postings by Adam Levitin

The Second Circuit Got It Right in Madden v. Midland Funding

posted by Adam Levitin

Professor Peter Conti-Brown of the Wharton School has written a short article for Brookings decrying the Second Circuit’s 2015 Madden v. Midland Funding decision. Professor Conti-Brown doesn’t like the Madden decision for two reasons. First, he thinks its wrong on the law. Specifically, he thinks it is contrary to the National Bank Act because it "significantly interferes" with a power of national banks—the power to discount (that is sell) loans. Second, he's worried about Madden from a policy standpoint both because he fears that it is unduly cutting of access to credit for low-income households and because he thinks it is reinforcing the large bank’s dominance in the financial system and impairing the rise of non-bank “fintechs”. I disagree with Professor Conti-Brown on the law and think that attacking Madden is entirely the wrong way to address the serious policy question of what sort of limitations there ought to be on the provision of consumer credit. As for fintechs, well, I just don't see any particular reason to favor them over banks, and certainly not at the expense of consumers.  

Continue reading "The Second Circuit Got It Right in Madden v. Midland Funding" »

Plan Optionality: Extreme Edition (A Pick-Your-Own-Adventure Restructuring with Shopko)

posted by Adam Levitin

I've seen some Chapter 11 plans that include some optionality, such as allowing the debtor, based on subsequent market conditions or litigation outcomes to undertake a transaction or change the way a class is paid.  Such optionality has always troubled me because I don't think a disclosure statement can provide "adequate information" in the face of debtor optionality--a hypothetical investor might understand that the debtor has options A or B, but the uncertainty about which option will be selected makes it hard to make an "informed judgment about the plan":  the investor might like option A, but dislike option B--without knowing the likelihood of A or B, how can the investor make such an informed decision?  To be sure, it is possible to get two disclosure statements approved, one for option A and one for option B, but then creditors would be able to vote separately on each plan, rather than voting on a plan that gives the debtor optionality.  

A disclosure statement I looked at today, however, takes such optionality to an extreme I've never previously seen.  Specifically, Shopko's proposed disclosure statement is for a plan that "contemplates a restructuring of the Debtors through either (a) a sponsor-led Equitization Restructuring or (b) an orderly liquidation under the Asset Sale Restructuring."  As explained:  

The Plan includes a "toggle" feature which will determine whether the Debtors complete the Equitization Restructuring or the Asset Sale Restructuring. The Plan thus provides the Debtors with the necessary latitude to negotiate the precise terms of their ultimate emergence from chapter 11.  

In other words, what is being disclosed is "we might liquidate or we might reorganize, our pick."  The plan has, of course, two separate distributional schemes, depending on which restructuring path is chosen.   I really don't get how such a single disclosure statement for a single plan with optionality can be approved given the huge difference between these two paths.  A creditor can't know what outcome it is voting on and might like one, but not the other.  Maybe others have seen this move before, but I suspect this will be a first for the Bankruptcy Court for the District of Nebraska.  

P2P Payments Fraud

posted by Adam Levitin

AARP has a nice piece (featuring yours truly) about the consumer fraud risks with peer-to-peer (p2p) payment systems like Zelle and Venmo.  

Both Zelle and Venmo expressly state in their terms of use that they are not for commercial use, yet there is certainly a healthy segment of their use that is commercial.  Some of it is sort of "relational" commercial--paying a music teacher or a barber--someone whom the payor knows, so there's a social mechanism for dealing with disputes and which protects against fraud.  But there is also some use for making commercial payments outside of a relational context--paying for goods purchased on the Internet--and that is very vulnerable to fraud.  

I wish p2p payments systems would do a bit more to highlight to consumers their prohibition on commercial use, including flagging the fraud risk, but I suspect that they have no interest in doing so--while the systems disclaim commercial use, they nonetheless benefit from it, and have little reason to discourage it.  

Nonpartisan Supreme Court Expansion

posted by Adam Levitin

My latest argument for a substantial nonpartisan expansion (i.e., not a partisan "packing") of the Supreme Court, which would require the Court to sit in randomly assigned panels, is up on Bloomberg Law.   Among other benefits, it would enable the court to hear more cases, so the bankruptcy world might finally rid itself of some of the lingering circuit splits (e.g., equitable mootness or actual vs. hypothetical test for assumption). 

Senate Banking Committee Testimony on Housing Finance

posted by Adam Levitin

I'll be testifying on Tuesday at a Senate Banking Committee hearing on housing finance that is focused on Chairman Crapo's reform outline.  My written testimony may be found here.  Suffice it to say, I'm skeptical.  I argue that a multi-guarantor system is a path to disaster and that the right approach is a single-guarantor system with back-end credit-risk transfers.  Oh wait, we already have that system in all but name.  The system has been totally reformed since 2008.  So why are we looking to do anything major with housing finance reform?  Hmmm.  

Restatement of Consumer Contracts—On-Line Symposium

posted by Adam Levitin

The Yale Journal on Regulation is holding an on-line symposium about the draft Restatement of the Law of Consumer Contracts, which is scheduled for a vote at the American Law Institute's annual meeting this May.  The launching point for the symposium are a pair of articles in JREG that take sharp issue with the empirical studies that underlie the draft Restatement.

The American Law Institute (ALI) is a self-appointed college of cardinals of the American legal profession.  It's a limited size membership organization that puts out various publications, most notably "Restatements" of the law, which are attempts to summarize, clarify, and occasionally improve the law.  Restatements aren't actually law, but they are tremendously influential.  Litigants and courts cite them and they are used to teach law students.  In other words, this stuff matters, even if its influence is indirect. 

