Mick-Mulvaney-Think

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.

House Financial Services Fintech Hearing

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.    

Whitford on Law School Financial Aid

Although technically emeritus and making history as a named plaintiff in a gerrymandering case before the U.S. Supreme Court, our commercial law colleague Professor Bill Whitford remains worried about law schools in a way in a way that connects with an issue well known to Credit Slips: student loans. Whitford's latest analysis of law school financial aid is forthcoming in the Journal of Legal Education but is available to us now on SSRN.

More on Madden

I have a more refined piece on the problems with the Madden fix bills in the American Banker.  See here for my previous thoughts. 

Guess Who's Supporting Predatory Lending?

Guess who’s sponsoring legislation to facilitate predatory lending? It’s not just the usual suspects from the GOP, but it looks like a number of centrist “New Democrats” are signing up to help predatory financial institutions evade consumer protections. 

Yup, you heard me right: Democrats. Ten years after the financial crisis, it seems like we’ve gone back to the mistakes of the Clinton years when centrist Democrats rode the financial deregulatory bandwagon. What I’m talking about is the McHenry-Meeks Madden “fix” bill, the “Protecting Consumers’ Access to Credit Act of 2017”. The bill effectively preempts state usury laws for non-bank finance companies like payday lenders in the name of ensuring access to credit, even if on extremely onerous terms.

Right now there's only one Democratic co-sponsor, but others seem to be preparing to join in. They shouldn't, and if they do sign onto this bill, it should only be in exchange for some solid consumer protections to substitute for the preempted state usury laws. This bill should be seen as a test of whether New Democrats "get it" about financial regulation. I'm hoping that they do. If not, perhaps its time to find some new Democrats.   

CFPB Politics Update

Time for a CFPB politics update:  FSOC veto, Congressional Review Act override of the arbitration rulemaking, Director succession line, and contempt of Congress all discussed below the break.

Senate Banking Committee Testimony

I'm testifying before the Senate Banking Committee this week about "Fostering Economic Growth: The Role of Financial Institutions in Local Communities".  It's the undercard for the Comey hearing.  The big point I'm making are that the problem is not one of economic growth, but economic distribution.  While the US economy has grown by 9% in real terms since Dodd-Frank, real median income has fallen by 0.6%.  That's pretty grim.  The gains have all gone to the top 10% and particularly the top 1%.  

None of the various deregulatory proposals put forward by the financial services industry have anything to do with growth, and they have even less to do with ensuring equitable growth. For example, changing the CFPB from a single director to a commission or switching examination and enforcement authority from CFPB to prudential regulators shouldn't have anything to do with growth.  It's a reshuffling of regulatory deck chairs.  

The banking industry has been doing incredibly well since Dodd-Frank, outperforming the S&P 500, for example.  You'd never know it, however, from their trade association talking points. It really takes a certain kind of chutzpah to demand the repeal of consumer protection laws and laws designed to prevent the privatization of gains and socialization of losses when you are already doing so much better than the typical American family.

My complete written testimony can be found here. 

Foreclosure Crisis Update

As the subprime foreclosure crisis grinds down slowly (there are still roughly 3 million pre-crisis subprime mortgages outstanding, many of them delinquent), and the HAMP program sunsets, the time has come to appraise the total damage done. In the ten years from 2007 through the end of 2016, about 6.7 million foreclosure sales were completed, and another 2 million or so short sales and deeds-in-lieu of foreclosure brought the total home losses to about 8.7 million, according to HOPE NOW.

Subprime mortgages accounted for 2 million of those foreclosure sales and perhaps another 500,000 of the stressed sales. The 2.5 million total home losses roughly matches predictions made at the onset of the crisis, and exceed by a considerable number the total number of subprime mortgages made to first-time home buyers from 2000 to 2007. In other words, subprime mortgages subtracted more than they added to home ownership.

