Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask

There's a great new paper available on out-of-court restructuring and the Trust Indenture Act.   The New Bond Workouts is up on SSRN.  From the abstract it sounds pretty darn amazing—a new, empirically based analysis of bond restructurings that rediscovers a long-forgotten intercreditor duty of good faith: 

Brooklyn Law School Conference on Public Debt

On March 1, 2016, Credit Slips commenced a virtual symposium on Puerto Rico's financial crisis. Where do things stand today, a year later? And what governance lessons can be learned from municipal bankruptcy cases like Detroit for the public debt problems of tomorrow? Thanks to a fortuitously timed conference at Brooklyn Law School, a subset of Slipsters will be considering these very questions on Friday March 3, 2017. Check out the agenda and join us in Brooklyn - register here today.

Two Books About Selling Math and Its Consequences for Inequality

Over at Consumer Law & Policy Blog, Jeff Sovern recently discussed James Kwak's new book, Economism: Bad Economics and the Rise of Inequality, which mounts a convincing case against the blind application of Economics 101 to important policy questions, such as healthcare, international trade, the minimum wage, mortgages and other financial products, and taxes. Kwak details the consequences of "economism," which he defines as "the belief that a few isolated Economics 101 lessons accurately describe the real world." Kwak analogizes using economics in this way to justify widening socioeconomic inequality to prior century's reliance on religion and applications of Darwinian evolution to justify the social order of those times. Part of the lure of economism, and how it can be used as an effective justification, is that it seemingly is grounded in math. And math appears to many as absolute, complicated, and scary. 

Which made me think of another relatively new book, Cathy O'Neil's Weapons of Math Destruction: How Big Data Increases Inequality and Threatens Democracy. O'Neil chronicles the repercussions of relying on algorithms fed by big data to assess everything from grade school teachers' effectiveness to credit worthiness to which households politicians should target during election campaigns. When not used properly, these "weapons of math destruction" can entrench and perpetuate inequality.

Swindlers and Crooks Doing Backflips: New Balleisen Book on Fraud

Not a moment too soon, Princeton University Press has just released Fraud: An American History from Barnum to Madoff by historian & Duke University Vice Provost Ed Balleisen. (Some readers might be familiar with his earlier book on bankruptcy in Antibellum America).

As I learned when reviewing an earlier draft, Fraud is meticulously researched and completely fascinating, with plenty of careful attention to law and regulatory structures. The book's other virtues are well encapsulated by Kirkus:

"Balleisen casts a gimlet eye on the passing parade of hucksters and charlatans, peppering a narrative long on theory with juicy asides that build toward a comprehensive catalog of ‘Old Swindles in New Jargon’. . . . Ranging among the disciplines of history, economics, and psychology, Balleisen constructs a sturdy narrative of the many ways in which we have fallen prey to the swindler, and continue to do so, as well as of how American society and its institutions have tried to build protections against the con. But these protections eventually run up against accusations of violating ‘longstanding principles of due process,’ since the bigger the con, the more lawyers arrayed behind it."--Kirkus

Although it starts in the 19th Century, the book's breadth includes our recent "deregulatory" decades and the impact of that approach on fraud containment.  A book for our life and times for sure.

 

Scarcity, Money, and Undocumented Immigrants

Scarcity refers to having less than one needs -- time, money, calories when on a diet. For example, not having enough money reduces a person's cognitive capacity as much as missing one full night of sleep. When Scarcity, by Sendhil Mullainathan and Eldar Shafir, was published, Slipster Katie Porter connected its lessons about the mental tax of not having enough to adding a "cushion" to a chapter 13 plan. And now, Slipster Nathalie Martin's recently published paper, Survival in the Face of Scarcity: The Undocumented Immigrant Experience, uses her hour-long interviews with 50 undocumented immigrants living in Albuquerque, New Mexico to explore how their acute financial scarcity impacts their lives. Though the paper is focused on undocumented immigrants, some of the lessons of the narrative that Martin weaves apply equally to all cash-strapped people.

Recommended Reading: Empire of the Fund

It's that time of year again! Time to revisit and perhaps rebalance the investments in your retirement portfolio. While it is a sad fact that many people lack significant retirement savings, it is nonetheless useful for those interested in consumer finance (and investment companies, pensions, etc.) to think about how retirement savings plans work and to be able to offer some advice, for example, to debtors emerging from bankruptcy with their clean slate. William Birdthistle, of Chicago-Kent law school, has recently released Empire of the Fund, a magnificent new work on the most common vehicle that carries individuals' retirement savings in the US: mutual funds.

I have heard that Birdthistle, who teaches across town from me, is legendary in the classroom. Having read his new book, I'm not at all surprised. While his fairly esoteric subject matter made me hesitate to nominate his book in response to Katie's post, Birdthistle has really pulled one off here by managing to make a book about the structure and pitfalls of mutual funds and retirement savings ... extremely entertaining! It is masterfully written, with both erudite references to relevant comments by literary and historical figures, along with laugh-out-loud allusions to modern culture ("OMG! Friends, right! Mutual funds are lame!"). This book is an absolutely brilliant example of how to make a work on an otherwise dry financial subject not only accessible to the general public, but a real pleasure to read. It is no wonder the New York Times calls this "a lively new book."