The draft Restatement of Consumer Contracts is founded on a set of six quantitative empirical studies about consumer contracts.  This is a major and novel move for a Restatement; traditionally Restatements engaged in a qualitative distillation of the law.  Professor Gregory Klass of Georgetown has an article that attempts to replicate the Reporters' empirical study about the treatment of privacy policies as contracts.  He finds pervasive problems in the Reporters' coding, such as the inclusion of b2b cases in a consumer contracts restatement.  

A draft version of Professor Klass's study inspired me and a number of other advisors to the Restatement project to attempt our own replication study of the empirical studies of contract modification and clickwrap enforcement.  We found the same sort of pervasive problems as Professor Klass.  While the ALI Council completely ignored our findings, we wrote them up into a companion article to Professor Klass's.  

Some of the pieces posted to the symposium so far have been focused on replication study methodology (sort of beside the point given the very basic nature of the problems we identified) or defenses of the Reporters including mixed statutory-contract decisions in their data sets (which is no defense to inclusion of b2b cases or duplicate cases or vacated cases, etc.). But Mel Eisenberg has contributed an important piece that highlights some of the substantive problems with the draft Restatement, namely that it guts consumer protections.  For example, it would require findings of both procedural and substantive unconscionability for a contract to be unconscionable, while many states only require substantive unconscionability. Not surprisingly, I am unaware of any consumer law expert (other than the Reporters) who supports the project.  

But this thing that should really be a wake up call that something is very, very off with this Restatement project is the presence of outside opposition, which is virtually unheard of in the ALI process.  Every major consumer group (also here, here, and here), weighed in in opposition as well as 13 state attorneys general (and also here), and our former co-blogger (and also former ALI Vice-Chair), Senator Elizabeth Warren.  Nor has the opposition been solely from consumer-minded groups.  The US Chamber of Commerce and the major trade associations for banking, telecom, retailers, and insurers are also opposed (albeit with very different motivations).  Simply put, it's hard to find anyone other than the Reporters (and the ALI Council, which has a strong tradition of deference to Reporters) who actually likes the draft Restatement.  

So, if you're an ALI member, get informed.  If you know an ALI member, make sure that s/he is informed.  This is coming for a vote in May and if enacted would be bad policy, based on the legal equivalent of "junk science."  This isn't what the ALI should be doing.  

Is SB 901 Constitutional?

posted by Adam Levitin

PG&E filed a notice that it was preparing to file for bankruptcy in around 15 days.  Companies don't usually make this sort of announcement willingly; it's an invitation to a creditor run.  PG&E filed the notice because it's required to under a recently enacted California law, SB 901.  SB 901 requires public utilities to file notice of changes of control at least 15 days in advance, and "change of control" is defined to include filing a bankruptcy petition.  That strikes me as really problematic--it is a state law conditioning and interfering with the exercise of a federal right.  (Imagine how this would work with a financial institution bankruptcy process...)  I can't believe that the law would hold up if challenged.  Yet PG&E filed the notice.  Maybe there's just not a meaningful run possibility for a power utility.

Credit Bidding and Sears

posted by Adam Levitin

The Sears' auction is a really valuable teaching moment, I think (and perfectly timed for the start of the semester)—does Sears have going concern value that merits a sale of substantially all assets as a going concern, or is an immediate liquidation the value maximizing move?  

I don't have an opinion on that issue, but something strikes me as rather strange about ESL's bid for a sale of substantially all assets.  Very little of the now $5B in consideration offered is cash, less than 20%.  Instead, a large chunk is in the form of debt assumption and another large chunk is in the form of a credit bid.  It's the credit bid that looks odd to me.  ESL seems to be trying to credit bid three different loan facilities, including a second lien facility.  Here's the thing--ESL should only be able to credit bid against its collateral and then only in the amount of its collateral. I don't know what exactly is covered by the liens on each of the facilities, but I suspect that the assets being sold include things that are not covered by the liens. That would seem to create a Free-Lance Star problem for ESL.  And then there's the problem of the valuation.  In order to know what ESL can credit bid, we need to know to what extent it is secured.  To wit, consider a second lien facility.  If the collateral is worth $100 and the first lien debt is for $80 and the second lien debt for $30, the second lien debt shouldn't be able to credit bid $30 because it would only recover $20 from the sale in foreclosure.  The second lien's credit bid should be capped at $20.

Continue reading "Credit Bidding and Sears" »

Federal Student Loans and the Shutdown

posted by Adam Levitin

Is the Department of Education doing anything to assist furloughed federal employees with federal student loan obligations?  Federal contractors with such obligations?  You'd think that ED might instruct its servicers to treat delinquencies for furloughed federal employees and contractors differently than regular delinquencies.  That would be the right thing to do.  

SCRA and the Coast Guard in the Shutdown

posted by Adam Levitin

The Coast Guard apparently briefly had some advice for furloughed guardsmen that included "Bankruptcy is a last option."  The leaped out at me as strange.  What about the Servicemembers Civil Relief Act, a special act that provides protection for active duty military members and their dependents against collection actions?  Shouldn't SCRA hold creditors at bay, such that they don't need to consider bankruptcy for the foreseeable future?

Continue reading "SCRA and the Coast Guard in the Shutdown" »

The Implication of Reasonable Consumers Not Reading Contracts of Adhesion

posted by Adam Levitin

A final installment to this evening's blog storm (you can tell that I'm procrastinating on exam grading...).

The Consumer Financial Protection Act prohibits "unfair" acts and practices.  "Unfair" is defined as an act or practice that causes or is likely to cause substantial injury to consumers, that is not reasonably avoidable by consumers, and the harm of which is not outweighed by benefits to consumers or competition.  

