The Stakes Of Design

That 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

The 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

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? 

Dancing Around the Risk Question

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).

The Virtues of Price Caps

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).

Usury and the Loan Shark Myth

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.

Minimum Wage & Consumer Borrowing

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.

National Consumer Protection Week and Disclosure 3.0

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.

When Nudges Fail: Slippery Defaults

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. 

Disclosure 3.0: Making Disclosure Smarter

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! 

The Behavioral Economics of Title Lending

This 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.

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

In 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?

Putting Disclosure to the Test: User Comprehension Requirements

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? 

Pawnbroking: The Hot New (Ancient) Credit Market

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.

Facebook & Credit Scores

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

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.

Disclosure 2.0: Disclosure in the Lab

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.

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

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.

The Legal Employment Market, Student Debt, and Legal Education Reform

There has been a great deal of press recently about the sorry state of the legal jobs market, student debt, and the irrelevance of legal education (see, e.g., here).  A lot of the thinking on these issues has struck me as incredibly ga-ga and muddled and as reflecting unrelated and pre-existing agendas about legal education, student debt, and the role of lawyers in society.  The jobs market, student debt, and legal education are all distinct, if related issues.  But it's important to untangle them and see where the problems are and what can be done about them.   

Many Young People Will Die in Debt, but Hopefully Not From Debt

I had a weird night’s sleep and then openned up my e-mail to find this headline from credit and collection news “Does The Consumer Bureau Harm Those It Claims to Protect? & Study Predicts Millions Will Die In Credit Card Red.” The immediate implication in my drowsy state was that the CFPB was somehow killing people. Wow. As it turns out, these were two headlines from two different stories, first one about how the CFPB was hurting Americans and the overall economy by constricting credit, according to a  Heritage Foundation paper by Diane Katz, available here. 

The second story was by Laura Rolland of the Huffington Post, and contained some grim news from a recent Ohio State Study published in the January issue of the Journal of Economic Recovery. It claims, consistent with informal data from my financial literacy class, that young people are up to their eyeballs in debt. According to Rowley, Millions of young Americans will die in debt to credit card companies. The study data show that people in their late 20s and early 30s (born 1980 to 1984) carry significantly higher credit card debt than older generations and pay it off more slowly, have about $5,700 more than people born 1950 to 1954, and $8,200 more than those born 1920 to 1924. The study even predicts that these young people will continue to charge well into their 70s.

Usury Laws Are Dead. Long Live the New Usury Law. The CFPB's Ability to Repay Mortgage Rule

[Updated 1.14.13] The CFPB has come out with its long awaited qualified mortgage (QM) rulemaking under Title XIV of the Dodd-Frank Act.  The QM rulemaking is by far the most important CFPB action to date and will play a crucial role in determining the shape of the US housing finance market going forward. The QM rulemaking also represents a return in a new guise of the traditional form of consumer credit regulation—usury—and a move away from the 20th century’s very mixed experiment with disclosure.

Happy New Year: Shall We Make Some Resolutions?

Welcome to 2013 Credit Slips Readers! It’s time to think about our debtor/creditor future, what to keep and what to leave behind. Sometimes I ask my fellow bloggers if they made any financially-related resolutions but usually everyone say no, so this year, we’ll just make a nice list of resolutions through your comments!   My List:

1. I resolve to read less about the financial crisis (leave it behind, all) and more about other juicy financial news. First, I want to get my hands on Pound Foolish, a new book by Helaine Olen slamming the financial advice industry. Ms. Olsen claims that advisors are not generally on the side of clients but rather on the sides of various people who buy their love. Yes we knew that, but this still might be a good read. Olen exposes the fallacies spun by some of America's current personal-finance celebrities, including  David Bach, a former senior vice president at Morgan Stanley, and his Latte factor theory. Olen also takes on Robert Kiyosaki (Rich Dad, Poor Dad), apropos since one of his companies (Rich Global, LLC) filed for Chapter 11 back in August.

Gift Cards and Bankruptcy

There's a linguistic irony that "gift" is the German word for poison. What, then, should we make of the "gift card"?  

Senator Richard Blumenthal's introduced new legislation, the Gift Card Consumer Protection Act (S.3636) that aims to close up the loopholes in existing gift card regulation and to protect consumers with gift cards when the retailer goes bankrupt. The legislation has a few moving parts:

• It expands the definition of gift card to include loyalty, award, and promotional gift cards.

• It would make the prohibition on dormancy, inactivity, and service fees absolute. Currently, the Electronic Funds Transfer Act permits inactivity, dormancy, and service fees for cards that have been inactive for a year, provided disclosure requirements have been met.  

