110 posts categorized "Consumer Finance"

Madden v. Marine Midland Funding

posted by Adam Levitin

In a recent case called Madden v. Marine Midland Funding, the Second Circuit ruled that a loan owned by a debt collector violated New York's usury statute.  The loan had been originally made by a national bank and was subsequently sold to the debt collector when it was in default.  There's no question that the state usury law was preempted when the loan was held by the national bank.  The Supreme Court's (awful) Marquette National Bank v. First of Omaha Service Corp. decision from 1978 makes that very clear.  (The Court suddenly discovered in 1978 that over a century of legal understanding of the 1864 National Bank Act was somehow wrong and that banks had been leaving lots of money on the table.)  

The debt collector argued that because the loan had been made by a national bank, it carried preemption of state usury laws with it as a permanent, indelible feature.  "Applesauce!" proclaimed the Second Circuit:  National Bank Act preemption of state usury laws extends no further than National Bank Act regulation.  Preemption is part of a package with regulation, but once the loan passes beyond the hands of a National Bank, it loses its preemption protection and becomes subject to state usury laws.  (Some of you might recognize that this is an argument I made several years ago. Plaintiff's counsel sent me a very nice email to this effect.  You owe me a citation, 2d Circuit!).  

Continue reading "Madden v. Marine Midland Funding" »

Is There a Student Loan Debt Crisis?

posted by Adam Levitin

I've been a skeptic for some time about claims that we have a student loan "crisis" in the United States. For individuals mired with student loan debt, it is very much a crisis, of course.  But my reluctance to term growing levels of student loan debt a crisis reflects the fact that student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises:  long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs. (This is more true of government loans than private loans.) And, while student loan debt is growing rapidly, it is still only about a 9th of the size of the mortgage market. All of this has kept the student loan kettle from boiling over.  

Yet at the same time it is precisely because of the concentration of student loans in the younger population that it is concerning.  Large debt loads at the beginning of one's adult life are likely to have very different effects on than debt spread out over a life time.  Moreover, student loans are not incurred based on current income, but on assumptions of future income (if that), so student loan debt burdens are more likely to be poorly calibrated to borrower's actual earning capacity. Additionally, because student loan debt is not dischargeable in bankruptcy (except in extreme circumstances), unlike other types of debt, it likely to stick around.  And, unlike various types of secured debt, there is no "put" option. A homeowner who runs into trouble with a mortgage or a cash-strapped auto loan borrower can always sell the house or car (or let them be repossessed) to pay off part or all of the debt. That's not possible with unsecured debt.  

The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one. 

Continue reading "Is There a Student Loan Debt Crisis?" »

Rent-to-Own Hair Weaves

posted by Adam Levitin

Apparently there is a business of rent-to-own hair weaves.  As a bald man, this is of particular interest. Below is a description of some of the program:

Please use our purchase program. The owners of this website or The Weave Loan Store/Weave Loans is not a lender Approval will vary based on credit determination and state law. This transaction is a rental-purchase agreement (or in NV, a lease agreement with an option to purchase; in IA, ND, NE, and SC, a consumer rental-purchase agreement; in CT and NH, a rent-to-own agreement; in AK, DC, DE, HI, ID, KS, OR, SD, VA, and WA, a lease-purchase agreement; in MA and RI, a lease; or in VT a consumer lease agreement). The Weave Loan Store Purchase Program is not available in MN or WI. For Consumers in Massachusetts and Rhode island, at any time after the initial payment, [sic]. You will not own the merchandise in The Weave Loan purchase program until the total amount necessary to acquire ownership is paid in full or until you purchase your early purchase option of our program. Ownership is optional. For consumers In VT, minimum 18-week  billing period applies. Product availability and pricing may vary by store, the internet sales, and seasons.. The Weave Loan Store Hair Extension Sales is not responsible for merchandise damaged by the customer. Free or reduced rent offers will not reduce total rent or purchase-option amounts. Our program contains credit and no credit check and no credit needed. The Customer must agree to not abide by the merchandise care instructions it is and shall hold The Weave Loan Store harmless of any damage caused by the customer. Program validation and Agreement requires verification of residence, income and personal references. You can release merchandise. The Weave Loan Store and Weave Loans, Wig Loans etc. are trademarks of Couture Enterprises INC. and the use of the names in anyway without written permission of the owners of Couture Enterprises is strictly prohibited and if used without permission will be subject to penalty of the law. By using the services and participating in our program are agreeing to the Terms & Conditions of this website and The Weave Loan Store. By using the services on this website you are agreeing to the Terms and Conditions listed.

There are clearly some editing problems with this langauge, such as "The Customer must agree to not abide by the merchandise care instructions".  

There's also the irony of a place called "The Weave Loan Store" claiming that it's not a lender. 

I particularly like the highlighted portion noting that "You can release merchandise."  Perhaps that's meant for hair weave businesses to finance their weaves and then sublet them to customers, but if not, how'd you like to rent my weave? 

But here's the real question:  what happens if you default on the rental?  Can The Weave Loan Store replevy the hair?  I don't think there's a self-help remedy here that doesn't involve breaching the peace.  And how does The Weave Loan Store prove that the hair being replevied is its hair?  It's not as if weaves come with serial numbers (as far as I know). 

Lessons For Consumer Protection From The World Of Inclusive Capitalism

posted by David Lander

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

Continue reading "Lessons For Consumer Protection From The World Of Inclusive Capitalism " »

Who is Helping Consumers With Defaulted Student Loans?

posted by David Lander

Clearly, the biggest surprise in consumer borrowing since the crash has been the explosive expansion of student loan debt. It has surpassed both auto lending and credit card lending. And, since it ties with Payday Lending and pre-crash sub-prime mortgage lending for the thinnest underwriting there are defaults aplenty. 