Now consider that the reasonable consumer does not read prolix contracts in detail.  The reasonable consumer might look at a top-level disclosure, say the Schumer Box for a credit card, or maybe the TRID for a mortgage, but I don't think it's controversial to say that the reasonable consumer isn't going to get into the fine print that follows.  The reasonable consumer isn't going to bother doing this because (1) the consumer might not understand the fine print, (2) the consumer can't negotiate the fine print, and (3) the consumer knows there's a good chance that all of the competitors have similar or worse fine print, so a search for better fine-print terms is might be futile (and might come at the expense of worse top-line terms).  Only a fanatic or a masochist reads every line of a cardholder agreement.

If I'm right that a reasonable consumer doesn't bother reading the details in contracts of adhesion, then notice what the "unfairness" prohibition is doing:  it is requiring that the terms of the contract be substantively fair.  Any hidden tricks or traps, like the double cycle grace period language I highlighted in my previous post, are going to be unfair.  Add in the prong of "abusive" that deals with taking unreasonable advantage of consumers' lack of understanding, and I think the Consumer Financial Protection Act is effectively requiring that consumer finance contracts must be "conscionable" or else have all of the tricks and traps made very clear to the consumer.

That's actually pretty remarkable. That's a light year beyond prohibiting "unconscionable" contracts.  It's an really affirmative fairness requirement for contract terms. It's also exactly what it should be.  Contracts should be a mechanism for mutual (subjective) welfare enhancement, not for one party to hoodwink the other. I wonder how many compliance lawyers are looking at consumer finance contracts in light of the fact that a reasonable consumer doesn't read fine print.  They should be.  

A final thought:  where does this leave arbitration agreements?  Arguably they fall into the problem unfair and abusive category (although there may be some argument about consumer benefit).  Yes, the CFPB's arbitration rulemaking was overturned by the Congressional Review Act.  But the rulemaking was undertaken under a specific power.  Query whether that prevents a rulemaking that is substantially the same under the UDAAP power.  No one really knows.  

UDAAP Violation in BofA Credit Cardholder Agreements?

posted by Adam Levitin

Heads up Kathy Kraninger:  you might want to look at whether Bank of America is engaged in an unfair or abusive act or practice in its credit cardholder agreements.  Here's the deal.  

The Credit CARD Act of 2009 prohibits so-called "double cycle billing" on credit cards:

Prohibition on double-cycle billing and penalties for on-time payments.  ...[A] creditor may not impose any finance charge on a credit card account under an open end consumer credit plan as a result of the loss of any time period provided by the creditor within which the obligor may repay any portion of the credit extended without incurring a finance charge, with respect to—

(A) any balances for days in billing cycles that precede the most recent billing cycle; or

(B) any balances or portions thereof in the current billing cycle that were repaid within such time period.

The prohibition in clause (A) is on calculating the average daily balance to which the APR is applied based on balances other than in the current billing cycle.  That was the practice of double cycle billing:  the average daily balance was the average of not just the current billing cycle but of the current and previous billing cycles.  So even if you had no charges this billing cycle and had paid off the balance, you'd still have a positive average daily balance because of the previous month and thus pay interest.  

The prohibition in clause (B) is supposed to get at "trailing interest"—no interest should accrue on balances to the extent they are paid off on time.  If you charged $100, but repaid $90 on time, you should only be paying interest on $10, not on $100.  But notice how it's drafted. It only applies if there is a loss of a grace period; there is no grace period required.   If there is no grace period, you can be charged interest on the $100, even if you repaid $90 on time.  

So consider, then, this term from Bank of America's current credit card holder agreements:

We will not charge you any interest on Purchases if you always pay your entire New Balance Total by the Payment Due Date. Specifically, you will not pay interest for an entire billing cycle on Purchases if you Paid in Full the two previous New Balance Totals on your account by their respective Payment Due Dates; otherwise, each Purchase begins to accrue interest on its transaction date or the first day of the billing cycle, whichever date is later.

Did you get that?  You only have a grace period allowing for interest-free repayment if you have paid in full the two previous billing cycles.  Otherwise, you're going to be charged interest even if you pay the current cycle's balance in full.

Continue reading "UDAAP Violation in BofA Credit Cardholder Agreements?" »

Are Convenience Check Loans Underwritten to Ability-to-Repay?

posted by Adam Levitin

In my previous post, I complained that convenience check loans weren't underwritten based on ability-to-repay.  That's not to say that there's no underwriting whatsoever.  But it's important to recognize that prescreening for direct mailing for convenience check loans is not the same as underwriting the loans based on ability-to-repay.  For example, Regional Management, on the companies that offers convenience check loans says in its 10-K that:

Each individual we solicit for a convenience check loan has been pre-screened through a major credit bureau or data aggregator against our underwriting criteria. In addition to screening each potential convenience check recipient’s credit score and bankruptcy history, we also use a proprietary model that assesses approximately 25 to 30 different attributes of potential recipients.

That's dandy, but a credit score is a retrospective measure of credit worthiness. It doesn't say anything about whether a borrower has current employment or income, and it doesn't generally capture material obligations like rent or health insurance.

Continue reading "Are Convenience Check Loans Underwritten to Ability-to-Repay?" »

Usury 2.0: Toward a Universal Ability-to-Repay Requirement

posted by Adam Levitin

There's bi-partisan legislation pending that would prohibit the practice of installment lenders sending out unsolicited live convenience check loan:  you get an unsolicited check in the mail.  If you cash it, you've entered into a loan agreement.  

