postings by Adam Levitin

Payday Rulemaking: Is Too Much Competition a Bad Thing?

posted by Adam Levitin

The CFPB's proposed payday rule making is out.  There's a nice summary here.  

I'm going to reserve comment other than to note a critical implication of a rare area of agreement between the supporters and opponents of the payday rule:  it will result in a lot of payday lenders closing up shop.  That might be just what the industry needs.

Payday lending differs materially from bank lending in (among things) that there are very low barriers to entry.  Bank regulators restrict the number of bank charters in order to reduce interbank competition. (What was that about free markets, Jamie Dimon?) That mode of regulation does not exist in payday, and it results in a self-cannibalization of the industry. Most storefront lenders have very few actual customers--a few hundred per store per year. Often stores average less than one customer per day (offset only partially by the fact that these customers tend to take out multiple loans). That means that payday lenders have to amortize their fixed and semi-fixed costs over a small borrower base, which in turn results in very high priced loans even without outsized profit margins. (This also suggests that bank payday lending, like Postal payday proposals, is economically more feasible because of a broader base over which to spread fixed costs.) In other words, too much competition is actually pushing up prices.  

The situation is somewhat analogous to a population of deer (or wolves) that grows too large for the sustenance base.  The resulting overgrazing (or overpredation) can ultimately result in a catastrophic collapse.  The typical wildlife husbandry solution is to cull the herd in order to ensure that the survivors are stronger and healthier.  Regulations that have the effect of reducing the number of lenders can be thought of as functioning in a similar way. In banking, this is done through control over chartering. Insurance does this through rate regulation (preventing destructive rate races). The CFPB's rulemaking is likely to achieve something similar in payday lending. 

We've seen this happen before. In 2010 Colorado undertook a major regulation of its in-state payday industry (this after an unsuccessful round of regulation in 2007). Pew has nicely analyzed the results.  The result of the regulation was that the number of in-state payday lenders fell by half (-53%).  Demand slackened only a little (-7%; why would it disappear?), however, so the number of customers per storefront almost doubled (up 99%).  The terms borrowers received were much better under the Colorado reform, and the revenue per store increased (+26%).  

What the Colorado experience suggests is that it's possible to have both better loan terms for consumers, and a healthier payday lending industry, but only if there is a contraction in the number of lenders. Put another way, some lenders have to go out of business in order for others to do better and for consumers to get better terms. It's rather counterintuitive--normally we think of competition as an important force for consumer protection, but at a certain point, it seems, too much competition actually results in price increases.  But it goes to show that the free market may not always produce the socially efficient result. (Obviously this isn't Pareto efficient, but it could well be Kaldor-Hicks efficient.) Curious to hear thoughts. 

 

Digital Wallets: The Honor All Devices Rule

posted by Adam Levitin

Every wondered how ApplePay works?  What the whole deal with Chip cards is?  Those contactless readers at stores?  If you're looking to nerd out on 21st century payment technology...and its legal and business implications, look no further.  I have a new paper out entitled Pandora’s Digital Box:  Digital Wallets and the Honor All Devices Rules.  The paper was commissioned by the Merchant Advisory Group, a retail industry trade association that focuses on payment issues.  The paper, which benefitted from interviews with the payments teams from a number of the largest merchants in the US, covers the range of technologies known as "digital wallets," including mobile wallets like ApplePay and Samsung Pay (with the magnetic stripe emulation).  The paper focuses on the potential benefits, but particularly the risks posed by digital wallets to merchants, and the legal implications, which are primarily antitrust issues.  

The basic issue with digital wallets is that they aren't all the same in terms of costs and benefits, but merchants have to accept them equal on an all-or-nothing basis.  Digital wallets involve lots of different technological and business arrangements that affect security, control over data, control over customer relationships, IP litigation risk, choice of payment method, and cost of payment.  Some wallets are very attractive to merchants; others less so.  Merchants, however, cannot accept digital wallets selectively or condition the terms of acceptance for particular wallets.  This is because Visa, MasterCard, and American Express all have so-called "Honor All Devices" rules that require merchants to accept payments without discrimination from all devices using any technology accepted by the merchant.   The arrangement has the nasty (but probably not coincidental) effect of foreclosing entry to digital wallets that offer cheaper payments, such as those that use PIN debit or ACH.   

If this sounds a bit like a redux of the Honor All Cards rule and the two previous monumental rounds of antitrust litigation that produced (first on the tying of signature-debit and credit, second on the tying of different credit products, among other things), well, you're right. The problems that arise with the Honor All Devices rule show that things have not been properly resolved in terms of anticompetitive behavior in the payment card space, and the issues are just migrating over to new technologies.  