The pre-crisis loans are by no means all resolved. About one million active mortgage loans were modified under the HAMP program, meaning that interest rates and payments were reduced for up to five years. Many of those mortgages will face steep rate and payment increases in the coming years, and many are also in negative equity, making sale or refinancing difficult or impossible. A total of around 8 million mortgages were modified under various programs at some point, although a significant portion of those later ended up among the 8 million home losses. The good news is that the number of homes whose mortgage exceeds the market value (underwater or negative equity) has declined from 30% of homes to fewer than 8%. The bad news is that just under 8% of homes are still underwater, a precarious situation that remains historically unprecedented.

These stats and many others can be found in an excellent new monthly housing finance data compendium from the Urban Institute.

Consumer Rights to Know Regarding Adverse Action

Four core federal consumer financial laws—the Truth in Lending Act (and Reg Z), the Electronic Fund Transfer Act (and Reg E), the Real Estate Settlement Procedures Act (and Reg X) and the Equal Credit Opportunity Act (and Reg B)—all have a mechanism whereby a consumer has a right to know why a financial institution denied a claim of an error or a credit application.  I've often puzzled over how much work these provisions really do--TILA and EFTA and RESPA are attempts at informal dispute resolution, while ECOA is a way of policing discriminatory lending (if the creditor cannot come up with a plausible reason for the denial, there's a problem).  But at the end of the day, there's no guaranty of any relief for consumers from these provisions.  

Today, however, I started to understand these provisions better because of the mess that's going on with student loan forgiveness.  The federal government has a major loan forgiveness program for those who work 10 years in public service or at non-profits. Apparently some applications for loan forgiveness eligibility have been denied without any explanation. That really puts borrowers at a loss--they can't tell if the problem is simply a missing form or incorrect paperwork or that they truly aren't eligible or that's the government's loan servicing agent has made a mistake.  That's a pretty awful situation because without more information, a consumer cannot figure out if there's a simple, low-cost way to resolve the issue, if the only solution is through litigation, or if the consumer is truly in the wrong.  

On a related note, the potential revocability of the loan forgiveness eligibility letters strikes me as teeing up the mother of all promissory estoppel cases. 

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."

CFPB Tales Told Out of School (Updated)

Former CFPB enforcement attorney Ronald Rubin has a lengthy attack on the CFPB in the National Review. It's got lots of sultry details, but there's nothing new and verifiable in the piece.  Instead, it's all tales told out of school, unverifiable personal anecdotes by Rubin, who seems to have an particular axe to grind with certain other CFPB staffers, and an ideological one too. Incredibly, Rubin, a former Managing Director for legal and compliance at Bear Stearns, holds up the oft-feckless SEC as a model of good enforcement practice, and criticizes the CFPB for any departures from that practice. 

The point of the piece seems to be that the CFPB is an agency gone rogue and that this wouldn't have happened if the CFPB had just been structured as a bi-partisan commission. That's hogwash. Assume that everything Rubin claims is true and correct. Even if so, every single problem Rubin identifies in the piece could just as easily have occurred at a bi-partisan commission. Partisan hiring? Of course that can happen because the staff hiring decisions (other than those of the personal staffs of the commissioners) are done by the commission chair and people the chair has selected. Secrecy and stonewalling Congress? We see allegations about that regarding agencies all the time (and that from agencies not facing partisan witch-hunts). Unhappy employees? Check. Pressure on regulated firms to settle enforcement actions? Check. Claims of discrimination by employees? Check. These are problems that can occur at any agency, irrespective of its structure or funding. 

Fake News, Special Carrie Sheffield CFPB Edition

The "fake news" phenomenon has gotten a lot of attention of late, but there's also the problem of its kissing cousins, faux academic research and opinions piece that springboards off of fake news and faux research.  A comically bad example of the latter category is the hatchet job Carrie Sheffield tries to pull on the CFPB in a piece on Salon.com.  In a nutshell, Sheffield (1) accuses the CFPB of being "rampant with internal racism and anti-woman bias," (3) claims that the CFPB has resulted in an increase in bank fees, and then (3) makes a big deal out of CFPB employees' political donations tilting toward Democrats.  The first and second points are simply false and not supported by the evidence Sheffield cites.  The third point is just irrelevant, but shows Sheffield to be nothing more than a partisan hack.  Sheffield's piece really doesn't merit a response intellectually, but given the current political climate, it's necessary to respond to any calumny, no matter how ridiculous.  So a point by point follows, after which I share a few thoughts on the political price tag that will come with trying to get rid of the CFPB.