How Consumers Use the CFPB's Complaint Function

I recently posted to SSRN my new article, Calling on the CFPB for Help: Telling Stories and Consumer Protection (Law & Contemporary Problems, forthcoming 2017). In the article, I survey a random sample of consumers' narratives detailing their complaints about consumer credit and financial service providers, with the goal of assessing how people engage with the complaint function in light of how the CFPB processes complaints. In short, consumers submit complaints via the CFPB's website and by phone, the CFPB forwards the complaints to companies, and the companies are required to respond. That the CFPB does not respond to complaints in the first instance may come as a surprise to some consumers, despite the CFPB's websites’ prominent statements about where it sends complaints. Importantly, the CFPB is not the only federal or state agency that maintains a complaint function. The DOJ, FTC, and other agencies similarly take complaints from constituents, and likewise often do not respond directly to the complaining individuals. Identifying when and how people are not understanding how their complaints will be processed may provide agencies an opportunity to further help constituents and to augment how they meet their goals.

Civil Rights and Economic Justice in a New Era

Sharing news of this post-election civil rights conference on December 2, 2016 that, notably for Credit Slips, features pathbreaking research by Professors Mechele Dickerson and Bob Lawless (in collaboration with Dov Cohen and the late Jean Braucher) on the intersection of race with debt and bankruptcy and an exploration of how this research informs policymaking and advocacy going forward. Time permitting, I will address a different intersection between race and debt: collecting judgments arising from police misconduct when cities file for bankruptcy. Thanks to Professor Ted Shaw and the Center for Civil Rights for recognizing the role debtor-creditor research can play in the quest for equality. 

Register using this link.

 

Does Behavioral Economics Matter?

The New Republic (yes it still exists) has a piece about whether behavioral economics will have as much influence in a Clinton administration as it did in the Obama administration. The unspoken assumption of the piece is that behavioral economics actually had a big influence in the Obama administration. Here's the thing:  as far as I can tell, behavioral economics has been basically irrelevant in the Obama administration.

Yes, Cass Sunstein was the head of OIRA for part of the Obama administration. But when Sunstein went on a post-administration victory lap giving talks at a bunch of law schools (including at Georgetown), it was notable how few concrete examples he could give of the influence of behavioral economics on policy. There is, to be sure, an executive order suggesting that agencies subject to the order consider behavioral implications in their rulemakings, but the only concrete example Sunstein had was the transformation of the food pyramid into a food plate. (If you missed that change, well, you aren't the only one.) It's not entirely clear to me what great behavioral implication is from going from a pyramid to a plate, much less how much influence it had on how anyone eats.  There are, apparently, a bunch of other behaviorally-influenced moves according to a recent White House report.  But man, they are really small bore improvements on the margins (e.g., calling unemployed workers "job seekers" rather than "claimants"). If this is the highwater mark for behavioral economics, then it has truly fizzled as a policy move.  

Join us for the "The NCBJ at 90"

Will you be in San Francisco for the National Conference of Bankruptcy Judges annual meeting and related events? Please mark your calendars now for Thursday October 27, 3:oo pm Pacific Time: a special educational session honoring the 90th anniversary of the NCBJ.^* We (Profs. Gebbia, Simkovic, Pottow, and me, with great guidance and input from Judge Colleen Brown and Judge Mel Hoffman) will be discussing original historical research on bankruptcy courts and bankruptcy law conducted for this occasion. Early abstracts can be found on the NCBJ blog. In the meantime, Prof. Gebbia has been posting quizzes; I suspect some Credit Slips readers would ace these tests, but you won't know until you try!

So please do join us on October 27 to be part of this commemoration and conversation.

* The mission of the NCBJ, according to its website, is:

The National Conference of Bankruptcy Judges is an association of the Bankruptcy Judges of the United States which has several purposes: to provide continuing legal education to judges, lawyers and other involved professionals, to promote cooperation among the Bankruptcy Judges, to secure a greater degree of quality and uniformity in the administration of the Bankruptcy system and to improve the practice of law in the Bankruptcy Courts of the United States.

 

Are Consumer Protection Regulations Harming the Middle Class?

A new paper by Franceso D'Acunto and Albert Rossi, both at the University of Maryland's Department of Finance, contends that the Dodd-Frank Act resulted in "a substantial redistribution of credit from middle-class households to wealthy households", as lenders reacted to regulations by reducing credit to middle-class households and increasing it to wealthy households.  This conclusion is based on a regression analysis of loan and ZIP-code level HMDA data.  The redistribution point is a serious charge to be leveled at the Dodd-Frank Act, and you can bet that this paper is going to be repeatedly cited by Congressional Republicans in their attempts to repeal Dodd-Frank. 

Unfortunately, the paper is founded on a pair of mistaken factual claims about the legal landscape that are so staggering that I am puzzled how they could have been made in good faith. Once these mistakes are corrected, it becomes apparent that the paper's analysis cannot actually support its claims because it is testing the wrong thing.  The paper is observing changes in the mortgage market that pre-date the implementation of Dodd-Frank.  By definition, then, these changes cannot have been caused by Dodd-Frank.  What the paper shows (without realizing it) is that there has been a redistribution of credit from middle class households to wealthy ones, but that it wasn't caused by Dodd-Frank.  Whoops. 

Conference and Call for Papers: Consumer Protection and Economic Development, 25 Years of the International Association of Consumer Law

A Conference celebrating the 25th year of International Association FO Consumer law will be held July 16 to 19, in Porto Alegre (UFRGS), Brazil. The The purpose of the Conference is to provide a forum where leading international scholars, practitioners, representatives of the consumer organization, public authorities and business representatives can join to present and discuss together the fundaments, the challenges and the future of consumer protection worldwide.

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.

