postings by Adam Levitin

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.  

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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. 

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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. 

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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.    

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Congressional Review Act Confusion: Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)

posted by Adam Levitin

Part of the legacy of Newt Gingrich and his Contract with America (can I get damages for breach?) is the Congressional Review Act.  The CRA creates a mechanism whereby Congress can override an agency rulemaking on a simple majority vote in both houses, meaning that it is not subject to the filibuster in the Senate. Congress has only used this tool infrequently, most notably with the CRA resolution overriding the CFPB's arbitration rule. 

Some members of Congress have now turned their CRA sights on various regulatory "guidance" that they find objectionable. This guidance is not formally binding and enforceable law, but other sorts of communications from agencies that help regulated entities understand agency expectations, interpretations, and policies. Among this guidance is the CFPB's Indirect Auto Lending Guidance. I suspect that most of the folks who rail against it have never actually bothered to read it. It's a short document. Most of it is spent explaining what indirect auto lending is. In brief, you can get a car loan from a direct lender who makes the loan directly to you or you can get the loan from the dealer. If you get the loan from the dealer, the dealer will typically turn around and sell the loan to the real lender.  (The exception are buy-here-pay-here used car dealers who keep the loans.)  These indirect lenders include captive finance companies of auto manufacturers, but also banks (e.g., Santander has a large business in this space). The indirect lenders compete for dealer business, not for consumer business, and therein lies the problem. The indirect lenders set a "buy rate"--the minimum interest rate and other terms on the loan at which they will purchase it, but then allow dealers to markup the loan above the buy rate (this is the "dealer reserve," which looks an awful lot like the now-prohibited yield spread premiums on mortgages paid to mortgage brokers).  This sets up a situation in which dealers might engage in discriminatory markups in violation of the Equal Credit Opportunity Act. The question is whether the indirect lenders face any liability for such discriminatory markups.  

The CFPB's Indirect Auto Lending Guidance notes that this is a possibility as indirect lenders can potentially qualify as "creditors" under ECOA. The guidance then goes on to say that because there are compliance risks, here are some things that indirect lenders should consider doing as part of their compliance programs.  Critically, the guidance doesn't actually say that the CFPB believes that dealers ar "creditors" under ECOA, only that it is possible that they could be, nor does it require that dealers do anything.

It's not clear if there are the votes in Congress to pass the CRA resolution, but even if there are, there are still a bunch of legal questions about whether such a resolution can validly be passed in regard to the Indirect Auto Lending Guidance and what its impact would be. These are discussed below the break. My short answer is that it is very questionable whether the CRA has any application of the Indirect Auto Lending Guidance and even if it does, it is unlikely to have much impact as it doesn't invalidate ECOA or ECOA enforcement actions against indirect lenders. This then raises the question of why the (GOP) wants to spend political capital pursuing a rather pointless resolution.  

Continue reading "Congressional Review Act Confusion: Indirect Auto Lending Guidance Edition (a/k/a The Fast & the Pointless)" »

Junk Cities: Insolvency Crises in Overlapping Municipalities

posted by Adam Levitin

I have a new paper out on municipal insolvency. It's called "Junk Cities:  Resolving Insolvency Crises in Overlapping Municipalities," 107 Cal. L. Rev (forthcoming 2019).  The paper is co-authored with Aurelia Chaudhury and David Schleicher. The launching point for the paper is the observation that there are frequently overlapping local government jurisdictions--cities, counties, school districts, water districts, park districts, hospital districts, sewer and sanitary districts, forest preserves, etc. These overlapping jurisdictions share a common revenue source--the same set of taxpayers. This means that they have correlated exposure to economic downturns or population declines. It also means that they face a common pool problem in terms of revenue generation, and they frequently lack coordination mechanisms whether formal or informal (such as political "machines").

