Credit Slips

Call for Papers on Regulation of Financial Institutions

The Association of American Law Schools Section on Financial Institutions and Consumer Financial Services Program for the 2009 Annual Meeting (January in San Diego) has announced its topic: Does Modern Financial Institution Regulation Work? Reflections on Deregulation and Internationalization of Supervisory Standards. The program will consider these, and other, questions: 

• Did deregulation through the Gramm-Leach-Bliley Act save an anachronistic industry or did it create opportunities for abuse?
• Have our enormous investments in capital regulation and our increasing reliance on risk-based models paid off?
• Will structural reforms abroad, the subprime crisis, and the Treasury’s Blueprint serve as an impetus for the United States to address its complex and, arguably, inefficient agency structure?

Law teachers and other scholars are invited to submit manuscripts dealing with any aspect of the foregoing topic. Junior faculty members are particularly encouraged to submit manuscripts. A review committee will invite the author(s) of each selected paper to make a presentation at the program session. Please send manuscripts to the Program Chair, Heidi Mandanis Schooner, Catholic University, no later than August 1, 2008.

Thank you to Judge Eugene Wedoff

The Credit Slips bloggers thank Judge Eugene Wedoff, U.S. Bankruptcy Court for the Northern District of Illinois, for his participation as a guest blogger last week. His posts identified a number of important consumer bankruptcy issues, including student loans, the means test, and the potential of rule-making to address issues in bankruptcy cases.  We are grateful to Judge Wedoff for being the first judge to participate in Credit Slips. The bankruptcy judges are on the front lines of addressing the problems of serious financial distress, and we have much to learn from their perspectives.

Welcome to Judge Eugene Wedoff

I'm delighted to introduce Eugene Wedoff, who will be the first judge to guest blog at Credit Slips. He is a judge in the U.S. Bankruptcy Court in the Northern District of Illinois, a position that he has held since 1987. Last year, he concluded a five-year term as Chief Judge of that district. Judge Wedoff has overseen thousands of consumer and business bankruptcy cases, including the Chapter 11 reorganization bankruptcy of United Airlines. He has authored influential articles on the means testing, the provisions added to the Bankruptcy Code in 2005 to screen consumer debtors for eligibility for Chapter 7 bankruptcy. Judge Wedoff is a member of all the prestigious bankruptcy professional organizations (each of which has their own fancy acronym (NCBJ, ABI, AMC, and NBRC)). He's one of the brightest minds in the world of bankruptcy, and I hope our readers will join me in welcoming him.

The Future of Mortgage Servicing

In my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower's information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point--mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn't gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

Negotiating with the Mortgage Company

At the heart of a loan modification is communication between a creditor and a debtor that leads to an agreement on new contract terms. If the debtor cannot get reach a person with authority to negotiate, a modification won't be possible. If the creditor can't get the debtor to return its calls or read its mail, a modification also won't be possible. The communication problems in today's securitized mortgage market are very different than during past real estate downturns, such as the Midwest farm crisis of the 1980s or the wave of foreclosures in the 1930s. Why? Because of the widespread use of mortgage servicers, third-party agents who collect payments from borrowers and remit them to the mortgage note holders (usually investors, often via a trust). Mortgage servicers are responsible for enforcing defaults, including pursuing foreclosures, and for engaging in loss mitigation. Gone are the days of sitting down with the bank that originated your loan and negotiating a new deal. Why am I making this very basic point? Because I am concerned that policymakers, including legislators, judges, and regulators still do not understand the barrier that loan servicing presents to voluntary or consensual loan modification.

IRS Should Have Gone for a Baker's Dozen with RAL

Each year the IRS releases a Dirty Dozen of tax scams. I wish the 2008 list had labeled another practice a scam--refund anticipation loans or RALs. A RAL is a short-term cash advance against an anticipated tax return. Essentially, the taxpayer is paying to access their own money immediately rather than waiting for the IRS to process their refund. There are about 9 million RALs made each year, with APRs ranging from 50% to 500%. Perhaps their high fees are justified by the fact that they are short-term loans. On the other hand, the tax preparers have a lock on this market, which could reduce competition. It seems hard to believe that the risks of nonpayment are very significant when the amount of the refund is being determined during the tax preparation process and the preparer captures the refund directly, rather than relying on voluntary remittance from the debtor.

The IRS does warn against "dishonest" tax return preparers who "make their money by skimming a portion of their clients’ refunds." Although most leading preparers offer RALs, I think RALs are "making money by skimming clients' refunds."

Call for Papers "Real Estate Transactions in Troubled Times"

The American Association of Law Schools is having its 2009 Annual Meeting in January in San Diego. The section on Creditors' and Debtors' Rights and the section on Real Estate Transactions are planning a three-hour extended program on Real Estate Transactions in Troubled Times. The speakers will be selected by a submission of papers, which are due April 10, 2008, and can include early works in progress. Practitioners are eligible to submit papers for consideration, as are adjunct professors or professors in other fields (although the bulk of presenters will be law professors). The entire call for papers is after the jump.

Welcome to Paige Marta Skiba and Jeremy Tobacman

Credit Slips welcomes Paige Marta Skiba, a behavioral economist who studies payday lending. She earned her Ph.D in economics from the University of California, Berkeley in 2007 and is currently an associate professor of law at Vanderbilt Law School. She'll be joined in some or all her posts by her frequent co-author, Jeremy Tobacman, who is a postdoctoral fellow in the Department of Economics at Oxford University. Their current research uses a dataset from a payday lender with two million loan records to examine questions about the profitability of payday lenders, the relationship between payday borrowing and bankruptcy, and consumer behavior in payday-loan borrowing and default. With financial distress on the rise in America, payday lending looks like a growth industry. We look forward to reading more about their findings and thank them in advance for sharing their behavioral economics perspective on consumer borrowing.

Payment Cards Continue Global Growth

While Americans continue to lead the world in credit card spending, other forms of plastic payment such as debit cards continue to have an edge in other nations. Overall, Ronald Mann reports that global spending on credit and debit cards has quadrupled in the last ten years to $5.2 billion. In 2006, card spending represented 11 percent of global GDP. In a new piece for Foreign Policy, Mann provides a quick look at the available data on trends in plastic payment around the world, updating the findings on global card spending that he presents in his book, Charging Ahead. As additional encouragement to check it out, let me report that the Foreign Policy piece is loaded with really fun graphics; my favorite is the little figure carrying a huge credit card on his back in Atlas-like fashion.