Auto Title Lending: Exploding Toasters

posted by Adam Levitin

The CFPB has a new report out on auto title lending, and the findings are jaw-dropping. If ever there was a consumer financial product that looks like an exploding toaster, it is an auto title loan.  Default rates on auto title loans are one in three, with one in five resulting in a repossession. Is there any consumer product that is tolerated when one out of three products blows up? Even one in five? 

There's a lot of good data in the report (which assiduously avoids any interpretation, but just presents the facts), but beyond the default rates, here's what really jumps out at me: over 80% of the loans roll over and around half result in sequences of 10 or more loans.  That means that rather than viewing auto title loans as short term products with an extension option, they are really used more like longer-term products with a prepayment option. But more importantly, it tells us something about how to interpret default rates.  

Continue reading "Auto Title Lending: Exploding Toasters" »

New York Professional Responsibility Rules vs. Delaware Corporate Law?

posted by Adam Levitin

The Caesars examiner's report makes for interesting reading. Of particular interest for our readers might be its discussion of the role of the lawyers, namely those at Paul Weiss, who simultaneously represented the Caesars holding company, its operating subsidiary, and the holding company's private equity sponsor.  As the report notes, it is not unusual for a law firm to simultaneously represent at a parent and a sub or a sponsor and a portfolio company. But the examiner's report argues that things change in one of the entities is insolvent because then the real party interest in that firm are the creditors, not the shareholders, and that means there is a real conflict of interest between the insolvent (or potentially insolvent) sub and the holding company (and private equity sponsor). 

Although the examiner's report ultimately concludes that there's probably not much basis for finding liability against Paul Weiss (which might not have even know of the insolvency), something jumped out at me:  the lurking conflict between Delaware corporate law and NY Rules of Professional Conduct.  

Here's the problem.  While the examiner's report is correct in describing creditors as the real party in interest in an insolvent company, that's not how Delaware corporate law treats things. In North American Catholic Educational Programming Foundation, Inc. v. Gheewala, the Delaware Supreme Court made very clear that even if a firm is insolvent, the duties of the directors still run to the firm and its shareholders, not to the creditors. (Were it otherwise, we'd have a lot of interesting litigation every time a firm got anywhere near insolvent, and risk averse directors would be well-counseled to file for bankruptcy the second insolvency appeared on the horizon.)

But let's assume that the examiner's report is correct that for the purposes of New York Rules of Professional Conduct there would be a conflict of interest such that the attorneys could not simultaneously represent both the parent and the insolvent sub.  Presumably whatever attorneys would represent the sub would have to look to the interests of the creditors of the sub under NYRPC.  How on earth would that work, when the sub's directors are responsible to the shareholder (i.e., the parent) under Delaware law?  If the examiner's report's interpretation of NY RPC is correct, then I don't see how any NY barred lawyer can represent a Delaware corporation that might be insolvent. (Of course, the solution to all of this might be simply be that there is a violation of NY RPC, but it isn't really actionable by any body, and no bar committee is going to look at this too closely.) 

Sorry Paul, but the Bailout WAS about the Banks

posted by Adam Levitin

Paul Krugman claims that "Many analysts concluded years ago" that the big banks were not at the heart of the financial crisis and that breaking them up would not protect us from future crises.  Incredibly, his claim is linked to an article by ... Paul Krugman.  Maybe a Nobel Prize comes with a license to cite oneself as Gospel authority, but I don't believe that Krugman's Nobel Prize was for his expertise on bank regulation. 

So what's wrong with Krugman's claim?  Let's go piece by piece. 

Claim 1.  "Predatory lending was largely carried out by smaller, non-Wall Street institutions like Countrywide Financial."

Wrong.  The actual loan origination was generally not carried out by Wall Street institutions.  It was carried out by mortgage companies, mortgage brokers, and commercial banks (I can only think of only two large commercial banks that are "Wall Street institutions--Citi and JPMorgan).  But this is silly.  It's like saying that the banks didn't do the origination, their loan officers did.  The mortgage companies, mortgage brokers, and commercial banks were just origination agents for a Wall Street-based securitization machine.  The Wall Street institutions provided the funding for the predatory lending--warehouse lines of credit from commercial banks and then the ultimate funding from securitizations organized by Wall Street.  Absent securitization there just isn't that much predatory mortgage lending.  The proof is the disappearance of all of the subprime mortgage companies with the implosion of the securitization machine.  And for the cherry on top, let me note that Krugman ignores the direct ownership of some of the mortgage companies and commercial bank originators by Wall Street institutions.  Lehman, Bear Stearns, Goldman, AIG...all owned origination entities.  