The correlated economic exposure plus the common pool problem for revenues increases the likelihood of simultaneous financial crises for these overlapping jurisdictions. Chapter 9 bankruptcy, unfortunately lacks the tools to deal with the inter-governmental coordination problem. The techniques used for handling multi-entity debtors in Chapter 11--joint administration, deemed consolidation for voting and distribution purposes, and (in the extreme) full substantive consolidation do not work for municipalities that lack common corporate control and have much clearer separation of assets and liabilities.  Chapter 9 does not currently have the capacity for considering a shared revenue source that is not an asset per se.  Our paper identifies the nature of the overlapping municipal financial crisis problem, discusses why Chapter 9 is inadequate, and proposes a number of solutions ranging from incremental doctrinal improvements in Chapter 9 to the adoption of a "Big MAC Combo" (or perhaps a "supersize Big MAC") mechanism for coordinating the finances of overlapping municipalities. The abstract is below the break. 

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Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough

posted by Adam Levitin

This weekend a mini-scandal erupted over the law firm Munger, Tolles requiring its summer associates to sign pre-dispute arbitration clauses. Munger, Tolles was rightly shamed into rescinding the practice, but one suspects that Munger, Tolles isn't the only firm doing or contemplating doing this. 

I believe law schools have a particular duty to stand up here and protect their students. Law students seeking firm jobs are at an incredibly disadvantage in terms of both market power and knowledge. The students are often heavily leveraged and desperate to land a high-paying job with a large law firm in order to service their educational debt, and even when debt doesn't drive them, a summer associate position at a large firm is often seen as a stepping stone to career success. Law students really have no bargaining power in terms of their contractual relationship with summer employers.  It's take-it-or-leave-it, and leave-it isn't an option for law students.  Law students also lack knowledge about the importance of an arbitration clause in terms of the procedural and substantive rights they will surrender and knowledge about the firm culture they are stepping into and the likelihood it will result in a dispute of some sort (e.g., sexual harassment).  Whatever one thinks of the virtues of arbitration generally, this strikes me as a very clear cut case of pre-dispute arbitration agreements  being inappropriate.  I don't think it's a stretch to call such arbitration provisions unfair and unconscionable both procedurally and substantively.  (Does anyone think the firms are doing this for the summer associates' benefit?) 

I believe that the appropriate response for law schools in light of the situation is to refuse access to on-campus interviewing to any firm that requires its summer associates to sign an arbitration clause. Schools have done this when their students civil rights were being threatened both under don't-ask-don't-tell and in the era when firms would often refuse interviews to women and people of color. The right to have one's grievances heard before a court (including for race and gender discrimination!) is also a civil right.  It is a civil right that is fundamental to the whole endeavor of law schools, and schools should be just as vigilant to protecting their students civil rights in this instance as they have in the face of discrimination. 

Continue reading "Summer Associate Arbitration Clauses: Why Disclosure Isn't Enough" »

Stormy Daniel's Three-Way (Contract) & Donald Trump's Performance Problem

posted by Adam Levitin
I want to return to the Stormy Daniels-Donald Trump-Michael Cohen Three-Way Contract.  It's actually really interesting from a contract doctrine perspective (besides being of prurient interest). The continued media coverage and scholarly commentary seems to be missing a key point, namely that this is a contractual ménage à trois, not a typical pairing. The fact that there are three parties, not two to the contract actually matters quite a bit doctrinally.
 
Let’s start with a point on which I think everyone agrees.  For there to be a contract, there needs to be mutual assent. This assent may be manifested in different ways—it may be manifested expressly, say through a signature, or implicitly, say through performance or, in rare cases, through silence. 
 
The complication we have in this contract is that it is a 3-party contract, not the standard 2-party contract.  That’s a problem because basically everything in contract doctrine is built around 2-party contracts.  Traditional contract doctrine is monogamous and doesn't really know what to do with three-ways, especially when one party has a performance problem.  It's not, for what it's worth, that multi-party contracts are rare--they're not. In fact, they're the common arrangement in corporate finance where a contract will involve numerous affiliates. But traditional contract doctrine developed in an era in which these multi-party contracts were rarer (indeed, look at how the Bankruptcy Code is not drafted with the contemplation of multi-entity debtors!) and there's always been a wink-wink, nod-nod about the separateness of corporate affiliates. 
 