The debate about check loans has turned on whether consumers understand what they're getting into.  The legislation's sponsors say consumers don't understand all the terms and conditions, while the installment lender trade association, the American Financial Services Association, argues that there's no problem with live check loans because all the terms are clearly disclosed in large type font.  

This debate about consumer understanding and clarity of disclosure totally misses the point.  The key problem with check loans is that they are being offered without regard for the consumer's ability to repay.  For some consumers, check loans might be beneficial.  But for other they're poison.  The problem is that check loans are not underwritten for ability-to-repay, which is a problem for a product that is potentially quite harmful.  Ability to repay is the issue that should be discussed regarding check loans, not questions about borrower understanding.  Indeed, this is not an issue limited to check loans.  Instead, it is an issue that cuts across all of consumer credit.  Rather than focus narrowly on check loans, Congress should consider adopting a national ability-to-repay requirement for all consumer credit (excluding federal student loans).  

Continue reading "Usury 2.0: Toward a Universal Ability-to-Repay Requirement" »

No One Wants to Serve on House Financial Services?

posted by Adam Levitin

The Washington Post reports today that many of the incoming Democratic freshman representatives do not want to serve on the House Financial Services Committee, traditionally a plum assignment because it facilitates representatives' ability to fund-raise for their reelection.  I'm proud to say that the member-elect who is proudly bucking the trend is our former co-blogger, Katherine Porter, and I can confidently say that her interest in the committee has nothing to do with fund-raising and everything to do with its jurisdiction.  

There are a lot of good reasons an incoming member might not want to serve on HFS--the member might have expertise or interest that more closely tracks the jurisdiction of another committee.  But I worry that the lack of interest also reflects a really problematic trend on the left. While many progressive politicians like to decry abuses in the financial services industry, they often have little to no understanding of the industry and aren't interested in gaining one.  The industry and its regulation are complex.  Its often not as intuitively understandable as, say, issues of criminal justice reform.  But its consequences are at least as far-reaching, both because all Americans depend on financial services and because of the influence of financial services on the whole political process.  Any politician who is concerned about social inequality ought to be deeply engaged with financial regulation.  It's not the low-hanging fruit, perhaps, but it's where the future of the middle class will be decided.  

Sadly, this phenomenon isn't limited to progressive politicians.  It's endemic on law school faculties.  I recall several years ago hearing colleagues bemoaning the financial crisis foreclosure crisis, but having absolutely no clue about what led up to it and what was contributing to it.  They did, however, have lots of strong normative views on methods of Constitutional interpretation.  The irony here is that my colleagues very much understand that dry, technical legal rules can have enormous social consequences.  But they prefer to engage primarily with social justice, rather than economic justice issues, even though the two are intimately linked.  I suspect this is part of the general phenomenon of the legal academy having disengaged with its traditional bread-and-butter---commercial law.  But it meant that much of the progressive establishment was asleep at the wheel (if not financially co-opted) when financial deregulation occurred in the 1990s and 2000s. 

To be sure, there's a small cadre of progressive thought-leaders and politicians (most notably some of our former co-bloggers) who have taken the time to understand the financial system in depth, and they've contributed in an out-sized manner to financial regulatory debates.  But the fact remains that most progressives don't want to touch financial and commercial regulation.  And we're all the worse off for it.  

Expanding the Supreme Court to Depoliticize It

posted by Adam Levitin

I've got an op-ed in The Hill that calls for an expansion of the Supreme Court as a way to depoliticize it.  And to be clear, I'm not calling for Court-packing by Dems.  That would only require adding a couple of seats.  I'm calling for a major structural change in the Court—an expansion plus a shift to sitting in panels.  And I'm perfectly fine if the majority of the initial picks went to President Trump, as I think that the structural change would be very healthy for the Court and the political process, and with a larger Court, there will be much more frequent turnover among Justices.  

I'm sure my proposal will be some skepticism (to say it lightly), whether because folks think this is a barely closeted Court-packing scheme (but why bother with this when there's a much simpler way to pack the Court), or because they somehow think that there's something sacred or efficient about 9 Justices (clearly those folks have never been to a SCOTUS oral argument, but I suspect those are also the same folks with the naive idea that judges ever merely apply the law as written).  

Yet, I think a SCOTUS expansion is coming in any future Democratic administration for a very simple reason:  Republicans overplayed their hand and upset the basic equilibrium of the Court.  Democrats were far from happy with the Court before Trump, but the Court was basically a wash:  it made both Dems and Reps unhappy on certain issues.  As long as no side overreached, the Court was able to maintain a level of legitimacy.  If the Court now veers right, that will be lost, and all bets are off about preserving its current form.  There are lots of ways the Court could be remade; I'm trying to find one that creates a healthier judicial system.  And note that it only takes 50 votes in the Senate, not a Constitutional amendment, to expand the Court, but that it can't be dialed back without vacancies or a Constitutional amendment.  

For Cause Removal of the CFPB Director?

posted by Adam Levitin

Mick John Michael Mulvaney's callow pursuit of a CFPB name change raises an intriguing question:  what should be done with a CFPB Director who spends all of his or her time showboating with political issues rather than actually carrying out the law?  

