On behalf of Credit Slips, I would like to welcome Henry Sommer as a guest blogger this week. Sommer is a noted attorney who has dedicated his career to fighting for consumers' rights. Currently a supervising attorney at the Consumer Bankruptcy Assistance Project, he spent more than 20 years at Community Legal Services of Philadelphia. He is also the editor-in-chief of Collier on Bankruptcy. With the financial regulation bill nearing the home stretch, this is the perfect time to get the insights of such a distinguished consumer advocate.
I'm sure I'm one of about five people who are excited that the Federal Reserve's credit card agreement database is now up and running, but as a bankruptcy professor, you've got to get your kicks where you can. I have no illusions that it will help many consumers understand their agreements. The database will take the state of credit card contracts from laughable to slightly less laughable. Nobody can read these agreements, and that's the point. To top it off, the Fed has managed to organize the database in a way that makes it largely unusable for the ordinary consumer. When you search by credit card issuer, it gives you all the agreements that company uses. If it's a large issuer, that's more than a dozen agreements. And the listings don't distinguish between the cards by card name (i.e., "Double Platinum Rewards," etc.), so the consumer has no good way to tell which one is hers without opening every one. Worse still, an issuer may have more than one entry to search under. For example, CitiBank is listed under both "Citibank N.A." and "Citibank (South Dakota) N.A." How many people know which one holds their credit card?
Why then, you may ask, is it worth having this database at all? There are at least three good reasons.
The Washington Post is reporting that financial reform may make it out of the Senate largely intact. The current bill appears to have a strong consumer protection agency and to cover derivatives -- two crucial issues going forward. I personally won't believe it until I see it though. Keep your fingers crossed and your legislators emailed!
Credit Slips' Elizabeth Warren is on the cover of Time this week, along with Sheila Bair of the FDIC and Mary Schapiro of the SEC. In The New Sheriffs of Wall Street, Michael Scherer describes how a new crop of female sheriffs are attempting to impose law and order on the testosterone-driven chaos of Wall Street. Obviously, this is a welcome change. At a time when the word "outsider" has been overused to the point of meaninglessness, women really are outsiders in the financial industry. And this group has risen to prominence as it has become increasingly clear that we need financial experts who don't view the world through a narrow, Wall Street lens.
At the same time, though, I wonder if an equally appropriate headline might have been, "Women Brought in to Clean Up Mess Made by Men." This is particularly striking at the SEC, where a pornography problem among senior staff threatened to undermine the entire agency. It got so bad that the New York Times ran a blog post entitled Will Wall Street Be Saved By Porn? With that in mind, it may well have occurred to Obama that the best way to save the SEC from itself was through the appointment of a fully-clothed woman.
The New York Times may have thought it had the scoop on the repo man of the future, but the new movie Repo Men has it beat by several hundred years. Jude Law and Forrest Whitaker star as space-age repossession agents who track down debtors and retake their collateral. The twist is that the collateral in question is transplanted body parts. So if, for example, you fall behind on the payments for your new kidney, Law and Whitaker will hunt you down and take it off your hands. Early in the preview – the movie opens later this week – we see the two scalpel-toting contract enforcers taking the Article 9 “breach of the peace” standard to whole new levels and saying over beers that a job is just a job. But, not surprisingly, Law has change of heart, one that appears to be spurred by a literal change of heart, and suddenly . . . the repo man becomes the debtor. (That’s credit-speak for “the hunter becomes the hunted.”)
Judging from the preview, Repo Men looks like your typical sci-fi dystopia flick where good-looking people fight a seemingly losing battle against a behemoth government or corporation that controls every aspect of human life. What’s interesting is that the credit industry has a starring role as the Big Brother. The movie takes two of the worst miseries of the current credit system – overwhelming medical debt and rampant foreclosure – and twists them into one debt nightmare. I never thought the line, "We could come up with a plan that fits your [budget]" could sound so menacing. Does a movie like this mean that there’s enough anger at lenders to, say, get us a Consumer Financial Protection Agency with teeth? I don’t know. But it does suggest that this is our big chance. We may never get an action-movie moment again.
Thank you to UT student Jennifer Carter for the tip!
For those who haven't seen it, Sheila Bair, chair of the FDIC, has an op-ed in today's New York Times. In a piece entitled The Case Against a Super-Regulator, she argues that creating one regulator with authority over all our financial institutions would be a mistake. She supports Obama's plan for a consumer financial protection agency that would be regulate the consumer side of banking, but opposes consolidation of the other regulatory functions. Her main argument is that a centralized, necessarily federal regulator would neglect the smaller banks, which currently tend to be regulated by the states (with backup from the FDIC). She is also concerned that we would be putting all our eggs in one regulatory basket. I agree with most of her points. Small, state-chartered banks did do a better job than the larger, federally-chartered institutions of not overextending themselves during the housing bubble and tend to be in better shape now. I also share her concerns about the potential for a single regulator to ignore the next budding financial crisis until it was too late.
But she fails to address the most powerful argument for consolidation: forum shopping. Right now, financial institutions basically get to choose their regulator. It's the company's charter that determines whether it's a bank or a thrift, whether it's a state entity or a national one -- and institutions can change their charters. In fact, the notorious Countrywide Financial did just that in 2007. On a mission for weaker regulation, Countrywide changed its status from a bank to a thrift, thereby changing its regulator from the OCC to the OTS. Given that the OCC and OTS derive large portions of their budgets from fees assessed on the institutions they supervise, it's no surprise then that both agencies not only failed to enact enough of their own regulations during the subprime boom, but also aggressively fought off the regulatory attempts of other governmental entities, such as New York and California. If we maintain our current system of fractured financial supervision, we must find some way of dividing authority so that the regulators can monitor the banks rather than the other way around.
We here at Credit Slips frequently get asked the question, Just how much credit card debt do people filing for bankruptcy actually have? So as a public service of sorts, I’m going to begin answering it. I say “begin” answering it because, even though our data comes directly from court records – a reliable source if there ever was one – it is not always possible to tell whether a given debt was acquired via credit card. For example, a debt listed as being owed to J.P. Morgan may be from a credit card or may be from a signature loan the debtor got at the bank. On the other hand, we do think our numbers are as accurate as they can be. We coded 10 percent of our cases twice in order to check for discrepancies and found them only 0.8% of the time.
With those caveats in mind, according to data from the 2007 Consumer Bankruptcy Project, the mean credit card debt for bankruptcy filers is $23,543, with a median of $13,279. Among chapter 7 filers, the mean credit card debt was $26,267 and the median $17,032. For chapter 13, those numbers were $18,076 and $6,079, respectively. This actually seems fairly modest when you consider that, by the end of 2008, the average accredit-card balance was $8,329, more than a quarter the average bankruptcy total of $23,543. In addition, 7.9% of our chapter 7 filers and 18.2% of those in chapter 13 reported no credit card debt at all. In the general population, 53.9% of Americans held no credit card debt – a much larger difference. Again, it is important to repeat the caveat that our count of credit card debts may have missed some, although the 53.9% figure comes from the Fed’s Survey of Consumer Finances, which may have miss some credit card debt as well.
These data are from the 2007 Consumer Bankruptcy Project, the first national random sample of bankruptcy filings by consumers. For details on how the database was constructed, please click here and go to Appendix I of the article.
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