Credit Slips

Not Valid Unless Signed

All my credit and debit cards state on the back above the signature specimen block "Not Valid Unless Signed". I'm curious as to what exactly that means. If I make a purchase with an unsigned card, could it possibly absolve me of liability for the purchase price? Or, at the very least, does it mean that I am not subject to the terms and conditions of the cardholder agreement, including binding mandatory arbitration? Would my only liability be quantam meruit to the issuer (or to the merchant if the issuer refused to pay and the merchant didn't meet PCI standards)? There's no published case law on this.

What work is the "not valid unless signed" language really doing? Surely my signature isn't necessary for me to be contractually bound. Card usage alone should be sufficient, but the signature language might raise the consent bar. Signature specimens are checked so rarely and so perfunctorily at that that one has to wonder whether they serve any serious security function other than for maybe providing a comparison specimen for contested transactions. I wonder if this is an example of contractual form language that has outgrown its purpose, but that no one is bold enough to delete.

Housing Bankruptcy Ripple Effect

We're starting to see the bankruptcy ripple effect of the housing crisis beyond the housing and financial services industry. Now municipalities are being forced to declare bankruptcy because property tax revenue has dried up while foreclosures have imposed significant strains on municipal resources.

While moral hazard concerns are a real issue for any government aid to borrowers or lenders, its worthwhile remembering a major exception to moral hazard--third-party costs. As Larry Summers summarizes: When the fire department rescues people who start fires by smoking in bed, it creates a moral hazard for in-bed smokers. But no one gets exercised about moral hazard, in part because we know that fires can spread and burn down neighbors' apartments in "contagion" fires and that the in-bed smokers won't take care to insure their neighbors. That's what we're seeing in foreclosure crisis--mounting third-party costs to neighbors and local government. If the municipal government goes bankrupt, it affects everyone in the community--indeed, those who had to relocate because of foreclosure escape this consequence. Foreclosure is a real problem for everyone, not just those who get kicked out of their homes or whose investment portfolios take a hit.

Preemption Chutzpah

Elizabeth Warren draws our attention to an astonishing example of banking industry chutzpah--claiming preemption protection against state foreclosure laws. Not only has no one ever historically believed that state foreclose law was preempted; the OCC's preemption reg's specifically carve out state debt collection law from preemption. There's no conflict preemption here, and given specific mortgage preemption laws like DIDMCA and AMTPA that preempt state usury limits on some mortgages and limits on exotic mortgage structures, it is hard to see how there is general field preemption or the like.

The preemption argument is even more chutzpadik, though, because banks hold only a small percentage of mortgages. Most mortgages are held by securitization trusts. The last time I checked, they are not federally chartered financial institutions nor are they operating subsidiaries or agents of federally chartered financial institutions. Thus it is utterly beyond me how anyone could claim that preemption applies to mortgages owned by securitization trusts, even if the mortgages were originated by national banks and are serviced by them. The preemption claim here doesn't even pass the straight-face test. As unbelievable as it is, though, perhaps legislation should clarify this just to, um, foreclose possible preemption arguments.

I'm curious whether the same financial institutions pushing the preemption claim are also the same institutions that are members of the HOPE Now Alliance, who have supposedly committed themselves to working to modify loans rather than foreclose. The preemption agenda is simply inconsistent with a commitment to efforts to avoid foreclosure.

Proposed Fed/OTS/NCUA Credit Card Regulations

[Updated  5.4.08.  Updated language, largely comparing Regs to pending legislation, is in brackets.]

This afternoon, the Federal Reserve, Office of Thrift Supervision, and National Credit Union Administration unveiled a set of new, proposed unfair and deceptive practices (UDAP) rules under section 5(a) of the Federal Trade Commission Act.  A copy is available here.  Other materials are here.  It's not light reading--269 pages. 

Some of the proposed rules are quite favorable for consumer interests.  Others do not go far enough, however, and perhaps most importantly, there are several major issues that the proposed rules simply do not address. From an initial perusal, the gist of the rules (and what's missing) seems to be as follows (below the break):

Frontier and First Data Corp.