Porter's Modern Consumer Law

Credit Slips blogger Katie Porter has produced a new textbook in consumer law that anyone teaching the subject should consider adopting. Indeed, law professors not teaching consumer law should to take a look at it and consider whether they should add the class to their teaching portfolio. A 2013 poll on Brian Leiter's Law School Reports named consumer law as the number one "area of law which deserves more attention in the legal academy." Next academic year I will be picking up a new course, and the emergence of Porter's new text made the decision easy for me as to which course it will be.

In the preface, Porter makes explicit her three-pronged approach to the topic of consumer law:

1. The book situates consumer law within the business-law curriculum. "Consumer law is big business," she notes. Understanding the legal issues requires understanding the "deal," the information flow, and the market in which the transaction occurs. Porter expressly recognizes, "the world of consumer practice offers opportunities for lawyers to represent consumers (as government lawyers, policy advocates, and plaintiffs’ attorneys) and to represent businesses (as in-house counsel, defense attorneys, and
   lobbyists)."
2. The book provides a strong theoretical frame by situating consumer law at the intersection of tort and contract. The book does not present consumer law as a hodgepodge of cases and statutes loosely organized around the term "consumer." Rather it recognizes that a lot of what travels under the law of "consumer law" responds to the gaps that traditional contract and torts doctrines have when it comes to the issues that consumer transactions create.
3. The book explores where the social-science literature has learning for consumer law. Porter looks to see what psychology, sociology, marketing, and economics can add to our understanding of the legal issues. By doing so, the book explores the difference between law on the ground and law in the books. 

The book uses a problem-based method of instruction that will be familiar to users of Porter's co-authored bankruptcy textbook or my co-authored secured transactions textbook. The problems range from straight-forward statute readers to teach doctrine to tough client counseling problems that focus on real-world lawyering skills.

More information, including a table of contents and a sample chapter, can be found at Aspen Publishers.

The Bad CHOICE Act

I'm testifying before House Financial Services tomorrow regarding the "CHOICE Act," the Republican Dodd-Frank alternative.  My testimony is here.  It's lengthy, but it doesn't even cover everything in the CHOICE Act--there are just too many bad provisions, starting with the idea of letting megabanks out of Dodd-Frank's heightened prudential standards in exchange for more capital, then moving on to a total gutting of consumer financial protection, and ending with a very poorly conceived good bank/bad bank resolution system executed through a new bankruptcy subchapter.  The only good thing about the Bad CHOICE Act is that it has little chance of becoming law any time soon. 

Law & Society, 2016 Panels on Household Finance

If you happen to be at the 2016 Law & Society Association meetings in New Orleans, stop by the panels from the Collaborative Research Network (CRN) on Household Finance. This group got its start as an international collaborative studying overindebtedness thanks for the leadership of people like the late Jean Braucher, Johanna Niemi, Iain Ramsay, and Bill Whitford. We have scholars from all over the world and from diverse disciplines thinking about how law on the ground affects household financial outcomes. Below the fold is a listing of panels, topics, and presenters for this year. If you are an academic and want to be on the CRN email list, contact me or Credit Slips blogger Dalie Jimenez.

Digital Wallets: The Honor All Devices Rule

Every wondered how ApplePay works?  What the whole deal with Chip cards is?  Those contactless readers at stores?  If you're looking to nerd out on 21st century payment technology...and its legal and business implications, look no further.  I have a new paper out entitled Pandora’s Digital Box:  Digital Wallets and the Honor All Devices Rules.  The paper was commissioned by the Merchant Advisory Group, a retail industry trade association that focuses on payment issues.  The paper, which benefitted from interviews with the payments teams from a number of the largest merchants in the US, covers the range of technologies known as "digital wallets," including mobile wallets like ApplePay and Samsung Pay (with the magnetic stripe emulation).  The paper focuses on the potential benefits, but particularly the risks posed by digital wallets to merchants, and the legal implications, which are primarily antitrust issues.  

The basic issue with digital wallets is that they aren't all the same in terms of costs and benefits, but merchants have to accept them equal on an all-or-nothing basis.  Digital wallets involve lots of different technological and business arrangements that affect security, control over data, control over customer relationships, IP litigation risk, choice of payment method, and cost of payment.  Some wallets are very attractive to merchants; others less so.  Merchants, however, cannot accept digital wallets selectively or condition the terms of acceptance for particular wallets.  This is because Visa, MasterCard, and American Express all have so-called "Honor All Devices" rules that require merchants to accept payments without discrimination from all devices using any technology accepted by the merchant.   The arrangement has the nasty (but probably not coincidental) effect of foreclosing entry to digital wallets that offer cheaper payments, such as those that use PIN debit or ACH.   

If this sounds a bit like a redux of the Honor All Cards rule and the two previous monumental rounds of antitrust litigation that produced (first on the tying of signature-debit and credit, second on the tying of different credit products, among other things), well, you're right. The problems that arise with the Honor All Devices rule show that things have not been properly resolved in terms of anticompetitive behavior in the payment card space, and the issues are just migrating over to new technologies.  

Learn about Teaching Consumer Law in Beautiful Santa Fe May 20-21, 2016

On May 20-21st, the Center for Consumer Law at the University of Houston Law Center will present “TEACHING CONSUMER LAW IN OUR POPULAR CULTURE AND SOCIAL MEDIA.” Sponsored by the University of New Mexico School of Law, this is the only Conference in the world dedicated to the teaching of consumer law.

This year’s Conference features 25 speakers, including the respected U.S. consumer law scholars, as well as presenters from nine other countries. Topics include discussions of new and innovative teaching techniques, substantive consumer law updates, a detailed discussion of the CFPB, empirical studies on consumer law issues, and numerous presentations of consumer law in other countries, such as Iraq, Japan, Nigeria, the EU, Nigeria, Denmark, and China.
 