Consumer advocates are rightly urging the Department of Education to provide simpler and clearer paths forward for consumers with student loans in default but many people still need a helper.  As defaults in mortgage loans and on credit card loans have fallen, providers who live on the profits of counseling people who default on those loans have turned their attention and their advertising and marketing to consumers who are in trouble on their student

Continue reading "Who is Helping Consumers With Defaulted Student Loans?" »

Can We Count on Macro-Economists to Analyze the Impacts of Inequality?

posted by David Lander

Prior to the crash, only a very few macro-economists were studying consumer borrowing and fewer still were investigating inequality of income or of wealth as an important macro-economic factor. Work in macro-economics is done at academic institutions, the Fed, think tanks and government and private enterprises. Historically, very few PhD dissertations in macro-economics dealt with consumer finance or consumer spending or inequality issues. Prior to the crash there was a divide between the small minority (which included some high prestige folks such as Joseph Stiglitz) and the dominate majority. Both sides make extensive use of mathematical formulae but the majority looks more like physics and the minority may include a dose of sociology.  This is important stuff because government fiscal policy and even monetary policy and private business decisions are often based on the work of these folks. The majority tended to believe that humans act rationally while the minority helped develop the field of behavioral economics. 

Continue reading "Can We Count on Macro-Economists to Analyze the Impacts of Inequality?" »

Community Banks and the CFPB

posted by Adam Levitin

I'm testifying before the House Financial Services Committee on Wednesday at a hearing entitled "Preserving Consumer Choice and Financial Independence." I'm the only non-industry witness (no surprise there). For those interested, my testimony is linked here.  Here's the highlight:  

Community banks face a serious structural impediment to being able to compete in the consumer finance marketplace because they lack the size necessary to leverage economies of scale. The CFPB has repeatedly acted to ease regulatory burdens on community banks in an attempt to offset this structural disadvantage. While community banks continue to face serious problems with their business model, their profits were up nearly 28% in the last quarter of 2014 over the preceding year, which strongly indicates that they are not being subjected to stifling regulatory burdens.

Ultimately, if Congress wants to help community banks, the answer is not to tinker with the details of CFPB regulations... Instead, if Congress cares about community banks it needs to take action to break up the too-big-to-fail banks that receive an implicit government guarantee and pose a serious threat to global financial stability. Until and unless Congress acts to break up the too-big-to-fail banks, community banks will never be able to compete on a level playing field. 

Hacking and Systemic Financial Risk (Encore)

posted by Adam Levitin

The data breach stories just don't seem to stop. (And why would they?). The latest (I think) is about a massive and sophisticated multi-million dollar hacking of several banks.  If you read down through the story, one of the things the hackers did was manipulate the balances of real accounts.  They'd change a real $1,000 balance to $10,000 and then have $9,000 wired to an account at another institution.  

But why take out only $9,000?  The hackers were being nice, I suppose, in that they didn't steal any actual depositor's funds (as far as we know). And that was also probably smart, because if they zeroed out an account, there might be a bounced transaction that would alert the consumer and then the bank to the theft.  But I don't know that we can count on future hackers being so polite, considerate, or careful. Indeed, they might actually want to create havoc by messing with account balances.  

I raised this scenario several months ago, and before that a couple of years ago. I think today's news confirms that the financial Armageddon via hacking scenarios I have nightmares about aren't totally farfetched. Between state-sponsored hacking (I'm looking at you DPRK), terrorist hacking (ISIS and Newsweek), and rogue individuals, I think we're looking at a matter of when, not if, we see consequences from financial hacking that go beyond a few hundred million in losses and result instead in institutions failing. 

Consumers Don't Shop for Mortgages and the CFPB Intends to Change That

posted by Matthew Bruckner

Shutterstock_191007053

Richard Cordray, the director of the Consumer Financial Protection Bureau, gave a short speech today at the Brookings Institution. In his speech, he outlined several steps the CFPB is taking to help fix the mortgage market. In his view, one of the chief problems with the mortgage market is that consumers do not shop around for mortgages the same way they shop for other products, including houses. According to a recent CFPB study, "almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply."

The CFPB's aims to solve this problem with some new tools. More after the break.

Continue reading "Consumers Don't Shop for Mortgages and the CFPB Intends to Change That" »

Nostradamus-Style Predictions for Consumers in 2015

posted by Nathalie Martin

First some easy ones you all know:

1. The stock market will drop, perhaps precipitously, making now great time to rebalance retirement portfolios.

2. The price of gas will inch up and in the meantime, more states will add a little gas tax here and there to quietly fill empty coffers.

On Mortgage Lending:

3. There will be more low rate, “no closing costs” home refinancings available to good credit risks, as lenders try to figure out what to do with themselves. Not much of a spoiler here, since this is already happening.

4. More lenders will be answering the phones when borrowers want to settle up their mortgages. Lenders will be cutting the red tape that is costing them a fortune. Also, more lenders will be settling pending home foreclosure litigation. Something is better than nothing, some might be thinking. 

5. Cases that don’t settle will result in more large judgments against lenders, in part because lenders did not do some of the things mentioned above all along.

On High -Cost Lending:

6. The CFPB will announce its long-awaited payday lending rules, which will apply to all high-cost loans, including payday loans, title loans, and high-cost installment loans.  These new rules will go a long way (though perhaps not all the way) to curbing high-cost lending abuses and protecting consumers from the debt trap. After all, the bureau is called the Consumer Financial Protection Bureau. Lenders will not like the rules much and may even sue over them but they won’t have a high-cost leg to stand on.