Felix Salmon has a great piece in CondeNast portfolio.com about the role of First Data Corporation in precipitating Frontier Airline's bankruptcy.  It's unusual to find a story that connects consumer credit card rights with a corporate bankruptcy, so I'll summarize the interaction beneath the break. 

Who Speaks for Mortgage "Lenders"?

Katie Porter makes an incredibly important point in her recent post about how securitization structures may be impeding mortgage modifications because the ultimate holders of risk on the mortgages are not the ones involved in the modification decision.  Mortgage servicers, who typically hold a small interest (if any) in the loans are the ones making the modification decisions.  When servicers do hold positions in the mortgage-backed securities, they are first lost positions, so the servicers likely takes a loss regardless of a modification or foreclosure, meaning that their interests are not aligned with the other MBS holders.

Let me take Katie's post a step further and suggest that the relevant voices on the lending side of the mortgage market have not been heard.  The ultimate risk on mortgages is held by mortgage-backed securities holders, private mortgage insurers, and pool-level bond insurers.  These parties have been entirely absent from the conversation on modification and bankruptcy reform. 

Credit Card Redlining

Several months ago, when I was a scarcely tolerated guest blogger, I wrote a post that asked (What Determines) What's In Your Wallet? The point was to highlight how little we know about what determines what credit card offers a particular individual receives. I suggested that there was a danger of red-lining in the credit card industry based at least on what solicitations one received. (I got a bunch of indignant e-mails about this emphasizing that federal law prohibits discriminatory lending...as if no one ever violated the law. Ah, Camelot.)

Well, now comes an empirical study from Ethan Cohen-Cole, an economist at the Boston Federal Reserve that indicates that there is redlining in the credit card industry. Residents of black neighborhoods are less likely to receive less consumer credit than residents of white neighborhoods, all things being equal:

This paper’s principal observation is that remarkably, in spite of identical scores and identical community characteristics, our individual in the Black neighborhood receives less consumer credit (e.g. fewer credit cards) than the individual in the White area. That is, in spite of the fact that both have been assessed to have similar risks of nonpayment, as determined by the credit score, the person living in the Black area has less ability to access credit.

And if there is less available credit card credit, where do people in black neighborhoods turn for credit?

To be sure, a single empirical study is just that and one can quibble about methodology, but wow! Talk about opening up a new front in credit card regulation. I've got to think that if this study gets some attention it is going to cause Congress to ask some questions. Of course, the study says nothing about the terms of the credit, but if I had to take a guess...well, what would you think?

UST Turned Loose on Countrywide

The UST has been turned loose on Countrywide. The United States Trustee has sought to conduct discovery on Countrywide as part of a motion for sanctions against Countrywide for abusing the bankruptcy process by filing claims that included fees Countrywide knew were not authorized. (See Katie Porter's article on this troubling phenomenon here.) Countrywide sought to squash the discovery motion. Yesterday, the Bankruptcy Court for the Western District of Pennsylvania denied Countrywide's motion. The bankruptcy court was unimpressed by Countrywide's slippery slope argument that this will open up the door to discovery on the entire lending industry. I have to think, though, that if anythign shocking comes out of discovery, trustees (and debtors) elsewhere might think about taking a closer look at creditors' claims. The decision can be found here.

My Very Own Risk-Based Repricing Experience

People sometimes assume that I have a personal issue with credit cards because I write a lot about the card industry and often argue that its practices are harmful to consumers and to general welfare.

I really don't. I just think they are an amazing laboratory for examining contractual relationships and bargaining power. Frankly, I'm surprised that more people don't study them, because they are the most ubiquitous type of consumer contract and are at the very core of the network of contracts that makes up our consumer economy.