The Conference will be held in Santa Fe, New Mexico, one of the most unique cities in American. A Conference brochure and registration form will be available shortly. In the meantime, please save the date. To view the tentative schedule and register , click here.
 
Richard Alderman and I look forward to seeing you in Santa Fe.

 

 

 

 

 

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.

Truthiness, Or the Shenanigans of Executoriness

For the first time in nearly two decades of wrestling with section 365 of the Bankruptcy Code, I feel like I really understand the practical problems with the notion of "executoriness," as well as a constructive way forward. This enlightenment arrived via a great new paper by Jay Westbrook and his former student, Kelsi Stayart (who passed the July bar and was admitted in November--yay!), entitled "The Abolition of Dysfunctional Contracts in Bankruptcy Reorganizations." This paper lays out with razor sharpness the problems that courts have encountered with using "executoriness" as a gateway to applying section 365 to important contracts like options, IP licenses, LLC operating agreements, and non-compete covenants. The ABI's Chapter 11 Reform Commission does not come out of this looking very good, at least in its appraisal of the case law on executory contracts. The only well-settled rule, as Westbrook and Stayart reveal, is that "executoriness functions only as a saboteur." The argument is persuasive, the analysis of the current (sad, chaotic, and frequently contradictory) state of affairs is lucid and entertaining, and the proposed solution (refocusing on state law and hard policy compromises) is compelling. This paper is a must-read for professors preparing to teach a class on section 365 in the coming weeks, as well as for the ABI Commission members, who seem to have really dropped the ball on this one.

AALS & The Slips

Quite a few Credit Slips bloggers and former guests are panelists at the session the Debtor-Creditor Section of the Association of American Law Schools (AALS) meeting.The session is entitled, "Bankruptcy for the Ninety-Five Percent: Making the System Work for Small and Medium-Sized Businesses and Sole Proprietors" and will take place on Saturday from 1:30 - 3:15 PM. If you are at the AALS meeting, check it out. Panelists and discussants are Matthew Bruckner, Andrew Dawson, Pamela Foohey, Margaret Howard, Melissa Jacoby, Ed Morrison, Foteini Teloni, and Jay Westbrook. The moderator is Gene Wedoff, recently of the U.S. Bankruptcy Court for the Northern District of Illinois. 

Foohey on Black Churches in Bankruptcy

Credit Slips blogger Pamela Foohey has a new article on SSRN, "Lender Discrimination, Black Churches, and Bankruptcy." This paper builds on her previous work about churches in bankruptcy to dig into the demographics of which churches end up in bankruptcy court. From her abstract: "Churches with predominately black membership — Black Churches — appeared in chapter 11 more than three times as often as they appear among churches across the country. A conservative estimate of the percentage of Black Churches among religious congregation chapter 11 debtors is 60%. The likely percentage is upward of 75%. Black Churches account for 21% of congregations nationwide."

Foohey discusses the various reasons why black churches would be overrepresented in chapter 11. I suspect there will be a lot of debate about the paper's conclusions, but it is hard to argue with the notion that race matters in bankruptcy as it does across so many parts of life in the U.S. (h/t to Mechele Dickerson's work). Foohey's paper will get bankruptcy experts talking again about why and how it matters, even if there is disagreement on the specifics.

No Way to Run a Railroad: Scholars' Letter on the Trust Indenture Act Amendment

A large number of bankruptcy and corporate finance scholars, including several Slipsters, signed on to a letter to Congressional leadership regarding the proposed omnibus appropriations bill rider to amend the Trust Indenture Act. We don't all agree on how to interpret the Trust Indenture Act, on whether it should be amended, or on what amendments should look like, but we are all agreed that it shouldn't be done through this sort of backroom process. As Professor Douglas Baird of Chicago put it, "This is no way to run a railroad." Any amendment of the Trust Indenture Act should proceed with the customary procedural checks of legislative hearings and opportunity for public comment.  The Trust Indenture Act is simply too important a statute to amend on the fly. 

Indiana Adds Some Bankruptcy to Its Bar Exam

Bernie Trujillo emailed me from Valparaiso University with the news that the Indiana bar examiners have added some bankruptcy law to the state bar exam. Specifically and effective February 2018, the Indiana bar exam will include "Indiana debt collection, including garnishment, attachment, and bankruptcy exemptions." A few years back, I noted that bankruptcy law was fair game on the Texas bar exam. Indiana's move appears to double the number of states with coverage of any bankruptcy law on the state exam. Regardless of whether bankruptcy law needs to be covered, I think it is probably a good thing to add coverage of judicial remedies. Every year in my courses, a fair percentage of the students seem surprised to learn that all those judicial decisions they study in the first year are not self-enforcing.

Indiana's move also bucks a trend noted by Slipster Jason Kilborn of declining coverage of commercial law law on state bar exams. In addition to debt collection law, Indiana is adding secured transactions to the list of subjects.

UPDATE (11/17/15): Bernie pointed out that secured transactions was already covered under the heading "commercial law," which is no longer listed. The change was to scale back "commercial law" to "secured transactions." Because sales is tested under the heading "contracts" by the Multistate Bar Exam, the Indiana change is effectively the same as Jason noted with the move by the Multistate Bar Examiners with regard to their essays -- dropping negotiable instruments/UCC Articles 3 and 4.

Who "Presides" over Chapter 13 Plan Confirmation Hearings?

Temple Law Review will soon publish a volume honoring Bill Whitford, based on a conference from last fall. That event was particularly special for an additional reason: it turned out to be the last opportunity, for many of us, to spend time with another inspiring leader in our field, Jean Braucher. 