Continue reading "Nostradamus-Style Predictions for Consumers in 2015" »

Is a 36% Cap Radical?

posted by Nathalie Martin

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

Hacking and Systemic Financial Armageddon

posted by Adam Levitin

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

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

Continue reading "Hacking and Systemic Financial Armageddon" »

Apple Pay and the CFPB

posted by Adam Levitin

Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP. 

Continue reading "Apple Pay and the CFPB" »

Toward a Universal Ability to Repay Requirement

posted by Adam Levitin

The latest consumer financial product to come under the regulatory microscope is subprime auto lending, which has seen a boom in the last few years.  The subprime auto market's boom underscores a real problem in consumer financial regulation: different consumer financial products have developed different substantive regulatory regimes that are not justified by differences in the products. Most fundamentally, we have an ability-to-repay requirement for mortgages, a different ability-to-pay requirement for credit cards, and nothing else for other products. In light of the changes in all consumer finance markets, in which securitization and sweatbox lending have undermined the traditional lender-borrower partnership that encouraged responsible lending, it is time to consider a universal ability-to-repay requirement for consumer credit. 

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

Criminal Law and Financial Distress

posted by Stephen Lubben

I commend to Slips readers Alex Tabarrok's post over at Marginal Revolution entitled "Ferguson and the Modern Debtor’s Prison." 

Bad Paper: Chasing Debt from Wall Street to the Underworld

posted by Dalié Jiménez

That's the name of a new book by Jake Halpern coming out in October. The New York Times has an excerpt on their site. If the excerpt is anything like the book, it's going to be gripping.

What's even cooler is that someone actually created a video game based on the book. Or at least on the debt collector business part of the book. You can play as a debtor or a debt collector and see the story through. It's web-based image-and-text but really well done (just some minor innacuracies).

 

A Bubble in Deceptive, Abusive Subprime Auto Lending?

posted by Jean Braucher

In a long story in today's edition, the New York Times is reporting a bubble in often deceptive and abusive subprime auto lending on unaffordable terms, including very high rates of interest.  Although not quite the threat to the overall economy that the subprime mortgage bubble created eight or nine years ago, this apparent new bubble in lending for used vehicles has some similar features (targeting vulnerable consumers, lax underwriting, securitization, investors seeking high returns) and is causing significant pain for low income and unsophisticated borrowers.  A few regulators are mentioned in the story, but oversight so far seems to have been lax.

CFPB: Let Consumers Make Their Complaints Public; All Rejoice

posted by Dalié Jiménez

CFPBcomplaintsbyproductThis week the CFPB announced it's seeking public comments on a proposed policy that would allow consumers who file a complaint with the agency to share all of the (non-personally identifying) details of that complaint with the public as part of its Consumer Complaint Database. (Right now the database only identifies the financial product complained about, name of the company, and a category identifying the topic of the complaint).

As a researcher, I am beyond thrilled at the possibility of being able to drill down into the details of complaints. This might allow us to go even further than the CFPB or Ian Ayres and others did last year in analyzing the complaint database. 

Good players in the consumer finance space should be thrilled too: more data will allow us to really separate those who are doing right by consumers from those who aren't. It would allow the public or researchers to decide for themselves whether someone was making a mountain out of a molehill or if was identifying a real problem in their complaint. The fact that we currently don't have transparecy into complaints is a common (and justified) complaint by the debt collection industry. The CFPB is also proposing to make public the institution's response to the complaint (at their option). Anyone could then evaluate whether they think particular industries/institutions are responding appropriately to complaints. 

Continue reading "CFPB: Let Consumers Make Their Complaints Public; All Rejoice" »

Being Unbanked, Part 1

posted by Katie Porter

Note from Katie Porter: This guest post is from Jennifer Song, senior staff attorney at the California Monitor Program. Jennifer pitched in and attended this workshop, and I hope Credit Slips readers will enjoy hearing about her experiences in a short series of posts. 

Last week, I, Jennifer Song, had the opportunity to join FinX/LA 2014:  Connecting to the Consumer Financial Experience.  Hosted by the Center for Financial Services Innovation as part of their three-day conference on consumer financial services,  FinX was an “in-the-field activity” that promised to give participants a “deeper understanding of the complexity of consumers’ financial lives in accessing financial services.” 

Upon arriving at the conference, we were placed into groups of four and given worksheets. The tasks to complete included cashing a personal check, cashing a pay check, purchasing a general purpose reloadable card and reloading the card, purchasing a money order, inquiring about auto title loans, etc.  We were given a little over two hours to complete these tasks in lower income areas throughout Los Angeles. With only a quick slideshow of interesting facts and a pep talk, we set off on our journey. 

While I will share my experience and how it shaped my thinking on low-income banking, I want to start by identifying factors that may have prevented me from fully experiencing and understanding the challenges facing the under banked and unbanked. PhotoFirst, we were traveled in groups of four; most people using these services do not travel in packs or with an entourage, and are not able to consult each other about transactions.  Second, while we were told to “dress down” in order to “blend in” while performing these transactions, I do not believe we were fooling anyone at the shops we visited.  Third, and perhaps the most glaring contrast, was that we were chauffeured around Los Angeles in a town car to perform these transactions. While I assume there is access to public transportation in or around these financial centers, Los Angeles is notorious for being difficult to navigate via the public transportation system (did you even know it has a subway?) Many of the financial centers were clustered together but major banking institutions were noticeably absent in these areas. 

