Credit Slips

Financial Education: Money Talk Hits a Sore Spot

Money is a touchy subject. No matter how much you try to make discussions about how to preserve it, how much importance to place on it, etc, value neutral and nonjudgmental, people have issues.

I spend most of my free time these days trying to keep people off economic death row. While some of this work involves reviving a workable bankruptcy system, much more relates to prevention through financial education. I also believe that any financial education class must be very carefully crafted to fit the specific audience. Age and income are huge variables, so you can’t just teach a cookie cutter curriculum.

I teach a two-day financial literacy class to UNM undergrads and law students, and would love to share the details with anyone out there who is interested. Here is a start: http://lawschool.unm.edu/faculty/martin/fl-1.php.  Karen Gross gave me the idea and I have built on it. But, this year I was asked to do one hour on the topic for first year students, in part because they are in such terrible financial condition. Because the class in which this is taught is comprised of 9 sub-sections, I had the pleasure of having eight of my colleagues attend this class. We started with basic compounding interest hypos, including one exercise in which one person gave up one $4.50 latte a day for 10 years, saved, $18,000, invested it at 8% and held it for 30 years, ending up with over $150,000! We then saw the math moving in the other direction with credit card debts, learned a bit about credit reporting and scoring, a bit about bad car deals, and then broke up into groups to think of ways to economize. The students enjoyed this last part, even if some of the suggestions (selling plasma, getting paid to be in drug tests, finding a sugar mama/daddy,  or giving up long-distance relationships), were a bit extreme.

Students enjoyed the class but many of my colleagues had issues. "Wasn't it unfair to tell students they could reasonably expect to earn 8% on investments?" Um, no. "Don’t they need to use credit cards to build credit?" Uh….not really, no. "What is wrong with a car lease if you’ll be getting a new car every two years anyway?" "And expensive car payments? So what? Why does the total cost of interest matter if on a cash flow basis, you are fine. Isn’t it all about the cash flow?" These last two are stumpers all right. I guess I am both greedier and simpler than most people. I like to drive it till it dies, earn interest, not pay interest, etc.

This does tell you though that it is hard to listen to advice about money that is geared to a different crowd. Cash flow is the issue if retirement is fully funded and the kids are out of college. Otherwise, I can't imagine how a little extra dough lying around could be a bad thing…

Comments, anyone? What information would be useful in a class like this?

Think Public Benefits are Exempt from Execution? Think Again.

I have been telling my students this for years. Perhaps you have too. 42 U.S.C. § 407(a) says social security and other public benefits are free from the claims of executing creditors, but for many people that is true only on the books, not in real life. Why the disconnect? Because right now, under current law and regulations, banks are under no obligation to check to see if the money in a bank account comes from social security or disability payments before allow a garnishment to go through. This is true even if the only funds in the account are wired there directly from the government and are marked SSI or SSA. In fact, banks say they must comply with any garnishment order, even if the funds are obviously exempt. Of course, they also make a bundle on all the fees that result from this shameless practice.

Section 407(a) is not worth the paper it's printed on because it is very hard for a consumer to undo the garnishment, as I recently learned. My cousin (a 67 year old woman with a disabled adult son, who has been through a horrible marriage and divorce, several minimum wage jobs since she had no work experience, a car breakdown, etc.) had her ATM refused.

News from the Law Professors’ Conference

I thought I could channel techno-guru Bob Lawless and blog live from the AALS program on Creditors' and Debtors' Rights, but I couldn't so here's what went on at our conference yesterday. Our own Katie Porter (Iowa) organized this year’s panel, entitled "Broke, but not Bankrupt," a provocative and entertaining program about other (non-bankruptcy) laws affecting the down and out. Other panelists included Ronald Mann (Columbia) of credit card fame, Richard Alderman (Houston) who runs the FABULOUS consumer law conference at Houston every other May, and the always informative and entertaining consumer law maven Cathy Mansfield (Drake). Topics ranged from arbitration clauses that hurt consumers (and most do since according to Richard, businesses win 97% of the cases against consumers that go to arbitration, consumers have a hard time finding lawyers for arbitration, and businesses choose the arbitrators), race and the sub-prime crisis (lawyers should consider using the equal credit opportunity act to deal with credit discrimination, or as Cathy called it, credit apartheid), solutions to the sub-prime crisis, securitization, and fair debt collection or a total lack thereof (as Ronald pointed out, it is far more profitable to violate the collection laws than to comply with them).