Claim 2.  "The crisis itself was centered not on big banks but on 'shadow banks' like Lehman Brothers that weren't necessarily that big."

Continue reading "Sorry Paul, but the Bailout WAS about the Banks" »

The Loany for the Loony: Looniest Consumer Finance Argument of the Year

posted by Adam Levitin

There are lots of silly or unsupported arguments made about consumer finance; too often commentators rely on their priors and read evidence through the light of their priors (here too). But sometimes you read a piece that just causes your jaw to drop with the stupidity ridiculousness of its argument.  I think we should recognize these loony arguments with an annually award that I'm proposing calling the Loanys (rhymes with Tonys, get it?).  The point of these nominations is not the ultimate policy merits of a position, but the strength of the particular argument made.  Thus, advocacy for or against a bad product is not itself grounds for a Loany nomination.  The argument itself has to be laughably bad, as in it doesn't even pass the straight face test.  CreditSlips contributors, including yours truly, are, of course, eligible for the Loanys.  

So without further ado, my Loany nominee is Achim Griese’s recent op-ed in the American Banker in opposition to overdraft regulation.  This was a piece with such a thin argument that I had to reread it a couple of times to make sure I wasn't missing something. So what was this Loany-worthy argument?  Here it is in a nutshell: 

There's no need to engage in substantive (i.e., price) regulation of overdraft fees because overdraft isn't one of the top complaints in the CFPB's complaint database.

Continue reading "The Loany for the Loony: Looniest Consumer Finance Argument of the Year" »

Does the White House Stand for Consumer Protection or for Predatory Lending?

posted by Adam Levitin

Does the Obama White House truly stand for consumer financial protection, or will it support Wall Street when it thinks no one is looking?  That's the question that the Supreme Court served up today.  The Supreme Court is considering whether to hear an appeal in a critical consumer protection case called Midland Funding v. Madden. This is one of the most important consumer financial protection case the Supreme Court has considered in years. (See here for my previous post about it.)

The Court will only take the appeal if at least four Justices are in favor of hearing it.  Today the Supreme Court requested the opinion of the Solicitor General about whether to take the case.  That's a good indication that there's currently no more than three Justices who want to hear the appeal and another one or more who are unsure (it will take five to overturn the lower court decision in the case).  If four Justices wanted to hear the case, there'd be no reason to ping the Solicitor General. 

The request for the Solicitor General to weigh in on the case puts the White House in the position of having to decide whether it wants to stand up for consumer financial protection or to fight for Wall Street.

Continue reading "Does the White House Stand for Consumer Protection or for Predatory Lending?" »

Puerto Rico: The Multiple Issuer Problem

posted by Adam Levitin

One problem complicating any resolution of Puerto Rico's financial distress is that there are a multiplicity of issuers. There are separate claims on separate issuers, and it won't work to resolve just some of them, as they are all ultimately drawing on the same set of economic resources.  While there are claims on different assets, they value of those assets derive from Puerto Rico's overall economic production.  This multiple debtor problem makes Puerto Rico materially different from, say Detroit, where there was one primary debtor (the City of Detroit). (I don't know the legal status of Detroit Public Schools--is it separate from the City, the way the Chicago Public Schools are?) As far as I'm aware, Chapter 9 filings have almost always been single entity filings, rather than filings of multiple associated cases, as occurs with Chapter 11. 

So what can be done to deal with the multiple issuer problem? Even if Puerto Rico were allowed to file for bankruptcy (or its various sub-territorial entities were allowed to file), it doesn't solve the problem. While there can be multiple bankruptcy filings and the different cases can be administratively consolidated, that is a very different thing that actual consolidation of debtors, and the inability to resolve claims on one debtor can hold the other cases hostage.  It doesn't do any good to resolve the general obligation debt if creditors can force the electric utility to raise prices through the roof.  With this sort of multiple entity case, the hostage value held by creditors increases significantly.

Puerto Rico's division of governmental authority into various government units is a form of asset partitioning.  This asset partitioning might have helped Puerto Rico get more credit than it should have on cheaper terms ex ante (for a model, see here), but ex post this sort of asset partitioning can blow up in a debtor's face if there is no way to reconsolidate in order to restructure. (Consider, for example, the value of the LA Dodgers without their stadium and without the parking lots by the stadium.) Partitioning via devolution of authority to multiple local government units and authorities is a more permanently binding form of asset partitioning than corporate subsidiaries or even than some securitization arrangements.