Continue reading "Being Unbanked, Part 1" »

Robbing Peter

posted by Katie Porter

How exactly do people make ends meet? While there are a few formal studies of "payment hierachies" courtesy of the big data organizations, there is little ethnographic work. A new contribution in this regard is "Robbing Peter to Pay Paul":  Economic and Cultural Explanations for How Lower-Income Families Manage Debt by Laura M. Tach and Sara Sternberg Greene. The authors interviewed 194 lower-income households, finding that debts generally receive less attention than regular monthly expenses where credit cannot substitute for meeting the need (e.g., paying rent). The best findings of the paper describe how households choose among debt coping strategies, which Tach and Greene categorize to include debt juggling such as rotating which debt to skip paying, rejecting responsibility/ignoring debt, using an EITC refund to make a large payment, and others. Tach and Greene sketch out an "Injustice Narrative" based on respondents' own understandings of why certain debts should be ignored or rejected. In their sample, these debts were frequently subprime credit cards or debts ballooned up with fees. By contrast, the authors present an "Economic Mobility Narrative," where debtors prioritized and paid consistently if they believed repayment was required to achieve a goal, like improving a credit score enough to qualify for a home loan. The overall perspective of the paper is that cost-effective approaches to debt repayment (highest interest rate first), or logical approaches (last in, first out), are less prominent than cultural narrative strategies that allow debtors to explain their payment--or lack thereof--using cultural sociological norms about mobility and justice.

The paper is a nice addition to the generalized reporting that focuses on middle class people--those with mortgages and credit cards. As Nick Timiraos recently reported in the WSJ, mortgages are once again the king of the bill heap. The article has some nice graphics that illustrate regional differences in payment hierarchies that appear to correlate with property values.

p.s. There was a rumor that I would never blog again. I started it. But it just didn't catch on, despite my dissemination efforts.  I'm back . . .

Working and Living in the Shadow of Economic Fragility

posted by Melissa Jacoby

OupbookCredit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live

The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.

Bitcoin Tax Ruling

posted by Adam Levitin

The IRS has spoken:  Bitcoins are property, not currency.  This was hardly a surprise, but it has some important implication that tells us a lot about what it takes to make a currency work.  

Satoshi

For a payments geek, the real lesson from the IRS Bitcoin ruling is that for a currency--or any payment system--to work, its units must be completely fungible.  One reason dollars work really well as a currency is that one $20 bill is entirely fungible with another $20 bill.  This means that when I pay, I don't have to make a decision about which $20 bill to use (unless I have some idiosyncratic attachment to the crisp ones or the like). It means that when I accept a payment, I don't care which $20 bill I am given, in part because I know that my ability to spend that $20 bill will not depend on which $20 bill it is.  If payment were in, say, camels, then it would probably matter a great deal which camel were tendered.  Camels aren't fungible. And we know that's not going to make for a very good payment system. 

So what does this have to do with Bitcoin?  

Continue reading "Bitcoin Tax Ruling" »

The Behavioral Economics of Bitcoin

posted by Adam Levitin

I'm going to wade into unchartered Slips waters today and head into Bitcoinland. I've been trying to understand Bitcoin from a payment systems perspective, where it has an interesting problem and solution:  double spending.  The lesson in all of this is how Bitcoin has a sort of built in seniorage--payments are never free. Currently Bitcoin builds in its costs through inflation, which is not particularly transparent, but that will ultimately change to being more transparent--and salient-- transaction fees. By disguising its costs through inflation, rather than through direct fees, Bitcoin effectively incentivizes greater consumer use of the system, much as credit card usage is incentivized through no-surcharge rules preventing merchants from passing on the cost of credit card usage to consumers. 

Continue reading "The Behavioral Economics of Bitcoin" »

How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit?

posted by Adam Levitin

        One of the huge questions hanging over the mortgage market today is what will happen to access to credit for credit impaired or non-traditional borrowers. There is a real concern that the Dodd-Frank Act’s mortgage reforms will reduce the availability of mortgage credit because lenders’ fear liability for making mortgage loans that fail to qualify as “Qualified Mortgages” (QM) and are thus potentially subject to an Ability-to-Repay (ATR) defense. I've blogged on aspect of QM before (herehere, herehereherehere, here, and here). Based on a preliminary analysis, I think this concern is overblown, and in this very long post I attempt to work through the potential liability for lenders that make non-Qualified Mortgages. (I note that all of this is my tentative readings of the statute; we really don’t know how courts will interpret it, and others may see better readings than I do now.) 

        Still, my back-of-the-envelope calculation suggests that it is quite low in terms of loss given default and could probably be priced in at around 18 basis points in additional cost for a portfolio with weighted average maturities (actual) of five years.  Even with rounding up, that's 25 basis points to recover additional credit losses, which is not a big impact on credit availability. I invite those who would calculate this differently to weigh in in the comments—it’s quite possible that there are factors I have overlooked here, as this is a really preliminary analysis.

        Ultimately, I don't think ATR liability really matters in terms of availability of credit. What matters is the lack of liquidity--meaning a secondary market--in non-QM loans, as lenders aren't going to want a lot of illiquid loans on their books, and that is a function of the GSEs' credit box, not CFPB regulation.