Prof. Mann's piece reminded me of an interesting story on NPR's Marketplace a few months ago about the role of credit cards in China. Scott Tong reported that many younger Chinese consumers are eager to get a credit card; like their American counterparts on college campuses they like the T-shirts, toasters, or other freebies that are offered in return for signing up for a card. But the growth in actual card use remains slower than banks are used to seeing in American customers. While credit cards are increasingly a global phenomenon, there remain important differences in their use that reflect historical trends in payment systems, the cultural norms of consumers, and macroeconomic conditions.

Unmerchantable McDonalds' Fries? New Commercial Law Blog

Several law professors have started a new blog, Commercial Law, to offer their thoughts on issues arising under the Uniform Commercial Code or commercial laws. The blog is off to a lively start with daily postings on all sorts of topics, including the status of Revised Article 1 of the UCC, contracts of adhesion, and the future of teaching commercial law.

The post that caught my eye was Jennifer Martin's post on a trio of cases alleging that McDonald's products violate UCC sales provisions, including the warranty of merchantability. While all three cases failed (and I'm in agreement with Prof. Martin about the correctness of those rulings), it's fun to think about how the UCC applies to so many ordinary transactions and to question how these doctrines hold up to shifting societal norms. For contracts or consumer law teachers, the cases provide fun hypothethicals for class, and for all of us who struggle to explain their legal specialty to friends and families, the cases offer an everyday, if somewhat silly, example of commercial disputes.

Surprise!!! You've Earned a Discharge AND a Foreclosure

Tomorrow, the Senate is expected to vote on the Foreclosure Prevention Act of 2008, Title IV of which would permit bankruptcy courts to modify home mortgages in certain ways if the loan and the debtor met specified criteria. We've described that idea before, but the bill has crucial implications for bankruptcy that are not related to loan modification. Specifically, take a look at section 421, which proposes a solution to a problem with current bankruptcy law. Many Chapter 13 debtors pay for 3 to 5 years on a repayment plan, doing everything the law requires of them, and only a week or two later, face a foreclosure. How does this happen? Because the mortgage servicers frequently assess charges during a bankruptcy case, but fail to disclose these fees. Courts don't approve them; trustees don't adjust the debtor's payments to account for them; and debtors aren't even given notice that these charges are piling up. Instead of emerging from bankruptcy with a fresh start, homeowners find themselves defending a foreclosure or having to immediately pony up hundreds or thousands of dollars. Just last week, Judge Brendan Shannon of the Delaware Bankruptcy Court addressed this issue, challenging lenders to disagree that these undisclosed "surprise" fees don't "frustrate" bankruptcy's home-saving purpose. The Foreclosure Prevention Act of 2008 tackles this problem by requiring mortgage companies to disclose all fees within the earlier of 1 year of assessing the charges or 60 days before the end of the bankruptcy. The law also specifies that a lender may only charge such fees if they are lawful, reasonable, and provided for in the contract. It's sad that this latter requirement is even necessary--it essentially just prohibits mortgage servicers from violating existing law by overcharging consumers, a problem that an increasing body of case law and research suggests occurs with alarming regularity. I see lots of reasons why permitting bankruptcy courts to modify mortgages may be the best comprehensive solution to the foreclosure crisis, but I also hope Congress takes a hard look at the rest of the bill and considers its overall importance. If consumers do their part in bankruptcy and make every payment required by law, the system should honor its promise to give them a financial fresh start.

Webcast on Foreclosure Crisis

The Cleveland City Council is webcasting a foreclosure forum on Wednesday February 27th from 10am-1pm. Here's the link to watch. The event is timed to coincide with the visits of the Presidential candidates and national media to Ohio. Senator Obama is sending adviser and law professor, Mark Alexander, and Senator Clinton's representative will be Fred Hochberg. McCain has not yet identified who, if anyone, will attend. The foreclosure situation in Cuyahoga County may be the worst in nation, or certainly is a leading contender for that sad distinction. The city is taking some novel approaches, as I learned from Prof. Creola Johnson's presentation at a symposium on Subprime Foreclosures at the University of Utah College of Law earlier this week. I was particularly interested in the problem of abandoned properties, and the practice of many lenders to not file deeds after purchasing a property at a foreclosure sale. That practice makes it very difficult for the city to figure out who is responsible for the upkeep on abandoned properties. The speakers at the Forum will include Cleveland Mayor Jackson, County Treasurer Jim Rokakis, Housing Court Judge Ray Pianka and several community organizations.

Even the US Trustee Has an Occasional "Credit Crunch"

On January 14, 2008, the US Trustee announced that it has suspended audits of consumer debtors. While consumer advocates have criticized the audits as overzealous and unnecessary, the temporary end of audits occured for a simple (if somewhat, ironic, reason)--the US Trustee is out of money. The 2008 Appropriations Act didn't provide any funding for debtor audits, and consequently the US Trustee has stopped the audits. While the Financial Services Roundtable, a credit industry lobby group, says "nobody" benefits when the watchdog is taken off the job, I suspect many in the consumer bankruptcy bar will applaud the audits' current status as an unfunded mandate.

Homeowners in Trouble--Don't be an industry statistic

The Mortgage Bankers Association released a study this month that touts the efforts of mortgage servicers and lenders to assist borrowers. The industry asserts that it "took major steps" to "help those borrowers who could be helped." Therein, lies the catch. While apparently relying on self-reporting by mortgage servicers (an industry facing numerous accusations of misconduct (see here and here and here)), even assuming accurate data, the study's methodology gives a big boost to the mortgage industry. How? The study begins by excluding as beyond help all loans on properties that servicers could not confirm the house was occupied by its owner (18%). It also excludes all loans in which the borrower defaulted despite a previous payment plan (29%). Notably, there is no evidence on the parameters of those plans--were debtors given an extra week to cure their mortgages or were these serious modification efforts? Given what we know about modification efforts from public securities filings, there is no way 29% of loans would meet a strong criteria of previous repayment plan. Most disturbingly though, from a policy standpoint, the industry points the finger directly at borrowers. It excludes 29% of loans from the group where it asserts modification is feasible because the "borrower would not respond." In his post on the House hearing on the mortgage modification bill, Prof. Adam Levitin reported on a witness' testimony that families in financial trouble may not respond to phone calls or open mail from creditors. My advice to homeowners--talk to your servicer or open mail from them. Better yet, contact them affirimatively to ask for a loan modification and keep records of your efforts in so doing. Don't be an industry statistic! Beyond this practice advice, the fact that industry says it can't reach 3 in 10 borrowers has important policy implications--including for the fate of the bankruptcy modification bill.