Continue reading "Stormy Daniel's Three-Way (Contract) & Donald Trump's Performance Problem" »

Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck

posted by Adam Levitin

There's been a lot of poorly informed reporting about the Stormy Daniels contract litigation, including in some quite reputable publications, but by reporters who just aren't well versed in legal issues.  For example, I've seen repeated reference to an "arbitration judge" (no such creature exists!) or to a "restraining order" (there's no enforceable order around as far as I can tell.  So what I'm going to do in this blog post, as a public service and by virtue of some tangential connection to our blog's focus, dealing with arbitration agreement (to satisfy Sergeant-at-Blog Lawless), I want to clarify some things about the Stormy Daniels contract litigation and engage in a wee bit of informed speculation based on tantalizing clues in the contract.  As a preliminary matter, though, I apologize for the clickbait title.  

Let's start with the facts as we know them.

Continue reading "Debbie Does Damages: the Stormy Daniels Contract Clusterf*ck" »

Merit Mgmt. Group LP v. FTI Consulting Inc.

posted by Adam Levitin

The Supreme Court weighed in today on one of the the most important circuit splits in the bankruptcy world, namely the scope of one of the section 546(e) safe harbors from avoidance actions in bankruptcy.  Section 546(e) has two safe harbors, one for "settlement payments" and the other for transfers "made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract … commodity contract… or forward contract…”. This latter safe harbor had been read (ridiculously) broadly by some of the courts of appeals, as every non-cash transaction has to go through some sort of financial institution.  Specifically, imagine a transaction in which funds are moving from A to D, but go through intermediary financial institutions B and C:  A-->B-->C-->D.  Can D shelter in the fact that the transfer went through financial institutions B and C?  

The Supreme Court unanimously said no, and I think they clearly got the right result, although I fear the methodology the court used may ultimately be unhelpful for those who think that fraudulent transfer law has an important role to play in policing the fairness of financial markets and preventing against excessively risky heads-I-win, tails-you-lose gambles.  

Continue reading "Merit Mgmt. Group LP v. FTI Consulting Inc." »

How S.2155 (the Bank Lobbyist Act) Facilitates Discriminatory Lending

posted by Adam Levitin

If you think it's ridiculous that the CDC can't gather data on gun violence, consider the financial regulatory world's equivalent:  S.2155, formally known as the Economic Growth, Regulatory Relief, and Consumer Protection Act, but better (and properly) known as the Bank Lobbyist Act.  S.2155 is going to facilitate discriminatory lending. Let me say that again.  S.2155 is legislation that will facilitate discriminatory lending. This bill functionally exempts 85% of US banks and credit unions from fair lending laws in the mortgage market.  Support for this bill should be a real mark of shame for its sponsors. 

Continue reading "How S.2155 (the Bank Lobbyist Act) Facilitates Discriminatory Lending" »

Wacky Warehouse Lien Scam

posted by Adam Levitin

The US Trustee's office just prevailed in a sanctions case against a law firm with a most creative fee scam.  To oversimplify (and leave out certain other issues of bad behavior), the law firm steered debtors who owned cars in which they had zero equity into an arrangement in which the debtor's car would be towed for an (unpaid) fee by an affiliated firm and then stored in Indiana. The existing auto lender would never be notified of any of this. The affiliate would then assert a warehouseman's lien for the unpaid fee and foreclose on the car, and use the sale proceeds to pay back the fee and pay the debtor's bankruptcy filing fee to the law firm, with the auto lender getting nothing. 