The CFPB and Behavioral Economics

This post is an extended aside from my previous post about David Evans' argument about the CFPB's mindset and institutional incentives.  The point isn't critical to Evans' argument, but I'm writing because it really irks me because it shows such a lack of understanding about the CFPB.  Specifically, Evans suggests that the CFPB's supposed emphasis on preventing consumer harms rather than maximizing consumer welfare stems from the CFPB’s “intellectual foundation in behavioral economics.” This just wrong.  The CFPB really doesn’t have a behavioral economics DNA. (Heck, behavioral economics hasn't made much of a mark on government in general).  

The CFPB and Consumer Welfare

David Evans has an interesting article on PYMNTS that argues that "The fundamental problem with the CFPB ... isn’t who’s on top. It is that the CFPB does not have an institutional desire, or incentives, to make sure that the financial services industry supplies consumers with products that consumers need, including loans.” It’s refreshing to hear a CFPB critic argue that the issue isn’t really with the CFPB’s structure, but with its worldview. But Evans is still wrong.  

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.  

Is It Time for the CFPB to Regulate Retail Bank Employee Compensation?

It doesn't take a genius to figure out that incentive-based compensation like the type featured in Wells Fargo's current and previous consent orders has the potential to encourage fraud and steering of consumers into inappropriate products in order to make sales numbers. Here's the thing:  there's little regulation of retail banking employee compensation. Instead, banks are relied upon to self-regulate, to have the good sense not to have unduly coercive incentive compensation and to have internal controls to catch the problems incentive compensation can create. But when a leading bank like Wells Fargo repeatedly fails to have good sense and to have sufficient internal controls, it suggests that it might be time for more directed regulation that will create clearer lines that facilitate compliance.  

The CFPB already regulates the compensation of mortgage originators (loan officers and brokers), limiting compensation based on loan terms to 10% of total compensation. But this regulation applies only to mortgage loans. There's no regulation of retail banking employee compensation generally.  And there are some big wholes in the CFPB mortgage loan officer compensation regulation. In particular, the CFPB's regulation does not cover compensation based on the number of loans made or the size of the loans, only on the terms of the loans. That leaves the door open for banks to set up compensation schemes that pressure employees to engage in fraud to meet quotas and get bonuses. 

So what can be done going forward?  

Not Wells Fargo's First Rodeo...

Over on Twitter, Michael Barr noticed that there's an eerie similarity between Wells Fargo employees team members being incentivized to open up unauthorized deposit and credit card accounts for consumers and another practice that got Wells in trouble in 2011, falsifying borrower income and employment information in order to sell debt consolidation, cash-out refinance mortgage loans at sub-prime rates (often to prime borrowers).  Wells entered into an $85 million consent order with the Federal Reserve Board in July 2011 over these practices. (See summary here.) The consent order noted that it was Wells incentive-based compensation and minimum sales quotas that drove the employee fraud:  

B. Under Financial's sales performance standards and incentive compensation programs, Financial sales personnel, called "team members," were expected to sell (a) a minimum dollar amount of loans to avoid performance improvement plans that could result in loss of their positions with Financial, and (b) a minimum dollar amount of loans to receive incentive compensation payments above their base salary.

This rather expensive consent order should have been a giant red flag for Wells Fargo's compliance department, for Wells Fargo's board of directors, and for John Stumpf, Wells Fargo's Chairman/CEO.  It should have caused Wells Fargo to reexamine its loan officer compensation structures throughout the bank.  One assumes that the consent order did not come out of the blue in July 2011, but was likely the result of months if not years of investigation and negotiation.  That suggests that Wells should have been aware of problems with its compensation system substantially before it began firing employees in 2011 over the unauthorized account openings.  As ugly as things already look for Wells, we might learn that things were in fact worse. 

John Oliver and Consumer Law YouTube Videos

I'm trying something new this year. My consumer bankruptcy policy seminar students will read many great articles by many wonderful academics on this blog, as well as others, but this year, their "reading" will also include a great deal of YouTube.