Servicing Kickbacks Alleged in Class Action

Last week, a class action lawsuit (Harris v. Fidelity National) was filed against Fidelity National Information Services, a huge player in the billion dollar world of mortgage servicing. "What? I've never heard of them," you say. Fidelity is the company that provides default servicing to most of the large residential mortgage servicers. Their role is a shadowy one; unless you've delved deeply into how consumer mortgages are serviced, you probably weren't aware of their existence--much less how they may be driving up costs for consumers. Foreclosure petitions, proofs of claims, and bankruptcy court motions never bear Fidelity's name (instead they are signed by the regular servicers or by local counsel retained by the servicers.) But despite its invisibility, Fidelity is almost always part of the action in foreclosures or bankruptcy cases.

The lawsuit alleges that Fidelity receives illegal kickbacks from attorneys who work under contract with them. The exhibits to the class action are clear. Fidelity bills its clients--the servicers--for certain fees-- for example, $100 to review a bankruptcy plan. The servicer includes those fees as due and owing on bankruptcy proofs of claims, many of which appear only as "attorneys fees" or "postpetition charges." However, Fidelity requires attorneys to let it "retain" $50 of that $100. Fidelty characterizes these as "admin fees" paid by the attorney to Fidelity. The big problem with this practice is that bankruptcy law requires full disclosure of where the debtor's money is going. If the service is getting the debtor to pay these fees, the bankruptcy court should be approving those charges and who is going to receive the debtor's money. At least, that's how the class action has framed the legal issues in the case.

One final note: the schedule of Fidelty's fees includes a line item for "Drafting Missing Documents." Hmmmm . . . If documents are missing, they are missing. I don't see how "drafting" can appropriately play into this. It sounds like more evidence of "recreating" mortgage servicing documents like the actions by Countrywide exposed in the In re Hill case.

Will the "Real" Anti-Foreclosure Mr. Paulson Please Stand Up?

Yesterday's front page story in the Wall Street Journal was not the usual Paulson story about subprime mortgages---blah, blah Treasury Secretary Henry Paulson has organized mortgage companies to make blah, blah, blah unenforceable promises to offer short-term help to blah, blah homeowners. (Can you see that I share Prof. Elizabeth Warren's skepticism about the "Sandbag" plan?)

This story about Paulson and foreclosures was much more interesting. It profiled John Paulson (no relation), a hedge fund manager who bet big in 2005 that the mortgage market was heading sharply south. Paulson's take home pay in 2007 was reputedly $3 to $4 billion dollars (WOW!). What is he doing with all this money? Well, he's given $15 million of it to the Center for Responsible Lending to fund legal assistance to families facing foreclosure. This is a chunk of change, even for someone with his paycheck, and it is a momumental gift for direct legal services, which typically struggles along on small gifts. Another surprise--John Paulson says in the WSJ that "bankruptcy is the best way to keep homeowners in the home without costing the government any money." This bowled me over; a Wall Street maven backing the pending legislation that would let consumers modify their home mortgages in bankruptcy! I'd say this Paulson won't be making the speaker's list at the next Mortgage Bankers Association meeting, which has strenously opposed the legislation. They'll have to content themselves with the Treasury Secretary.

Mortgage Magic--Recreating Servicing Documents

The latest uproar about mortgage servicing in bankruptcy is an admission by Countrywide that it "recreated" documents related to the servicing of a consumer's home loan. The short story is that Countrywide says a debtor's monthly mortgage payment changed during the Chapter 13 plan and that the debtor didn't make the increased payments. The problem is that the debtor, her attorney, and the trustee say that they were never told about the increase in payments, which is purportedly due to changing escrow requirements. Countrywide gave the debtor letters showing that the amounts changed; those letters were dated 2003, 2004, and 2007. The problem is that those letters were not copies of actual letters from 2003, 2004, and 2007. As Countrywide admitted, it "recreated" these letters as "evidence" of the change in the monthly payment. The judge had a few questions about that practice:

Forget the "Foreclosure Investigator"--File a Lawsuit!

Elizabeth Warren's recent post asked "What Can a City Do?" about subprime lending. The post prompted many thoughtful comments, both on Credit Slips and on the Calculated Risk blog. While readers were discussing the merits of various ideas, including a city-appointed "Foreclosure Investigator," the city of Baltimore took a much more aggressive tact--it sued Wells Fargo on January 8th. Calling the city a "second victim" after the homeowners, Baltimore filed suit in U.S. District Court alleging that Wells Fargo engaged in predatory and discrimatory subprime mortgage lending. Wells Fargo denies the allegations, which focus on purported steering of black homeowners into high cost loans. The Associated Press reports that "two-thirds of Wells Fargo's foreclosures occurred in neighborhoods that are more than 60 percent black." The city attorneys apparently analyzed foreclosure data, finding that while most lenders had higher foreclosure rates in majority-black communities, that according to the AP, "Wells Fargo stood out having the most glarity racial disparity."

I believe this is the first lawsuit filed by a city as plaintiff to grow out of the current subprime loan crisis, and it seems sure to be controversial. Past Credit Slips guestblogger and law professor, Kathleen Engel, has an article on SSRN for free download entitled "Do Cities Have Standing? Redressing the Externalities of Predatory Lending?" that addresses many of issues that the Baltimore v. Wells Fargo suit will raise.

Is Cheaper Better?

As part of the 2005 amendments, consumer bankruptcy debtors must complete a financial education course to receive a bankruptcy discharge. The requirement was controversial among law professors, with some seeing the requirement as one of very few reforms that could help consumers and others viewing it primarily as a cumbersome obstacle designed to deter filings or increase the hassle and expense of bankruptcy.  As John Rao noted in his excellent post on the topic, the quality of this education left a lot to be desired. Specifically, he noted that the courses were not tailored to the particular educational needs of bankrupt families. Guestblogger Nathalie Martin shared her experiences as a financial educator on just why tailored education is vitally important.

I have no evidence that these problems have been remedied, but I can report that at least bankrupt families won't have to pay as much for their under-education in the future. I've recently gotten notices from two financial education providers, both of whom are approved nationwide by the United States Trustee. The respective costs of the services are $25 and $15. This is a dramatic drop in price from the $50 that most providers initially charged. Do you get what you pay for? Or is this a good cost-savings for consumers? The most interesting thing about both advertisements was that neither of them contained ANY mention of the quality of their course--no mention of curricular content; quality of intructors; or pedagogical methods. Instead, the programs emphasized their low cost--and non-educational features such as their acceptance of credit cards, and their immediate certificate delivery. If even the financial educators aren't competing on quality--or perceive that doing so is of no use--I think we should be pessimistic that bankruptcy financial education is going to delivery on its promise at any price. 

