Just posted: Other Judges' Cases

This article has been in the works a long time. During the Detroit bankruptcy, I wrestled with some of its topics on Credit Slips.  

The case studies involve bankruptcy. The mediators in those cases are life-tenured judges.

The footnotes make it long; the text is short.  

Other Judges' Cases remains in the edits stage and is scheduled to be published later this year.  

Please read it. Thank you!

The Miscalculations Underlying Miller & Zywicki's Payday Loan Paper

Earlier this month Professors Todd Zywicki and Thomas Miller, Jr. wrote an op-ed in the Wall Street Journal arguing against payday loan regulation, based on their new empirical paper. Miller & Zywicki wrote:

Our findings will startle the rule writers at the CFPB. Contrary to the research cited in the CFPB’s 2017 rule, which claimed that “loans are almost always made at the maximum rate permitted,” we found that neither fees paid nor loan amounts inexorably rose to maximum allowable levels when those allowable levels were reasonable.

The implication is that there must be price competition among payday lenders with supply and demand setting prices, vitiating the need for regulation.

The problem is that Miller and Zywicki have incorrectly calculated the maximum fees permitted in numerous states. They wrongly assume that the effective rate charged for the first $100 of credit also applies to higher amounts. In fact, in many states, there is either a tiered, decreasing rate or a rate plus a flat fee included in any loan. As a result, Miller & Zywicki calculate the maximum permitted fees as being substantially higher than they in fact are in every state in which they find lenders are not pricing up to the legal limit.

Once this error is corrected, Miller and Zywicki’s figures actually confirm a truth that has long been obvious to anyone who has ever looked at payday loan pricing: there is no price competition, as lenders virtually always price up to the legal limit.

If my (lengthy) analysis below the break is correct, Professors Miller and Zywicki ought to retract both their op-ed and their paper. This is the sort of error for which op-eds and research papers are properly retracted. While Professors Miller and Zywicki might be opposed to payday regulation on ideological grounds, they surely do not want to base their claims on erroneous calculations of state fee caps.

PSLF update

At last report, the US Education Department has discharged 38,000 student loans under the limited waiver program to increase Public Service Loan Forgiveness approvals. US ED does not report comprehensive data, but piecing together several reports, this looks to be out of perhaps 800,000 to 900,000 total applications since 2017. In November 2020 there had been 227,000 applications, of which fewer than 6,000 were approved. From November 2020 to September 2021, borrowers submitted 678,000 applications, and 11,600 were approved (PSLF and TEPSLF).  The waiver program began in October 2021, and the 38,000 figure was reported in mid-December 2021.

In short, the 2% approval rate has been boosted to 5% to 10% (the denominator is hard to determine.) According to the September 2021 report, the vast majority of denials before the new waiver program (80%) were people either in non-qualifying FFEL repayment or some other non-repayment status (forbearance or deferment) for part of the ten-year period. The waiver should permit most or all of those denials to be reversed. So if you were turned down for PSLF before October 2021, send in an application under the waiver program. It is currently set to expire in October 2022.

Professionals Must Now Disclose Their Interests in the PR Cases

President Biden has just signed the "Puerto Rico Recovery Accuracy in Disclosures Act of 2021’’ or ‘‘PRRADA’," which requires professionals to make chapter 11-style disclosures when they file fee applications in the PROMESA title III cases. Failure to comply not only can result in loss of fees in the Puerto Rico cases, but such failure to disclosure must also be disclosed in other chapter 11 cases going forward. Presumably the prior failure to comply with statutory disclosure requirements should factor into the decision to authorize retention in chapter 11.

The Blurring of Tech and Finance

I have an op-ed in ProMarkets about how Apple leverages control of the iPhone's NFC chip to push the dominance of its platform into new areas that let it hoover up more consumer data. The NFC (near field communication) chip is what lets the iPhone do contactless payments for ApplePay.  Apple strictly controls access to the NFC chip--it doesn't let AndroidPay use it, for example. But the NFC chip's uses extend beyond payments.  Apple is now using it to let the iPhone operate as a car key and a hotel room key. The catch? If you're a car manufacturer or hotel and you want this cool technology to work with your product, you're going to need to share some of the consumer data with Apple. 

What we're seeing here is an example of the increased blurring between tech companies and financial services companies, tied together by troves of consumer data.  This is a development that ultimately challenges the traditional regulatory boundaries of FTC and CFPB and is going to raise all sorts of issues for antitrust, consumer protection, and data privacy for years to come.

A Better Way to Deal with Student Loan Debt

My Georgetown colleague Jake Brooks and I have an op-ed in Politico about the best way to address the student loan debt problem. We argue that existing proposals for outright student debt relief, whether $10k, $50k, or everything, are problematic, at least standing on their own, particularly because they fail to address the student loan problem going forward. Instead, we see income-driven repayment (IDR) plans as a key part of addressing the problem. 

Clauses and Controveries: From Commercial Bank Loans to Blue Bonds

Mark Weidemaier and Mitu Gulati

After a short hiatus (we like to say we are between seasons), the Clauses and Controversies podcast has resumed. This week's episode, From Commercial Bank Loans to Blue Bonds, features Antonia Stolper from Shearman & Sterling:

Sovereign debt markets have evolved significantly over the years, from syndicated bank loans, to bonds, to the current infatuation with ESG lending. Antonia Stolper (Shearman & Sterling) joins us to talk about the evolution of sovereign debt practice over the course of her eminent career. We also talk about Belize's recent debt restructuring, where some say creditors agreed to significant additional reductions in exchange for promises by Belize to invest the savings in environmental conservation projects. Antonia helps us understand what actually happened in this deal and what its implications might be for future sovereign restructurings.

New Year, New Data in Your Credit Score

During 2021, reports from the CFPB and consumer advocates spotlighted the role of credit scoring in people's financial growth or stagnation and decline. These reports emphasized racial and ethnic disparities in credit scores and in complaints about errors in credit reports. Congressmembers introduced three draft bills aimed at improving credit reporting. Given the problems with traditional credit reports and scores, along with barriers to access to credit and other opportunities faced by the credit invisible, the idea of alternative credit scoring was raised repeatedly last year -- in reports, news stories, and in the draft bills. Seemingly in reaction, starting now, Experian is adding data about "buy now, pay later" loans to credit reports. Soon after Transunion announced that it was “well on [its] way” to including the same data.

Sara Greene and I have a new paper about credit reporting and scores, "Credit Scoring Duality," that focuses on the benefits and potential problems of adding alternative data to credit scoring models. Adding more data to credit scores, at first, may seem appealing. More data = better, more accurate scores? However, the use of this alternative data will not necessarily make the credit invisible or people with low credit scores more attractive. Much of the additional data proposed suffer from the same demographic disparities as the data already incorporated into credit scores. That is, in general, the people supposedly helped by inclusion of alternative data are likely to perform below-average on these inputs. Beyond replicating already present disparities, Greene and I worry that pointing to alternative credit scoring as a solution will distract from larger, systemic issues that are shown by disparities in credit scores. For more details, see our draft paper.