This week, however, it got personal. I fell into the card industry's billing practice traps. And the funny thing is that this is because the card issuer screwed up. In the end I don't actually owe any money (alas, there's still some issues to resolve)--but I could have very easily ended up paying a lot of money I didn't owe. The ridiculous twists and turns in my saga are illustrative of the serious problems that exist with credit cardholder agreements and why there needs to be legislative limits placed on the terms of these agreements.

Credit Card Fair Fee Act

This weekend, the lead editorial in the Wall Street Journal was about the Credit Card Fair Fee Act, legislation sponsored by John Conyers (D-MI) and Chris Cannon (R-UT) that would create a special administrative law judge panel to set credit card network interchange fees.

The Journal came out against the legislation, as a simple fee setting regime. Whether an ALJ panel is the best way to fix the interchange problem is certainly a fair issue for debate…once we all acknowledge that there is a serious problem and that a legislative fix might be in order.

I was pleased to see that the Journal recognized that there might be some problems in the card market, even if I am less sanguine that a fix will emerge from the market itself. Still, I want to address a few points in the WSJ editorial, though, that should not go unchallenged.

Loaded for Bear?

Last week, JPMorgan was going to pay $2/share for Bear, Stearns, with any loss absorbed by the Fed (and thus by taxpayers). Now JPMorgan is going to pay $10/share.

This new offer shows what a lowball offer $2/share was. The offer just jumped 500%! This should make one question whether $10/share is still a lowball. Can we expect the current process to produce a fair market price for Bear? Shouldn't we at least have some sort of an auction? Perhaps that already happened informally before the JPM bid came out, but now that the initial panic has subsided, maybe it's time to have a more formal and orderly auction. In light of the apparent drafting snafu in the original offer that has JPM on the hook for all of Bear's trades, regardless of whether the deal is consummated, I have to think the Bear Stearns board might have a duty to shop for other offers. I assume that the Fed would offer its guarantee to anyone who could top the JPM offer.

Regardless of whether JPM pays $2 or $10/share to eat Bear, I'm still puzzled why the Fed didn't guarantee BS directly or buy it out itself? Why would the Fed take the downside risk, but not also the upside? I'm not familiar with the Fed's enabling statute--perhaps there is a legal impediment. But even if not, I doubt that the Fed wants to own BS itself--it's one thing to hold some mortgage backed securities, it's another thing to have a 100% stake in a major investment bank, even for a short period. Still, it's one thing to bail out Bear Stearns. It's another to hand JPM (or anyone else) a windfall that should rightfully be the taxpayers'.

The Future of Consumer Credit...Today

Paige and Jeremy have had some wonderful posts this last week, and although I have not been deputized to be their official host, I want to thank them for really pushing the behavioralist perspective.

I want to take up the final question Paige and Jeremy posed, however. They ask "Will the terms of consumer credit improve (lower interest rates, more frequent flyer miles) or worsen (higher late fees, more invasive collections practices)?"

We already know the answer, because the future is here today.

The Visa IPO

Visa is scheduled to have its IPO later this week. The IPO could potentially be the largest in history. This market seems like terrible timing for an IPO, although for liquidity-strapped banks, the IPO could be a much-needed source of cash. The Visa IPO, along with the 2006 MasterCard IPO and the end to MasterCard and Visa's dual-exclusivity rules, which prohibited banks that issued MC/Visa cards from issuing Amex or Discover cards, is setting the stage for a major reconfiguration of the payments world in the next decade. These changes could have far-reaching effects for consumers, merchants, and banks because of potential shifts in the way payment networks will compete with each other

Bear's Bankruptcy Alternative

Would a bankruptcy have been better for Bear than a $2/share sale? We don't know. But I think a comment made by Alan Blinder, the noted Princeton economist, on the News Hour with Jim Lehrer this evening is telling precisely because it was wrong.

Blinder noted that the sale was basically the same result as a bankruptcy because equity was largely wiped out. That's true, but misses a very important point about bankruptcy: process matters.