90% of the videos are John Oliver segments from his excellent show on HBO, Last Week Tonight. They cover particular "products" (student loans, credit reports, debt buying, payday loans, auto loans, retirement plans and financial advisors) and middle class issues (minimum wage, wage gap, wealth gap, paid family leave).

I thought Credit Slips readers might enjoy seeing them all in one place. Here they are in no particular order. Let me know if I've missed any!

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. 

Further Debate About Debt Collection Reform and Credit Availability

The Center for Responsible Lending has produced a nice, new empirical paper reflecting on and refuting the notion that certain debt collection reforms restrict the flow of consumer credit. The analysis is careful and impressive, and the natural laboratory experiment they found is fun and intriguing. In a nutshell, North Carolina in 2009 and Maryland in 2012 imposed new restrictions on debt buyers suing consumer debtors on purchased accounts (both states now require actual documentation of the debts and their ownership to support such suits). On cue, in the period leading to these reforms, the credit lobby predicted gloom and doom in terms of restricted access to credit, especially to sub-prime borrowers, if such liberal nanny-laws were adopted. Several years later, the CRL decided to look back and test this. Comparing the change in the number and dollar volume of new credit lines in North Carolina and Maryland in the two years before and after each of the reforms (coincidentally, periods of general economic contraction and recovery, respectively), and comparing these differences with comparable data for selected peer states and the nation as a whole, did the reforms seem to have a noticeable effect of reduced access to credit in these states?  The simple answer, of course, is no (i.e., less contraction in North Carolina than elsewhere during a recession, and more expansion in Maryland than elsewhere during recovery). The more nuanced answer means the debate will rage on.

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.

 

 

 

 

 

The Financial Lives of Undocumented Immigrants

We know little about the financial lives and credit constraints of undocumented immigrants, partly because they are such a difficult to reach population. But Slips contributor Nathalie Martin gained access to this population in Albuquerque, New Mexico, interviewed 50 immigrants, and recently published a paper that provides an important glimpse into how this population handles money and finances. As the paper's title -- Giving Credit Where Credit Is Due: What We Can Learn from the Banking and Credit Habits of Undocumented Immigrants -- suggests, this population is leery of taking out credit, despite having so little income and savings that unexpected expenses quickly can become financial crises.

One of the most interesting, but expected findings is this population's extremely low level of savings. When asked if they could handle an unexpected expense of $100, three-quarters of respondents (37 of the 50) said they could not. But the majority of interviewees also expressed serious concerns with taking out credit, including via credit cards and the almost inevitable title loans (and payday loans, but most payday loans require a bank account, which a majority of respondents did not have). Indeed, they stated that they would rather ask family and friends for help, including help in trying to find work, which adds nuance to what we know about low-income individuals' feelings about relying on family and friends to deal with unexpected expenses (for instance, see Laura Tach and Sara Greene, Robbing Peter to Pay Paul). Martin's paper also contains data about how undocumented immigrants think about what ultimately often are legal problems and using (or not using) the legal system. Taken together, the paper provides a needed first glimpse into the financial lives of a subset of people who are in the country.

The Promise and Limits of Postal Banking

It’s easy for Progressives to get excited about the idea of postal banking: a public option for banking! What’s not to love?

I’m glad to see the idea of public options in financial services getting some play of late; it’s something I’ve championed for a while in payments and housing finance. But I think it’s necessary to recognize some of the limits to postal banking. In particular, it's not at all clear to me why we would want to involve the Post Office in the public provision of financial services. What the Post Office offers is a way to recreate a brick-and-mortar branch bank network. This really doesn't make a lot of sense for 21st century banking. Additionally, postal banking is often pitched as an alternative to payday and title lenders. Before we go running down that path, we should think about what it means to have the government in the payday lending business.

Credit Slips Unofficial Contest: Win Everything (all the glory that is)

Credit Slips has great readers, and I'd love to encourage more of our readership to comment. So I've created this contest, of which I will be the sole judge, except that I'll probably actually let John Pottow decide to keep it quirky.