If you missed the conference, you can order the tapes from the AALS (e-mail me if you don’t know how) because this was a great program. There is too much to revisit here, but here are a few highlights and interesting facts from the program.

Home Mortgage Crunch: Is it Better to Have Loved and Lost?

There is SO MUCH interesting on this site and in the TPM Cafe's posts today...not sure this stripdown thing is at the forefront of people's concerns, but....here are two more thoughts, relating to the economics of home mortgage stripdown and to the comparative treatment of second mortgages. The long-term economic ramifications of allowing or not allowing stripdown are important, but I do not think they weigh against allowing home mortgage stripdown. Adam Levitin just posted on TPM Cafe about interest rates. Great post! What about that other idea out there that allowing home mortgage stripdown will dry up home lending. First, I doubt it.  Second, maybe it is ok, even if it is true. If part of the goal is to improve the value and predictability of investments in these products, and to lend only to people who will likely pay the loan, more careful lending (and fewer loans) could be a good thing. In other words, it may indeed have been better to never have loved……That does not mean we shouldn’t help those who are in the bad loans. They may have spent all of their savings on a bad deal, and now be deserving of help. Second home mortgages in Chapter 13?  I am not sure but I think Prof. Scarberry is saying that under the current Chapter 13, borrowers can strip down the second home mortgage, but only if they can pay the whole mortgage off in the 3-5 year plan period. If a bill is passed that allows the primary home loan to be stripped down and stretched out, he argues, lenders will be treated less advantageously for second home loans. Prof. Scarberry feels this would be a problem, though I am not so sure. I’d like to see all these mortgage holders treated the same, but if we had to favor one over the other, I’d favor the creditor in the second home loan and the borrower in the primary home loan. It seems indefensible that under current law, borrowers might have an easier time saving a vacation home than a primary residence. (I admit, most of the time, borrowers cannot pay the second home mortgage in 3-5 years anyway, but at least theoretically borrowers are more protected on the vacation home than the primary residence). That just seems wrong. (as Bob lawless noted a few weeks back....). Again, if I had to choose between giving people a break on a primary home mortgage and giving them a break on a vacation home mortgage, I’d choose to give the break (and yes, to treat the mortgage lender less favorably) on the primary home loan. But the main thing is…..The treatment of vacation or second home mortgages should not bear at all on what we do with the overall issue of home mortgage stripdown. I mean, how often is second mortgage stripdown an issue? Second home mortgages are rare in Chapter 13, are a small percentage of the overall home mortgage market, and do not play a big part in the current crisis. I would just hate to see the tail wag the dog, in other words to allow current second home mortgage treatment (surely an afterthought in bankruptcy policy in any case), to direct our decision on how to treat primary home mortgages.

More on the Home Mortgage Stripdown Bills…Why We Should Not Hurt People for No Gain to Anyone Else

Yesterday I posted on the topic of the essential nature of secured debt and why we should be consistent in how we treat it across the board. Today, I wanted to address some more specific points brought out in ABI Resident Scholar Mark Scarberry’s testimony before Congress last week. The purpose of the post is to support passing a law allowing home mortgage stripdowns, with few limitations.

One argument Professor Scarberry made is that now that some personal property is excluded from stripdown, it would be wrong to treat home mortgage holders less advantageously than personal property loans. I totally agree that this would be wrong, but reach a different conclusion. Stripdown should be allowed in all undersecured cases, consistent with state law principles. Both the home mortgage stripdown exception and the 2005 limitations on stripdown are equally out of line with basic bankruptcy and state law collections principles. (see yesterday’s post). We can and should work on fixing this after the home mortgage crisis has passed, if not immediately.

On the Home Mortgage Stripdown Bills…Why Perpetuate Philosophical Inconsistencies and Hurt People for No Gain?

Thank you for the opportunity to guest blog. As Bob indicated, I will blog about the stripdown of home mortgages for a couple days, take a brief hiatus and be back with you at the first of the year. Some of the things likely to be bloged about next year include the “so called” exemption of federal benefits from execution (sounds boring but boy does this ever work differently than what we’ve been telling our students), a little about my upcoming payday lending study, and perhaps a small taste of financial literacy/anti-consumerism to boot. Thanks and I look forward to conversing with you!!

Now on to the home mortgage issues......

It seems that most of the arguments against the current senate bills on stripdown of home mortgages boil down to one notion: when some people don’t pay their debts, others are disappointed. Bankruptcy laws, as well as state collection laws from real estate foreclosures to Article 9, all recognize that some debts simply will not be paid back. This is economic, rather than legal, realism.