Reexamining Non-Judicial Foreclosures

Katie Porter's posts and scholarship about illegal fees tacked on by mortgage servicers to defaulted mortgages raise an interesting question:  why aren't states reconsidering non-judicial foreclosure?  Non-judicial foreclosure is generally faster and cheaper than judicial foreclosure, which is a good thing, at least for the foreclosing lender as it reduces loan losses.  And as Karen Pence has shown, there is a reduced supply of credit in states with judicial foreclosure.  But as the name implies, non-judicial foreclosure lacks court oversight, and this raises the possibilities for abuse.

[UPDATED LINK 3.4.08 at 5:06pm]

HOPE Now January Report

HOPE Now, the government-encouraged alliance of mortgage servicers assembled to facilitate mortgage workouts, has released its January 2008 numbers. There's good and bad news in these numbers.

The Credit Cardholders' Bill of Rights

We at the Slips have been remarkably silent about the proposed Credit Cardholders’ Bill of Rights, easily the most major proposed credit card legislation in a long time, perhaps since the Truth-in-Lending Act of 1968. I think we’ve all been expecting each other to take the lead in piping in. It’s high time we started a discussion on this legislation, so here goes (warning, this is a long post, but this is a hugely important issue).

The Cardholders’ Bill of Rights takes aim at some of the most troubling and odious practices of the card industry. The proposed legislation has lots of features (summarized here), but the most important is that it would prohibit or limit a number of card issuer billing practices that are substantively unfair or that consumers rarely know about even if disclosed: (1) universal cross-default clauses; (2) any-time, any-reason rate changes; (3) retroactive application of interest rates without a opportunity to cancel the account first; (4) two-cycle billing; (5) unlimited applications of overlimit fees in a single billing cycle; (6) give consumers the ability to opt-out of overlimit transactions; and (7) require pro rata application of payments to balances accruing at different interest rates.

These terms and practices may not be familiar to all readers of the Slips, so let me briefly explain each in turn, because chances are some apply to at least one of your credit cards.

Contracting for Stay Waivers

One of my students brought to my attention this recent decision enforcing a prepetition waiver of the automatic stay in a Chapter 11 case. As the decision notes, it's not uncommon to see court enforce pre-petition waivers of the stay when the waivers were made in the context of earlier aborted Chapter 11 plans. But in this case the waiver was made in exchange for a foreclosure forbearance agreement and not in the context of an early Chapter 11.

There is, of course, an important body of scholarship arguing for permitting contracting around bankruptcy on efficiency grounds. The literature has a real problem in addressing the fairness norms that are central to bankruptcy, but leaving it aside, I think prepetition waivers of the stay have a fundamental doctrinal problem--the stay is a right of the estate, not of the prepetition debtor, so the prepetition debtor has no ability to bargain it away.

What the Foreclosure Mess Tells Us About Private Student Loan Dischargeability

The most recent attempt to roll back some of the BAPCPA's limitations on the scope of the bankruptcy discharge seems to have faltered in the House. The House passed an education bill, but without a proposed amendment that would have made private student loans dischargeable in bankruptcy, as they were before October 2005, was voted down. A Senate bill (S.1561) sponsored by Dick Durbin (D-Ill.) that proposes making the private loans dischargeable is still in committee. (For a discussion of the legislation see here.)

Credit Card Application Approval Processes

An enterprising individual decided to test whether he could get a card using a torn-up application that he taped together and then filed out with a new (unverified) address and phone number.  He ended up with a shiny new Chase Mastercard sent to the new address.  (This story is a couple years old, but I just saw it today.)  If this doesn't make you go out and buy one of those fancy super-duper cross-cutting Ollie North/Arthur Andersen-endorsed shredders, I'm not sure what will.  And we wonder why identity theft is a problem...   

Put that together with the latest story of a dog getting a credit card, and you've got to ask whether credit card lending has become like NINJA loans in the mortgage market--does the lender really care about whether the borrower can or will repay?   What's going on here?  Has securitization created a moral hazard for the card industry?  It's surely less than in the mortgage industry because card issuers carry much more of the debt themselves than say a mortgage bank.  Or are fraud costs so low that it isn't worth the cost it would take to fix them?  Or is something else going on? 