Here's the challenge. What is an important legal protection for consumers that nobody has ever heard of? I don't mean literally that nobody has heard of but rather a consumer legal right that is poorly understood or underutilized. Even your fellow savants (aka nerds) who read Credit Slips will be blown away to learn of this law. Federal or state laws are fair game, and while the law does not have to be strictly a borrower protection, it should have some connection to household financial security or credit.

I'd love to give you an example but I don't want to take the wind out of everyone's sails by revealing my entry.

The prize is only glory and bragging rights (and maybe a mention in my new Consumer Law textbook) but at least it's not an all-expense paid trip to the next Presidential debate.

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. 

Pro Publica: Extraordinary Struggles of African American Debtors

I understand what it's like to live in a low-income family. I can only begin to try to understand the extraordinary struggles facing low-income families who also happen to be black. Pro Publica has just released a story and accompanying study that helps a bit to bridge this empathy gap.

Along the way, the story raises a frustrating point about our legal system that impacts all lower-income communities, but black folks in particular: Most legal protections against the kinds of rapacious collections activities described in the Pro Publica story require the debtor to affirmatively invoke the protections. For example, the story notes a collector explaining "if Byrd had filed a claim in court stating that the funds were exempt, the garnishment would have been terminated." Does the tragic irony escape this commentator? Byrd doesn't have enough money to pay the $29 sewer bill--do we really expect her to hire and pay for a lawyer to "file a claim in court stating that the funds were exempt"?! Similarly, the story describes default judgments being entered on time-barred debts because the debtors failed to invoke the statute of limitations--why in the world would a rational system allow time-barred debt to be revived against an impecunious debtor for failure to pay for counsel to raise this defense?! It's a self-fulfilling prophesy. The clever and unscrupulous inevitably prevail in a system where "The law doesn’t require anyone to tell debtors like Winfield of the [head-of-household 10% garnishment] exemption, and the burden is on them to claim it."

The story also cites and links to a study (and comments from study contributor and Slipster, Bob Lawless) on racial disparities in Chapter 13 practice. I've witnessed the emotional fervor that this study can whip up in a crowd of bankruptcy attorneys ... but the Pro Publica story ought to prompt us to return to the provocative question of whether, intentionally or not, directly or indirectly, our debt collection and debt relief systems are disparately impacting our black neighbors. Fixing problems that fall more heavily on these debtors would improve the system for everyone.

Image courtesy of Shutterstock

Prime, Subprime, Deep Subprime, Suprime-Like . . . and hold it, my fav "Aspiring Prime"

What's in a name? A lot of heartache, potentially, as Johnny Cash explained in A Boy Named Sue.

The consumer finance industry is awash in labels for lending. Despite the lack of data, and clear analysis, that left certain people (apparently nearly all of Wall Street) surprised about the housing crisis, the lending industry is still defining success for itself. Kevin Wack at American Banker examines the "slippery" definition of subprime, giving examples of Equifax recalibrating the "subprime" and "deep subprime" labels to different places on the credit score range. The result: instantly, the percentage of subprime auto loan originations falls from 36% to 28%.

Labels themselves do not predict default risk (we hope the actual underwriting, including credit score, does that work). But labels do matter. Consistent use of terms such as "prime" and "subprime" help government and researchers study trends and make consistent, reliable determinations about markets. They make sure that various regulators are looking at similar loans, and they help the public evaluate their credit standing.

Maybe this is a project for the Financial Stability Oversight Council, which devoted one-page to consumer protection in its 100-page 2015 report. In what I take as a sign that FSOC should tackle this issue, there is even a heading on "Data Gaps."

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. 

Faster Payments: Is There a Business Case?

The Federal Reserve System has embarked on a project of exploring the possibility of faster retail payments in the United States.  A similar move has occurred with the UK Payments Council.  At the same time, the Electronic Payments Network is rolling out a faster version of ACH.

Here's what puzzles me:  what on earth is the business case for faster retail payments in the United States?  The U.S. payment system works incredibly well. Yes, it has flaws: the interchange system is unfair and security is atrocious. But those aren't really speed issues.  Real-time authentication is a security issue, but that's separate from speed of payment clearance and settlement.  