• It makes the ban on expiration dates on gift cards absolute.  Currently, the EFTA allows cards to expire after 5 years if the expiration date is properly disclosed. 

• It makes it illegal for bankrupt firms to sell gift cards and for anyone to resell gift cards issued by firms that have been in bankruptcy for more than a week. 

• The bill creates an automatic stay exception for presentation of gift cards and requires the trustee/debtor in possession to honor gift cards at full value the same as cash. 

It'll be interesting to see what the opposition ends up being to the bill. The bill is dealing with two separate, but related problems.  

Walmart for Women?

Say what you will about Walmart, but give it credit perhaps for partnering in a project aimed to empower female entrepreneurs.  Walmart's Women's Economic Empowerment Project in partnership with Enactus (a global non-profit organization) has been criticized by some as merely part of a public relations campaign to combat image problems in the wake of sex-discrimination lawsuits.  Regardless of whether that is true, however, the project has provided hundreds of women with workforce training and assistance in creating new businesses or strengthinging exsiting businesses in the United States alone.  The Project connects students with academic and industry leaders throughout the United States and other countries to create and carry out endeavors designed to empower women through education and entrepreneurial action.  

Walmart and Enactus award millions of dollars to fund teams of students and leaders who carry out their proposed plans to empower women.  Plans are selected for funding based on the following stated criteria:

• "Degree of empowerment achieved for women
• Media exposure (teams are required to recognize Walmart by name in all Walmart Women’s Economic Empowerment activities pertaining to signage, advertising and media outreach)
• Project concept, execution, outputs and outcomes"

The "media exposure" component may again raise skepticism regarding Walmart's motives. Nonetheless, the program seems to be producing results so why complain?  Spokespersons for the Project report that hundreds of women in the United States alone have been able to enter or renter the workforce, receive promotions and increase their overall income due to participation in funded projects.  Those interested in the Project or applying for funding should check out the website and decide for themselves.  The application deadline for the next round of funding has closed, but the next round of selections should open soon. 

MyConsumerTips.info

I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

The Gender Divide in Payday Lending

Nathalie Martin has done great work and has posted comments on Creditslips.org regarding payday lending. I also have been interested in how these payday loans prey on consumers with the least resources and power, and have helped consumers with related issues through my outreach work. At the same time, I have had the privilege to have students like Adria Robinson, who take great interest in these consumer issues. Adria Robinson is so passionate about consumer issues that she volunteered to work with me in gathering the latest data on Colorado's payday lending post-passage of its new payday regulations in August of 2010. Thanks to Adria for her help with this post!

When Squeaky Wheels Get Rusty

Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System.  The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.  

That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty.  Sure, the warranty covered replacement . . . but  not shipping (a la "fine print").  The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments.  Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.

Layaway Fees Waived

We've posted before about Layaway's resurgence after the Great Recession.  A new development: gearing up for the holiday season, many major retailers are waiving their layaway fees, and consumers are responding positively. Here's KMart's.  Also, embargos on various popular products are now being lifited.  This leads me to belive that Layaway's resurrection (in places where it died) may be long-lasting.  It seems that spending on layaway items has gone up in response to this campaign, which makes me wonder: is this just another way to drive foot traffic as the payments are made?  And if so, is there anything wrong with that?  Layaway, it occurs to me, has financing simplicity of the sort that should make the CFBP dance, so if customers like it, and it prevents consumer debt on excessive interest terms, isn't that a good thing?

Latest Visa Fraud

A heads up regarding the latest in Visa fraud. Royal Bank received this communication about the newest scam. This is hitting the midwest with a vengance and moving. The trick here is that they provide YOU with all the information, except the one piece they want. The callers do not ask for your card number; they already have it.  By understanding how the VISA & MasterCard telephone Credit Card Scam works, you can avoid this one.

Payday Loans and the Tribal Sovereignty Model

Think about what happens when you pit tribal sovereign immunity against effective consumer protection laws. In my view, no one wins. Yet payday lenders are now very actively seeking tribes with whom to partner, in order to get the benefits of tribal sovereign immunity.  As one might expect, the payday lenders make out big and in most cases, the tribes get very little, at least so far.

The Bully Model of Consumer Finance and Litigation

There's a fearful symmetry in the consumer finance world. It's a symmetry of bullies between overreaching financial institutions and plaintiff strike suits, as in both, litigation costs present a ceiling, under which there's a license to overreach. 