I have trouble believing that this is just a couple of isolated errors or the result of a bad apple.  There are just too many examples of minors and pets getting "pre-approved" card applications.  Or as Alan Greenspan put it a few years back "Children, dogs, cats, and moose are getting credit cards."  Thoughts?  Comments are open. 

Financing Boob Jobs, Facelifts, Braces, Root Canals, LASIK, oh, and Artificial Insemination

While the presidential candidates are busy debating healthcare finance, the Capital One barbarians and their friends have stepped into the breach. You can finance your elective healthcare through Capital One. It turns out that the company best known as a credit card issuer very effectively marketed by barbarians demanding to know "What's in Your Wallet?," has an entire operation dedicated to healthcare finance. Who knew? Capital One Healthcare Finance finances elective healthcare, such as dental, cosmetic, vision, orthodontic and fertility treatments.

I haven't been able to get precise rates off the web without submitting hordes of personal information, but they offer fixed rates ranging from 1.99% APR to 25.99% and payment terms of 18 months to 7 years (depending on the treatment). The pitch is that this is a cheaper way of financing elective healthcare procedures than credit cards--low fixed rates instead of variable rates. If this is true, then Cap One is providing a real service to folks who have elective medical issues--like wanting children--but don't have the cash on hand. Interesting to see Capital One Healthcare competing, in essence with Capital One cards.

Revolving Credit Rollercoaster

The Federal Reserve tracks outstanding revolving consumer debt in its statistical release G.19. Revolving consumer debt is primarily, but not entirely credit card debt. The G.19 statistic includes all balances outstanding, not just those that are accruing interest and fees--it includes balances from transactors, who pay off their statement at the end of the month, as well as revolvers.

The last few months of G.19 statistics in terms of percent change at an annual rate have been a rollercoaster ride. In October and November revolving consumer credit grew at annual rates of 11.1% and 13.7% respectively. Now December has dropped to 2.7%. Any one want to share thoughts in the comments about what's going on? It looks like we had a spike and then a sudden curtailment (in the Christmas shopping season of all times, when we usually see a jump in revolving credit)?

Is Spending the Way2Save?

Financial institutions have begun to offer programs that appeal to consumers’ desire for assistance with disciplining their saving and spending decisions. These programs draw on the insight of behavioral economics and cognitive psychology that default rules have a powerful effect in shaping consumer behavior. For example, Richard Thaler and Shlomo Benartzi have proposed requiring people to opt-out, rather than opt-in to employer-sponsored savings plans in order to overcome bounded rationality and encourage higher savings rates.

The first financial institution I know of that offered a savings assistance program was Bank of America’s Keep the Change program, which has been well-critiqued around the web. Now Wachovia has a new program called Way2Save. On the surface the program looks great. But when probed, it isn’t clear whether consumers end up with meaningful savings—increased purchasing power. With all of these programs the question that we need to ask is how much does it cost you to save?

$175,862.27 in Credit Card Debt and a Bleg

I've been going through consumer bankruptcy filings recently and have been astounded by the levels of credit card debt that show up on some (but certainly not most) debtor's schedules of assets and liabilities. I've seen a bunch of cases with upwards of $60,000 of debt for a single debtor, a few with over $100,000, and the current record holder is $175,862.27. Yes, that's right, $175,862.27. That's larger than a lot of mortgages.

Will the Mortgage Industry Fix the Mortgage Mess Itself? A Look at Project Lifeline

The mortgage industry has been arguing against bankruptcy reform legislation that would permit the court-supervised modification of single-family principal home mortgages in bankruptcy. The industry argues that permitting mortgage modification in bankruptcy would result in higher interest rates and that its private efforts will solve the problem. In an earlier post and in a working paper, I have shown that we are unlikely to see higher interest rates as a result of allowing bankruptcy modification. Here, though, I want to take issue with the mortgage industry’s claim that its private efforts will solve the problem.