Now, it's true that the US lags behind other countries in terms of mobile payment technology.  We don't have anything like Kenya's m-Pesa mobile payment system. But there's a reason for that:  we don't need m-Pesa in the US because we already have a functioning retail banking system, and our banks are better safety-and-soundness risks than our telecom operators.  (Kenya's government owns a large share of m-Pesa, making it quasi-guarantied, I guess.)  

So readers, tell me, what am I missing?  Is there a business case, or is this just about chasing shiny bells and whistles and wanting to have the latest technology just because?  My sense is that we're seeing an "iPhone effect" of wanting the best and newest, even though the current system is just fine. 

Madden v. Marine Midland Funding

In a recent case called Madden v. Marine Midland Funding, the Second Circuit ruled that a loan owned by a debt collector violated New York's usury statute.  The loan had been originally made by a national bank and was subsequently sold to the debt collector when it was in default.  There's no question that the state usury law was preempted when the loan was held by the national bank.  The Supreme Court's (awful) Marquette National Bank v. First of Omaha Service Corp. decision from 1978 makes that very clear.  (The Court suddenly discovered in 1978 that over a century of legal understanding of the 1864 National Bank Act was somehow wrong and that banks had been leaving lots of money on the table.)  

The debt collector argued that because the loan had been made by a national bank, it carried preemption of state usury laws with it as a permanent, indelible feature.  "Applesauce!" proclaimed the Second Circuit:  National Bank Act preemption of state usury laws extends no further than National Bank Act regulation.  Preemption is part of a package with regulation, but once the loan passes beyond the hands of a National Bank, it loses its preemption protection and becomes subject to state usury laws.  (Some of you might recognize that this is an argument I made several years ago. Plaintiff's counsel sent me a very nice email to this effect.  You owe me a citation, 2d Circuit!).  

Is There a Student Loan Debt Crisis?

I've been a skeptic for some time about claims that we have a student loan "crisis" in the United States. For individuals mired with student loan debt, it is very much a crisis, of course.  But my reluctance to term growing levels of student loan debt a crisis reflects the fact that student loan debt is highly concentrated within the population and is generally structured in a way that does not create sharp liquidity crises:  long (and often deferrable) maturities, no sharp repayment shocks, and often offers established repayment and forgiveness programs. (This is more true of government loans than private loans.) And, while student loan debt is growing rapidly, it is still only about a 9th of the size of the mortgage market. All of this has kept the student loan kettle from boiling over.  

Yet at the same time it is precisely because of the concentration of student loans in the younger population that it is concerning.  Large debt loads at the beginning of one's adult life are likely to have very different effects on than debt spread out over a life time.  Moreover, student loans are not incurred based on current income, but on assumptions of future income (if that), so student loan debt burdens are more likely to be poorly calibrated to borrower's actual earning capacity. Additionally, because student loan debt is not dischargeable in bankruptcy (except in extreme circumstances), unlike other types of debt, it likely to stick around.  And, unlike various types of secured debt, there is no "put" option. A homeowner who runs into trouble with a mortgage or a cash-strapped auto loan borrower can always sell the house or car (or let them be repossessed) to pay off part or all of the debt. That's not possible with unsecured debt.  

The real concern with student loans is not an acute liquidity crisis, like a mortgage payment resets or a massive surge in defaults, as with underwater homeowners.  Instead, the systemic danger from student loans is a debt overhang problem in which consumers' consumption habits are altered by the constant drag of debt service. That's not a "crisis" yet, but it's a problem that needs to be addressed before it becomes one. 