Call for Banking and Consumer Financial Services Papers

The University of Connecticut School of Law is hosting a Junior Scholar Workshop on Banking and Cosnumer Financial Services Law on May 28-29th. Consumer Financial Services is certainly a hot area of policymaking right now, and this academic conference promises to be exciting and timely.

Papers may be submitted by any law faculty with less than eight years of teaching, and may be on topics, including, but not limited to:

• State and federal supervision and regulation of bank safety and soundness
• Consumer financial services and the regulation of those services
• Payment systems and other topics of commercial law relating to consumer banking
• Legal implications of bank-based systems of finance; and
• International banking principles, supervision and regulation

Submissions are due Friday February 29th and may either be in the form of a full paper or a precis of 800-1200 words. To submit a paper or for more information, contact Prof. Patricia McCoy at the University of Connecticut School of Law.

Bankruptcy Blasphemy: (Continued) Embarrassment for the Wall Street Journal

Most days, I enjoy reading the Wall Street Journal. But I may have to cancel my subscription if the editors continue to miseducate the public and embarrass themselves about the pending legislation to allow for the modification of home mortgages in bankruptcy. On December 13th's Opinion page, the Wall Street Journal lauded itself for warning "in October about this legislation, which would allow bankruptcy judges to treat mortgage debt the same as credit-card debt." The Wall Street Journal in October did say the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt."

The problem is that BOTH OF THESE STATEMENTS ARE NOT FACTUALLY ACCURATE. Stop writing them!  There is no pending legislation that proposes to treat mortgage debt the "same" (or even "similar to") the way credit card debt is treated in bankruptcy. A fact-checker should not let these statements go to print. This is not a matter of speculative or normative disagreement between the Wall Street Journal and me about what the effect would be on interest rates if consumers could modify their home mortgages in bankruptcy--neither of us knows that for sure, and they can certainly assert their belief that if the Conyers bill becomes law mortgage interest rates will climb to credit card rates (and I'll respectfully disagree). They should not, however, make clear misstatements about pending legislation or existing law. As a number of Credit Slips posts have explained (see here and here and here), the legislation simply would not transform mortgages into unsecured debt, which is the form of most credit cards. Even if the bill passed, the mortgage liens would remain valid; the lenders would have the ability to foreclose on property if they were not paid. And there would be no ability to discharge the debt in a Chapter 7 proceeding (as there is in most instances for credit cards). 

I did benefit from reading the editorial. In addition to learning that the Wall Street Journal doesn't read Credit Slips, and apparently hasn't read the Bankruptcy Code or the Conyers bill very carefully either, I got a chuckle out of the sarcastic reference to Justice Stevens as a Cato Institute fellowship winner.

New Twist on "Making a Federal Case Out of It"

Have you heard that expression, "Don't make a federal case out of it?" It's usually used to caution against blowing something out of proportion. Two recent decisions from federal courts in Ohio explained why the courts have an obligation to take issues of standing seriously and made clear that if you want to make a federal case out of it, you have to follow the federal court's rules. As Elizabeth Warren explained, the decisions are a reminder that the law matters. And in federal court, at least some judges are going to require the lenders to follow **all** the rules, an outcome that the lenders apparently asserted was not the situation in state court.

But why are these foreclosures in federal court? Foreclosure is a state law action, and a vast majority of such actions are filed in state courts. Apparently, the holders of the mortgages (or should I say "putative" holders of the mortgages?) are frustrated that some state courts in Ohio and other jurisdictions are taking a long time to adjudicate foreclosure cases. The cause of the delay is that the state courts are overwhelmed by the sheer number of foreclosure actions being filed. In many jurisdictions, foreclosures go to a specially-designated division of state court and as foreclosure rates have climbed rapidly, these judges and their staffs can't keep up with the backlog.

No Charge to Call Your Mortgage Servicer?

William Launder at American Banker did a story about my earlier Credit Slips post, What do Phone Sex and Mortgage Servicing Have in Common? In the post, I reported on an actual mortgage proof of claim that listed a the creditor's phone number that was a toll service that charged $9.99 per minute. After calling several people at Household Finance Corp and its parent, HSBC, Mr. Launder concludes in his story that the phone number was the result of a typographical error, a possibility that I acknowledged in my initial post. HSBC said that the misprinted phone number was an "isolated incident of error." However, HSBC never responded to the debtor's objection, causing the debtor's attorney and the court to need to take further action by entering an order resolving the objection in the debtor's favor. Additionally, the Chapter 13 trustee spent time trying to contact the servicer and did not have any other contact information than the mistaken toll-charge number. The effect of the servicer's mistake was to tax the bankruptcy system.

I'm glad to know that borrowers aren't being charged a per minute fee to talk to their mortgage servicers. That's a welcome change from standard servicing practices that do charge consumers to receive information: payoff statement fees, fax fees, email fees, etc. In this case, the debtors were fortunate. Their attorney didn't charge them additional legal fees to file the objection. As a general matter, however, the costs of servicing errors fall on debtors, who are already cash-strapped and struggling to save their homes.

Reporting on the "Mortgage Meltdown"

Journalists have produced some really excellent stories about the rising foreclosure rate and the struggles of families to save their homes. I've previously blogged about an interesting LA Times piece about the lack of reliable data about foreclosure numbers; another favorite article is the NY Times story, Can These Mortgages Be Saved?, about difficulties that consumers have in obtaining loan modifications from servicers.

In recent days, however, the Wall Street Journal has published pieces about bankruptcy that contain inaccuracies. An editorial on October 24th, The Mortgage Meltdown, grossly mischaracterizes pending bankruptcy legislation. The bill, the Emergency Home Ownership and Mortgage Equity Protection Act of 2007(HR 3609), would reverse the existing preferential treatment in Chapter 13 bankruptcy law for home mortgages and permit debtors to modify their home loans in certain ways. The Wall Street Journal says that the legislation will "allow bankruptcy filers to treat home loans as similar to unsecured credit-card debt." The editorial then sarcastically posits "Guess how eager lenders will be to offer low mortgage rates if they have no better chance of collecting on a mortgage than they do on a credit card?" This characterization isn't mere alarmist hyperbole. It's flatly wrong. Mortgages are liens; they give the lender a security interest in the debtor's real property. Absent unusual circumstances, secured creditors retain their property interestsin the collateral. If they aren't paid--inside or outside of bankruptcy--they can foreclose on the property. In contrast, credit cards are normally unsecured debt. The lenders have no collateral. Unsecured debt and secured debt are treated differently in bankruptcy law, just as they are in state law. The apt comparison for HR 3609's proposal is that home mortgage lenders would be treated just like lenders whose collateral are vacation homes, or commercial property, or rental houses, or whose collateral are cars, motorcycles, or appliances. The Wall Street Journal should print a correction, making clear that the bill would not put mortgage lenders on par with credit card companies, and retracting its suggestion that the legislation would thereby cause mortgages to have the same interest rates as credit cards. Perhaps some would excuse the Journal because these statements were in an editorial. But a recent news article on bankruptcy as a home-saving device was also misleading.

