Reverse Mortgage Meltdown ... and Gov't Complicity?

USA Today just came out with an interesting expose about reverse mortgages and their negative impact, especially in low-income, African American, urban neighborhoods (highlighting a few in my backyard here in Chicago). I have long been interested in reverse mortgages, touted in TV ads by seemingly trustworthy spokespeople like Henry Winkler and Alex Trebek as sources of risk-free cash for folks enjoying their golden years, and I am always on the lookout for explanations of the pitfalls. Most of these breathless critiques strike me as overkill, but the USA Today story reveals fairly compelling real stories of a few of the ways in which a combination of financial illiteracy and sharp marketing tactics can lead to bad outcomes ranging from rude awakening (heirs having to buy back their childhood homes) to tragedy (simple missed paperwork deadlines leading to foreclosure and an abusive accumulation of default and attorney fee charges).

One line really jumped out at me. In defense of their seemingly hard-hearted and Emersonian-foolish-consistencies-being-the-hobgoblins-of-little-minds conduct, an industry spokesperson deflects, "lenders would prefer to extend the deadlines for older borrowers but fear violating HUD guidelines." Another bank official chimes in, “No matter how heinous or heartbreaking the case, it’s not our call. There’s no wiggle room,” adding that the stress of being unable to behave in a commercially and morally reasonable manner “takes a toll on employees.” [Yes, the unquoted characterization of the rigid lender behavior is mine, not the bank official's].

"Really??!!," I wondered. I wouldn't put any outrage past the Trump administration these days, but forcing banks to foreclose because an elderly surviving spouse overlooked a single piece of paperwork and is prepared to fix the problem a few days past the deadline strikes me as ... hard to believe. Is the government complicit in these reverse mortgage tragedies because it forces lenders to observe rules and deadlines rigidly? If so, how sad and frustrating, and yet another sign of the failures of our modern political stalemate between rational compromise and hysteria, where the latter seems to be winning on all sides.

The New Bond Thing: Sub Sovereign Masala Bonds?

Bored on my flight into Kerala, India’s southern most state, a few weeks ago, I picked up a newspaper lying on the empty seat next to me.  Most of the news was either about the Indian elections and how the nationalist BJP party had swept to power or about or India’s prospects in the cricket World Cup.  What caught my eye though was a little piece in the back section with a photo of luminaries from Kerala’s Marxist party at the London stock exchange. Kerala, for those who don’t know, has a long tradition of cycling between electing the supposedly anti-market Marxists and their pro-market Congress opponents. But here, I was seeing the Kerala Marxist party leaders at the London Stock Exchange.  My first thought was: This is a gag. Turned out not to be though.  The occasion was a five-year rupee denominated bond issued by Kerala, with a Canadian pension fund as its anchor investor (For more, see here).

The celebration at the London exchange was for Kerala having issued the first ever sub sovereign “masala” bond issue on the LSE.  Masala bonds are rupee-denominated bonds issued overseas (like Dim Sum, Samurai and Yankee bonds) and there are almost fifty of these masalas out there.  This though was the first one ever issued by an Indian state on the international market. I was intrigued for multiple reasons.

First, this was the first international sovereign bond of any variety from post-independence India that I had ever seen.  India has long had an enormous capacity to borrow on the international markets.  But its sovereign entities, state and federal, have staunchly refused tap this capacity until now.   

Second, I’ve long been fascinated by the question of why some countries borrow internationally at both the national and state (or sub sovereign) level (e.g., Spain), and others do their international borrowing only at the national level and effectively constrain the states to borrow from domestic markets (e.g., U.S.).  Here, we appear to have a new third category:  tapping the international market at the state level and not doing so at the national level. 

Third, I had had the vague impression that the Indian constitution barred the states from tapping the overseas markets (the language of the constitution, best I can tell, is not crystal clear on the matter).  And yet here it was: a bond issued by a wholly owned corporation of the state of Kerala (the Kerala Infrastructure Investment Fund Board or KIIFB), fully backed by a state guarantee with a rating from Fitch of BB.

Home Contract Financing and Black Wealth

A remarkable new quantitative study finds that over two decades, African American home buyers in Chicago lost between $3 and $4 billion in wealth because of credit apartheid. The study authors from research centers at Duke, UIC and Loyola-Chicago reviewed property records for more than 3,000 Chicago homes. During the 1950s and 1960s, up to 95% of homes sold to black buyers were financed with land installment sale contracts rather than mortgages. Mortgage loans were largely unavailable due to continued redlining by banks and the Federal Housing Administration (FHA). Instead, a limited group of speculators bought homes for cash and resold them with large price markups to newcomers in the Great Migration. The interest rates for  land installment contracts were several points higher than comparable mortgage loans offered to whites. Thus, black home buyers were overcharged for the home price and the interest rate they paid compared with similar white home buyers. The authors quantify this as a 141% race tax on housing.