Below I present three ideas for how to resolve the multiple issuer problem: consolidation via exchange offer; consolidation via merger; and consolidation via the creation of a common co-issuer entity that is bankruptcy eligible.  

Continue reading "Puerto Rico: The Multiple Issuer Problem" »

Why the 9th Circuit Fannie Mae "Federal Instrumentality" Ruling Doesn't Matter for the Net Worth Sweep Litigation

posted by Adam Levitin

Now for a break from Puerto Rico. 

Some housing finance commentators (here and here, e.g.) have been very excited by a 9th Circuit ruling that Fannie Mae is not a governmental entity for purposes of the federal False Claim Act (FCA) because they believe that basically decides the issue of whether Delaware law applies to the controversial Net Worth Sweep undertaken by Treasury as part of its support of Fannie and Freddie. Unfortunately, this excitement reflects a misunderstanding of some legal concepts and issues. The 9th Circuit opinion is a big nothing for the Delaware Net Worth Sweep litigation. It does matter for those who try to bring FCA claims against sellers to Fannie and Freddie, but that's a different kettle of fish. 

Continue reading "Why the 9th Circuit Fannie Mae "Federal Instrumentality" Ruling Doesn't Matter for the Net Worth Sweep Litigation" »

Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings

posted by Adam Levitin
The Puerto Rico situation feels a little like a McGuyver episode.  How do we get out of a locked room with only a rubber band and a toothpick?  Here are some half-baked thoughts, first on the nature of the problems and then some ideas for solutions.  

Continue reading "Puerto Rico: Eminent Domain, Greenbacks, and the Exchange Stabilization Fund--Some Outside-the-Box Musings" »

Two Cheers for Fannie and Freddie Synthetic CDOs

posted by Adam Levitin

My ears perk up whenever I hear the musical words "synthetic collateralized debt offering". (Bill Bratton and I did write the paper on history of these crazy things, after all....) So, it was with interest that I read a Wall Street Journal editorial decrying Fannie Mae and Freddie Mac's use of synthetic CDOs to transfer credit risk on mortgages to the private market through the STACR and Connecticut Avenue programs. Unfortunately, the WSJ piece does not accurately describe what Fannie and Freddie are doing and fails entirely to understand why unfiltered private capital is a recipe for financial instability in housing markets. 

Continue reading "Two Cheers for Fannie and Freddie Synthetic CDOs" »

The Trust Indenture Act Rider Is Not a "Clarifying Amendment"

posted by Adam Levitin

Ken Klee has argued that the Trust Indenture Act rider to the omnibus appropriations bill is just a "clarifying amendment":

The primary objection being made by those opposed to this amendment is that Congress needs to hold extensive hearings. But this is just a correction to a recent misinterpretation of the statute – not a wholesale revision of the Trust Indenture Act.

That's just not right. This isn't just a "clarifying amendment". The proposed amendment neuters the Trust Indenture Act as a protection for bondholders. 

Continue reading "The Trust Indenture Act Rider Is Not a "Clarifying Amendment"" »

No Way to Run a Railroad: Scholars' Letter on the Trust Indenture Act Amendment

posted by Adam Levitin

A large number of bankruptcy and corporate finance scholars, including several Slipsters, signed on to a letter to Congressional leadership regarding the proposed omnibus appropriations bill rider to amend the Trust Indenture Act. We don't all agree on how to interpret the Trust Indenture Act, on whether it should be amended, or on what amendments should look like, but we are all agreed that it shouldn't be done through this sort of backroom process. As Professor Douglas Baird of Chicago put it, "This is no way to run a railroad." Any amendment of the Trust Indenture Act should proceed with the customary procedural checks of legislative hearings and opportunity for public comment.  The Trust Indenture Act is simply too important a statute to amend on the fly. 

Private Equity's Private Bill to Amend the Trust Indenture Act

posted by Adam Levitin

One of the many creatures attempting to crawl its way onto the back of the omnibus appropriations bill is an amendment to the Trust Indenture Act.  The Trust Indenture Act is the 1939 securities law that is the major protection for bondholders. Among other things, the Trust Indenture Act prohibits any action to "impair or affect" the right of bondholders to payment or to institute suit for nonpayment absent the individual bondholder's consent. This legislation was passed in the wake of extensive study by the SEC of the unfair and abusive practices in bond restructurings in the 1920s and '30s, when ma and pa retail bondholders were regularly fleeced in corporate reorganizations.