My own short contribution, on judicial oversight in chapter 13 bankruptcies, has just been posted here. We will share the word when the entire volume is available - including, I believe, a piece from Jean.

Gavel image courtesy of Shutterstock

Tired of Dealing with Students' Exams?

As exam grading season looms, some professors lament. I actually enjoy reading exams, as at least a few students usually write something fairly comical. For those academic readers, the American Board of Certification is seeking additions to its faculty committee. The main task is to design and grade the certification exams.

It's a great way to perform a public service and get ideas for your classes. Consumer and business topics are both possibilities, and the entire process turns out to be quite fun. I served for several years and felt like, particularly as a younger academic, it was a great way to discuss exam strategies with more experienced colleagues. Academics do not need to be certified by the ABC to participate. If you are interested, please contact Laura Bartell of Wayne State University Law School, who is Dean of Faculty.

 

The Myth of the Disappearing Free Checking Account

A regular trope sounded by opponents of consumer financial regulations is that the regulations have resulted in the disappearance of free checking. Whether it's the Durbin Interchange Amendment, the CFPB, or the Dodd-Frank Act in general, all are variously blamed for the supposed demise of free checking.  As it turns out, free checking is a little like Mark Twain--reports of its death have been greatly exaggerated.  Most Americans with bank accounts report paying nothing for their services.  The prevalance of such respondents has actually increased since 2010, from 53% to 61% of respondents. 

Recycling News

    Catching up on some posting in other places:

• The Columbia Blue Sky Blog recently featured a summary of my article on the treatment of failed clearinghouses under Dodd-Frank. Interestingly, the EU recently opened the door to something similar to what I've been suggesting. Thanks to Colleen Baker for pointing that out.
• And over at Dealb%k, I look at LSTA's recent rejection of the ABI's chapter 11 reform proposals in light of two recent retail bankruptcy cases.

Covenant Banking

A new book out by University of Minnesota Law Professors Claire Hill and Richard Painter proposes a really intriguing proposal for disciplining wayward financial services firms: "covenant banking." The problem, as Hill and Painter observe, is that when things go badly at a financial institution, the burden is borne by shareholders, not by the managers, who have portable human capital and whose compensation is not typically subject to clawback. In essence the problem, as Hill and Painter see it, is that bankers lack "skin in the game." And Hill and Painter have a plan to fix it. 

Law of Debtors and Creditors Users (and would-be users)

As Jason Kilborn has graciously described, Credit Slips is the blogging base of the authors of the Law of Debtors and Creditors, 7th edition, (Aspen/Wolters Kluwer 2015). We have revised the Teacher's Manual this summer and encourage all adopters or potential adopters to download the new version, available at the book's Companion Website. If we you need the professor password, email your Aspen rep or one of us. 

The unfun change was discovering a few typos (blush!) in the textbook itself. We created an errata. Distributing that to your students on the first day of class will help everyone.

The fun work was updating the Teacher's Manual to reflect our own experiences in the classroom and your feedback. We hope that we've given improved guidance for certain problems and we updated the discussion to reflect several changes in law.

(One of the younger cohort thought updating jurisdiction was fun; the other decidedly did not, but is extremely thankful to have a Teacher's Manual that will let her survive teaching in a world after Wellness and Arkinson/Executive Benefits/whatever-we-are-calling-that-case.)

The Teacher's Manual update is a wholesale replacement of the prior version, so you can rely solely on it, rather than the prior version, in the future. The  technologically adept co-author (aka the non-jurisdiction person) notes that you can download the TM to an iPad for in class use or annotate the PDF with bubbles and notes in your teaching preparation using Adobe Pro.

Please continue to send us your thoughts and ideas. have a great 2015-2016 year in teaching!

Consumer Financial Protection Clinic Position

Here's an opportunity to supervise a consumer financial protection clinic that has done some great work - information on the position and how to apply here. 

New and Improved Warren & Westbrook, now with Porter & Pottow!

My school bookstore asked me to identify my fall book choices the other day, which reminded me that I had intended to comment on the new book I've been using for my Bankruptcy class. The new 7th edition of the classic Warren & Westbrook Law of Debtors and Creditors now features Katie Porter and John Pottow as co-authors (note the Credit Slips sweep of the author page). This is not the type of frustrating and all-too-common new edition incorporating a few nits here and there and swapping out two cases to change the pagination on your syllabus. The previous editions, which I've used for 15 years, were very good; this latest edition is really great.

New Chair for Bob Lawless (And I Don't Mean a Recliner)

Just saw a terrific announcement: the University of Illinois is recognizing Credit Slips' fearless founder, Bob Lawless, with the Max L. Rowe Professorship.

Bob has done so much for our field and the legal academy that attempting a quick summary is futile. And, putting aside the recliner quip, roasting is best left to others. So I'll leave it at this for now: Bob is a role model for working harder and smarter, and with modesty. To see such contributions rewarded is satisfying indeed.

 

 

 

Coming to Law -- Churches in Bankruptcy Edition

Credit Slips contributor Pamela Foohey has just posted her most recent work in her series of articles on churches in bankruptcy. I have been a big fan of this research project since Pamela was a fellow at the University of Illinois. She tells us not only about bankruptcy but also about the ways in which these churches look like most any small business. Most impressively, the work builds on existing literature on how people come to law to solve their problems and expands that literature into a new and nonobvious setting, suggesting this literature may have deep explanatory power to help us understand more about how people perceive and use law. It is exactly what we need more of in the law reviews -- scholarship using rigorous social science to help us understand what actually happens in the legal system.