Continue reading "Wacky Warehouse Lien Scam" »

Financial Education Isn't Consumer Protection

posted by Adam Levitin

The CFPB is out with its Strategic Plan for FY 2018-2022, also known (without any apparent irony) as The Five Year Plan.  Lots to chew on in this doozy, starting with this:

If there is one way to summarize the strategic changes occurring at the Bureau, it is this: we have committed to fulfill the Bureau’s statutory responsibilities, but go no further. Indeed, this should be an ironclad promise for any federal agency; pushing the envelope in pursuit of other objectives ignores the will of the American people, as established in law by their representatives in Congress and the White House. Pushing the envelope also risks trampling upon the liberties of our citizens, or interfering with the sovereignty or autonomy of the states or Indian tribes.

I've written about envelope pushing and Mick-Mulvaney-Think previously, but there's two new things here.  First there's the claim that going beyond the Bureau's statutory responsibilities violates the will of Congress.  (Note the unusual addition of "the White House" to the formulation.)  Narrowly that's uncontroversial, but the way Mulvaney-Think approaches the Bureau's statutory responsibilities, if there isn't a statutory clearly and directly prohibiting something, then there's no prohibition. Standards-based regulation is gone, even if that is exactly what Congress (and the White House when the bill was signed into law) demanded.

Second, there is a curious solicitousness for the rights of states and Indian tribes.  The CFPB has never previously been accused of trampling the rights of states, but the inclusion of states is all the more confusing given the Bureau's newfound commitment to protecting the sovereignty of Indian tribes. The only relevance of Indian tribes to the CFPB is that a few of them partner with "fintechs" in rent-a-tribe schemes to avoid state regulation, particularly state usury laws. It would seem that upholding state sovereignty and rights would require cracking down on rent-a-tribe schemes; the idea that a tribe has immunity for commercial activities extending outside of tribal lands is clearly wrong--were it so all of federal law could be subverted. It looks like someone forgot to remove the "states rights" talking point from the usual GOP talking points deck because someone didn't realize that it conflicts with the new tribal rights talking point.  Oops.  

But let's turn the the actual plan itself, not just the opening rhetoric. I'm only going to focus here on item number 1:  more financial education. This might qualify as Worst. Consumer. Protection. Idea. Ever. 

Continue reading "Financial Education Isn't Consumer Protection" »

Bankruptcy's Lorelei: The Dangerous Allure of Financial Institution Bankruptcy

posted by Adam Levitin

I have a new (short!) paper out, Bankruptcy's Lorelei:  The Dangerous Allure of Financial Institution BankruptcyThe paper, which builds off of some Congressional testimony from 2015, makes the case that proposals for resolving large, systemically important financial institutions in bankruptcy are wrongheaded and ultimately dangerous. At best they will undermine the legitimacy of the bankruptcy process, and at worst they will result in crash-and-burn bankruptcies that exacerbate financial crises, rather than containing them.  The abstract is below.

The idea of a bankruptcy procedure for large, systemically important financial institutions exercises an irresistible draw for some policymakers and academics. Financial institution bankruptcy promises to be a transparent, law- based process in which resolution of failed financial institutions is navigated in the courts. Financial institutions bankruptcy presents itself as the antithesis of an arbitrary and discretionary bailout regime. It promises to eliminate the moral hazard of too-big-to-fail by ensuring that creditors will incur losses, rather than being bailed out. Financial institutions bankruptcy holds out the possibility of market discipline instead of an extensive bureaucratic regulatory system.

This Essay argues that financial institution bankruptcy is a dangerous siren song that lures with false promises. Instead of instilling market discipline and avoiding the favoritism of bailouts, financial institution bankruptcy is likely to simply result in bailouts in bankruptcy garb. It would encourage bank deregulation without the elimination of moral hazard that produces financial crises. A successful bankruptcy is not possible for a large financial institution absent massive financing for operations while in bankruptcy, and that financing can only reliably be obtained on short notice and in distressed credit markets from one source: the United States government. Government financing of a bankruptcy will inevitably come with strings attached, including favorable treatment for certain creditor groups, resulting in bankruptcies that resemble those of Chrysler and General Motors, which are much decried by proponents of financial institution bankruptcy as having been disguised bailouts.