The CFPB Director is removable only for cause, as the PHH case confirmed. Back with Richard Cordray was Director, Republicans reportedly were attempting to assemble a dossier to justify his for-cause removal.  In the case of Cordray, the gist of the allegations was that he overstepped his authority by daring to issue non-binding regulatory guidance about indirect auto lending or was profligate in the renovations of the CFPB's 1960s-era headquarters building. But here's the thing.  The "for cause" removal statute has actual statutory language, and it does not explicitly include either overstepping authority or profligacy.  Instead, it covers "inefficiency, neglect of duty, or malfeasance in office."  There's some imprecision in these words, but the statutory language seems aimed at failure to act, rather than over-zealous action.  This interpretation makes sense because the courts are available to prevent against over-zealous actions, but only the President can take care that the law is in fact faithfully executed.  

As long as Donald Trump is President, the for cause removal language is of little importance.  Kathleen Kraninger is about to be confirmed as the CFPB Director, and her five-year term will extend past 2020, which means she might potentially serve under a Democrat President's administration.  If Kraninger operates similar to Mulvaney, focusing on things like the name of the agency and internal restructuring designed to undermine the agency's effectiveness, rather than on carrying out the agency's mission, that "for cause" dismissal language could actually have some bite.  

Let me be clear.  Historically, for cause dismissal has never been used.  I am unaware of any past case approving the actual for cause dismissal of an agency head (but let me know if I missed one).  Yet I think the implicit political rules have changed over the last few years such that this is no longer something that is beyond the Pale.  If Kraninger follows in the footsteps of Mulvaney, then at the very least, a Democratic President in 2021 would have a credible threat of for cause removal of Kraninger (and there would certainly be political pressure for the President to act).  This counsels for Kraninger to take a more energetic approach to carrying out the CFPB's statutory mission than that pursued by Mr. Mulvaney, who has gotten hung up on the statutory name and political headlining at the expense of the agency's mission

The Cost of the CFPB Name Change

posted by Adam Levitin

Mick John Michael Mulvaney's wanted to change the CFPB's name to the Bureau of Consumer Financial Protection (BCFP), and indeed, the Bureau has already changed its signage and the name it uses on some of its communications.  But the name change has not had full effect yet, and it is now reported that it would not only cost the CFPB more than as much as $19 million, but it could cost regulated firms as much as $300 million.  

It's worth comparing that $300 million cost to industry for Mulvaney's vainglorious renaming project to the funds that the Bureau has recovered from wrongdoer's on Mulvaney's watch.

Continue reading "The Cost of the CFPB Name Change" »

Lead into Gold? Sears' Possible Post-Petition Sale of Intracompany Debt

posted by Adam Levitin

Sears is supposedly considering trying to raise liquidity through the post-petition sale of intracompany debt. The details of the debt and the proposed transaction aren't clear, but as a general matter, the post-petition sale of intracompany debt (or Treasury stock) seems problematic to me as with any lead into gold transaction.  Here's the issue:  if the debt is sold, is it still intracompany debt or does it become general unsecured debt? 

The viability of Sears' strategy depends on the answer to this question.  If it is still intracompany debt post-sale, it's not going to sell for very much; if it is general unsecured debt, it's much more valuable.  (This is putting aside the weird arbitrage with the CDS settlement auction market that gets warped by the CDS volume exceeding the reference debt volume.) 

In most bankruptcies, intracompany obligations between affiliated debtors are either subordinated or cancelled outright.  Nothing in the Bankruptcy Code compels this, but it's pretty standard. It tends to follow from a separate classification of intracompany obligations (again, not compelled by the Code) and from the difficulty in determining net intracompany obligations--deemed consolidation for voting and distribution is standard operating procedure in large bankruptcies. If the leaden intracompany claims can be transformed into golden general unsecured claims, it's a huge siphoning of value away from other general unsecured creditors.  General unsecured creditors are paid pro rata on their claims, so an increase in the size of the general unsecured claim pool dilutes recoveries on the debt.  

So would a sale of intracompany obligations transform them into arms' length obligations?

Continue reading "Lead into Gold? Sears' Possible Post-Petition Sale of Intracompany Debt" »

Matthew Whitaker as a Mini-Trump?

posted by Adam Levitin

It seems no surprise that President Trump has named Matthew Whitaker as Acting Attorney General:  it turns out that he's a Mini-Trump.  There are two rather remarkable parallels to Trump in Whitaker's history.  First, his involvement with the  operation known as World Patent Marketing closely parallels Donald Trump's involvement with the fraud known as Trump University. And second, both have used charities as their own personal piggybanks. Classy.  

Continue reading "Matthew Whitaker as a Mini-Trump?" »

CLO Yawn

posted by Adam Levitin

There's a big story in the NY Times about how the financial structures being used to finance many corporate loans—so-called Collateralized Loan Obligations or CLOs—look very similar to those used to finance mortgages during the housing bubble.  Yup.  That's true. CLOs are a securitization structure, like MBS.  (If you want to know more gory details, see here.)  But that's really where the similarities end.  While the financing transactions are similar, the asset class being securitized is fundamentally different in terms of the risk it presents, and that's what matters.  The financing channel might be more vulnerable to underpricing than other financing channels because of opacity and complexity, but is the underlying asset class that matters in terms of societal impact.  This is for (at least) four reasons. 

Continue reading "CLO Yawn" »

CFPB "Abusive" Rulemaking?

posted by Adam Levitin

Acting BCFP CFPB Director Mick John Michael Mulvaney announced this week that the CFPB would be undertaking a rulemaking to define "abusive," the third part of the UDAAP triad. The CFPB's key organic power is to prohibit unfair, deceptive, and abusive acts and practices.  Unfair and abusive have statutory definitions, whereas deceptive does not, but "abusive" is a new addition to the traditional UDAP duo of unfair and deceptive.  Mr. Mulvaney suggests that a definitional rulemaking is necessary so that regulated entities will know what the law is. 