The amendment in question is being pushed by the private equity firms that own Caesar's Entertainment Corporation (CEC), which is attempting to unburden itself from the guaranty of $7 billion of bond debt issued by its (now bankrupt) subsidiary, Caesar's Entertainment Operating Company (CEOC)

There are several problems with the proposed Trust Indenture Act Amendment, ranging from political unseemliness to ineffective drafting to unintended consequences on capital markets. There might be good reason to amend the Trust Indenture Act, but not through a slapdash job intended to bail out some private equity firms from their own sharp dealings.  

Continue reading "Private Equity's Private Bill to Amend the Trust Indenture Act" »

HARA$$ the CFPB: Omnibus Edition

posted by Adam Levitin

It's appropriations season and efforts to harass the CFPB seem to be going into overdrive. The latest scheme:  hit the CFPB with financial reporting requirements unparalleled for any government agency.  This little nugget of petty harassment is found in section 504 of the House Financial Services Appropriations bill being considered for inclusion in the final budget package. 

The bill would require the CFPB to submit quarterly reports to Congress that detail its obligations by object class, office and activity; an estimate of the same information for the coming quarter; the number of full-time equivalents in each office the previous quarter and an estimate for the coming quarter; and actions taken to achieve the goals, objectives and performance measures of each office. This level of reporting detail required is unprecedented for other agencies, as is the reporting timeline: two weeks after the close of each quarter. 

It's hard to see what the point of section 504 is other than to harass the CFPB, tie up the agency in bureaucratic redtape, and distract from its mission.  

Now you might note that the CFPB IS required under section 1017(a)(4)(A) of the Dodd-Frank Act to make quarterly budget reports to OMB and under section 1017(e)(4) to submit annual reports to the appropriations committee. But these reports do not require the level of detail mandated by section 504 and do not have a specific deadline, much less a two-week turnaround. There's also an annual Comptroller General audit and report to Congress.  All of which is to say, the CFPB is subject to standard financial controls and oversight. There haven't been any budget scandals, etc. that merit closer scrutiny. It's hard to see any reason for the additional level of scrutiny in section 504 other than animus toward the CFPB's mission. 

How Backpage Is Different from Choke Point

posted by Adam Levitin

The Seventh Circuit Court of Appeals recently slammed Cook County Sheriff Thomas Dart for his actions trying to get Mastercard and Visa to stop processing payments for Backpage, an advertising website whose ads include various adult services (some legal, some not). The Backpage decisions has been taken as an indication of the strength of the legal case by some payday lenders against the FDIC, OCC, and Fed over Operation Choke Point

Unfortunately, Judge Posner got it wrong in Backpage because he incorrectly assumed facts not in the record. But even if he got it right, there's a lot that differentiates Operation Choke Point (whose name does, unfortunately, sound like it might be from an adult ad on Backpage). 

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The Politics of Indirect Auto Lending and the CFPB

posted by Adam Levitin

Steve Davidoff Solomon has a Dealbook column on the CFPB's attempts to regulate auto lending that unfortunately gives the wrong impression about what the agency is up to, but which does tee up a really interesting question about the agency's politics.

Continue reading "The Politics of Indirect Auto Lending and the CFPB" »

Student Loan Interest Accruing Faster than Garnishment Limits?

posted by Adam Levitin

The New York Times recently ran a very sad, if extreme and unrepresentative, story of student loan debt. There's lots one can say about the article, but two points really jumped out at me. 

First, it's a real problem that the Department of Education cannot refuse to lend on the basis of a borrower's unsustainable debt load.  The DoE should be allowed to refuse to lend to overleveraged consumers, both as a consumer protection matter and as a protection of the public fisc. There's a problem begging for a bipartisan legislative fix. 

Second, by my back of the envelope calculations, the DoE simply cannot collect most of the debt from Ms. Kelly. Let's assume that the only real source of recovery for the DoE is by garnishing Ms. Kelly's income. Her other assets are either legally off-limits to creditors or not valuable enough to go after. As far as I can tell, the maximum garnishment amount will not even cover the interest accruing on the loans. In other words, her loans will negatively amortize even with full-bore collection activity. 

The article didn't report Ms. Kelly's income as a parochial school high school teacher. Let's guess that it's around $50,000 annually and that her annual disposable income is around $39,000.  The most DoE can garnish is 15% of disposable income (basically post-tax).  That would be $5,850/year.  Thus, if Ms. Kelly's $410,000 in debt is accruing interest at much over 1.4% per year, it will continue to grow even while in collection absent voluntary payments.  The interest will accrue faster than the garnishment will reduce the debt. If that isn't a sign that something has gone seriously wrong with a lender-borrower relationship, I don't know what is. (It also makes me wonder if there is some sort of unconscionability argument possible here.)