What does a bully do?  A bully looks and acts tough and claims things to which s/he isn't legally entitled. But as we all know, if you push back against a bully, the bully is likely to back down; the bully doesn't actually want a fight. We see the bully model of consumer finance and the bully model of plaintiff litigation all too frequently. There's no sense, however, that we'd be better off eliminating both. Instead, interest groups look to eliminate one or the other, when the larger problem is in our adjudicative system, which imposes significant costs and delays substantive rulings. 

Reputational Sanctions in an Age of Internet Manipulation?

A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.  

This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things. 

The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

Learn about Teaching Consumer Law at Houston Law Center May 18-19, 2012

On May 18-19, the Center for Consumer Law at the University of Houston Law Center will hold its sixth bi-annual Teaching Consumer Law Conference. This year’s theme is “Teaching Consumer Law in an Evolving Economy.” I have always enjoyed this conference as it is the only one in the country devoted exclusively to teaching consumer law.  It is designed for those currently teaching consumer law, those interested in teaching, as well as those who just wants to know more about consumer law issues. More than 30 presenters will discuss issues ranging from Fringe Banking, Debt Collection and Advertising, to Foreclosure, Payments and Arbitration.  For example, I will moderate a panel with Max Weinstein of Harvard and fellow blogger Jean Braucher, discussing how to fill unmet need for foreclosure defense through foreclosure defense clinics. There also are several presentations discussing consumer law from an international perspective, as well as discussions of teaching U.S. Housing Policy, foreclosure defense clinics, consumer arbitration, international perspectives, what’s new with the FTC, substantive regulation versus disclosure, and a host of other hot topics.  . Presenters include law faculty, adjunct faculty, and practicing attorneys. For more information and a registration form, go to http://www.peopleslawyer.net/for-the-lawyers.html.  For even more information, call or e-mail Richard M. Alderman, Associate Dean, Dwight Olds Chair, and Director of the Center for Consumer Law, at 713-743-2165 or alderman@Central.UH.EDU.

 

Platform, Infrastructure, Utility?

While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”

There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money--and a challenge for the Credit Slips community.

Cash as Social Infrastructure

Sticker in San Francisco: "Of course it's cash-only, it's the Mission."

Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)

The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

Cash: Killing It, or Building Bridges to It?

Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).

In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.

New Panel Data!

The Fed has just released their data from the 2007-2009 panel Survey of Consumer Finances.  The SCF, conducted every three years, includes hundreds of variables on the assets, liabilities, income, and financial product shopping and utilization of American consumers.  Some questions include "what was the most important factor in your decision to refinance your mortgage?" and "during the past year, have you taken out a payday loan?".  The 2007-2009 panel data set is especially valuable because it offers a picture of household finances before and after the Global Financial Crisis; the 2007 survey respondents were resurveyed in 2009.  There is also a separate 2010 SCF survey, but those data have not been released yet. 

Possible research subjects one might explore with this data set include the relative wealth loss of different racial and ethnic groups, what type of consumers chose different types of mortgage loans and other credit products, and how financial product choice interacted with changes in consumer finances as the crisis unfolded.

The Fed staff's own summary of the data is here.  The paper describes wealth losses by wealth category and geographic region, but not by race or ethnicity.

Principal Reduction and Strategic Default

Moral hazard, moral hazard, moral hazard....  How often have we heard that as a reason for why principal reductions can't be done.  As if it were the worst thing in the world.  

As an initial matter, we don't have to do principal reduction in a way that creates moral hazard, such as making principal reduction contingent on default and no strings attached. (To put it another way, we don't have to be stupid about the way we do principal reduction.) One solution would be principal reductions contingent on level of negative equity, not on default. Another would be to offer principal reductions only to those who have already defaulted (I don't like this because it penalizes those who kept paying, but the point is that it avoids moral hazard inducement). Another possibility would be to make principal reductions contingent upon paymentshared appreciation, which doesn't have to be a 50-50 split. Instead, it could be that initial appreciation goes all to the lender and then it starts to shift to the borrower. 

But let me suggest something counterintuitive and heterodox. Principal reduction is a case in which we WANT to encourage moral hazard. To understand why, you need to start with the understanding that our goal here is macroeconomic, not moral. The goal is stabilizing the housing market and the the economy, not balancing the moral cosmos and bringing harmony to the Force (not that there's anything wrong with that).

Making principal reduction contingent upon default means that there will be a bunch of people who default just to get the principal reduction. That's a "ruthless" group of people who are quite likely to be strategic defaulters otherwise. They are precisely the people who need to get principal reductions to incentivize them to stay in their homes in order to stabilize the market. We might not like rewarding people who would act opportunistically like this, but if you accept the issue as macroeconomic, not moral, then the results are what matter:  fewer foreclosures and a stabilized housing market.  