Hopefully the mortgage industry is correct about this. But there is good reason to doubt the efficacy of the industry’s efforts. To date, the mortgage industry’s efforts to fix the foreclosure crisis have been a lot of sizzle, but not much steak. Unfortunately, this seems to be the case with Project Lifeline, the latest half-measure to come out of the mortgage industry. As I explain below, the very structure of Project Lifeline means that homeowners in a significant number of states will be unable to take advantage of Project Lifeline's meager offering because it will kick in only after their homes have been sold in foreclosure.

Mortgages at the Dem's Debate

To my surprise, the second thing out of Hilary Clinton's mouth, after "health care," when asked about the differences between her and Barack Obama, was "mortgages." It's about time that the foreclosure crisis is getting prime billing in the presidential race.

Credit Card Rewards Down Under

The Sydney Morning Herald (Australia) was kind enough to feature my article about the social costs of credit card merchant restraints. (Sorry for the shameless self-plug...)

It's worth noting that when the Reserve Bank of Australia forced credit card networks to lower interchange rates and allow merchants to surcharge, the card networks had to cut back on their rewards programs (which are funded from merchant fees). That reduces the incentive to use cards simply for transacting, which means that fewer Australians are likely to end up paying interest and fees because of overestimating the likelihood that they'll make their card payments on time (because of everything from carelessness to changed financial circumstances).

House Judiciary Cramdown Hearing

A great thing about teaching in Washington, D.C., is the ability to drop in on legislative hearings. Today I went to a House Judiciary subcommittee hearing on the cramdown bill, also known as the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609). A report is below the break.

More Bogus Numbers from the Mortgage Industry

The past few months have seen story after story about fraud in the mortgage industry.  Now we're seeing a new type of fraud--mortgage lobbying fraud.  The Mortgage Bankers Association has been claiming the proposed bankruptcy reform legislation that would significantly roll back the special treatment given to mortgage lenders in chapter 13 bankruptcies would result in residential mortgage interest rates rising 1.5 to 2 percent.  (Somehow this number started at 2% and has drifted down to 1.5% without any explanation.)  The MBA's number is pure and demonstrable hokum.  As Joshua Goodman, a Columbia University economist and I show in a new working paper, permitting bankruptcy modification is likely to have little or no impact on mortgage interest rates or origination volumes.  Keep reading below the break for the proof.

Bankruptcy at the Dem's Debate

I think this blog has been really good at eschewing electoral politics issues, and I don't want to be the one to change that. Serendipitously, though, during the five minutes I had the TV on watching the Democratic debate, Tim Russert asked the Democratic candidates tonight about bankruptcy reform and their past positions on bankruptcy legislation, and the occasion cries out for a blog post.

European Commission Rules MasterCard's Interchange Fees Are Illegal

In December, the European Commission antitrust authority, the Directorate General Competition, ruled that MasterCard's interchange fees are illegal. (I realize it is now mid-January, but I wasn't blogging when it the ruling came out.)  MasterCard is, of course, appealing. 

Although ruling this made page 4 of the Wall Street Journal, it has gotten very little attention otherwise in the business or general press.  ( The ruling has huge ramifications for consumers and merchants.  The underlying issue is technical, however, but well worth understanding.   

Your Free Lottery Ticket: Credit Card Truncation and Identity Theft

You might be holding a litigation lottery ticket without knowing it. Take a look at your most recent credit card receipt. The receipt likely shows your credit card account number—but with everything except the last

Confused? The explanation lies in a strange little federal statute and tells us some very important things about the root causes of a key consumer credit problem--identity theft.

The Social Security Prepaid Debit Card

The Wall Street Journal reports today that Social Security is planning on disbursing funds using prepaid debit cards instead of checks. 

This is significant for two reasons.  First, it redistributes the costs of Social Security payments among the federal government, social security recipients, merchants, and banks.  Second, it represents the federal government's most major outsourcing of payments and creates a potential benefits provision monopoly.  The Because of this monopoly situation, Treasury and Social Security Administration need to ensure the reasonableness and fairness of any consumer fees associated with Social Security debit cards.

