Book of the Year

Credit Slips readers are invited to share the best credit/finance book of this year. The book can be a monograph, fiction, textbook, anything. It doesn't have to be published this year; just that you found it this year.

My nomination is Evicted by Matthew Desmond. It's an ethnography of evictions in Milwaukee and compellingly describes the problems of financial distress. The book describes how tenants struggle to make rent, and the strategies used by landlords, with the help of the courts and sheriff's department, to collect if they cannot. The site for the book contains amazing photographs-- check it out.

While the book focuses on evictions for nonpayment of rent, the foreclosure crisis also wreaked havoc on millions of lower-income Americans who may never own a home. When the property owner was foreclosed upon, the tenants found themselves on the street. The scarce and uneven protections available led to the enactment of the Protecting Tenant at Foreclosure Act. That law expired two years ago, leaving at-will tenants in about half of states vulnerable to eviction immediately after foreclosure.

Evicted describes the heartache that comes with home loss: the strain on family relationships, the mental anguish, the physical illness, and other harms. These problems are all too familiar to those who study consumer bankruptcy, but Desmond's work is a powerful story of financial distress that ensnares families who cannot make ends meet.

Thanks to Gary Neustadter

Credit Slips was fortunate to hear from Professor Gary Neustadter of Santa Clara Law this month on consumer credit issues.

He identified several emerging issues, including a serious weakness in  California's homestead exemption. What I enjoyed so much about his post was his analysis of not just the law, but also the credit market and how various GSE policies shape it.

His post on the delivery of consumer bankruptcy services wove together the best of the thinking on the deployment of technology in legal services, and the context-specific research on how people in financial distress. He imagines how the work of Credit Slips occasional Dalie Jimenez on paper-based self-help resources could be delivered digitally. The result would push the edges of how we think about legal practice.

We hope to have Gary back soon and appreciate his contributions!

Welcome to Guestblogger Gary Neustadter

Credit Slips is delighted to welcome first-time guest blogger, Professor Gary Neustadter. A renowned innovative teacher, Professor Neustadter  specializes in debtor-creditor law, contracts, consumer protection, and legal practice. His classic work, When Lawyer and Client Meet: Observations of Interviewing and Counseling Behavior in the Consumer Bankruptcy Law Office, is a must-read, particularly worth revisiting as the nature of legal practice changes in the last decade driven by BAPCPA and the technology.

His new article, Randomly Distributed Trial Court Justice: A Case Study and Siren from the Consumer Bankruptcy World, is one of the most exciting pieces of scholarship that I've had the pleasure of reading. Gary offers all those interested in civil justice and economic rights a rare window directly into the justice system. While the picture that he portrays is far from pretty, his article approaches the effect of great art: it challenges us to question our assumptions and our perspectives.

Welcome, Gary, to Credit Slips. We look forward to your insights.

Remembering Alan Resnick

One of the hardest things about teaching, whether in an informal setting or in a classroom, is telling someone that they are . . . ahem, WRONG. Or at least not right. Or could use improvement. Or there is an opportunity to improve. Something like that. . . . Professor Alan Resnick, a beloved bankruptcy scholar and practitioner, had a gift of helping others improve their work. He would generously and gently offer suggestions, always making those around him feel hope that the could improve. Whenever one worked with Alan, they felt profound gratitude that the bankruptcy world had his intellect and commitment.

Alan had a remarkable talent for drafting legislation, rules, and statutes. When I tried my hand at writing a simple amendment to a statute a few years ago, Alan reviewed my work. Rather than sending me a tangled redline that would have at least temporarily crushed my spirit, he picked up the phone, and kindly offered to "support" my effort. He spent hours that day teaching me considerations in drafting. Put another way, Alan rescued me from sure disaster. Over his 40 years of service to the bankruptcy world, his keen eye and amazing knowledge of bankruptcy law prevented hundreds of instances of poor drafting. This was not mere technical work. Alan's insight, which he passed along to those he taught and knew, was that any good idea could fail if the written law did not accurately and fully capture the idea. He truly was the guardian of the written Bankruptcy Code and Bankruptcy Rules.

Alan Resnick passed away on July 28 of complications from multiple myeloma. I lost a close family member to this cancer, and I find comfort in knowing that Alan undoubtedly brought his incredible spirit and optimism to battling this disease. Alan's family continues to work to find a cure for multiple myeloma.

We at Credit Slips welcome comments remembering Alan, as a person and a professional. I especially remember his laugh, which lightened many intense debates about bankruptcy policy.  Anyone who was lucky enough to hear Alan talk about the drafting mess of BAPCPA, the bankruptcy reform in 2005, observed both his passion for bankruptcy's purpose of a fresh start and his ability to find humor in a dark time. His memory reminds us to keep perspective and keep fighting the good fight. May he rest in peace, and may we honor Alan's memory by continuing to urge Congress to remedy every misplaced comma, incorrect cross reference, and hanging paragraph in the Bankruptcy Code that limits help for struggling families and failing businesses.

Return of the RAL

It's tax time, and here comes another Porter blog post about refund anticipation loans (RALs). I've written several times before about RALs, but was given a reprieve the last few years by changes in policy that made them nearly extinct. (See here for Slipster Nathalie Martin's post on that development in 2011).

