postings by Adam Levitin

Zombie Debt and the Metaphysics of Discharge

posted by Adam Levitin

The NYT has a piece about credit reporting of so-called "zombie debt"--debt that has been discharged in bankruptcy.  Apparently the US Trustee Program is investigating various creditors in connection with this debt.

The reporting obscured a bit of very subtle bankruptcy metaphysics. The discharge of debt in bankruptcy does not void the debt. The debt is still owing. But it cannot be collected except if the debtor volunteers to repay it. The discharge is an injunction against the enforcement of the debt against the debtor as a personal liability. The discharge voids judgments on the debt, but not the debt (and it does not prevent the enforcement of liens).  In other words, the debt still exists post-discharge.  It just isn't enforceable.

That means that there is nothing per se inaccurate about the debt being reported to a credit reporting agency as owing, provided that the debt is also reported as discharged in bankruptcy. (Different story altogether under Fair Credit Reporting Act and Fair Debt Collection Practices Act if the discharge is not reported.)   

As far as I can glean from the reporting, the problem seems to be less the continued reporting of the debt than creditors saying that they will only cease reporting it as owing if the debt is paid.  Is that a violation of the discharge injunction?  I'm not sure.  It is fine for a private party to require payment as a condition of future dealings:  "pay up if you want to do another deal with me." But that's not quite this situation. The purpose of continuing to report a discharged debt is not to invite a condition of future dealings.  Instead, its purpose (other than if continued reporting were the default) would seem to be to extract payment, which would be an "act to collect, recover, or offset any such debt as a personal liability of the debtor."  It'll be interesting to see more about how this plays out. 

QRM's Missed Opportunities for Financial Stability and Servicing Reform

posted by Adam Levitin

There are three major new regulations shaping the housing finance market:  QM (qualified mortgage), QRM (qualified residential mortgage) and Reg X.  QM is a safe harbor from the statutory ability-to-repay requirement that applies to all mortgages.  QRM is a safe harbor from the statutory risk retention requirement that applies to mortgage securitization.  And Reg X are the new mortgage servicing regulations.  It's important to understand how these three regulations interact and how they're going to affect the housing finance market.  (There's also new TILA/RESPA disclosure stuff, but I don't think that's particularly impactful, in part because I don't think disclosure regulation is especially effective in most real world circumstances.) 

Continue reading "QRM's Missed Opportunities for Financial Stability and Servicing Reform" »

Credit Risk Retention Rules and QRM

posted by Adam Levitin

The long awaited credit risk retention rules for securitization are out. The big question--whether the qualified residential mortgage or QRM exemption would be narrower than the CFPB's qualified mortgage or QM safe harbor to the Ability to Repay requirement for mortgages is no. QRM=QM. The short version is that the rule doesn't require meaningful credit risk retention where it counts, and imposes significant market-shaping safe-harbor requirements where skin in the game isn't so important.

Continue reading "Credit Risk Retention Rules and QRM" »

Are You Sure That's Your Testimony?

posted by Adam Levitin

Yves Smith has had some great coverage of the AIG bailout trail over on Naked Capitalism.  While the litigation, as Yves has characterized it, is a bit like a brawl between the ugly stepsisters, it's telling us all kinds of stuff we didn't know (or at least couldn't document) about the 2008-09 bailouts.   

Today's coverage is a must-read piece by Matt Stoller about the civil service regulatory capture at the Fed, as personified by its general counsel.  The AIG trial has highlighted some of the worldview problems at the Fed. It has also included some jaw-dropping exchanges like the following:

Q: Would you agree as a general proposition that the market generally considers investment-grade debt securities safer than non-investment-grade debt securities?
A: I don’t know.

You can't make this stuff up.  I'll let readers draw their own conclusions. 

Unseal the Doomsday Book!

posted by Adam Levitin

When I first heard about the NY Fed's Doomsday book, my initial thought was, "Wow, they've got a comprehensive survey of land titles, so MERS really isn't an issue!" Then I realized it was a Doomsday book, not a Domesday book. Apparently the Doomsday book is some sort of "in case of emergency" do-it-yourself bailouts manual that outlines the steps the NY Fed believes it can legally take to stave off economic Armageddon. 