Buyers financing homes with installment land contracts also face greater risks of losing their homes and accumulated equity than buyers with a deed and mortgage purchase, for reasons we teach, or ought to teach, in any Property Law or Real Estate class in law school. A missed payment on a land contract can mean quick eviction, while a homeowner behind on a mortgage is protected in many states by foreclosure procedures and redemption rights. More importantly, when a bank, FHA or other lender finances a home, the lender has strong incentives to protect the buyer and itself from defective home conditions or title problems. Those protections are missing from the installment land contract financing structure. The Duke study did not include the cost of premature evictions, home repairs, and title problems experienced by black contract buyers, all of which would further magnify the wealth gap between white and black home buyers. 

St. Petersburg Int'l Legal Forum & Insolvency Forum

I've just returned from a really fantastic conference, the entire recorded proceedings of which are available online and might be of interest to Credit Slips readers. The St. Petersburg International Legal Forum takes place annually in the marvelous city of St. Petersburg, Russia, and nestled within the broader forum is a two-day International Insolvency Forum. The numerous panels for this forum were recorded, both in English with Russian simultaneous translation and in Russian with simultaneous English translation--it was a magnificently well-organized undertaking. The insolvency forum was held on Thursday and Friday (May 16 and 17) in the main auditorium, with an agenda including panels on implementation of a rescue culture in business reorganization (chaired by INSOL Europe), digital technology in insolvency proceedings, enforcement proceedings and involuntary bankruptcy petitions (which included a great introduction to Israel's new personal insolvency procedure by the Official Receiver of Israel, the always impressive David Hahn), consumer insolvency (chaired by a member of the State Duma, and including presentations by a Supreme Court justice and other impressive Russian and foreign experts--this was the panel on which I presented on the sticky issue of financing low-value personal insolvency cases), and asset tracing.

The hosts and attendees of the forum were very grateful for and receptive to the exchange of ideas and opinions from non-Russian experts, and they seem eager to recruit more of this kind of exchange in the coming years. If you're interested in participating and/or presenting in May of next year, please let me know, and I'll coordinate and pass on the info to the organizers. St. Petersburg is an absolutely gorgeous place, and it is a very European-ized Russian city (as was Peter the Great's goal in founding the new capital there in the early 1700s). It has changed dramatically since I lived and studied there in college in the early 1990s; today, it is safe, clean, and easy to navigate, there is English on all the signs, most shop and restaurant employees speak English, and the restaurant scene is accessible, varied, and delicious, to say nothing of the world-class cultural opportunities.  Consider it!

Counting Healthcare Chapter 11 Filings: Are There More Than Expected?

This post is co-authored with my student, Kelsey Brandes, rising 3L, IU Maurer School of Law

Reports of hospitals, physician practices, healthcare systems, and clinics filing for bankruptcy have become seemingly increasingly well publicized in recent years. At the beginning of this year, Pew released a study detailing why rural hospitals are in greater financial jeopardy in non-medicaid expansion states in the wake of the ACA. This may foreshadow more hospital closures and possibly more bankruptcy filings. With this in mind, one of my students at Indiana University Maurer School of Law, Kelsey Brandes (with whom I'm co-posting), decided to survey healthcare businesses that had filed chapter 11 between the beginning of 2008 and the end of 2017 with the goal of assessing how many healthcare businesses filed chapter 11 and why they filed, as based on their disclosure statements and other filings.

This survey found that, after combining jointly-administered cases, on average, 38 healthcare organizations filed per year during the study's ten year period, as shown by year on this graph.

Is Cryptocurrency What Makes Ransomware Possible?

The story about Baltimore's entire municipal IT system being held hostage by ransomware has two angles that might be of interest to Slips readers. 

First, among the services that are affected is the city's lien recordation system (the city is treated as a county; confusingly there is a separate Baltimore county). That means you can't readily get a lien search, and that's gumming up property transactions.  To me this underscores the risk of electronic property records. They are vulnerable to disruption in a way paper is not. One has to worry about fire and water with paper, but we know how to deal with those risks pretty well. Electronic systems are vulnerable in other ways.  Indeed, if a system can be taken hostage, what prevents data from being altered without Baltimore's knowledge?  I don't want to be a Luddite here, but the convenience of electronic systems comes with some scary risks. 