Pamela's most recent paper, "When Faith Falls Short: Bankruptcy Decisions of Churches," relies on structured interviews with church leaders and and their lawyers. One of the most surprising things is the church leaders did not see their problems as legal. Foreclosure may have beckoned, but the leaders had to be brought to law. They turned to social and professional networks both to get information about the law and for support that bankruptcy was the correct thing to do. There is much more in Pamela's paper. Get it before SSRN runs out of electrons to send it to you.

Man Bites Dog! Regulatory Edition

I woke up this morning to see an abstract of a paper entitled Is Regulation to Blame for the Decline in American Entrepreneurship? When I saw that one of the co-authors was on the George Mason University economics faculty, I said to myself, "Well I know how this plays out." But then I read the abstract, which concludes: Federal regulation has had little to no effect on declining dynamism."

I wonder what the same commentators who trumpeted the "Dodd-Frank is killing community banks" stuff will think of this paper. I'm personally skeptical that one can measure the stringency of regulation in any quantifiable way, much less for different industries, but I'll just flag that this paper is out there.

Size Matters: Community Banks' Real Problem

Community banks are ailing.  Over the past decade many of them have failed or been gobbled up by larger banks. What's going on? 

A new study by a fellow and a masters student at the Harvard Kennedy School of Government thinks it has found the culprits:  Dodd-Frank!  The CFPB!  Regulation! Not surprisingly, this paper is already getting circulated by bank lobbyists as a prooftext for their anti-regulatory agenda. 

Let me make no bones about this study. It is gussied up to look like serious academic research, with footnotes and working paper series cover page, but don't let looks fool you. The study doesn't conform with basic norms of scholarship, such as discussing contrary evidence and having conclusions flow from evidence. Instead, the study is really a mouthpiece for a big bank anti-regulatory agenda that pretends to really be looking out for community banks.  

I'm not going to spend the time on a full-blown Fisking of this piece, but let me point out some serious problems and then talk about the real problem facing community banks and how big banks exploit community banks' problems to advance their own agenda. 

Sh*t In, Sh*t Out? the Problem of Mortgage Data Corruption & Empirical Analysis

Empirical economic analysis is a powerful tool. It can elucidate correlations and sometimes even get us to causual explanations. But it has a serious weak-spot:  its value is entirely dependent upon the integrity of the data analyzed. To put the problem succinctly: sh*t in, sh*t out.

This brings us to analyses of the housing bubble. There's a sizeable academic literature on the housing bubble (and relatedly also expert witness reports on loss causation in MBS litigation) that rely on loan-level data. The problem is that a lot of that loan-level data is suspect. That should hardly be a surprise: the industry even referred to some products as "liar loans". And there were also FBI Mortgage Fraud reports indicating an uptick in mortgage fraud. But it was easy for economists to ignore the data integrity problem as long as the problems were merely anecdotal (e.g., the mariachi musician with the six-figure income), and could be blissfully assumed to only affect a small number of loans.

No longer. It's hard to show mortgage fraud empirically, but there's a growing empirical literature about mortgage fraud. There are now a couple of academic studies demonstrating significant inflation of borrower income on loan applications (here and here and here and here and here). (To be clear, this does not mean that the income was inflated by the borrowers. It could be inflated by either borrowers or lenders, including loan brokers.) There's also a Fitch Ratings report from late 2007 that shows questionable stated income, employment, FICO scores, property occupancy status, and appraisals on a large percentage of a small sample of subprime loans. 

I want to emphasize that this literature does not undermine all empirical work on the housing market during the bubble years. But it should give us pause when considering any analysis that relies on either loan-level or pool-level loan characteristics such as income, DTI, FICO, occupancy status, and LTV/CLTV. I suspect that the empirical mortgage fraud literature will not deter many economists from plowing ahead whenever their data produces a regression with statistical significance. And the studies might well be right in the end. But it should tell the rest of us to consume the studies with a grain of salt.

The Disappearance of HOEPA Loans

While I'm on the subject of dead markets, what about HOEPA loans? HOEPA loans are super-high-cost loans that qualify for special consumer protections under the Home Owners Equity Protection Act of 1994. (Yes, that's the one that directed that the Fed "shall" implement a rule on abusive lending, which the Fed understood to be discretionary until 2008.) 

HMDA data has previously been a bit of a pain to manipulate to get summary statistics--big data sets and annoying variable labels.  No longer. The CFPB has an amazing on-line HMDA data tool that is a lot of fun to explore. The CFPB's created the Rolls-Royce LoPucki-BRD of HMDA data.  It's a real public service. My only complaint is that the CFPB only has data going back to 2007. Hopefully the Bureau will add in 2005-2006, at least (there was a reporting change in 2004). The Urban Institute also has a nice HMDA data page, but it's really more for power users. 

OK. So what's gone on with HOEPA loans? HOEPA status was always a kiss of death, but in 2005, there were 35,980 HOEPA loans made. In 2013 (still under the same definitions), there were just 1,873. That's a 95% decline in HOEPA lending. Now it might well be that lenders are making lots of loans just under the HOEPA reporting thresholds. But there's little reason to think that they suddenly started doing that in 2013--that trick's been around for a while. Instead, what we're seeing is that high-cost mortgage lending has simply disappeared in the United States, much more so than lending has contracted in general.

Second-Liens and the Leverage Option

Susan Wachter and I have a new (short!) paper up on SSRN. It's called Second-Liens and the Leverage Option, and is about the curious absence of negative pledge clauses in US home mortgages, which enabled enormous amounts of second-lien leverage (much more than anyone realized) during the housing bubble. We have a very simple, narrowly tailored legislative fix that should make additional mortgage leverage via junior liens a bargained-for matter between the borrower and the senior lienholder(s), rather than an absolute right of the borrower. 

