant chip that safely stores encrypted information. (The particular secure element for Isis Wallet depends on the phone model.) That payment information is then communicated with merchants using NFC (near field communications, i.e., contactless). Isis Wallet also integrates various loyalty programs and merchant offers (including some that are proximity based). As Apple's Apple Pay platform shows, mobile payments is becoming a crowded field with some real heavyweights. Yet, as I'll blog shortly, there are some real challenges ahead for anyone in the field.
One of the post-bubble conventional wisdom stories that has gotten a lot of traction is that housing is a bad investment and that consumers would do better to rent and invest in the stock market. The problem is that it's wrong.
The prooftext for the idea that housing is a bad investment is a straightfoward comparison of the returns on stock market indices with those on housing market indices. If one compares the return on the S&P500 index vs. the S&P/Case-Shiller Composite 10 index from the beginning of the Case-Shiller data (1987) to present, one sees that the S&P500 went up 630%, while the Case-Shiller went up only 197%. Even if one uses an average return (averaging the monthly index values, relative to the starting value), S&P500 is 244%, while Case-Shiller is 98%. Ergo housing is a bad investment compared to the stock market, right?
That's certainly what a bunch of smart people have argued. (I won't link or name names, but Google isn't coy.) There are two problems with this line of argument.
First, it fails to account for the leveraged nature of housing investment. Most homes are purchased on leverage, and housing is the only leveraged investment broadly available to the middle class. When one factors in leverage, housing massively outperforms stock market mutual funds, making it a pretty sensible investment in most cases.
Second, the simple return comparison fails to account for the indirect benefits of housing, such as school districts, commuting time, quality of life etc. I'm not going to try to quantify the indirect benefits, although some of them definitely translate into pecuniary terms (schooling, for example).
If you'll indulge me with some number play below the break, you'll see that the leverage point alone blows the "housing is a bad investment" argument out of the water. Leverage is not without its complications, though.
Last December the FDIC put out for comment a proposal for a Single-Point-of-Entry (SPOE) Strategy to implement its Orderly Liquidation Authority (OLA) under Title II of Dodd-Frank. Single-Point-of-Entry has gotten a lot of policy traction. The Treasury Secretary supports it and there’s huge buy-in from Wall Street. And it’s an approach that is likely to ensure financial stability in the event that a systemically important financial institution gets into trouble. There’s just one problem with it. SPOE means “No Bank Left Behind”.
Mark Fogarty has a nice write-up in National Mortgage News of a book chapter about duties to serve in housing finance that I wrote with Jannecke Ratcliffe for a volume entitled Homeownership Built to Last (Brookings/Joint Center on Housing Studies 2014). It's a real pleasure to realize that someone has actually read our chapter!
Financial crisis litigation has been going on for several years now and has been resulting in lots of piecemeal settlements. As a result, it's easy to miss the big picture. There's actually been quite a lot of settlements covering a fair amount of money. (Not all of it is real money, of course, but the notionals add up).
By my counting, there have been some $94.6 billion in settlements announced or proposed to date dealing with mortgages and MBS.
The latest consumer financial product to come under the regulatory microscope is subprime auto lending, which has seen a boom in the last few years. The subprime auto market's boom underscores a real problem in consumer financial regulation: different consumer financial products have developed different substantive regulatory regimes that are not justified by differences in the products. Most fundamentally, we have an ability-to-repay requirement for mortgages, a different ability-to-pay requirement for credit cards, and nothing else for other products. In light of the changes in all consumer finance markets, in which securitization and sweatbox lending have undermined the traditional lender-borrower partnership that encouraged responsible lending, it is time to consider a universal ability-to-repay requirement for consumer credit.
There's a fascinating long magazine piece in the NYTimes about consumer debt sales and collection. The piece ends by asking why we don't have a national debt registry, as if that were the solution to all debt collection problems. Unfortunately, the author only asked the FTC about this issue (and acknowledges that it isn't in FTC jurisdiction), not the CFPB, and the author doesn't consider any of the problems with creating and implementing a debt registry. (I'm guessing Dalie will have something to say about this...) As the case of MERS shows, it isn't so easy to create a well-functioning registry of property rights of any sort. Let me illustrate a few challenges to creating a debt registry:
My Consumer Finance students used to think I was wasting their time by spending a whole class session on usury laws and taking them into the nitty-gritty of their application (or non-application). I think usury is important conceptually (but for the Marquette decision and its fallout, our regulation of consumer credit would likely be very different), has a lot of neat statutory reading twists and turns, and it actually can matter for non-bank lenders. Among other things I cover is the NY state usury statute, including its criminal provisions. Cyrus Vance's prosecution of payday lenders under the usury statute would seem to vindicate my choice of class materials.
I name names and point fingers in the Wall Street Journal. NML gets some blame for overplaying its hand, but the fault primarily lies with the federal courts for letting the case go forward. I understand the courts being angered by an unrepentant debtor thumbing its nose at them, but the federal courts should know better than to get into a pissing match with a foreign sovereign. Federal judges are possessed of awesome powers, but not that awesome. It's not at all clear to me how Judge Griesa's going to get this case out of the hole he dug, and the recent reporting on the case indicates that he doesn't have any idea either. "We're in the soup." Indeed.
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.
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 Point to find out. Or you can just keep reading here.
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.
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.
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 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."
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.
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.
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:
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.
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.
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.
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:
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.
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!
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).
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?
I have an new article, The Politics of Financial Regulation and the Regulation of Financial Politics, forthcoming in the Harvard Law Review. The 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.
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.
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...)
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!
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.
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).
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.
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.
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.
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.
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 (here, here, here, here, here, here, 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!):
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.
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:
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:
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.
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.
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.
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 violation...as 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 violation...as 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.
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.
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.
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