Actually, it's very clear what "abusive" means, at least as applied by the CFPB to date.

Continue reading "CFPB "Abusive" Rulemaking?" »

Levitin's Consumer Finance: Markets and Regulation

posted by Adam Levitin

I'm very excited to announce the publication of a new book, Consumer Finance:  Markets and Regulation.  The book (also available on Amazon) is the first consumer finance textbook in existence. It's the product of several years of teaching a course I call Consumer Finance.  The course, and the book, largely track the regulatory ambit of the CFPB:  payments, credit, and consumer financial data. 

The book is divided into two parts.  The first part covers the question of "who regulates" consumer financial products and services.  It covers regulation by private law (including arbitration agreements), state regulation, and then spends a lot of time going through the ins-and-outs of the CFPB's rulemaking, supervision, and enforcement powers and specifically UDAAP.  Much of this part of the book is what I think of as "applied" administrative law.  The second part of the book covers specific consumer financial product markets and their regulation: deposits and payments, credit and collections, and financial data.  While some chapters focus on particular products (e.g., auto loans or student loans or mobile wallets), others focus on topics of broader applicability (e.g., usury or fair lending or credit cost disclosure). 

Although the book is marketed as a "casebook," it hardly is.  There are maybe 20 cases in the whole book.  Instead, most of the book is expository material plus non-case materials, such as litigation complaints, regulatory materials, or transactional documents (e.g., arbitration agreements, parts of a deposit account agreement, a uniform note and mortgage).  Each chapter ends with a problem set.  It's possible to teach the book either solely through the problem sets or as a lecture course without the problem sets or some combination thereof.  There's also a handsome companion statutory supplement.

If you're interested in teaching consumer credit policy or electronic payments and data security issues, this is a course and a book for you.  (Don't take my word, however--ask Bob Lawless, who generously taught a draft version of the book last year and is teaching the published version of the book this semester.) 

Continue reading "Levitin's Consumer Finance: Markets and Regulation" »

Levitin's Business Bankruptcy, 2d Edition

posted by Adam Levitin

I'm pleased to announce that the second edition of my casebook, Business Bankruptcy:  Financial Restructuring and Modern Commercial Markets, is now in print and available for purchase from quality establishments such as Amazon

If you haven't used the book, here's the pitch.  It's a financial restructuring book.  (The publisher insists on it being called "Business Bankruptcy" to align with existing course categories.)  My take is that bankruptcy—that is in-court restructuring—is only one part of the financial restructuring picture, and that one really can't understand bankruptcy law very well without understanding first what is and isn't possible in terms of liquidations and restructurings out-of-court.  If you don't know what can be done in terms of restructuring, say bond debt or syndicated loans outside of bankruptcy, it just won't be clear what bankruptcy brings to the table in terms of legal tools.  Thus, the first third of the book is about out-of-court restructuring.  I believe it's the only book around with that sort of coverage of out-of-court restructuring issues, but I strongly believe that students are well-served by this coverage, both intellectually and as preparation for practice, as bankruptcy lawyers don't just do Chapter 11 work. 

Continue reading "Levitin's Business Bankruptcy, 2d Edition" »

Facebook: the new Credit Reporting Agency?

posted by Adam Levitin

Facebook, it seems, has developed a system of rating users trustworthiness. It's not clear if this is just a system for internal use or if users' trustworthiness scores are for sale to third parties, but if the latter, then would sure seem that Facebook is a Consumer Reporting Agency and subject to CRA provisions of the Fair Credit Reporting Act (FCRA).

FCRA defines a CRA as

any person which, for monetary fees, dues, or on a cooperative nonprofit basis, regularly engages in whole or in part in the practice of assembling or evaluating consumer credit information or other information on consumers for the purpose of furnishing consumer reports to third parties, and which uses any means or facility of interstate commerce for the purpose of preparing or furnishing consumer reports.

A consumer report is, in turn, defined as:

any written, oral, or other communication of any information by a consumer reporting agency bearing on a consumer’s credit worthiness, credit standing, credit capacity, character, general reputation, personal characteristics, or mode of living which is used or expected to be used or collected in whole or in part for the purpose of serving as a factor in establishing the consumer’s eligibility for [credit, insurance, employment or government license].
 
Thus, if Facebook is selling information about a consumer's general reputation—trustworthiness—to third parties that might reasonably be expected to use it for credit, insurance, or employment, it's a CRA, and that means it's subject to a host of regulatory requirements as well as civil liability, including statutory damages for willful noncompliance.
 
Facebook is hardly the only tech company that might be a CRA--I've written about this in regard to Google previously.  While Facebook has a bunch of money transmitter licenses and knows it is in the consumer finance space on payments, I suspect it hasn't thought about this from the data perspective.  Indeed, I don't think tech companies think about the possibility that they might be CRAs because we think of CRAs as being firms like Equifax that specialize in being CRAs, but FCRA's definition is broader.  If I collect data on you that I sell to third parties for employment or insurance or credit purposes, I'm a CRA.  Once one plays in consumer data, it's pretty easy to fall into the world of consumer finance regulation. Welcome to a very different Social Network, Mr. Zuckerberg.
 
Update:  Having just read Alan White's post about Thomson Reuters selling data to ICE, it makes me wonder more generally about the applicability of the FCRA to any firm that sells browsing history to parties that use it for credit, insurance, or employment.  I suspect that's a more aggressive of a reading of FCRA than a court would accept, but the statutory language is pretty broad, and perhaps it gets a party to discovery.