Abstract is below the break:

Safe Banking

Just in time for the new year, I've got a new article called Safe Banking up on SSRN. The article is a first principles reexamination of the industrial organization of financial services. It identifies the institutional combination of deposits and lending as the key problem in our financial system. We've developed an enormous financial regulatory state to attempt to hold these lending and deposits together, but it might be time to admit that bank regulation just doesn't work and can't. Our bank regulatory system is simply too complex and too politicized to work flawlessly as it must.

My solution is a radical, yet conservative structural change that has become possible because of recent technological and market changes: mandate the institutional separation of deposits from lending in both traditional and shadow banking markets, a reform I call "Pure Reserve Banking". Pure Reserve Banking means 100% reserve banking plus withdrawal of the entire panoply of government support and subsidization of shadow banking products. There's a host of financial stability and political economy benefits that would flow from such a change, but at core Pure Reserve Banking means ending the subsidization of a volatile growth economy in which gains are privatized and losses socialized and shifting to a more stable—and inherently equitable—growth economy.

The abstract is below the break:

Why the World Hates Lawyers

Why does the world hate lawyers?  Because of stuff like this.  You can't make this up:  the on-line menu prices for a Chinese restaurant weren't up-to-date, and a customer was overcharged $4. I get being pissed about that.  But what would most people do?  Just lump it, stop patronizing the restaurant, ask the restaurant for a refund, or complain to the credit card issuer. But in this case, the customer has a JD (and to make it more delicious, happens be a Harvard Business School professor). The professor decides to go all legal on the restaurant, demanding $12, as treble damages under Massachusetts' unfair and deceptive acts and practices (UDAP) statute, MGL 93a (even citing the statute!).  

I get why people would be hating on the professor for that alone. But here's what really peeves me. He gets MGL 93a wrong!!!  (I happen to teach this statute.) The professor is demanding something that he almost assuredly cannot get under law.

Bar Examiners Abandoning Commercial Law

Exams are on my mind this time of year, and I'm disappointed that bar examiners are increasingly regarding commercial law as unimportant. Earlier this year, the National Conference of Bar Examiners announced that Negotiable Instruments/ Commercial Paper (UCC Articles 3 and 4) will no longer be tested in the essays they draft for about 30 states. And just before Thanksgiving (ironically?), the Louisiana Sup. Ct. Committee on Bar Admissions abruptly announced that Secured Transactions (UCC Article 9) would no longer be tested on the Louisiana exam at all--this after years of very heavy testing of that material twice a year since Louisiana adopted the UCC in 1990. And California has long excluded all but a smattering of the UCC from their bar exam--no Negotiable Instruments, and no Secured Transactions (except for fixtures). What is the deal?! Is this a trend in other jurisdictions, too? As a longtime commercial law professor, I'm feeling very unappreciated by bar exam authorities.

Photo courtesy of Shutterstock.

Another Tribute to Jean Braucher: On the Lighter Side

Bob’s post made me cry. Jean was an incredible scholar and colleague. She also had a fun, light side that I will forever cherish, and that I share here. 

I met Jean about 18 years ago through my mentor Bill Woodward (formerly of Temple University Law, now at Santa Clara Law), Jean and Bill were very close academic friends and he thought Jean and I would also hit it off.  He was right. From the very beginning, she helped me with everything from casebook selection to choosing (and negotiating) my job here. Not too long after I moved to New Mexico Law, Jean moved to the Arizona Law faculty. Bill used to ask me “do you ever see Jean out there?” as if we’d now run into each other regularly, since we lived just 7 hours apart by car. The west is a big place, for all your easterners out there, but actually, Bill was on to something. Whatever the reason, Jean herself became a mentor and close friend.

We organized a few conferences together, most recently at Washington and Lee in 2011 with Jim Hawkins (Houston law Center). Wherever we were, we always stayed up late, drinking and gossiping and just having fun. One year at Richard Alderman’s Conference in Houston, my husband said “that’s it, no more hanging out with Jean Braucher” (Mary Spector you were also implicated)

Tributes to Jean

Our friend and co-blogger, Jean Braucher, passed away a week ago today. Our first post here on Credit Slips had only a few paragraphs about her contributions to our professional community. There was a lot more to say about Jean.

Since that time, a number of comments have made their way into my inbox or were posted on to that original post. The comments have come from practicing attorneys, academics, judges, and journalists and from all over the United States as well as Europe, Australia, and South America. If you sent me a longer comment, I hope I have done justice to it below in excerpting it, and my apologies if I mistakenly omitted some. Here is what people wrote about Jean.

Jean Braucher, In Memoriam

It is with great sadness that I pass along the news that Jean Braucher passed away yesterday. Jean was my co-author, my co-blogger, and my friend. This news came suddenly this morning for all but her closest family and friends who were aware of her illness. 

The official record will show that Jean was a giant among bankruptcy and contracts scholars. Her work on local legal culture in bankruptcy courts is one of the standard references on the topic. As Dov Cohen and I were trying to understand the disparities we were seeing in our data among local bankruptcy courts, we turned to Jean. She joined our research team, and her understanding of the very fine detail of how the bankruptcy courts worked in action made the project's experimental materials a success. Jean also was widely known for her work on contracts law, being one of the authors of the seminal Contracts: Law in Action textbook.