Rent-to-Own Hair Weaves

Apparently there is a business of rent-to-own hair weaves.  As a bald man, this is of particular interest. Below is a description of some of the program:

Please use our purchase program. The owners of this website or The Weave Loan Store/Weave Loans is not a lender.  Approval will vary based on credit determination and state law. This transaction is a rental-purchase agreement (or in NV, a lease agreement with an option to purchase; in IA, ND, NE, and SC, a consumer rental-purchase agreement; in CT and NH, a rent-to-own agreement; in AK, DC, DE, HI, ID, KS, OR, SD, VA, and WA, a lease-purchase agreement; in MA and RI, a lease; or in VT a consumer lease agreement). The Weave Loan Store Purchase Program is not available in MN or WI. For Consumers in Massachusetts and Rhode island, at any time after the initial payment, [sic]. You will not own the merchandise in The Weave Loan purchase program until the total amount necessary to acquire ownership is paid in full or until you purchase your early purchase option of our program. Ownership is optional. For consumers In VT, minimum 18-week  billing period applies. Product availability and pricing may vary by store, the internet sales, and seasons.. The Weave Loan Store Hair Extension Sales is not responsible for merchandise damaged by the customer. Free or reduced rent offers will not reduce total rent or purchase-option amounts. Our program contains credit and no credit check and no credit needed. The Customer must agree to not abide by the merchandise care instructions it is and shall hold The Weave Loan Store harmless of any damage caused by the customer. Program validation and Agreement requires verification of residence, income and personal references. You can release merchandise. The Weave Loan Store and Weave Loans, Wig Loans etc. are trademarks of Couture Enterprises INC. and the use of the names in anyway without written permission of the owners of Couture Enterprises is strictly prohibited and if used without permission will be subject to penalty of the law. By using the services and participating in our program are agreeing to the Terms & Conditions of this website and The Weave Loan Store. By using the services on this website you are agreeing to the Terms and Conditions listed.

There are clearly some editing problems with this langauge, such as "The Customer must agree to not abide by the merchandise care instructions".  

There's also the irony of a place called "The Weave Loan Store" claiming that it's not a lender. 

I particularly like the highlighted portion noting that "You can release merchandise."  Perhaps that's meant for hair weave businesses to finance their weaves and then sublet them to customers, but if not, how'd you like to rent my weave? 

But here's the real question:  what happens if you default on the rental?  Can The Weave Loan Store replevy the hair?  I don't think there's a self-help remedy here that doesn't involve breaching the peace.  And how does The Weave Loan Store prove that the hair being replevied is its hair?  It's not as if weaves come with serial numbers (as far as I know). 

Lessons For Consumer Protection From The World Of Inclusive Capitalism

Lately I have been teaching courses with names such as "Global and Economic Justice" and "History, Impacts and Regulation of Consumer Credit" instead of "Bankruptcy," "Secured Transactions" and "Chapter 11 Reorganizations." So I have been reading different books and listening to different speakers. A lecture I attended recently by Xav Briggs  here brought to my mind a couple of books that I use in one of my courses, “Borrow” and “Debtor Nation” both written by Louis Hyman. In many ways Hyman's books remind me of "Credit Card Nation" the outstanding and "ahead of its time" book by Robert Manning which I used extensively when I created my consumer credit course in 2002. 

Part of the wisdom I find in each of these books is the caveat that you cannot understand consumer protection without understanding the nature of American capitalism or the drive for an above-market return. This was never clearer or more of a "blow to the side of the head" than during the frenzy in the early 2000's, and perhaps nothing demonstrates it more crassly than the rating agencies covering their eyes as they rated subprime securitizations allegedly in order to "keep the business." 

Who is Helping Consumers With Defaulted Student Loans?

Clearly, the biggest surprise in consumer borrowing since the crash has been the explosive expansion of student loan debt. It has surpassed both auto lending and credit card lending. And, since it ties with Payday Lending and pre-crash sub-prime mortgage lending for the thinnest underwriting there are defaults aplenty. 

Consumer advocates are rightly urging the Department of Education to provide simpler and clearer paths forward for consumers with student loans in default but many people still need a helper.  As defaults in mortgage loans and on credit card loans have fallen, providers who live on the profits of counseling people who default on those loans have turned their attention and their advertising and marketing to consumers who are in trouble on their student

Can We Count on Macro-Economists to Analyze the Impacts of Inequality?