MoviePass Bankruptcy Watch

posted by Adam Levitin

The financial travails of MoviePass and its parent company Helios & Matheson caught my eye today. I almost never go to see movies in theaters, so MoviePass was an unfamiliar business to me, but the basic idea is that the consumer pays an upfront subscription fee and then MoviePass provides an unlimited number of tickets for the consumer (although one per show, and more recently with various additional restrictions):  basically an all-you-can-eat buffet model applied to movies.  The buffet model requires the Jack Sprats of the world to subsidize their wives:  those who go to the counter once and get low-cost foods are subsidizing those who make multiple trips for the foie gras, etc.  The buffet model can work for a few reasons. First, there is a limit to how much anyone (except Joey Chestnut) can eat.  Second, people often go to restaurants in groups, which means that there will be some Jack Sprat wives in the mix.  Third, there are sales of other items (drinks, liquor) that can offset the buffet to the extent it's a loss leader.  And fourth, the buffet can be priced high enough that it won't lose too much money.

MoviePass doesn't seem to have many of these factors working in its favor.  People can watch a lot more movies in a month than they can make trips to a buffet table in an evening. There's going to be an adverse selection of heavy users among subscribers, and they don't bring along Jack Sprat wives--the extra business of friends who come to the theater doesn't go to MoviePass, but to the theaters.  And MoviePass doesn't have much in the way of other sale items to offset losses on tickets.  OK, so we've got a really bad business model that will only work if lots of people sign up, but don't actually go to the movies.  This strikes me as different from other subscription models, like gyms.  People are likely to overestimate their likelihood of going to the gym. My guess is that they are much less likely to overestimate how often they'll go to the movies. 

Well, this is all very interesting, but what does it have to do with Credit Slips?  Three things, I think, one dealing with payment systems and secured lending, and the other two dealing with bankruptcy, which seems to be where this is all headed (assuming that MoviePass is not run out of a bankruptcy remote entity). 

Continue reading "MoviePass Bankruptcy Watch" »

Unsolicited, Live Check-Credit

posted by Adam Levitin

The Washington Post has an interesting story about consumer installment lender Mariner Finance.  Three brief observations.

First, Mariner has found an interesting regulatory loophole.  The Truth in Lending Act prohibits the issuance of "live," unsolicited credit cards.  That provision, however, only applies to devices that can be used for multiple extensions of credit, not single use items like a check. So Mariner can mail out live checks to consumers (it presumably prescreens a population to target), without running afoul of the federal prohibition on mailing live, unsolicited credit cards.  That's a  creative way of reaching customers without having an extensive and expensive brick-and-mortar presence.  It also avoids some of the adverse selection problems of internet-based lending.

Second, there is no federal preemption obstacle to states prohibiting the issuance of live, unsolicited checks used to create a credit balance. Mariner seems to be the only major firm doing this, and it doesn't have any preemption argument I can see.  

Third, no one should be shocked that large financial institutions provide the money behind Mariner. Large banks don't do small dollar lending themselves; there are too many regulatory and repetitional issues, but they will provide the financing for small dollar lenders, whether by providing lines of credit or by making equity investments in them. And this has political consequences:  the lobby opposing the regulation of small dollar lenders isn't just finance companies, but also the large financial institutions that are funding them.  Consider how that might affect efforts to close the unsolicited live check loophole on either the federal or state level. 

 

Ohio v. American Express

posted by Adam Levitin

The Supreme Court handed down a disastrous antitrust opinion in Ohio v. American Express.  In a 5-4 opinion the Court's conservative majority held that the district court failed to properly define the relevant market because it looked only at the merchant-side of Amex's business, not the also the consumer side.  The case has far-reaching implications for any so-called "two-sided" markets--basically platform markets that connect buyers and sellers.  Justice Breyer wrote a lengthy and very lucid dissent that tries furiously to cabin the scope of the majority's opinion (explicitly arguing that most of it is dicta).

I'm not going to try to parse through the analysis in the case here, but suffice it to say Justice Thomas's opinion reads like the sort of just-so arm-chair law-and-economic analysis that the academy has largely moved beyond. Justice Breyer scores a lot of points in his dissent.  Damningly, he points out some findings of fact by the District Court that the majority simply wouldn't address, most notably that Amex was able to raise prices 20 times over 5 years without losing appreciable market share and that most of the price increases were retained by Amex, not passed through to its cardholders.  Under any market definition, that should be pretty convincing evidence of an exercise of market power. 

There is also a pretty embarrassing factual mistake in Justice Thomas's opinion.  He writes "Visa and MasterCard earn half of their revenue by collecting interest from their cardholders, Amex does not.”  Visa and MasterCard don’t make ANY money from interest. Their issuer banks do, but their issuer banks are not the networks. If the Court can't get this level of factual description right, it doesn't leave me with much confidence in its ability to parse the economics.

I don't think this ruling completely shuts the door on credit card antitrust litigation, but it makes it harder--plaintiffs will have to plead facts about the consumer half of the card market.  Given that only a fraction of interchange fees actually get passed through to consumers in the form of rewards, I think it's still possible for plaintiffs challenging anti-steering rules to make a case—indeed, I don't see what prevents the state plaintiffs in the case from simply repleading their case, as the decision that now stands is simply that they did not prove their case because they didn't prove market power.  There's no double-jeopardy issue in civil suits, and res judicata here only covers the question of market definition. 