Debt Slavery? Correlation of Slavery with Chapter 13 Filing Patterns

Looking at Bob's posting of chapter 7 and 13 filing rates, I couldn't help but notice the correlation between high chapter 13 filing rates and states in which slavery was legal until 1863 (the "South" broadly speaking). The 11 jurisdictions with the highest rate of chapter 13 filings (and all of those with over half the filings being 13s) were slave states. The top 9 (and but for Lincoln imposing martial law in Maryland, the top 11) states were all part of the Confederacy. With a few of exceptions, all former slave states were in the top 15.

What are we to make of this this correlation?

Is This Just a "Sub-Prime" Mortgage Crisis?

The current home mortgage crisis is often referred to as a "subprime" crisis. That's useful shorthand, but it really isn't accurate and unfortunately obfuscates the scope of the problem. The mortgage problem isn't just limited to subprime. It extends beyond it in (at least) two ways.

Credit Card Charge-Off Rates

It's great to be a permanent addition to Credit Slips. This blog has become a really great forum for discussing credit and debt issues, and I’m looking forward to contributing to the conversation. It's a nice way to start a new year.

As it is New Year's Eve, people are making resolutions, including about their finances, and that puts me in the mood to think about how to measure the effect of the BAPCPA on bankruptcy and credit. (Happy New Year, btw).

One way to measure the effect of the BAPCPA is to look at credit card charge-off rates. Credit card issuers have to charge off debts that are 180 days delinquent or otherwise uncollectable, such as by a bankruptcy discharge. Below the break are two graphs (my apologies for the HTML layout issues), one showing historical credit card charge-off levels, and the other the percentage of those charge-offs related to bankruptcy.

Bankruptcy Claims Trading: Part II

I’ve greatly enjoyed my stint blogging at Credit Slips for the past two weeks. It’s given me new respect for the energy and commitment of the blogosphere community, and I’ve learned at least as much as I’ve taught. Bob Lawless has already posted a very kind goodbye, but before I go back to lurking, I have one last post to make, namely a follow-up to my general introduction to bankruptcy claims trading.

Claims trading, like any other investment, has risks. The question is what risks does one assume when one purchases a bankruptcy claim?

The Benefits of Accepting Credit Cards

In a previous post I wrote about the costs of accepting credit cards. It is important to note that merchants derive lots of benefits from card acceptance, including and lower credit risk (at least compared to checks), easier bookkeeping and currency conversion, lower theft risk (less cash in the till), and improved checkout speed. The most important benefit, though, is increased sales. (See an example of this claim here.) But is that right? Do consumers really purchase more because they are purchasing with credit cards? Put more technically, does price elasticity depend on payment method?

Who’s Paying for Your Rewards Points?

The relationship between consumers and credit cards gets a lot of attention. But merchants also have relationships with credit cards, and the dynamics of this relationship have significant effects on consumers’ use of credit cards as well as on the competitive landscape in the credit card industry. A lot of my academic work has related to this (I apologize for the self-promoting links), and this post is meant to provide a short summary of some of the issues that arise in this relationship. There are a lot of twists that I cannot convey in this blog posting, but I am happy to carry on a conversation in the comments and refer readers to my articles on the topic for more detail (the most recent papers are at the bottom of the linked webpage).

Merchants pay banks a fee on every credit card transaction. The fee is referred to varying as the "merchant discount fee" or the "interchange fee." Because of these fees, credit card transactions are much more expensive for merchants than transactions on most other consumer payment systems: cash, checks, ACH, PIN debit (but not signature debit). There is also significant cost variation among credit cards. Some cards, such as rewards and corporate cards can cost merchants twice as much as others. These fees (tens of billions of dollars) are vital to credit card networks’ profitability and have led merchants to attempt all sorts of strategies to minimize their payment costs.