        Because this post is REALLY long (the Mother of All QM Posts), here’s where it goes (yes, I feel like I'm doing one of those unwieldy 100+ page UFTA decisions, so I'm going to have a table of contents!):

Continue reading "How Risky Is It to Make a Non-QM Mortgage? And Is QM Going to Hold Back Access to Credit? " »

Supreme Court Discrimination Case Settles

posted by Alan White

Banks and insurance companies are apparently gnashing their teeth at the news that the Mt. Holly case pending before the Supreme Court has been settled.  The case itself does not involve financial services; it arose from a Fair Housing Act claim that a neighborhood redevelopment plan would  have a discriminatory impact on black residents.  The legal issue is whether the Fair Housing Act permits discrimination claims based on disparate impact.  This issue has been resolved unanimously by 11 Circuit Courts of Appeal.   HUD, the agency charged with enforcing the FHA, recently issued regulations confirming its long-standing interpretation that disparate impact claims are permitted. The Supreme Court's grant of review in the case is a clear signal that at least 4 activist Justices were prepared to overrule all 11 Courts of Appeal and HUD, and insist on proof of discriminatory intent in fair housing suits. 

The 1968 Fair Housing Act is not new, nor is disparate impact analysis, i.e. establishing race discrimination without showing intent to discriminate. What has prompted an all-out assault by banks and their lawyers is the decision by the Justice Department under Attorney General Holder and by other federal agencies to use disparate impact analysis against mortgage lenders, and not just against realtors and landlords.  Banks and their allies in the business press are hysterical about disparate impact analysis because it forces financial institutions to be mindful of the impact their credit policies have on the huge and recently expanded racial wealth gap in this country, and to adjust lending policies to mitigate the racial divide.  Between 2005 and 2009, white Americans lost 16% of their net worth; black Americans lost 53% of their net worth.  Access to mortgage credit, and the interest rates paid for that credit, have a major impact on family wealth.

If realtors and landlords must avoid discriminatory policies to further the goal of equal housing opportunity, it seems only fair that banks, beneficiaries of continuing taxpayer subsidies and safety nets, should have some duty to advance the same public goal.

Living down the Lattes

posted by Katie Porter

Credit Slips is a virtual community so very few of you know that I go to Starbucks at least once a day, although a small detail in the pic here was a hint in that direction. It's not a cheap habit, as personal finance writers have observed here and here. But does it drive people to financial ruin, or even indicate a failure of sound financial habits?

I've never thought so. The decades of research on consumer bankruptcy show that the big 3--job problems, medical problems, and family changes--are underlying structural problems. My thoughts on the "latte problem" are now enshrined in print in Helaine Olen's new book, Pound Foolish. It's tone is largely that of an expose, which makes for fun reading, although academics may find some of the research a bit light. But part of the problem that the book reveals is the lack of innovative solutions to improve financial advice. Certainly the CFPB has undertaken this as a major part of its mission. I'd love to hear readers' suggestions for innovative (not more junior high financial education, please) ways to get people to be more critical "consumers" of financial advice and to take the time and effort to make strides toward their financial goals. In the meantime, I'll enjoy my latte and procrastinate on rebalancing my retirement portfolio!

New Empirical Paper on Home Mortgage Foreclosure and Bankruptcy

posted by Melissa Jacoby

RibbonHouse Cross-campus colleagues and I have posted a paper that studies intersections between mortgage foreclosure, chapters of bankruptcy, and other variables, using the Center for Community Capital's unique panel dataset of lower-income homeowners. An excerpt from the abstract:

We analyze 4,280 lower-income homeowners in the United States who were more than 90 days late paying their 30-year fixed-rate mortgages. Two dozen organizations serviced these mortgages and initiated foreclosure between 2003 and 2012. We identify wide variation between mortgage servicers in their likelihood of bringing the property to auction. We also show that when homeowners in foreclosure filed for bankruptcy, foreclosure auctions were 70% less likely. Chapters 7 and 13 both reduce the hazard of auction, but the effect is five times greater for Chapter 13, which contains enhanced tools to preserve homeownership. Bankruptcy’s effects are strongest in states that permit power-of-sale foreclosure or withdraw homeowners’ right-of-redemption at the time of auction.

Bear in mind that most homeowners in foreclosure in this sample did not file for bankruptcy. Among the 8% or so who did, the majority filed chapter 13. For even more context, please read the paper - brevity is among its virtues, and exhibits take credit for page length. A later version will ultimately appear in Housing Policy Debate.

Ribbon house image courtesy of Shutterstock.

Buying Hope

posted by Melissa Jacoby

NumbersThose interested in The Stakes of Design back in April may appreciate Why We Keep Playing The Lottery. Thanks to The Morning News for alerting readers to the article, and thanks to author Rosecrans Baldwin for co-founding The Morning News, and . . . that's enough.

Numbers image courtesy of Shutterstock

Don't Throw In the Towel on Mobile Yet

posted by Adam Levitin

Felix Salmon has an interesting and provocative piece arguing Why Mobile Payments Will Never Take Off. The problem, Felix observes, is that none of the mobile payment systems around really offer any improved convenience over plastic. (Indeed, one might note that depending on the setting, cash is still the fastest, especially if security procedures for plastic, such as checking to see that a card is signed, are followed.)  Felix also observes that the developing world examples of successful mobile payment systems, like M-Pesa, don't really present a model for the US.  In the developing world, mobile payments represent the Great Leap Forward, bypassing the age of retail banking and plastic cards, and going straight from paper/barter to digital. If the contest is mobile vs. paper/barter, the outcome is likely to be different from mobile vs. plastic.  Felix is right on both points. Still, I'm not as ready as he is to throw in the towel on mobile.

Continue reading "Don't Throw In the Towel on Mobile Yet" »

Don't Fancy Games (For Your Kids' Financial Education)? How About The Theatre?

posted by Melissa Jacoby

MoneyTree"Make it fun and they will come," Lauren Willis discussed in the instructive post that evaluated the pros and cons of "The Gamification of Financial Education." Meanwhile, in London, a live show has been designed for children as young as five to teach them about the financial system. Interesting story on the show in The Guardian here. Tickets to "Bank On It" (running through the 14th of July) and other information here.   