What Do Phone Sex & Mortgage Servicing Have in Common?

Question: What do phone sex and mortgage servicing have in common?

Answer: They both cost $9.99 a minute.

This isn't a joke. It's a real-life example of the difficulties that consumers sometimes face in working with their mortgage servicers. As part of a study of mortgage claims that I'm conducting, I came across an objection to a mortgage claim where the debtor asked for the court's help to avoid paying $9.99 a minute to talk with his mortgage servicer. The mortgage company had filed SIX duplicate claims, each for an identical amount. These claims were not marked as amended claims, so the debtor wanted to ensure that he only was on the hook for his mortgage debt one time. Since these claims were obviously mistakes, the question is why didn't the debtor just contact the creditor and tell them--"Hey, stop spitting out these claims and withdraw the extras and let's just get on with this bankruptcy." In fact, the debtor's attorney and the Chapter 13 trustee both tried to do just that. They called up the creditor at the listed phone number, but were directed to call another number if they needed actual assistance. The hitch--that other number required them to pay $9.99 A MINUTE. Frustrated, the debtor's attorney went the formal route and filed a claims objection, which I've put below the jump.(Click on it to see it big enough to read clearly; you may need to adjust to 50% in the picture viewer to see the bottom). 

We owe you what!!?!!? The Federal-Mogul Story

I'm currently attending the National Conference of Bankruptcy Judges' Annual Meeting. One of the most interesting educational presentations was coordinated by Jay Westbrook, an expert in international insolvency law. Instead of being a collection of disparate cases and a summary of general trends, the presentation focused on a single case, the bankruptcy of Federal-Mogul, a huge company that manufactures and supplies parts to transportation companies, including U.S. automakers. The example was chosen to illustrate what happens when things DON'T go as planned. It wasn't a self-congratulatory success story, which made listening to the lawyers and judges who were actually involved in the case--and who represented opposing parties--very fun. The key point was that working out nifty international bankruptcy laws doesn't completely smooth the way for these cases. The differences in core principles of legal regimes and differences in applicable non-bankruptcy law make it hard for even the most cooperatively-minded parties to bridge the gaps. Here, a major problem was the difference between the U.S. and the U.K. tort system.

Duck, Duck, Duck . . . Bankrupt!

Recent CreditSlips guestblogger Adam Levitin send me a short piece from the American Banker, "Data Tool from Visa, Experian" about a new risk model called "BankruptcyPredict." The technology is proprietary, of course, but one innovation seems to be the use of data from "all forms of payments cards" processed by Visa, not just credit cards. This means that your pin-based debit transactions processed through the VISA network get incorporated into the model, as well as all the usual stuff in an Experian credit report. This potentially gives the model a great deal of information about your bank account and non-credit spending, not just loans. The model purports to be able to identify consumers who are very likely to go bankrupt up to two years in advance.

My first thought on this: WOW--two years in advance! Although more work is needed on this point, the data that I've seen suggest that most people who file bankruptcy report struggling seriously with their debts for about a year or a bit more before they go broke. This model would outperform consumers themselves, it seems. I imagine a room full of consumers in financial trouble (maybe seeking credit counseling at a face-to-face location). From the consumers' perspectives, they are desperately hopeful to stay out of bankruptcy, but they know it is likely to happen to some people who get in deep financial trouble. They hope that they are the "ducks" in the room but wait out the next months in tense silence to see whether they tip over the edge into bankruptcy--who will be the "goose." Visa/Experian apparently are able to sort out the "ducks," who will continue to pay interest and fees and struggle along, from the "geese," who will seek legal relief through bankruptcy. I also wonder whether consumers would want this information? If the Federal Reserve or the National Consumer Law Center or some enterprising academic built a similar model and made it freely available, would consumers use it? Is there a societally beneficial use to a BankruptcyPredict model? Should financial educators pay for the service so they can counsel clients more realistically on the likelihood of that a client's financial problems will deepen and lead to bankruptcy?

Bankruptcy Court Tells Debtors To Charge It

My recent work has documented the targeted solicitations from lenders that consumer debtors receive after filing Chapter 7 bankruptcy and highlighted the industry's ability to profit from financially vulnerable consumers. One of that paper's findings was ubiquity of credit card solicitations. Over 92 percent of debtors interviewed in the Consumer Bankruptcy Project reported that they had received a credit card solicitation. If they live in New Hampshire, bankruptcy debtors may need to accept one of those postbankruptcy credit cards if they want to stay in the good graces of the New Hampshire Bankruptcy Court. Why?

The main parking garage for the U.S. Bankruptcy Court in New Hampshire will no longer accept cash as payment for parking in the garage. The garage owner (a private company) has installed machines that require payment with a credit card to lift the gate to permit patrons to park. Apparently, there is virtually no street parking and few alternatives for garage parking (but note that I have not been to New Hampshire to verify this). The Bankruptcy Code requires attendance at a meeting of creditors (called a 341 meeting after applicable statute) and these meetings are held in the same building as the U.S. Bankruptcy Court in Manchester, New Hampshire. In addition to the new BAPCPA requirements of credit counseling, financial education, pay stubs, tax returns, consumer debtors now may need a credit card to receive a bankruptcy discharge. 

Consumer debtors can expect most of their credit cards to be cancelled when the creditor receives notice of the bankruptcy. These Americans are instantly cardless, and as a matter of policy, we may want them to remain that way--at least for a short period after their bankruptcy. Indeed, if the debtor requires Chapter 13 bankruptcy, they are required to seek the permission of the trustee before incurring new postpetition credit. In New Hampshire, will the chapter 13 trustee view the need to park when attending the 341 meeting or a plan confirmation hearing as a valid reason to let debtors get new credit? Should Chapter 7 debtors accept one of the dozens of credit card offers they get in the first month of their bankruptcy or should they walk, bike, snowmobile, etc to the bankruptcy court?