Dunning at the Drive-Thru

posted by Adam Levitin

The CFPB announced the first new enforcement action since Mulvaneyshchina.  It's a settlement with an installment lender, Security Group, Inc. (d/b/a under a lot of different names) over unfair debt collection practices.  We now know just how badly a firm has to behave to get in trouble with the Mulvaney CFPB:  

Screen Shot 2018-06-14 at 12.11.41 PM

If I'm reading this correctly, it sounds as if the debt collectors drove up to drive-thru windows at a fast food restaurants where the consumers worked and dunned them through the drive-thru window.  I imagine it went something like this:  "Where my money, ya lousy deadbeat? Oh, and can I have an Extra Value Meal #2 with a large Coke, please?"  

So now we know:  under the Mulvaney CFPB, there's no dunning at the drive-thru.  And debtor's kids seem to be off-limits too, at least the young ones.  It's good to know that there are still some lines that can't be crossed.    

Continue reading "Dunning at the Drive-Thru" »

The Government-by-Grift Mentality

posted by Adam Levitin

Mick Mulvaney's entirely classless and petty firing of the CFPB's Consumer Advisory Board (CAB) has been amply covered elsewhere. Having served on the CAB from 2012-2015, however, I've got to comment on the statement by Mulvaney's henchman that “The outspoken members of the Consumer Advisory Board seem more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

Put aside that this statement is gratuitously offensive to a bunch of hard working folks who volunteer their time and expertise. The "junkets" I enjoyed from my CAB service involved flying coach with numerous connecting flights, staying at the Days Inn, being transported around in busses, attending full-day working meetings held in windowless rooms at community college campuses in small cities around the US, and then paying for my own dinner. But I sure made out with the free coffee, pastry, and box lunch. 

What's remarkable here is that Mulvaney's flunky believes that people serve in government or on advisory boards for the perks and self-enrichment.  In a world of Pruitt's first class flights, mattress, and security detail, Carson's dining room set, and Mnuchin and his Marie Antoinette jaunting off to see the eclipse on a military flight, not to mention the President and his emoluments plus tax-payer-funded vacations at his Mar-a-Lago timeshare, well, it's just natural to assume that's how everyone operates.  It's a new twist on "government for the people."  It's really sad that it doesn't enter the Mulvaney's dude's head that maybe some of us actually act out of true volunteerism and a desire to make the country a better place. 

OCC Payday Lending Bulletin

posted by Adam Levitin

The Office of Comptroller of the Currency put out a Bulletin this week encouraging banks to make short-term small-dollar installment loans to their customers—basically bank payday loans.  The OCC seems to envision 2-12 month amortizing, level-payment loans, but they're meant to be a payday substitute.  

I suspect many readers of this blog will react with indignation and possibly shock (well, maybe nothing's shocking these days), but I think the issue is more complicated.  Depending on what one sees as being the policy problem posed by payday lending, bank payday lending might make a lot of sense.  Specifically, if one sees the policy issue with payday lending as being its high costs, then bank payday lending (like postal banking) holds out the promise of lower-cost loans. If, however, one sees the policy issue as being about payday borrower’s inability to repay even the principal on their loans, then bank payday lending (or postal payday lending) isn’t a solution at all, but a whitewash. Yet, as we'll see, there's surprising convergence between these positions on the ground in regulatory-land.

Continue reading "OCC Payday Lending Bulletin" »

Illegal Repo Practices

posted by Adam Levitin

The Washington Post has an interesting piece about the coming of big data to the auto repossession world. But of particular note is the end of the article, wherein the repo man profiled says that he will return ransom the defaulted borrower's personal goods found in the car back to the buyer for a $50 flat fee (with child car seats given back for free). 

That's probably illegal. The auto lender's security interest extends only to the car, not to personalty that happens to be in the car (were it otherwise, it would violate the FTC Credit Practices Rule).  So the repo man, as the lender's agent, holds that personalty in the car as a bailment; there's no security interest interest in it.  The repo man can't simply destroy it or throw it away--that'd be conversion, and ransoming it back would seem to be some flavor of tort, making the repo many vulnerable to a trover action (for value) or replevin action (for the stuff itself), as well as a UDAP violation.

Now it's possible that there's contractual language in the loan agreement authorizing a storage and inventory fee or the like. But auto loan agreements aren't standardized and that language won't be in all agreements, so a blanket policy like the one described in the article surely isn't right.

As it happens state law in a handful of states (Connecticut, Florida, Maine) authorizes repo man storage fees, but I can't find anything like that in the Ohio Revised Code.  So the repo's practice looks like it's illegal to me.  

Whether or not anyone's going to litigate over this is another matter--Ohio's UDAP statute authorizes recovery of attorneys' fees, which changes the economics of litigation, and there are statutory damages of up to $5K, so with 25,500 repos last year alone there might be enough dollars at stake for a class action to make sense here (and the statute of limitations should cover more than that), but only if there's a defendant who can pay the damages.  I doubt the repo company has the assets to do so, but perhaps the lenders are liable for the repo man's actions.  And I suspect there are arbitration clauses on most auto loan agreements, so that will, at the very least, shield the lenders and perhaps also the repo man.  

Farewell to Signatures...

posted by Adam Levitin

Here's what all of the commentary I've read has overlooked.  Signatures are utterly irrelevant to consumers except to the extent that the slow down the transaction. (Ok, they also require those germaphobes among us to touch a shared pen when we were doing just great with a contactless NFC transaction). The signature requirement has ZERO effect on consumer liability.  Federal law already limits consumer liability on unauthorized credit card transactions to $50.  But that $50 liability only applies if (1) it is an "accepted card" and (2) the card issuer has provided a means to identify the cardholder, and those limitations mean that consumers are rarely, if ever, actually liable for unauthorized credit card transactions.  Put another way, the statute says $50, but it is basically saying $0.    

Continue reading "Farewell to Signatures..." »

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  • 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.

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