Glass-Steagall Is Campaign Finance Reform

posted by Adam Levitin

The financial wonkosphere just doesn't get it about Glass-Steagall.  Pieces like this one by Matt O'Brien concentrate on the questions of whether Glass-Steagall would have prevented the last crisis or whether it is better than other approaches to reducing systemic risk.  That misses the point entirely about why a return to Glass-Steagall is so important. No one argues that Glass-Steagall is, in itself, a cure-all.  Instead, the importance of a return to Glass-Steagall is political. But totally absent in much of the wonkospheric discussion is any awareness of the political impact of busting up the big banks.  

Let's be clear about why Glass-Steagall matters:  the route to campaign finance reform runs through Glass-Steagall.

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The Ibanez Property Ring

posted by Adam Levitin

There’s an interesting new article out on the celebrated Massachusetts U.S. Bank v. Ibanez case that suggests that the defendant, Antonio Ibanez, was at the center of a property fraud ring. It's not clear to me that there was anything illegal about Ibanez's activities, but even if there were, I don't think it much matters.  

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The Promise and Limits of Postal Banking

posted by Adam Levitin

It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?

I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.

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The Myth of the Disappearing Free Checking Account

posted by Adam Levitin

A regular trope sounded by opponents of consumer financial regulations is that the regulations have resulted in the disappearance of free checking. Whether it's the Durbin Interchange Amendment, the CFPB, or the Dodd-Frank Act in general, all are variously blamed for the supposed demise of free checking.  As it turns out, free checking is a little like Mark Twain--reports of its death have been greatly exaggerated.  Most Americans with bank accounts report paying nothing for their services.  The prevalance of such respondents has actually increased since 2010, from 53% to 61% of respondents. 

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Unhappy Birthday, BAPCPA

posted by Adam Levitin

BAPCPA's been in effect for 10 years now. I still remember the day before it went into effect, seeing round the block lines at the Wilmington courthouse as consumers rushed to file. 

There's lots to say about BAPCPA, for both consumers and businesses, but it boils down to this: it's not a fine wine and hasn't improved with age. The vinegar only gets more sour. 

Who's Afraid of a Republican CFPB?

posted by Adam Levitin

My thoughts on the issue at The American Banker.  Short version: the possibility of a GOP presidential victory in 2016 isn't a good argument for changing the CFPB to a commission structure. 

Glass-Steagall: It's the Politics, Stupid!

posted by Adam Levitin

It was like eight nights of Chanukkah in one for me watching the Democratic debate last night. There was a Glass-Steagall lovefest going on. But here's the thing:  no one seems to get why Glass-Steagall was important or the connection between Glass-Steagal and the financial crisis. The importance of Glass-Steagall was not as a financial firewall between speculative investment activities and safe deposits. It was as a political Berlin Wall keeping the different sectors of the financial industry from uniting in their lobbying efforts and disturbing the peace of the nation.

Until and unless we realize that the importance of Glass-Steagall was political, we're going to continue wasting our time debating insufficient half-measures of financial regulation like the Volcker Rule, which has the financial, but not the political benefits of Glass-Steagall. More critically, we're going to pass regulations like the Volcker Rule and then wonder slack-jawed why they don't work, as the financial industry undermines them through the regulatory implementation and legislative amendments. Financial regulation is just not that complex technically, even if if has a lot of technical rules (it's the capital, stupid!). The problem we face is not technical, but political.

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Covenant Banking

posted by Adam Levitin

A new book out by University of Minnesota Law Professors Claire Hill and Richard Painter proposes a really intriguing proposal for disciplining wayward financial services firms: "covenant banking." The problem, as Hill and Painter observe, is that when things go badly at a financial institution, the burden is borne by shareholders, not by the managers, who have portable human capital and whose compensation is not typically subject to clawback. In essence the problem, as Hill and Painter see it, is that bankers lack "skin in the game." And Hill and Painter have a plan to fix it. 

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Note to Payments Innovators: You Need a Value Proposition!

posted by Adam Levitin

The past year has seen two notable innovations in the payments world and a third is coming down the pike.  ApplePay was rolled out last spring, the EMV liability shift went into effect on October 1, and the Fed has convened a task force on designing a faster payment system.  All three of these developments seem unlikely to result in major changes in payments unless they come up with a clear value proposition for consumers, merchants, or both. 

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Interchange Evidence?

posted by Adam Levitin

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

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

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CFPB Data Collection

posted by Adam Levitin

I've got an op-ed in the American Banker about the CFPB's data collection, which has become the latest inside-the-Beltway attack on the CFPB.  