Second, the payment demanded is in Bitcoins. Ransomware seems very dependent upon cryptocurrencies (particularly Bitcoin). Did ransomware even exist before Bitcoin? (That's a serious question. Maybe someone knows.) The only reason to take data hostage is to get paid. But payment is the dangerous moment for the hostage-taker:  if the payment can be traced to the hostage-taker, the long arm of the law can likely get him too.  This means that a bank-based payment system doesn't work well for the ransomware model. Banks are required to "know their customer," and while false fronts can be used that still creates a possible route for law enforcement, as the beard may know who hired him, etc.  Prepaid cards and cash present similar problems because they have to be physically delivered.  But crypto, ah, crypto seems perfectly made for ransomware, particularly when the hostage takers are overseas.     

If I'm right about this, it leaves me wondering first, why there isn't much more stringent regulation of crypto-currency markets for AML? Not all the players can base themselves off-shore. Even if an exchange is in Ruritania, US consumers need to have a wallet provider. Someone's going to be doing business in the US and using a US bank. If the US can squeeze state actors with its AML regime, why can't it similarly squeeze crypto markets into compliance?   

Second, is there any positive social value to crypto currencies? They seem to be used primarily for two purposes:  money-laundering (I'm including ransom payments in this bucket) and speculation.  Other than the occasional odd case, they aren't being used to hedge, for payments, or for any other socially beneficial purpose that I can tell. Maybe I have this wrong, but I'm having trouble seeing why crypto currencies should be tolerated by the law. 

Payday Rule Comments

Because the ALI Consumer Contracts Restatement plus grading hasn't given me enough to do this week, I thought I would gin up some brief comments on the CFPB's proposed repeal of the Payday Rule.  My comments are here.   

Podcast on ALI Consumer Contracts Restatement

I did a podcast for the Consumer Finance Monitor Podcast about the American Law Institute's Consumer Contracts Restatement project.  It's not often that you will see me on the same side of an issue as the podcast's host, Alan Kaplinsky, an attorney at Ballard Spahr who represents financial services firms.  Indeed, I suspect the next time Alan is sitting across a table from me asking me questions, it will be at a deposition.  Given what a great radio voice Alan has, that might almost be fun. But our collaboration on this podcast goes to an important, but hard to understand thing about why both consumer groups and business groups are opposed to the Restatement.  

Both consumer and business groups are uncomfortable with the ALI acting as a private legislature, unchecked by any constituency.  But the real issue is that for consumer advocates, the Restatement is a bad project because it would bind all consumers to contractual terms that they do not agree with or even know about.  

In contrast, the concern for business groups is that the Restatement gives that small subset of consumers who litigate somewhat stronger tools.  These tools aren't strong enough to change the balance of power, but they are enough to be a pain for businesses, specifically a jettisoning of the parol evidence rule (i.e., it doesn't matter what the written contract says, the salesman's representations are admissible evidence) and a contract defense of deception that will apply to some contracts where UDAP would not (again, you've gotta worry about the sales rep's communications).  In other words, the concerns here aren't symmetrical, so this is not a situation where the Restatement is a moderate neutral position.  It's bad for all consumers, and it creates more litigation problems for businesses without creating meaningful consumer protections.   

 

ALI Consumer Contracts Restatement--More Problems with the Legal Research

More problems are emerging with the legal research underlying the American Law Institute's Consumer Contracts Restatement project.  The Consumer Contracts Restatement has been the subject of scholarly criticism for a while because of its novel quantitative empirical approach (case counting).  The Restatement stands on six empirical studies of consumer contracts.  While the current draft claims that these studies merely serve as confirmation for the Restatement's positions, which were supposedly arrived at through the traditional method of reading and distilling the law from the cases, all of the early drafts of the Restatement said nothing about this traditional method and only relied on the empirical studies, which now conveniently arrive at exactly the same positions.  

The first two scholarly works to examine the legal research underlying the Restatement were one by Professor Gregory Klass at Georgetown Law and another by yours truly with seven other ALI members.  These studies were basically looking for "false positives"--cases claimed to be relevant by the Restatement that aren't.  Both studies found an incredibly high rate of false positives--over 50% in some instances.  The Restatement had included in its case count, among other things, completely irrelevant cases, such as business-to-business cases, cases not involving common law contract disputes, duplicate cases, and vacated cases.  These types of errors were pretty shocking in what should be a document based on unimpeachable legal research.  A nice summary write-up of these studies by Professor Martha Ertman can be found over at JOTWELL (the Journal of Things We Like Lots).  