Girl Scouts Add Consumer Finance to the Badges

People with young girls may already have heard about this. Girl Scouts has rolled out a few new badges just in time for its 100 year anniversary. The badges have not been changed since 1987. Good bye fashion and makeup, hello Science in Style which covers nanotechnology in fabric and the chemistry of sunscreen. The new badges include thirteen related to financial literacy, that look like this. They include money counts, making choices, money manager, philanthropist, business owner, savvy shopper, budgeting, comparison shopping, financing my dreams, financing my future, on my own, and good credit. The "Financing My Future" badge requires girls to create a plan for paying for college, and the "Financing My Dreams" badge requires demonstrated skill in budgeting. "Good Credit" requires an understanding of the various ways to borrow money and what goes into building a good credit score.

As a daily finance article put it, “most of us understand intuitively that the Girl Scouts of America aren't just about selling cookies. What you might not know is that the green-sashed entrepreneur who preys on your weakness for Thin Mints is also preparing to be your son's boss." That's girl power you can take to the bank!

RDC App for Citibank?

Citibank is running commercials featuring the ability to deposit checks remotely via mobile device, a process known as remote deposit capture. Citi isn't the first retail bank to roll out RDC--USAA, for example, has been doing it for a while, but USAA has almost no branches, so checks have to be deposited remotely by their farflung depositor base.

There's no question that RDC will become a standard retail banking feature over the next few years, but I'm still puzzled how RDC will overcome its fundamental security problem:  multiple deposits of the same check. If I write a paper check to you and you deposit it remotely by sending in an image, you can still deposit/cash the physical check  elsewhere.  And you can, in theory, deposit the same check remotely multiple times. Moreover, the ability to deposit remotely means that check forgers don't need to bother obtaining magnetic ink, etc.  

There are things banks can do to limit the fraud risk, but RDC continues to appear very vulnerable to a coordinated kiting scam or other organized attack. I'm not sure what would prevent my cousin Boris in Odessa from making mass deposits of bogus checks and clearing out a whole bunch of accounts before anyone was the wiser, especially if he used a gang of smurfs.  It'll be interesting to see how long it takes before a bank takes a major loss from a RDC scam, if it hasn't happened already.   

[Updated 2.28.11:  Bob Meara, the leading RDC analyst, makes a very good point in the comments that makes me think I should clarify some points in the post, namely who is at risk with RDC.  The risk I was discussing is the risk of the depository banks, where the checks are deposited.  There is also potential risk for the bank on which the check is drawn, but that is a separate risk.  There really isn't much risk that I see for either honest depositors or honest drawers of checks.  If you didn't write the check, you shouldn't be liable, although there may be some hassle in getting your account recredited from a fraudulent draw.  

Instead, the issue here is the risk to the banks themselves, not to the payor or the payee.  There is a risk that the payor bank pays on multiple presentments of the same check, but as Bob Meara notes in his comment, that's an easy enough risk to address with computer systems that will allow only one payment on the same check number and check amount.  

The real risk is to the depository bank.  Banks have to make funds available per a schedule in Reg CC. The problem is that Reg CC sometimes mandates funds availability before checks have cleared--that is before the depository bank knows that the drawer bank will pay on the check.  Thus, the depository bank might pay out on a check, but be unable to collect.  There are ways to reduce the risk exposure here, such as deposit limits, neural networks looking for errant activity, and faster check clearing via electronic processing. (One wonders why check clearing hasn't become real time in most cases...) But the basic problem still remains--banks have to make funds available before they always know if they can collect on the check.  A smart fraudster will try and determine which checks will take the longest time to clear (my guess is that it means checks drawn on small banks) and try to clean out the funds made available before the depository figures out that the check has bounced. ]

Credit for Parenthood (in the Wall Street Journal)

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here. 

The Backdrop for BROKE: Consumer Debt Then and Now

In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle Class,  I present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.

In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?

Should the Government or the Market Set Mortgage Down Payments? A New Study

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

American Capitalism: Profit, But Fairly

Adam Davidson wrote up an interesting apologia for Wall Street in the NY Times last week, which I think is ultimately a call for better regulation, rather than bank-hating.  I missed the piece originally, but Yves Smith found it and has nothing good to say about it. I think Yves is a little too harsh on Davidson. I've got issues with parts of the piece, but on different grounds, namely that it efuses to engage on the real issue. The problem isn't financial intermediation.  That's a perfectly fine thing that plays a useful role in society.  