I'm rather puzzled by the NY Fed's claim that it should be kept under seal.  I guess we'll find out more of the Fed's reasoning soon enough, but it hardly seems to be particularly sensitive of secret information.  This isn't the Coca-Cola recipe or some sort of trade secret. It's hard to believe that we didn't see the full panoply of the Fed's bailout powers on display in 2008, and perhaps then some. (A colleague has suggested that they might be developing some sort of secret, stress-tested, boilerplate clad bailout machine in the basement of the NY Fed. Of course such a bailoutbot would exercise its own free-living-will. Its only vulnerability would be following a haircut.)

The fact that the Doomsday book apparently contains legal advice is not a seal issue--that's a privilege issue. Once that privilege is waived (I'm guessing it has been), I can't see why the fact that the document includes legal advice presents cause for remaining under seal. 

Courts have a lot of discretion in what they can allow to remain under seal, but I just don't see the Doomsday book as fiting into traditional categories of sealed documents. But as I said, we will see.  

Hacking and Systemic Financial Armageddon

posted by Adam Levitin

The revelation that 76 million JPMorgan Chase consumer accounts were compromised by hacking should be scaring the heck out of us. The Chase hacking is a red flag that hacking poses a real systemic risk to our banking system, and a national security risk as well. Frankly, I find this stuff a lot scarier than either ISIS or our still largely unregulated shadow banking space.  

Consider this nightmare scenario:  what if the hackers had just zeroed out all of those 76 million Chase accounts and wipes out months of transaction history making it impossible to determine exactly how much money was in the accounts at the time they were zeroed out? The money wouldn't even have to be stolen.  Just the account records changed.  What would happen then?

Continue reading "Hacking and Systemic Financial Armageddon" »

Flagstar Servicing Enforcement Order

posted by Adam Levitin

The CFPB entered into a Consent Order with Flagstar Bank regarding its default mortgage servicing practices. This order is really important. It's the first enforcement action of the CFPB's new servicing rules, and its "benching" remedy that prevents Flagstar from most default servicing until it demonstrates compliance shows that the Bureau is serious about cleaning out the Augean stables of servicing. (The Ocwen order had a much larger dollar figure attached, but was about pre-2014 conduct).

The details given in the consent order tell an all-too-common picture about mortgage servicing.  

In 2011, Flagstar had 13,000 active loss mitigation applications but only assigned 25 full-time employees and a third-party vendor in India to review them. For a time, it took the staff up to nine months to review a single application. In Flagstar’s loss mitigation call center, the average call wait time was 25 minutes and the average call abandonment rate was almost 50 percent. And Flagstar’s loss mitigation application backlog numbered well over a thousand. 

And we wonder why loss mitigation hasn't been more effective?

Continue reading "Flagstar Servicing Enforcement Order" »

Digital Wallets

posted by Adam Levitin

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.

Continue reading "Digital Wallets" »

Apple Pay and the CFPB

posted by Adam Levitin

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. 

Continue reading "Apple Pay and the CFPB" »

Isis Wallet Mobile Payments

posted by Adam Levitin

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. 

Is Housing Such a Bad Investment? Maybe Not...

posted by Adam Levitin

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.  

Continue reading "Is Housing Such a Bad Investment? Maybe Not..." »

Single-Point-of-Entry: No Bank Left Behind

posted by Adam Levitin

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”.  

Continue reading "Single-Point-of-Entry: No Bank Left Behind" »

Duties to Serve in Housing Finance

posted by Adam Levitin

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! 

MBS Settlements--Following the Money

posted by Adam Levitin

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.  

Continue reading "MBS Settlements--Following the Money" »

Toward a Universal Ability to Repay Requirement

posted by Adam Levitin

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. 

Continue reading "Toward a Universal Ability to Repay Requirement" »

A National Debt Registry?

posted by Adam Levitin

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:  

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Feeling Vindicated

posted by Adam Levitin

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. 

Whose Fault Is the Argentina Debacle?

posted by Adam Levitin

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. 

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." 

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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.

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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.  

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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.  

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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.  

Continue reading "Consumer Arbitration: Taking Stock" »

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.  

Satoshi

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.

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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). 

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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.

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

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. 

Continue reading "Data Breaches: Target, Neiman Marcus" »

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" »

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