Now Professor William Widen at the University of Miami has done some digging on the Restatement's treatment of pay-now, terms-later contracts. Professor Widen's preliminary research has found that there's also a false negative problem--the Restatement has missed a number of state Supreme Court cases, many of which are contrary to its position.  Additionally, the Restatement seems to have missed a substantial number of state Supreme Court cases that make clear that providing "notice" in consumer contracts means actual knowledge, not merely notional notice.  In short, there is increasing evidence of serious problems with the legal research underlying the Restatement, both false positives and false negatives.  My sense is that with more time, research will adduce even more false negatives.  Given that the ALI likes to present itself as the gold standard of legal research, these problems should give ALI membership pause when considering approving the Restatement.  

ALI Consumer Contracts Restatement-What's at Stake

The American Law Institute's membership will vote next Tuesday (the 21st) on whether to approve the ALI's Consumer Contracts Restatement project.  Let me recap why you should care about this project:  it opens the door for businesses to use contract to abuse consumers in basically any way they want.  The Restatement would do away with the idea of a "meeting of the minds," as the touchstone of contract law for consumer contracts, and allow businesses to impose any terms they want on consumers, even if the consumers are unaware of the terms and haven't consented to them.  

Under the proposed Restatement, a consumer would be bound by any and all of a business's standard form terms if the consumer (1) assented to a transaction, (2) had notice of the terms, and (3) had a reasonable opportunity to review the terms.  In other words, the consumer would not actually have to know or agree to any of the terms to be bound by them.  The Restatement would replace meaningful assent with a legal fiction of notice.  That opens the door to consumers being deprived of all sorts of rights by contract, starting with arbitration, but then going on the privacy rights and continuing to disclaimer of warranties, etc.  If you think I'm being paranoid, go look at Walmart.com's Terms of Use. Few, if any, of those terms exist when you buy something from Walmart at a storefront, but the cost of larding on an extra term on the Internet is so low, that there's no reason for a business not to bury its whole Christmas wishlist in linked on-line terms and conditions.  

The Restatement strangely believes that courts will somehow police abuses of contract through unconscionability and deception, but this presumes (1) that consumers will litigate in the first place, and (2) that courts will stretch these constrained doctrines to prevent the enforcement of not just outrageous terms, but also quotidian unfair terms.  Do I have a nice bridge to sell you in Brooklyn if you think that's a trade-off that will help consumers....

A bipartisan group of 23 state Attorneys General has recently written publicly opposing the Restatement. That sort of opposition is unprecedented and is a sign that something is seriously amiss with the project. 

So, if you know an ALI member, urge them to attend the Annual Meeting session and vote against the Restatement!

ALI Engages in Cheap Intimidation Tactics in Its Attempt to Ram Through the Consumer Contracts Restatement

As Credit Slips readers know, I've been fighting the American Law Institute's Consumer Contracts Restatement project for several years.  I think it started with good intentions, but it's unfortunately turned into a remarkably anti-consumer project.  The ALI has accused yours truly of a copyright violation for making the draft Restatement available through Dropbox to other ALI members in the context of a link in a letter urging those ALI members to vote against the Restatement.    

ALI's actions on this are the pettiest sort of bullying to try and quash the "vote no" campaign against a project that would seriously harm consumer rights.  ALI filed a DMCA takedown notice with Dropbox that resulted in Dropbox preventing me from sharing all my files, not just the one file in question. (Damages, damages...) ALI even went so far as to freeze me out of its website, which prevented me from reading comment letters about the draft or filing motions to amend it.  

Fortunately, there's a good way to deal with bullies, and that's get a lawyer.  ALI restored my website access after hearing from my righteous copyright counsel, and has in fact since made the draft Restatement publicly available, even while still insisting (on a completely factually misinformed basis, but ALI never bothered to ask me) that what I did was somehow outside of fair use and refusing to rescind the DMCA takedown notice. It's become clear that ALI desperately needs to finish its Restatement of Copyright so it can understand how fair use actually works.    

The fact that ALI is making the draft publicly available now just shows what nonsense its claim was—it was nothing but a cheap intimidation tactic. ALI ought to be ashamed for acting this way. Is this kind of thug behavior really how the nation's preeminent law reform organization rolls?