Update on Summer Reading

The summer reading "contest" has attracted several entries; I'll be summarizing them in another week, so last call to contribute a book or article on a corporate or consumer credit topic in the next few days. Please make your suggestion as a comment to this post and I'll aggregate everything. The best part of this blog is the great ideas that our readers give to us, so I hope you'll share a new or favorite reading, whether a novel, article, news story, or book.

John Pottow offers the following list of three suggestions, which I've put below. I've already mailed him his prize of Garfield stickers for the being an overachiever and sending in three entries.

1) Jim Hawkins, who previously co-authored a piece with Ronald Mann on payday lenders, has a great working paper on the rent-to-own industry that explores the dynamics of that industry and reports on interesting interviews that he conducted with executives.

2) Lynn LoPucki and JJ White are having a great back-and-forth in a volume of the Michigan Law Review that is forthcoming this year on Lynn's paper co-authored with Joseph Doherty on "fire sales" that suggests that outcomes from sales under section 363 of the Bankruptcy Code are much lower (based on measures such as return on pre-bankruptcy assets) than traditional reorganizations. JJ's response, in part, is that Lynn suffers a selection bias pertaining to certain telecom firms as well as a measurement problem in what he includes in his valuation measures (and with his adjustments, finds that Lynn's effects may point the other way!)

3)   "You Asked For It, You Got It . . . Toy Yoda: Practical Jokes, Prizes, and Contract Law" by Keith Rowley, 3 Nev. L. Rev. 526. (2003) (Speaks for itself--great title). 

US Trustee Report on Effects of Means Test

The U.S. Trustee recently released a report, Impact of the Utilization of Internal Revenue Service Standards for Determining Expenses on Debtors and the Court. This study was mandated by section 103(b) of BAPCPA. The U.S. Trustee contracted with RAND corporation to conduct the study, and Marianne Culhane and Michaela White were brought on as co-authors. As I've suggested before, these collaborations produce better studies that incorporate different viewpoints and methodologies. Compare the quality of this study with the Federal Reserve's "study" of credit card solicitations, which we highlighted about a year ago on Credit Slips.

The study is by no "means" (get it, hah!) the final word on the means test because the data come from only eight districts and the law on how to apply and calculate the means tests continues to evolve. Nonetheless, it is the most reliable national study that I have seen, and its findings are provocative. There is a lot to say about this study, but I start with the most basic point--how often do debtors come under the expense standards?

Summer Reading "Contest"

Remember the summer reading programs of your childhood, where you could keep track of your books, maybe prepare a few short reports on why you liked the books, and be entered in a drawing to win a grand prize--a new bike, a gift certificate at McDonalds, etc? Out of the same sense of nostalgia that brought back My Little Pony and Transformers, summer reading programs for adults are flourishing at libraries everywhere. Credit Slips is going to get into the action, in our own small way.

Leave a comment describing the most interesting or provocative book or article that you read this summer. The book/article must be bankruptcy or credit-related or plausibly related to the issues that we discuss on Credit Slips (no Harry Potter, please, unless you can explain how Harry Potter shed light on your understanding of debtor-creditor law). Please give the title, author, a short description, and if available, an online link.

What's the prize? . . . . Hmmm . . . the joy of sharing your love of learning. Isn't that really what motivated you back in elementary school; you didn't actually want those Strawberry Shortcake stickers, did you?  In two weeks, I'll put together a summary of the most popular or interesting nominations, along with the name of the nominating reader.

Living with the New Bankruptcy Law Conference

The Debtor-Creditor section of the American Association of Law Schools is having a special meeting in conjunction with the National Conference of Bankruptcy Judges'  Annual Meeting in Orlando. The NCBJ will meet October 10-12 and the Debtor-Creditor section will meet October 12-13. Registrants who sign up for the AALS Debtor-Creditor program, entitled Living with the New Bankruptcy Law, are admitted to the entire NCBJ program. The fee is very reasonable, thanks to efforts by the NCBJ to reach out to the academic community.

What's on the program? It kicks off with a discussion led by six judges on collaborative curricular and extracurricular programs that can improve law students' knowledge of bankruptcy law and practice.  The next day, Eric Brunstad will give a keynote presentation of how federal courts do and should rule on bankruptcy issues. The plenary program that follows is entitled Perspectives on the Impact of the 2005 Act, at which I plan to present the first data from the new 2007 Consumer Bankruptcy Project Phase IV. Jonathan Lipson and William Widen are also making presentations at that panel, and Judge Wedoff will offer comments. The event winds up with concurrent sessions and an off-site dinner. All this is on top of the preceding days of NCBJ Annual Meeting presentations.

Fed Conference on Consumer Credit

The Federal Reserve Bank of Philadelphia has just announced the six research papers that will be the focus of its upcoming Recent Developments in Consumer Credit and Payments conference. The papers are all written by economists and touch on a variety of bankruptcy or consumer credit topics that may interest Credit Slips readers.  I’ve given the titles and brief descriptions of the papers below:

• The Age of Reason: Financial Decisions Over the Lifecycle (finding that middle-aged adults borrow at less cost compared to younger and older adults across ten financial market and that some of the measured effects cannot be explained by observed risk characteristics and may result from age effects)
• Who Makes Credit Card Mistakes? (reporting that lower wealth individuals make more credit card mistakes of all types)
• Bankruptcy: Is It Enough To Forgive or Must We Also Forget? (developing model suggesting that optimal law would forbid lenders from fully utilizing past information about bankruptcy)

"Countrywide" Mortgage Delinquencies

Yesterday, both the Wall Street Journal (piece 1 and piece 2)  and the New York Times had prominent stories about a 33% drop in second quarter net income at Countrywide Financial. The company reported not only a jump in late payments on subprime mortgages (from 15.33% to 23.71% over the same period in 2006), but also escalating delinquencies among prime borrowers. Countrywide officials said that piggyback loans to prime borrowers were a main source of its earnings drop and noted that many consumers who put little or no money down when they purchased a home have no equity to tap because of falling or stagnant housing prices. Countrywide's CEO, Angelo Mozilo, has years of industry experience, and Countrywide restricted its subprime and alternative lending well ahead of some of its competitors. If Countrywide is facing this level of delinquencies, other lenders may fare much worse.