The central flaw with the idea of financial institutions bankruptcy is that it fails to address the political nature of systemic risk. What makes a financial crisis systemically important is whether its social costs are politically acceptable. When they are not, bailouts will occur in some form; crisis containment inevitably trumps rule of law. Resolution of systemic risk is a political question, and its weight will warp the judicial process. Financial institutions bankruptcy will merely produce bailouts in the guise of bankruptcy while undermining judicial legitimacy and the rule of law.

English v. Trump Amicus Brief

posted by Adam Levitin

Slipsters/Slips Guest Bloggers Kathleen Engel, Dalié Jiménez, Patricia McCoy and I submitted an amicus brief (with numerous other co-signors) to the DC Circuit in support of appellant Leandra English in English v. Trump, which, despite its caption is not about assault and battery, but about who is the rightful acting Director of the CFPB.  We believe that the text, legislative history, and order of enactment of the relevant statutes makes clear that the Consumer Financial Protection Act, not the Federal Vacancies Act control.  We further argue that there are particular problems with the OMB Director serving as the acting Director of the CFPB given that OMB has certain oversight roles vis-à-vis CFPB, but is also in other case specifically precluded from exercising control over CFPB.  

The Bootstrap Trap

posted by Adam Levitin

I just had the pleasure of reading Duke Law Professor Sara Sternberg Greene's paper The Bootstrap Trap.  I highly recommend it for anyone who is interested in the intersection of consumer credit and poverty law.  The paper is chok full of good insights about the problems that arise when low-income households strive for the goal of self-sufficiency, which results in the replacement of a public welfare safety net with what Professor Sternberg Green describes as a private one of credit reporting and scoring systems.  The paper shows off Professor Sternberg Greene's training in sociology with some amazing interviews, particularly about the perceived importance of credit scores in low-income consumers' lives.  

Other respondents referred to their credit reports or scores as “the most important thing in my life, right now, well besides my babies,” as “that darned thing that is destroying my life,” and as “my ticket to good neighborhoods and good schools for my kids.” Many respondents believed that a “good” credit score was the key to financial stability.

One respondent, Maria, told a story about a friend who was able to improve his score. She said, “He figured out some way to get it up. Way up. I wish I knew what he did there, because I would do it. Because after that, everything was easy as pie for him. Got himself a better job, a better place to live, everything better.” Maria went to great lengths to try to improve her score so that she, too, could live a life where everything was “easy as pie.”

Credit scores have become a metric of self worth and the perceived key to success.  

Continue reading "The Bootstrap Trap" »

Mick-Mulvaney-Think

posted by Adam Levitin

A couple of weeks ago there appeared a remarkable memo written by Mick Mulvaney (who claims to be the Acting Director of the CFPB) to the CFPB staff. The Financial Institutions practice group at Davis Polk, one of the top financial institution practices nationwide, seems to have elevated the ideas expressed in the memo into what one might call “Mick-Mulvaney-Think.”

The basic idea behind Mick-Mulvaney-Think is “a deep commitment to the rule of law as a philosophical concept and as an important brake on agency discretion in the administrative state.” In other words, agencies should not undertake any discretionary actions, but only enforce clear violations of express statutory prohibitions. There are two problems with this idea.

Continue reading "Mick-Mulvaney-Think" »

House Financial Services Fintech Hearing

posted by Adam Levitin

This Tuesday I'm going to be testifying about "fintechs" before the House Financial Services Committee's Subcommittee on Financial Institutions and Consumer Credit.  My written testimony on this impossibly broad topic is here.  It contains lots of good stuff on the so-called Madden Fix bill, "true lender" legislation, data portability, federal money transmitter licensing, small business data collection, and the need for a general federal ability-to-repay rule.    

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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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