The largest component of the fee merchants pay goes to finance credit card rewards programs, which in turn generate more credit card transactions. Although merchants finance the rewards programs, they derive little or no benefit from them. Rather than generating additional sales, rewards programs merely induce consumers to shift transactions from less expensive payment systems to more expensive rewards credit cards. So why, then, do all consumers pay the same price for purchases, regardless of the means of payment?

Bankruptcy Claims Trading: Part I

Let me turn to a true bankruptcy nerd topic tonight—corporate bankruptcy claims trading. Bankruptcy claims trading is the buying and selling of claims against a bankrupt corporate debtor. (Trading in consumer bankruptcy claims is an issue that has not been academically explored to the best of my knowledge.)

Bankruptcy claims trading is virtually unregulated in the U.S. Although claims trades can effect changes in corporate control, they are not subject to securities or mergers and acquisitions regulation. There is also little case law on bankruptcy claims trades; my next post will address a very recent decision in the Enron bankruptcy that is the most significant to date.

So who on earth would want to buy a bankruptcy claim?

Watching TV for the Commercials

I recently saw an amazing commercial on CNN Headline News for an operation called 1-800-Credit Card Debt. It appears to be some sort of debt adjustment agency. The CEO, a guy named, Tom Cooke, I think, was speaking and said "Don't let bankruptcy even enter your thoughts." I sure hope these guys are not allowed to serve as a BAPCPA credit counselor. (What I believe to be their website is a bit more balanced.) The commercial, though, raises the question of whether there are any ethical guidelines for credit counselors? What about liability? Malpractice? I would think that a credit counselor should be obligated to neutrally inform people of their full range of options under the law. For some folks, filing for bankruptcy is a wise decision.

Credit Rating Agencies

Credit rating agencies have begun to be scrutinized as the mortgage market struggles, but the scrutiny has been on corporate credit rating agencies that graded (and essentially blessed) securitized mortgage debt. But what about the consumer credit rating agencies?

(What Determines) What's in Your Wallet?

How do credit card companies make their lending decisions? Or more precisely, how do they decide who to target with which “pre-approved” offer or other solicitation? This is one of the major “known unknowns”. I'd like to give some intentionally provocative musings and hopefully start a discussion in the comments.

ATM Surcharges and Bank Consolidation

Last month Bank of America raised its ATM surcharge from $2 to $3. The surcharge is the fee charged to customers of other banks for using Bank of America’s automated teller machines (ATMs). Bank of America is the first bank in the United States to raise its ATM surcharge to the $3 level.

Why did Bank of America suddenly raise its ATM surcharge 50%? My theory is below the break.

Two Sides of the Coin: Payments and Lending

I’m thrilled to be able to join Credit Slips this week for my first foray into law blogging. I’m hoping to write a bit about credit card advertising, bankruptcy claims trading, reclamation rights, identity theft, and my pet topic of credit card merchant fees. Later this week I’m also hoping to post something timely about Yom Kippur and debts, which might put my background in Jewish history to use (I wasn’t always an attorney).

For my first substantive post, however, I’ve decided to write about ATM fees, although they are not a “credit” or “bankruptcy” issue per se. Nonetheless, I think they illustrate important themes in my work—the interconnectedness of different parts of the banking industry, particularly payments and credit, and how the competitive dynamics of the banking industry affect consumer lending and consumer behavior. Credit cards are surely the posterchild for the interconnectedness of payments and lending, an issue which I'll blog about later this week.

The ties between payments and lending go much further, though, as I hope my post on ATM fees will show. What banks do on the payments side of their operations (including ATMs) affects what they do on the lending side and vice-versa. Payments and depositary accounts fund lending operations, and the costs at which banks can raise funds affects how they lend out money; it’s a lot easier to make a risky loan if the cost of capital is low. Likewise, the consolidation and concentration of the banking industry focuses and increases the banking industry’s political power, which affects all types of banking and lending regulation. So, if we want to think about lending practices, it is also useful to think about what enables and drives those lending practices, as lending is only one part of bank economics.