Money tree image courtesy of Shutterstock 

Fed Board Couldn't Be Bothered to Vote on Multi-Billion Foreclosure Settlement

posted by Adam Levitin

The foreclosure fraud settlements were already farcical, but it just gets worse and worse. Now we learn that the Fed approved the amendments to its consent orders with mortgage servicers without it actually going before the Board of Governors for a vote.  

I get that Fed regulations permit delegation of this sort to the Fed's staff, but the foreclosure fraud settlement wasn't some Mickey Mouse enforcement action against a community bank's holding company for a minor know-your-customer rule infraction. As far as I'm aware, this was by far the largest settlement of any sort in the Fed's history. This settlement was a policy statement as much as an individual settlement. The fact that the Fed's Board didn't even bother formally deliberating and voting on the settlement is indicative of how seriously the Fed's Board takes the foreclosure fraud issue:  the Board doesn't think that it's worth their time.  Not even a single Board member requested review of the action. Yet another exhibit for why consumer protection cannot be left in the hands of prudential bank regulators. 

Tire Rentals

posted by Bob Lawless

Wheel and jackThe latest twist on the rent-to-own schemes seems to be car tires, as reported by Ken Bensinger in the L.A. Times. Consumers end up spending many times more "renting" car tires than the cash price at Wal-Mart. Obviously, the transactions are principally just incredibly expensive ways to finance the purchase of tires, which makes me wonder why the businesses involved in the market are offering tire rentals instead of  just  expensive credit. People in dire financial straits will take extraordinary steps to get the necessities of life, including tires, but I wonder why calling it a "rental" rather than a "loan" seems to matter. Although a few Google searches suggested the market for used car tires is more robust than I would have thought, it would not seem likely that the possibility of repossessing and reselling a used car tire is motivating the economics of the transactions.

Continue reading "Tire Rentals" »

The Stakes Of Design

posted by Melissa Jacoby

SlotThat 99% invisible is a vibrant architecture and design podcast might have been beside the point in Credit Slips land -- but for the fact that its current show (Episode 78) focuses on the design and technology of casino slot machines, and the particular profitability of penny slot machines. The short piece is built on the work of M.I.T. professor and anthropologist Natasha Dow Schüll. Lots on the consumer finance and cognitive behavioral side of things; don't expect any mention of bankrupt casinos.

Slot photo courtesy of Shutterstock.

New Study on Consumer Protection and Financial Distress

posted by Jason Kilborn

Shutterstock_115002976The European Commission's Financial Services Users Group has published an impressive report and a position paper on financial distress and consumer protection, written by a Euro-think tank called London Economics. The title is a real mouthful: Study on means to protect consumers in financial difficulty: Personal bankruptcy, datio in solutum of mortgages, and restrictions on debt collection abusive practices. The paper does an admirable job of surveying the legal landscape of 18 European countries, concluding with some well-considered "best practices." This paper is a nice addition to the already impressive body of work in Europe analyzing existing legal regimes for treating consumer financial distress and identifying strenghts and weaknesses in their varying approaches. It is highly recommended reading for anyone interested in consumer policy, especially with respect to appropriate solutions to financial distress.

European Union image courtesy of Shutterstock.

A Final Pet Peeve: The Right to Consumer Financial Industry Data

posted by Lauren Willis

Thank you to the Credit Slips team for allowing me to use their soapbox for the last few weeks.  I leave you with a final pet peeve: Why does the government have to rely on commercially-collected financial industry data sets or voluntary surveys of financial firms to discover the effects of policies the government has put in place? This is just embarrassing. The U.S. government has so little power over the financial industry – an industry that only exists by virtue of the full faith and credit, payments systems, FDIC insurance, etc. provided by the U.S. government – that it cannot demand data from banks and financial firms, but instead must ask politely for voluntary survey answers or search the data market and pay for information like a commoner? 

Continue reading "A Final Pet Peeve: The Right to Consumer Financial Industry Data" »

Dancing Around the Risk Question

posted by Lauren Willis

Reflecting on my last two posts – price caps, loan structure requirements, underwriting rules – discussing any of these puts the cart before the horse. We know we want to rein in risk without cutting off access to credit that is not too risky. But how much risk is too much risk when it comes to credit? 

I began posing this question to audiences at one of the very first talks I gave as an academic (a 2005 talk about predatory mortgage lending), but while most of my talks generate plenty of responses, not once has a single audience member attempted to answer this question.  

It is a remarkably difficult question to answer, one that varies with the expected costs and expected benefits, to borrowers, lenders, and society, of each extension of credit. Moreover, actual future costs and benefits are often unknown and perhaps unknowable (meaning we are dealing with uncertainty, not merely outcomes with known risk distributions) and incommensurable (meaning tradeoffs are difficult).

Continue reading "Dancing Around the Risk Question" »

The Virtues of Price Caps

posted by Lauren Willis

In the last post I discussed the potential benefits of price caps in the small loan market, one of which was to bring the price down to what consumer price shopping would produce if it were present in that market. Now I would like to turn to the potential benefit of price caps in even the most (albeit still quite imperfectly) price-competitive credit market, the mortgage market.

While superficially appearing to be about price, the primary potential benefit of credit price regulation is that it can rein in risk. Even in the small loan market, the primary problem is not paying high, noncompetitive prices, but the risk of not being able to pay off the principal and then being trapped in debt servitude to a loan shark. This trap imposes social costs and high psychological costs on the borrower. The primary problem in the mortgage crisis has also been risk, the risk of default and foreclosure. Risk is intimately tied to price in both situations, but setting a “fair” or “efficient” price seems to me to be to be secondary. (Then again, I am culturally tone-deaf, so maybe fairness in pricing is really what has motivated usury restrictions over the centuries; some historical accounts, however, place the risk of debt servitude as the primary motivator).