Instead, the problem is when financial intermediaries do not treat the intermediating parties (meaning consumer and investors) fairly. The history of US financial services is nothing short of a history of scandals involving financial institutions variously ripping off investors and consumers. I'm not just talking about those scandals we remember, like Milken or Madoff or the recent slew or even the second tier ones like the Salad Oil scam or all of 1920s mortgage bonds. The history of US financial services is largely a history of unregulated innovation resulting in abuse and then follow-up regulatory reform. Lather, rinse, wash, repeat. 

Davidson argues that the reason to "hate the banks" is that 

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. 

Davidson misses the mark here a bit. It's not just that the banks get bailed out, meaning that the rules of market discipline don't apply to them. It's that the banks frequently break the rules when applied to others.  It's fine to do foreclosures or hostile takeovers or sell consumers speculative securities. But it's not ok to foreclose without following the law or to profit on insider knowledge on hostile takeovers or or to sell investors "safe" assets when you know they are junk.

The fundamental rule of American capitalism is "profit, but fairly." Whatever one thinks is "fair", I don't think there should be much disagreement that Wall Street too often disregards the second part of this dictum to focus on the first. But take away the "but fairly" and society quickly becomes a Gilded Age baronial kleptocracy, a post-Soviet (or pre-Soviet) Russia. If we want capitalism to work--meaning that there is social stability, pace OWS--market players must play by the rules. This is where the debate needs to be focused:  ensuring that our financial intermediaries play by the rules. 

The Consumer Finance Pantheon?

In putting together a revised syllabus for my consumer finance course this semester, I was struck with how different this nascent field is from established courses like Contracts.  No matter what Contracts casebook one uses to teach, there are a bunch of well-established chestnuts that everyone knows:  Hadley v. Baxendale, for example, or Williams v. Walker-Thomas Furniture, Raffles v. Wichelhaus, Frigaliment, Lucy Lady Duff Gordon, Hawkins v. McGee, or Jacobs & Young v. Kent (and one could go on and on).  It's hard to say the same for Consumer Finance; indeed, I've got very few cases on my syllabus. 

I'm curious what Credit Slips readers think are the leading cases in the consumer finance area.

Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy

At the end of a lively session yesterday at Duke Law School featuring Professor Stephen Ware of University of Kansas Law School, there was a brief discussion of whether shorter foreclosure timelines and clearer rules would promote more workouts of delinquent mortgages. The aforementioned paper about bankrupt homeowners suggests that the opposite might actually be the case: among homeowners in bankruptcy, longer foreclosure timelines in their home states were associated with a lower probability of foreclosure initiation while shorter timelines were associated with a higher probability of foreclosure initiation.

What is the Relationship Between Credit Cards and Mortgage Delinquency?

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

BROKE: A New Book on Consumer Debt and Bankruptcy

Just in time for New Year's resolutions on 1) reading more, 2) paring back your own debt, and 3) learning more about consumer bankruptcy to help you do your job (if you are a lawyer, judge, or academic, media, etc), the book, Broke: How Debt Bankrupts the Middle Class was released from Stanford University Press.

The book makes extensive use of the 2007 Consumer Bankruptcy Project data, providing statistics, analysis, and commentary on consumer bankruptcy and debt topics. I edited the volume, and chapter contributors are many Credit Slips regulars or guest bloggers--Jacob Hacker, Bob Lawless, Kevin Leicht, Angela Littwin, Deborah Thorne, and Elizabeth Warren--along with other top scholars.

In the next few weeks, the chapter authors will blog here at Credit Slips about the research featured in the book, but to whet your appetite, I've included a table of contents for the book after the break. The book is accessible to lay readers but its scholarly focus provides plenty of data to educate and surprise even bankruptcy experts. Working on the book, I certainly learned a great deal about timely and important topics such as how pro se debtors (those without attorneys) fare in bankruptcy, where families go after they lose their homes to foreclosure, how bankruptcy affects couple's marriages, and the ways that bankrupt households differ in their financial straits from other households of concern such as those with low assets or late payments on debt. Of course I'm biased but I think the book provides the most comprehensive overview of the consumer bankruptcy system since the enactment of the 2005 bankruptcy amendments.

In or Out of Mortgage Trouble? A Study of Bankrupt Homeowners

This is a newly published paper  in the American Bankruptcy Law Journal that I was lucky to work on with Daniel McCue and Eric Belsky at the Joint Center for Housing Studies at Harvard University. Using previously unexamined data in the 2007 Consumer Bankruptcy Project, we study what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. Although much can be said about the econometric analysis, for now I wanted to mention quickly that the paper includes descriptive details about bankrupt homeowners (debtor-reported) such as numbers of missed mortgage payments, use of adjustable rate mortgages, mortgage broker use, mobile homes, and refinancing or home equity lines of credit. So please check it out!   

Buy Here Pay Here Dealerships

The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.

One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.