The problem is that the CFPB's data collection critics (and here and here and here, among others) don't understand the first thing about the nature of the data collected by the CFPB.  Newt Gingrich, for example, worries about the civil liberties implications of the CFPB seeing your credit card bill. I'd be worried about that too, but that's not the data the CFPB's getting.  Nor is it getting metadata that can be used to reidentify accounts. Nor is the data that the CFPB collects useful to cybercriminals--it lacks account numbers, expiry dates, PINs, etc. And almost all of it is already commercially or publicly available and already collected by other government agencies.  But shoot first, ask questions later is how things often play out with attacks on the CFPB.  Would it be too much to ask for factually-grounded policy discourse every once in a while?

The Agency That's Got Your Back

posted by Adam Levitin

Nice piece in Time Magazine on the CFPB here

Donald Trump Speaks the Truth

posted by Adam Levitin

I never thought I'd write this, but Donald Trump speaks the truth, at least as far as bankruptcy is concerned. 

There's plenty to criticize regarding Donald Trump, but I really wish the media would back off the bankruptcy angle of his career, or at least be smarter about it.  

Continue reading "Donald Trump Speaks the Truth" »

Dodd-Frank's Constitutionality

posted by Adam Levitin

I'm testifying tomorrow before Senate Judiciary Committee's Subcommittee on The Constitution (yes, that's the official capitalization), about the constitutionality of the Dodd-Frank Act.  

Short version: nothing to see here folks.

Slightly longer version: really nothing to see here.

Even longer version:  the plaintiffs in State National Bank of Big Spring v. Lew have a totally non-Originalist interpretation of the Bankruptcy Clause, namely that "uniform laws" apparently requires equal treatment of all similar creditors, so title II Orderly Liquidation Authority is unconstitutional.  Yes, that's the sound of me shaking my head.

My written testimony is available  here.  

Faster Payments: Is There a Business Case?

posted by Adam Levitin

The Federal Reserve System has embarked on a project of exploring the possibility of faster retail payments in the United States.  A similar move has occurred with the UK Payments Council.  At the same time, the Electronic Payments Network is rolling out a faster version of ACH.

Here's what puzzles me:  what on earth is the business case for faster retail payments in the United States?  The U.S. payment system works incredibly well. Yes, it has flaws: the interchange system is unfair and security is atrocious. But those aren't really speed issues.  Real-time authentication is a security issue, but that's separate from speed of payment clearance and settlement.  

Now, it's true that the US lags behind other countries in terms of mobile payment technology.  We don't have anything like Kenya's m-Pesa mobile payment system. But there's a reason for that:  we don't need m-Pesa in the US because we already have a functioning retail banking system, and our banks are better safety-and-soundness risks than our telecom operators.  (Kenya's government owns a large share of m-Pesa, making it quasi-guarantied, I guess.)  

So readers, tell me, what am I missing?  Is there a business case, or is this just about chasing shiny bells and whistles and wanting to have the latest technology just because?  My sense is that we're seeing an "iPhone effect" of wanting the best and newest, even though the current system is just fine. 

Madden v. Marine Midland Funding

posted by Adam Levitin

In a recent case called Madden v. Marine Midland Funding, the Second Circuit ruled that a loan owned by a debt collector violated New York's usury statute.  The loan had been originally made by a national bank and was subsequently sold to the debt collector when it was in default.  There's no question that the state usury law was preempted when the loan was held by the national bank.  The Supreme Court's (awful) Marquette National Bank v. First of Omaha Service Corp. decision from 1978 makes that very clear.  (The Court suddenly discovered in 1978 that over a century of legal understanding of the 1864 National Bank Act was somehow wrong and that banks had been leaving lots of money on the table.)  

The debt collector argued that because the loan had been made by a national bank, it carried preemption of state usury laws with it as a permanent, indelible feature.  "Applesauce!" proclaimed the Second Circuit:  National Bank Act preemption of state usury laws extends no further than National Bank Act regulation.  Preemption is part of a package with regulation, but once the loan passes beyond the hands of a National Bank, it loses its preemption protection and becomes subject to state usury laws.  (Some of you might recognize that this is an argument I made several years ago. Plaintiff's counsel sent me a very nice email to this effect.  You owe me a citation, 2d Circuit!).  

Continue reading "Madden v. Marine Midland Funding" »

Is There a Student Loan Debt Crisis?

posted by Adam Levitin

I've been a skeptic for some time about claims that we have a student loan "crisis" in the United States. For individuals mired with student loan debt, it is very much a crisis, of course.  But my reluctance to term growing levels of student loan debt a crisis reflects the fact that student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises:  long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs. (This is more true of government loans than private loans.) And, while student loan debt is growing rapidly, it is still only about a 9th of the size of the mortgage market. All of this has kept the student loan kettle from boiling over.  