But RALs are proving as hard to kill as a zombie--or as difficult as effectively regulating payday loans, as scholars from JJ White to Chris Peterson to Nathalie Martin have noted. RALs are back and "free." Or that is the pitch, as Kevin Wack reports in the American Banker (subscription req'd.) The new RALs work like this: the lending bank charges a fee of $35 or so for each approved loan to the tax preparers. The preparers are forbidden by contract from passing that cost along to borrowers. Hence, the loan is free to consumers. There is no fee and no interest charged. But of course nothing stops the tax preparer from raising fees across the board or for certain kinds of taxpayers who are most likely to pursue an RAL--such as those receiving an earned income tax credit. The consumer groups have pushed back. They note that tax preparation fees are often opaque already and consumers do not receive a final cost until the end making it difficult to be sure that preparers are hewing to their promises to not pass along RAL fees charged by lenders.

It'll be interesting to see if RALs regain a big hold in the marketplace. In the early 2000s, over 10 million taxpayers paid to get their own money back sooner. In the last few years, that number had dropped to about 30,000. While one would think that direct deposit, efile services, and computer tax software would all be pushing against the RAL market making a comeback, I predict RAL numbers are back in the millions by 2020 unless regulators change course again.

Recheck the Math on Reverse Mortgages

Tara Twomey is just a keen observer of the consumer finance world, and she recently alerted me to a trend. Reverse mortgages are being aggressively hawked as a valuable financial planning tool, and the media is picking up the story. Even the reverse mortgage industry rag is excited at its publicity rash. While I'm all for consumer finance journalism, these articles often report on studies that bear little resemblance to most Americans' situations.

First a quick definition of reverse mortgages: a loan secured by a home that pays the homeowner money based on accumulated home equity with loan repaid in the future. In its most straightforward form, the homeowner gets a lump sum of cash and must repay the loan when she dies (presumably out of the proceeds of the house that is sold upon her death.)  Reverse mortgages are a complex product marketed specifically to older Americans. (If you doubt the complexity, read Tara's great article that ponders how a reverse mortgage should be treated in a homeowner's bankruptcy.) Precisely for this reason, FHA requires counseling for its reverse mortgage, called a Home Equity Conversion Mortgage (HECM).

While we can hope that homeowners receive adequate information and make fully-informed decisions, the chatter about reverse mortgages is starting out their inquiry into reverse mortgages with some questionable math. The problem isn't the math itself, of course, but the assumptions. In a typical example featured in these stories, the couple owns a $400,000 home and has retirement savings of $1 million. Yeah, you read that right--tax-deferred, non-social security retirement savings of a cool mil'. Reality: about one-third of Americans have no retirement savings/pension at all. Even among those in the 55-64 year age bracket, one in five has zero dollars in retirement savings. Zero--to state the obvious--is a long way from $1 million. Even after excluding those with no savings,  the typical account balance of near-retirement households was only $104,000. Again, a long way from $1 million.

Long ago, when Elizabeth Warren was building support for the CFPB, she argued there needed to be a dedicated "cop on the beat" for consumers. Check out the press release, CFPB Study Finds Reverse Mortgage Advertisements Can Create False Impressions, for evidence that the CFPB is hard at work in educating consumers. While its study identified more fundamental confusion about reverse mortgages, those attracted to the financial promises in reverse mortgage research or ads should check the math against their own means.

California Cracks Open the Court Doors for Foreclosed Homeowners

As California Monitor, my staff and I fielded tens of thousands, probably hundreds of thousands, questions from homeowners. The hardest conversations were the easiest from a legal perspective. If someone's home was foreclosed in California, we advised there was little, if any, likely recourse. The California Homeowner Bill of Rights created a new remedy for consumers, but for homeowners before its January 2013 effective date, the options were nearly nil.

The California Supreme Court, in a decision that surprised many, staked out a clear right for homeowners to contest in court whether the foreclosing party had proper rights in the mortgage to allow it to foreclose. In Yvanova v. New Century Mortgage Corp, the court reversed the Court of Appeals and remanded to allow the plaintiff to present her action alleging wrongful foreclosure. The court was careful to stay away from the merits, making no ruling on whether the plaintiff could prove the assignment was void. But, I this the court engaged in a bit of chicanery in declaring that its "ruling in this case is a narrow one." Yvanova is a big change from the developing body of lower court cases in California denying a borrower standing to file a claim based on violations of the the terms of a pooling and servicing agreement. 

The LA Times story identifies a number of open questions that must be answered to know if any homeowners will actually win damages in wrongful foreclosure cases based on pre-Homeowner Bill of Rights' actions. For one thing, the statute of limitations for wrongful foreclosure is uncertain in California--partly because the state has had so few cases. While I think the court is correct on the law in Yvanova, the wheels of justice may have turned too slowly to help people. As a case study, the opinion may best be used as evidence of the importance of faster, legislative remedies for consumers such as the Homeowner Bill of Rights over developing the common law. The opinion is well-done, however, and merits a read, particularly for its quotation from the Miller opinion: "Banks are neither private attorneys general nor bounty hunters, armed with a roving commission to seek out defaulting homeowners and take away their homes in satisfaction of some other bank's deed of trust."