That is the official record. I last saw Jean just in October at the symposium in honor of Bill Whitford where Jean presented her latest work. Bill exhorted us to study how the law actually worked and how it actually worked for the least-privileged in society. Jean lived that research ethos and spread it to others. She helped to nurture a small gathering at the Law & Society Association that has grown into a section of close to 100 household finance experts from around the globe. She was continuing to play a leadership role for that group while encouraging the next generation of scholars to become leaders in their own right.

Looking back at what I have written seems a paltry overview of the big footprint that Jean leaves in the  academic world. Her work touched so many others. Tomorrow I will give thanks that Jean was part of my professional life.

In the coming days, I hope to gather thoughts and remembrances of Jean into a longer blog post. If you knew or worked with Jean and have something to pass along, please email me.

Update (12/2/2014): A new post collects comments that were emailed to me. I have closed the comments on this post and encourage new comments to be left on the new post.

Econometric Optimization of Fresh Start Policy

"What is the optimal consumer bankruptcy law?" Now that's an abstract first line that grabs my attention! I've thought about this question for most of my academic career, and I've struggled to find solid bases for an answer. Now, Indiana Univeristy economist Gray Gordon offers an intriguing if difficult to understand possibility. In his paper, Optimal Bankruptcy Code: A Fresh Start for Some, Gordon actually quantifies the sweet spot: (1) an optimal system offers a discharge of debt (a constant refrain in policy papers, e.g., here and here), (2) it does so for households whose debt is 2.6 times their endowment, and (3) this optimal system results in a welfare gain of 12.2%. The conclusion is nowhere near as confusing for a non-economist (like me) as the proof, expressed in inscrutable Greek-symbol-filled equations which occupy the bulk of the paper. But this paper offers a rock solid answer to a question that has plagued Europe, in particular, for many years--how does one define "overindebtedness" and therefore the proper entry criterion for personal debt relief. Gordon's answer is very powerful, though I wonder how compelling the econometrics are behind these hard numbers. I'm not at all qualified to critique Gordon's proofs, but I'm a bit skeptical in light of Gordon's observation that "[r]elative to the U.S., the optimal policy results in a four-fold increase in the bankruptcy filing rate and a thirty-fold increase in debt." Whoah! Anyone care to comment on what could be a really groundbreaking new approach?

Whitford Symposium

Professor Bill Whitford of the University of Wisconsin will be an intellectual hero to many of the Credit Slips readers and contributors. Bill has done pathbreaking work in consumer bankruptcy law, consumer law, and corporate reorganizations. On October 24, the Temple Law Review will hold a symposium honoring Bill's career, "The (Un)Quiet Realist: Building and Reflecting on the Contributions of Bill Whitford." Speakers include current or past Credit Slips contributors Jean Braucher, Melissa Jacoby, Angie Littwin, Katie Porter, and me. The full agenda and more information can be found at the Temple Law Review web site. Attendees can earn up to five CLE credits (four substantive and one ethics).

When I first came into the legal academy, Bill was one of a small group of bankruptcy scholars getting out of their university offices and engaging with the world as it is. He is  a role model for me as an empirical scholar, and it is an honor to be asked to be part of this event.

Feeling Vindicated

My Consumer Finance students used to think I was wasting their time by spending a whole class session on usury laws and taking them into the nitty-gritty of their application (or non-application). I think usury is important conceptually (but for the Marquette decision and its fallout, our regulation of consumer credit would likely be very different), has a lot of neat statutory reading twists and turns, and it actually can matter for non-bank lenders.  Among other things I cover is the NY state usury statute, including its criminal provisions. Cyrus Vance's prosecution of payday lenders under the usury statute would seem to vindicate my choice of class materials. 

Warren & Westbrook: Two More Authors = Six More Pages?

A dubious ROI you might think, but the long-awaited update to the classic is now here!

Many readers may have learned from or taught from Warren & Westbrook's casebook,  The Law of Debtors and Creditors. Necessitated by one author's distracting moonlighting in Washington, it now picks up an even stronger Credit Slips connection, transforming into Warren, Westbrook, Porter & Pottow.  The Seventh Edition is now in print and ready for use: bankruptcy nerds rejoice!

Those of us who have used this gem for years have recognized it was getting a trifle long in the tooth (the last edition was around 2008 when BAPCPA was just a pup).  Over the course of two years, we did a complete soup-to-nuts revision of the book, keeping the problem set focus and empirical bent -- and of course favorite characters from the problems. We vastly updated and overhauled some content, all within the confines of keeping the book the same length (save six pages of Pottow verbosity).  To give just a flavor, the book now has multiple assignments and problems on 363 sales and a new section on "Beyond Chapter 11," covering such topics as municipal bankruptcy and "too big to fail" financial institutions.  Consumer coverage was also revamped, moving the means test after the students have learned the basics of chapter 7 and chapter 13, and adding a new section on consumer bankruptcy theory and practice.

In the Teacher's Manual, we worked for more clear organization to help those of us in a pinch to prep. And of course, just as students have always feared, some answers changed--even when the problems didn't. We look forward to your comments and feedback, and hope you have as much fun teaching it as we did writing it.

Publishing Opportunity with International Consumer law Journal

The National Law School of India University (NLSIU), Bangalore, sponsored by the Indian Ministry of Consumer Affairs Department, New Delhi. India, is involved in various research activities in the area of Consumer Protection. It publishes the International Journal on Consumer Law and Practices and seeks articles on the topic of consumer law, which might be of use to students, academicians, consumer lawyers, policy-makers, consumers themsleves, and non-governmental organizations worldwide.

The Journal hereby invites contributions to the second Volume of Journal 2014.