Yet at the same time it is precisely because of the concentration of student loans in the younger population that it is concerning.  Large debt loads at the beginning of one's adult life are likely to have very different effects on than debt spread out over a life time.  Moreover, student loans are not incurred based on current income, but on assumptions of future income (if that), so student loan debt burdens are more likely to be poorly calibrated to borrower's actual earning capacity. Additionally, because student loan debt is not dischargeable in bankruptcy (except in extreme circumstances), unlike other types of debt, it likely to stick around.  And, unlike various types of secured debt, there is no "put" option. A homeowner who runs into trouble with a mortgage or a cash-strapped auto loan borrower can always sell the house or car (or let them be repossessed) to pay off part or all of the debt. That's not possible with unsecured debt.  

The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one. 

Continue reading "Is There a Student Loan Debt Crisis?" »

Andrew Ross Sorkin in SO Wrong about Starr v. Board

posted by Adam Levitin

Andrew Ross Sorkin is waiving his arms about the Starr v. Board of Governors ruling being the "end of bailouts." And he is SO wrong.  Sorkin writes that "Legal experts say that the ruling, coupled with certain provisions of the Dodd-Frank financial overhaul law enacted after the crisis, makes it unlikely the government would ever rescue a failing institution, even if an intervention was warranted." 

I don't know which "legal experts" Sorkin is referring to (not least as he doesn't name any), but anyone who has imbibed the slightest draught of legal realism will recognize that bailouts are never constrained by law. The prime directive in a financial crisis, as Anna Gelpern has taught us, is to prevent the ship from sinking.  All other concerns--legality, moral hazard, expense, etc.--are jettisoned the moment they get in the way. Afterwards there's inevitable finger waging and cases like Starr, but whenever there's trouble again, we'll be right back at it. Put another way, the Fed is not Superman, but Batman. It will break the rules to protect Gotham, no matter what.  And that's probably the way we want it deep down.  

So what does Starr mean? The ruling is a justly deserved embarrassment for the Fed. There were a lot of ugly details that emerged during the trial that Sorkin doesn't want to mention, but in the end, the case really doesn't matter when one looks at the big picture. It is going to have ZERO effect on future bailouts. So Sorkin and others can be outraged that the mighty Fed was called to task for the imperious way it conducted the bailouts, but this judicial tonguelashing is just that and nothing more. 

After Hey Hey, Ho, Ho, Mary Jo It's Time to Go

posted by Adam Levitin

Senator Warren has written a pretty stinging rebuke of the ineffectiveness of Mary Jo White as SEC Chair. The take-away from Senator Warren's letter is that it's time for MJW to go: the SEC needs new and effective leadership. The SEC was asleep at the switch during the lead-up to the financial crisis and its post-crisis performance has been less than impressive. In a target-rich environment, the SEC has not notched any major enforcement wins and its rulemaking has been milquetoast (and in many cases continues to be delinquent, five years after Dodd-Frank required the rules). The SEC has also been unwilling to seriously discipline large financial institutions, creating a double standard in which insider traders and boiler room operators are treated much harsher than recidivist institutions.  

I don't know if MJW will be out the door in a month or if she'll tough it out until the next administration. But I think it's useful to ask why things went so wrong with MJW and how not to repeat the mistake of her appointment.  

My view is that MJW had entirely the wrong background to be running the SEC. MJW's background was as a litigator:  a US Attorney and defense counsel at Debevoise Plimpton. She's got impressive litigation chops.  The SEC Chair, however, is not a litigation position. It's a policy and administrative position. The SEC Chair doesn't run litigation and cannot single-handedly direct litigation. The SEC in general does a lot more than litigation, including rulemaking and oversight. It's ambit extends far beyond the stupid, but headline grabbing insider trading cases and reaches into much more important things like regulation of rating agencies and safety-and-soundness issues with clearinghouses and broker-dealers.  So why would a litigation resume be what we want in an SEC Chair?  Many of the most important issues before the SEC never end up in litigation. In fact, the stuff that gets litigated is often the more minor stuff, like prosecution of penny stock frauds. 

I'm not sure what the ideal resume for an SEC Chair is, but I think it has to be someone who has some policy chops, not another former prosecutor or securities litigator. Unfortunately, a President who wants to indicate that s/he'll be tough on Wall Street often thinks the best way to signal this is to appoint a former prosecutor.  Hopefully we won't fall for that trick again. If we want better securities regulation, a prosecutor is probably the wrong choice to head the SEC. 

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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