Continue reading "The Virtues of Price Caps" »

Usury and the Loan Shark Myth

posted by Lauren Willis

Consumer financial education, disclosure, and defaults all dispensed with in my prior posts, shall we move on to “substantive” regulation, dare I even say “usury”? Before we do that, I need to clear up another myth that, like the belief in the efficacy of consumer financial education, is deeply ingrained: the loan shark myth.

Forthcoming in the Washington & Lee Law Review is a historical expose of the relationship – or lack thereof – between credit price regulation in the small loan market and loan sharking. The author, political scientist Robert Mayer, finds that what the popular culture has called loan sharking consists of two different types: violent and nonviolent. Both have been characterized by: (1) high prices, in excess of usury restrictions where such restrictions have applied, and (2) short-term, nonamortizing loans made to people who have a decent likelihood of being able to pay the interest amount due at maturity but a low likelihood of being able to pay off the principal balance, resulting in a steady stream of interest income to the lender as the loans roll over and over. It is this second feature that in the 19th Century first earned even nonviolent loan sharks their “shark” moniker – a single loan, even if it is expensive, looks harmless enough, but stealthily traps the borrower in a cycle of debt.

Continue reading "Usury and the Loan Shark Myth" »

Minimum Wage & Consumer Borrowing

posted by Bob Lawless

Over at VoxEU, economists Daniel Aronson and Eric French have a discussion about the their research of the effects of a minimum wage hike. I found my way to this post through Yves Smith's discussion of the topic at Naked Capitalism, which also includes some informative tables showing that the proposed hike to $9/hour is still below a living wage in many areas of the country.

Continue reading "Minimum Wage & Consumer Borrowing" »

National Consumer Protection Week and Disclosure 3.0

posted by Jean Braucher

It’s National Consumer Protection Week (NCPW)!   Federal, state, local, and nonprofit consumer protection agencies and organizations are making extra efforts to promote consumer awareness

First I have to get out of my system thoughts of Tom Lehrer’s song, National Brotherhood Week:

                Step up and shake the hand/Of someone you can’t stand . . .

                It’s only for a week so have no fear/Be grateful that it doesn’t last all year.

But to get back on message, of particular interest to Credit Slips readers is this part of the mission of consumer protection described on the NCPW website:

    "Financial Fraud Scams: American consumers owe a whopping $11.31 trillion dollars in debt and are behind on paying about $1.01 trillion of that amount. Mortgages, student loans, and credit cards account for a large portion of that debt. Consumers are often haunted with huge monthly payments, and fraudsters take advantage of that with debt relief scams, tax scams, and other financial fraud scams. Scams target individuals who are in financial distress, but they fail to fulfill their promises, and typically leave consumers worse off than when they started."

Let me say that Lauren Willis has done a great job on this site recently taking us, patiently and painstakingly, through the many problems with the idea that disclosure can be refined into a digital juggernaut to protect consumers. See here  and here and here.

Continue reading "National Consumer Protection Week and Disclosure 3.0" »

When Nudges Fail: Slippery Defaults

posted by Lauren Willis

Now that my last few posts have bludgeoned consumer financial education and at least bloodied disclosure, and given that my suggestion of comprehension requirements is completely untested as a means of consumer protection for financial products, what about “nudges”? 

One nudge I have taken a close look at is the use of policy defaults. Defaults are settings or rules about the way products, policies, or legal relationships function that apply unless people take action to change them. Although some defaults in the law are mere gap-fillers and others, as pointed out by Ian Ayres and Robert Gertner, penalize one or more parties with the intention that the parties will contract out of them, policy defaults aim for stickiness. The idea behind policy defaults is to set the default to a position that is good for most individuals, under the assumption that only the minority who have clear preferences to the contrary will opt out. 

Continue reading "When Nudges Fail: Slippery Defaults" »

Disclosure 3.0: Making Disclosure Smarter

posted by Lauren Willis

What if, instead of making the consumer smarter or the disclosures more comprehensible, as discussed in my last several posts, we made financial product disclosures smarter? For the uninitiated, “smart disclosure,” according to the federal White House Task Force on Smart Disclosure, is “the release of data sets in usable forms that enable consumers to compare and choose between complex services.” The Task Force description continues: “Smart disclosure requires service providers to make data about the full range of their service offerings available in machine-readable formats such that consumers can then use these data to make informed choices about the goods and services they use. While consumers may access the data directly in some cases, the data may also be useful in enabling government agencies or third parties to create online tools for consumer choice.” 

The idea is that both the government and firms will be required to release, in close to real time, complete price, feature, and performance data about products and services offered by the firm or government entity (“product data”) so that consumers can input their own preferences into on-line or mobile app tools (“infomediaries”) that can then recommend the products or services that will best meet those preferences. Kayak for everything! 

Continue reading "Disclosure 3.0: Making Disclosure Smarter" »

The Behavioral Economics of Title Lending

posted by Paige Marta Skiba

Shutterstock_52608853 copyThis week we have discussed some of the interesting facts our recent research has uncovered about the title lending industry and its borrowers. One of the goals of our research is to use economics tools, from both neo-classical and behavioral economics, to develop a broader understanding of how borrowers are making choices in this market.