By the way, Credit Slips readers who followed the extended comments on my post entitled Blunt Talk about Borrowing Standards may be interested in the op-ed in yesterday's NYT that criticizes the reaction of all three credit rating agencies (including Standard & Poors) to the subprime lending crisis. I thought this passage was particularly interesting:  "And the ratings agencies are far from passive arbitrators in the markets. In structured finance, the rating agency can be an active part of the construction of a deal. In fact, the original models used to rate collateralized debt obligations were created in close cooperation with the investment banks that designed the securities. Fitch, Moody's and S.&P. actively advise issuers of these securities on how to achieve their desired ratings. They appear to be helping investment banks, hedge funds and fund companies, all of which have a fiduciary obligation to investors, to develop the worst possible product that would still achieve a certain rating." The op-ed goes far beyond the original point in my post, which was that S&P's profits are partially driven by the quantity and size of credit transactions, which grew as subprime lending standards relaxed.

Blunt Talk about Borrowing Standards

The August 2007 Smart Money magazine featured a Q&A interview with Terry McGraw, CEO of McGraw-Hill Companies, which owns debt-rating company Standard & Poors. The interview asked him about the potential of the fall-out in the subprime market to hurt Standard & Poors. First, he bluntly admitted that while he "feels badly if somebody lost his home," that Standard & Poors makes money regardless. It's refreshing to see an industry executive being honest on this point. Profits frequently turn on the existence of the transaction, not its ultimate success. Ronald Mann made a similar point in his Sweatbox article about credit card issuers--consumers can struggle and sometimes fail to repay and the industry profits handsomely nonetheless. The bankruptcy debate was sometimes portrayed as a necessary antidote to the problem of consumer default, a characterization that misses the real world reality that profitability does not require a consumer to repay in full and on time. Standard & Poors is an excellent example of an organization that continues to profit, even if consumers suffer. I can think of many others--law firms securitizing receivables, investment banks putting together bond issues, mortgage brokers, real estate agents, and originating lenders every time a consumer buys a home, etc.

McGraw didn't stop his remarks with expressing sympathy for the harms that accompany S&P's profits. 

Over and Over Again

The Bankruptcy by the Numbers feature in the June American Bankruptcy Institute Journal contained a study on the prevalence of repeat bankruptcy filers. Several things about the study were good news. First, its author, Dr. Jean Lown, is a consumer science researcher who specializes in family finance. Legal scholars benefit from learning about how other disciplines approach research on consumer financial issues. Consumer educators may play an increasingly important role in the bankruptcy system as consumer debtors must satisfy credit counseling and financial education requirements. It makes sense to connect these folks with the bankruptcy community. Second, the research was funded by the ABI, and it's great to see the ABI supporting consumer bankruptcy research (for those who don't know, the ABI has poured lots of money into a big study of professional fees in business bankruptcy). Third, it's hard to drum up motivation for studying the dark underbelly of the bankruptcy system.  Repeat filers are troubling. Bankruptcy relief isn't free. Families spend money to file; courts and trustees process their cases; creditors retain counsel and submit proofs of claim. When some families re-enter the bankruptcy system, it raises concern about the core function of consumer bankruptcy--rehabilitation of debtors. Lown deserves credit for tackling this issue. Fourth, her key finding is that there are few people who file over and over again. In a total sample of nearly 5,000 debtors drawn from 10 districts, she found that first-time filers represent a hefty majority of bankruptcy cases. She concludes that repeat or serial filers are not a significant problem in most districts. Districts where Chapter 13 is popular, however, had significantly higher numbers of repeat and serial filers. While still a small fraction of all cases, Lown suggests that families re-entering the system partially explain the higher filing rate per capita in states with a high fraction of filers choosing Chapter 13. 

Credit Card Cartoons

The debate in Congress about credit card fees has spawned a new cartoon about credit card fees. Check it out here. It's a couple of entries down the archives, entitled New Credit Card Fees.

The Debt Divide: Gender

Gender-specific marketing is a mainstay of the ad industry--just think about the Virginia Slims ad. Woman-oriented versions of male products ("vintage rose" Carharrt overalls, pink hammers, etc) or women-only services (gyms, golf schools, etc) are growing in popularity. I recently received an advertisement that used gender specificity to market debt relief. This company, www.debtrelief4women.com, proclaims itself the "woman's choice for debt relief options." Their  homepage features a drawing of a slim, young woman wearing a sporty outfit and make-up. In her hand, is a wad of cash (although a stack of bills might be more realisitic). It seems the company does not itself provide financial consultations, but instead matches women with debt management, consolidation or settlement companies based on information women provide. It's pure marketing ploy; the substantive "help" that women get when using a service is not necessarily tailored to women.

Individuals cope with debt and financial distress in ways that reflect their gender. Fellow Credit Slips contributor Dr. Deborah Thorne examined some of these issues in her dissertation and has a forthcoming work on the topic. A recent Pew Center study showed that women bear responsibility for bill-paying in most households. These behavioral differences along gender lines aren't lost on creditors. A Wall Street Journal Article on debt buyers reported that collectors know that women are more likely to repay than men, incentivizing debt companies to focus their efforts on accounts on which women are the primary debtors. See Suein Hwang, Small Claims, Wall Street Journal (Oct. 25, 2004). Debt Relief 4 Women is just another reminder of Elizabeth Warren's observation that the facial neutrality of commercial law can distract us from the gendered realities of debt and household economics.

Manipulating the Means Test

Several months ago, I wrote on Credit Slips about my instinct that BAPCPA effectively has empowered the US Trustee's office to expand its authority.   My suspicision hasn't gone away. The prior post noted that the US Trustee's office has promulgated the median income numbers from the Census (an act that requires the exercise of some discretion and is subject to multiple interpretations). More recently, the UST took it upon itself to promulgate the so-called "IRS Expense" standards for non-mortgage home expenses." (number 2a when you link). Debtors seem to be required to use these numbers or face an objection from the UST office. The US Trustee is basically breaking down what the IRS gives in its own Collection Standards as a single figure (housing) into two numbers--ownership (mortgage/rent) and non-ownership (repairs, insurance, utilities, etc). The UST seems to be using a figure of about 67% for the former and 33% for the latter, but in other counties it was closer to half and half. Where on earth did this come from? Does the US Trustee have any expertise in determining the costs of maintaining a residence? Where does the statute empower the UST to be the interpretative guide of the IRS Standards? Section 707 says "IRS Expenses", not IRS Expenses as souped up or split out by the UST. Is this overreaching? Shouldn't the IRS standards be interpreted by, well, the IRS? Obviously, if there is a dispute, someone needs to solve it. But isn't that what we have bankruptcy courts for? Or why Congress can amend statutes? Does this go too far beyond the boundaries of the UST's traditional role of "maintaining the integrity of the bankruptcy system" and become substantive law-making?