Lessons on Puerto Rico Bonds from the Financial Crisis

With a fiasco as big as the financial crisis, one of the only positive outcomes is there are a lot of lessons for the future. As Credit Slips thinks about how the administration might influence the resolution of Puerto Rico's bond problems, I think there are a few points from the financial crisis to consider.

First, and foremost, is the importance of explaining the issue. Particularly in times of crisis, the explanation/education end of things tends to be pushed to the back of policymakers. "Action" is favored over explanation, but ultimately if the public does not understand what is at stake and the administration's goals, the White House and others quickly have to waste time on the defensive or retreat into silence. Neither strategy helps the problem. One need only look at all the calls to audit or disband the Federal Reserve Board in the wake of the crisis actions around Bear Stearns to see the long-term problems that come from policy without a good public relations campaign. If you need another example, read this great and short piece by William Sage, called Brand New Law! The Need to Market Health Care Reform.

Second, lawyers are fairly lousy at administration. They negotiate hard but the practicability of getting relief is not their strength. We can take a lot of blame for this as law school professors, in that we should teach skills in organizational behavior, project management, etc, especially for those interested in policy. With the financial crisis, the problem was not that the HAMP loan modification term was too stingy or bad on its substance. The problem was severe delays and tangles in rolling out the relief. Jean Braucher has an excellent piece--the title, Humpty Dumpty and the Foreclosure Crisis, gives away the punchline. Whatever is done with respect to Puerto Rico needs to be efficiently administered. In this regard, I think the involvement of seasoned chapter 11 bankruptcy lawyers is a great development. These lawyers are used to being keenly focused on administrative costs in an insolvency situation, and provide a much needed counter-perspective to traditional Washington policymakers. I think if more consumer bankruptcy lawyers had been consulted during the design of HAMP and similar Making Homes Affordable programs, those programs could have been more consumer-friendly, using where people stumble in bankruptcy to identify likely obstacles in obtaining a loan modification (such as submitting paperwork and describing one's own financial situation accurately).

Third, and finally I think the financial crisis reminds us not to get lost in the billions of dollars at stake and the high finance concepts. Behind every bond, there are real people--investors, Puerto Rican residents, taxpayers, and others. The quality of a solution to Puerto Rico's financial problems is not a Wall Street issue; it is a Main Street issue.

Puerto Rico Bondholders: Fact and Fantasy

When I think about "bondholders," I tend to think about their lawyers. (That probably says a lot about the crowds that I run in). In the case of Puerto Rico, we've seen affable, whip smart, expensively dressed New York lawyers make cogent arguments against many of the bond restructuring proposals. But these lawyers are not the bondholders themselves, who are a much more diverse lot. While the hedge funds may be voicing many of the arguments via their fancy attorneys, there is a large, and and largely silent, bondholder community of Puerto Rican residents. The number that I've seen for the share of bond debt held by residents is 40%, although it is difficult to validate this, and it almost surely varies depending on the bond issuer, bond vintage, and other factors. Thomas Mayer estimated to Congress that $15 billion in PR bonds are held by Puerto Ricans (this works out to a lower figure than the 40% share it's still hefty).

In the public debate about Puerto Rico's fiscal crisis, people have noted that the debt is widely held across the country--that this is not "just" a Puerto Rico issue. PR bonds were given tax-advantaged status, regardless of the bondholder's place of residence. But that  does not mean that residents of Puerto Rico themselves--for either fiscal or civic reasons--are not an important group of bondholders. Their concerns about a bond default and willingness to restructure may be quite different than hedge funds or institutional investors. Why? And how might this affect the Administration's interest--or taxpayers' interest generally--in a workout for bondholders?

That OTHER Consumer Agency: Why the FTC remains important

Since the launch of the CFPB, we haven't blogged as frequently at Credit Slips about the Federal Trade Commission (FTC). It remains hard at work, and in fact, I think has used some of the shift of some of its responsibilities to the CFPB to focus on a number of cutting edge issues. For example, their conferences and reports on big data analytics are top notch.

Chris Hoofnagle, UC Berkeley, has written an excellent book about the FTC and its approach to privacy. In part, it is an institutional history, using the FTC Act's passage and the advertising cases of the 1960s and 1970s to understand how and why the FTC is approaching privacy concerns today. The digital economy, the socialization and personalization of consumer finance, and alternative scoring algorithms all present new questions for privacy law. His thoughts on how the FTC developed in reaction to troubling applications of the common law are particularly useful in thinking about how courts might interpret new issues created by CFPB regulations. Business practitioners, consumer advocates, and academics will all benefit from Hoofnagle's analysis.

FTC Privacy Law and Policy also contains a look at the FTC's role in policing credit reporting agencies and the credit reporting regulations. Hoofnagle is even-handed, pointing to both successes and weaknesses on that front.

This is definitely worth a read, and I'm happy that it's available in paperback at an affordable price. I think the book also would make a great foundational text in a seminar on consumer law.