Continue reading "The Behavioral Economics of Title Lending" »

Title Lending’s Big Question: Dude, Where's My Car?

posted by Paige Marta Skiba


Shutterstock_110276351In a new paper on title lending with Katie Fritzdixon and Jim Hawkins, we report data from a survey of over 400 title lending customers across three states. To introduce this work, we wanted to start off by talking about the important issues that title lending raises. The biggest question, by far, is how many title borrowers end up losing their car?

Continue reading " Title Lending’s Big Question: Dude, Where's My Car?" »

Putting Disclosure to the Test: User Comprehension Requirements

posted by Lauren Willis

Given the limitations of Disclosure 2.0 and Disclosure 2.5 I described in my last posts, what is to be done? To answer this question, we might first ask what financial product disclosure is attempting to achieve. Although disclosure has several aims, one is consumer comprehension to the degree necessary to enable good decisions. Disclosure rules require particular information to be imparted, often in a specified format. What if the law instead allowed firms to disclose whatever truthful and nonmisleading content they choose in whatever format they choose, but required firms to demonstrate, through field-based testing, consumer comprehension of the key facts about the financial product needed to make a good fact-based decision? 

Continue reading "Putting Disclosure to the Test: User Comprehension Requirements" »

Pawnbroking: The Hot New (Ancient) Credit Market

posted by Paige Marta Skiba

Thanks for having me back at Credit Slips! This week I’ll be blogging about two forms of credit that are increasingly popular: auto title lending and pawnshops.

Pawnbroking is back, and in a big way. Recent television shows like Pawn Stars and Hardcore Pawn are a testament to the resurging interest in this ancient form of lending. In a new paper with Susan Payne Carter and Marieke Bos, "The Pawn Industry and Its Customers: The United States and Europe,"we document important facts about the pawn business. Pawnbrokers take collateral or a “pledge,” (anything from jewelry to tools to dental implants!) in exchange for about 50 percent of the item’s resale value, plus interest.

Continue reading "Pawnbroking: The Hot New (Ancient) Credit Market " »

Facebook & Credit Scores

posted by Bob Lawless

From the February 9th Economist:

Some firms piece together scores by analysing applicants’ online social networks. Professional contacts on LinkedIn are especially revealing of an applicant’s “character and capacity” to repay, says Navin Bathija, the founder of Neo, a start-up that assesses the creditworthiness of car-loan applicants. Neo’s software helps determine if applicants’ claimed jobs are real by looking, with permission, at the number and nature of LinkedIn connections to co-workers. . . .

Neo’s efforts to improve accuracy include recording borrowers’ Facebook data: Mr Bathija reckons that within a year there will be enough evidence to determine if making racist comments on Facebook is correlated with a lack of creditworthiness.

Racists? Sure, let's jack up their borrowing costs. But, if linking to cat videos on Facebook is correlated with a lack of creditworthiness, people are going to get upset.

The article is worth a read as it shows where we might be heading with Big Data and credit scoring. Regulation does and undoubtedly will play a major role in drawing boundary lines around what data can be used in credit scoring. But, where Big Data offers competitive advantages, companies will seek it out. It will be tough to get the genie back in the bottle once the horses have left the barn.

H/t to Frank Venis.

Disclosure 2.5: Moving from the Lab to the Field

posted by Lauren Willis

If financial education classes and lab-tested disclosures are unlikely to help consumers in their real-world financial decisions, what about field-tested targeted education/disclosure? Exciting work by Marianne Bertrand and Adair Morse shows that information given to payday borrowers can reduce their future borrowing, holding payday lender behavior static. Although this last caveat seriously limits the external validity of their results, the potential implications of their work are wonderful enough to be deserving of a full description here.

Continue reading "Disclosure 2.5: Moving from the Lab to the Field" »

Disclosure 2.0: Disclosure in the Lab

posted by Lauren Willis

If, as I suggested in my last post, making the consumer smarter is hopeless, at least for those of us whose prenatal and early childhood environments can no longer be altered, what about disclosure?  Could point-of-sale disclosure equip consumers to make good financial decisions? 

Simple disclosures appear effective in directly aiding consumer decisionmaking in some domains, the A, B, and C restaurant hygiene grades being the classic example.  But because financial products have many varying features that consumers need to understand to make good decisions, financial product disclosures are inevitably much more complex.  As a recent article by Omri Ben-Shahar and Carl Schneider details, generally speaking, consumers do not read, or if they do read they do not understand, or if they do understand they do not use correctly, the information presented in complex product disclosures.

Continue reading "Disclosure 2.0: Disclosure in the Lab" »

The State Legislative Process: It’s no Fun Watching Sausage Being Made

posted by Nathalie Martin

In a recent trip to testify before a state legislature, I was reminded of why one might want to avoid these types of interactions. First, it is no fun, second, is not required as a condition of my employment, and third, at least so far, no good ever comes of it.

I was there to support a consumer protection bill regulating disclosures and interest rate caps on refund appreciation loans (“RALs”). I know what you are thinking. Didn’t RAL providers go out of business when the IRS stopped providing lenders access to its debt indicator underwriting tools? Not all of them. RALS are still very common in Indian Country, for example.

Continue reading "The State Legislative Process: It’s no Fun Watching Sausage Being Made" »

Regulars

Occasionals

Current Guests

Follow Us On Twitter

Like Us on Facebook

  • Like Us on Facebook

    By "Liking" us on Facebook, you will receive excerpts of our posts in your Facebook news feed. (If you change your mind, you can undo it later.) Note that this is different than "Liking" our Facebook page, although a "Like" in either place will get you Credit Slips post on your Facebook news feed.

News Feed

Categories

Bankr-L

  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

OTHER STUFF

Powered by TypePad