Collecting Consumer Debts: Talk to the FTC

In the nearly  year of Credit Slips' existence, posts on debt collection have provoked consistently strong responses and lots of interest. The Federal Trade Commission is all ears if any Credit Slips readers would like to share their perspectives on issues relating to collecting consumer debts. The deadline is June 6th, and comments may be submitted by mail or electronically. Here are the technical details. The public comments to date offer some scary stories about abusive debt collection practices and seem to be submitted by consumers with real-life experience with debt collection. Read them. The FTC clearly is interested in comments from lawyers on the front lines of debt collection, whether their clients are creditors or debtors. For our professor audience, note that FTC says that it also welcomes "original research, surveys, and academic papers regarding consumer debt collection issues" and these papers are due September 7, 2007.

The topics for comment that interest the FTC illustrate a range of trends in debt collection, and hint at the FTC's interest in redirecting its regulatory focus in certain areas. As I read the topics for comment, I repeatedly was struck by pessism about obtaining reliable information on these questions. The sad reality is that there simply is not a substantial body of serious academic research on debt collection. Most empirical research is about bankruptcy, in part because the court process facilitates data collection. Many of the inquiries would require corporate proprietary or industry association data to answer, such as "provide data illustrating trends in the number or percentage of accounts in collection with each of the following: (1) credit issuers; (2) collection agencies; (3) collection law firms; (4) debt buyers; and (5) other identifiable industry sub-groups." On the other hand, an optimist could read the topics for comment as a future research agenda, a list of possible news stories, a manisfesto for legislative action, depending on one's livelihood.

Paying for the Privilege to Pay

During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.

Measuring the Problem: Foreclosures

On Credit Slips we have posted about the difficulties in obtaining timely and reliable bankruptcy data. (See here and here for some examples). Each of us is involved in the 2007 Consumer Bankruptcy Project, a new iteration of a decades-long effort to gather detailed data about a sample of bankruptcy cases to enrich (and sometimes critique) the very limited publicly available data. Apparently, similiar attention to the quality of released data and scholarly efforts to improve data are needed for foreclosures. Tara Twomey pointed me to this article in today's Los Angeles Times, Getting a Fix on Foreclosure Data, that explains growing concern with the divergent foreclosure numbers being hawked by different companies. The article itself is worth a read, offering some juicy quotations from testy company analysts asserting that their numbers are accurate.

Foreclosure data typically come from public real estate records. Since all companies look same place, how do they get different numbers? The answer may partly rest with quality issues with public data, but mostly comes from how one defines a "foreclosure." The LA Times writer, David Streitfeld, nicely explains: "Foreclosure is popularly understood as an event. . . Yet, foreclosure is really a process, one that can stretch over a year and vary from state to state." Does putting a "1" in the foreclosure tally require that a family must actually lose their house? Or merely that a foreclosure action has been filed? How do we count judicial and non-judicial foreclosures, which proceed in very different ways? Does a foreclosure occur if a lender files a notice of default but the homeowner then sells the house?

How Smart Do They Think I Am?

Bob Lawless' recent query How Dum Do They Think I Am? (sic) immediately caught my attention.  I was shocked at Bob's opening himself up to the obvious comeback from his smart-aleck friends by posing that question. But the other reason his question resonated with me was a full-page Wall Street Journal advertisement that I had just seen made a different assertion about consumers and their use of credit. In huge letters, the ad states "People are smart." It goes on to claim that "[t]his isn't an opinion. It's a fact." The advertiser is Ditech, which is the home financing arm of GMAC. Ditech is telling consumers that people "know what's best for them and their family. And they know if we offer competitive home mortgages and smart financial solutions, together, we can make the most of our smart."

The psychology of this ad seems to be to allay doubt in a customer's mind about whether a home equity loan is a good idea and confirm that people should trust their financial instincts. This perspective is counter to the insights of behavioral law and economics scholars. Their research shows that people often make mistakes in decision making, and that "smart" doesn't prevent this type of error. I was also struck by the anti-paternalism agenda of this ad. It strikes a libertarian cord, encouraging consumers to do what they want and trust that it will all work out. Of course, many experts disagree, as this interview done as part of a Bankrate financial literacy series for consumers explains. My final thinking on the ad is to wonder how financial educators would respond to this assertion. I don't doubt anyone's "smarts" but the research that I've seen reflects a strong belief by consumers that they need more financial education, that they are frequently worried that they do not understand lending products, and that they feel stressed and unsettled about financial issues. Suggesting, as the ad does, that because people know "it's not a good idea to stick a fork in a light socket," they can navigate the American credit economy seems to underrate the complexity of the home economics facing today's families.   

UPDATED: BAPCPA as Consumer Protection

A few weeks ago I posted about the bankruptcy of several subprime lenders and questioned whether or how consumers' potential actions against the lenders would be preserved after bankruptcy. New Century (Delaware Case No. 07-10416) has proposed to sell several of its assets, including pools of "bad" loans that it was forced to repurchase. The motion for an order approving bidding procedures specifically requested that the sale be "free and clear" under section 363(f). Conspicuously absent was any mention of 363(o), a BAPCPA provision that seems to limit "free and clear" sales of assets that are consumer credit transactions subject to the Truth in Lending Act or consumer credit contracts.

"Brave" New World of Consumer Spending?/Borrowing?

The Atlanta Braves recently became the first sports franchise to offer a finance plan for their tickets. Articles here and here give some details. Essentially,if you are spending $200 or more, GE Money will offer so-called "90 days same-as-cash" financing. If you don't pay before 90 days, then the APR is between 20 and 25 percent. The Braves management says that they have lots of fans who "want the ticket package" but "don't have that amount of cash on hand." Is this what we mean when we say that the democratization of credit improves consumers' quality of life? Maybe the answer depends on whether you are a Braves fan, or even a baseball fan?

GE Finance announced that it anticipates that "a very high percentage of customers will pay these [loans] off" before paying interest. If that is correct, then some small fraction of people must incur substantial interest or the finance option comes with an up-front convenience charge. I assume that GE Finance is not "brave" enough (sorry!) to be losing money on this deal. As a side note, I wonder why consumers would choose this option when credit cards are available. Perhaps they need a 90-day float rather than a 30-45 day float and zero percent introductory rates are scarce these days. Or perhaps consumers believe that dealing with GE Finance is likely to be a more pleasant experience that working with a credit card company? My co-blogger Angie Littwin may have a few thoughts about this latter idea based on her research about credit preferences and substitution.