Prior to the crash, only a very few macro-economists were studying consumer borrowing and fewer still were investigating inequality of income or of wealth as an important macro-economic factor. Work in macro-economics is done at academic institutions, the Fed, think tanks and government and private enterprises. Historically, very few PhD dissertations in macro-economics dealt with consumer finance or consumer spending or inequality issues. Prior to the crash there was a divide between the small minority (which included some high prestige folks such as Joseph Stiglitz) and the dominate majority. Both sides make extensive use of mathematical formulae but the majority looks more like physics and the minority may include a dose of sociology.  This is important stuff because government fiscal policy and even monetary policy and private business decisions are often based on the work of these folks. The majority tended to believe that humans act rationally while the minority helped develop the field of behavioral economics. 

Community Banks and the CFPB

I'm testifying before the House Financial Services Committee on Wednesday at a hearing entitled "Preserving Consumer Choice and Financial Independence." I'm the only non-industry witness (no surprise there). For those interested, my testimony is linked here.  Here's the highlight:  

Community banks face a serious structural impediment to being able to compete in the consumer finance marketplace because they lack the size necessary to leverage economies of scale. The CFPB has repeatedly acted to ease regulatory burdens on community banks in an attempt to offset this structural disadvantage. While community banks continue to face serious problems with their business model, their profits were up nearly 28% in the last quarter of 2014 over the preceding year, which strongly indicates that they are not being subjected to stifling regulatory burdens.

Ultimately, if Congress wants to help community banks, the answer is not to tinker with the details of CFPB regulations... Instead, if Congress cares about community banks it needs to take action to break up the too-big-to-fail banks that receive an implicit government guarantee and pose a serious threat to global financial stability. Until and unless Congress acts to break up the too-big-to-fail banks, community banks will never be able to compete on a level playing field. 

Hacking and Systemic Financial Risk (Encore)

The data breach stories just don't seem to stop. (And why would they?). The latest (I think) is about a massive and sophisticated multi-million dollar hacking of several banks.  If you read down through the story, one of the things the hackers did was manipulate the balances of real accounts.  They'd change a real $1,000 balance to $10,000 and then have $9,000 wired to an account at another institution.  

But why take out only $9,000?  The hackers were being nice, I suppose, in that they didn't steal any actual depositor's funds (as far as we know). And that was also probably smart, because if they zeroed out an account, there might be a bounced transaction that would alert the consumer and then the bank to the theft.  But I don't know that we can count on future hackers being so polite, considerate, or careful. Indeed, they might actually want to create havoc by messing with account balances.  

I raised this scenario several months ago, and before that a couple of years ago. I think today's news confirms that the financial Armageddon via hacking scenarios I have nightmares about aren't totally farfetched. Between state-sponsored hacking (I'm looking at you DPRK), terrorist hacking (ISIS and Newsweek), and rogue individuals, I think we're looking at a matter of when, not if, we see consequences from financial hacking that go beyond a few hundred million in losses and result instead in institutions failing. 

Consumers Don't Shop for Mortgages and the CFPB Intends to Change That

Richard Cordray, the director of the Consumer Financial Protection Bureau, gave a short speech today at the Brookings Institution. In his speech, he outlined several steps the CFPB is taking to help fix the mortgage market. In his view, one of the chief problems with the mortgage market is that consumers do not shop around for mortgages the same way they shop for other products, including houses. According to a recent CFPB study, "almost half of all borrowers seriously consider only a single lender or broker before deciding where to apply."

The CFPB's aims to solve this problem with some new tools. More after the break.

Nostradamus-Style Predictions for Consumers in 2015

First some easy ones you all know:

1. The stock market will drop, perhaps precipitously, making now great time to rebalance retirement portfolios.

2. The price of gas will inch up and in the meantime, more states will add a little gas tax here and there to quietly fill empty coffers.

On Mortgage Lending:

3. There will be more low rate, “no closing costs” home refinancings available to good credit risks, as lenders try to figure out what to do with themselves. Not much of a spoiler here, since this is already happening.

4. More lenders will be answering the phones when borrowers want to settle up their mortgages. Lenders will be cutting the red tape that is costing them a fortune. Also, more lenders will be settling pending home foreclosure litigation. Something is better than nothing, some might be thinking. 

5. Cases that don’t settle will result in more large judgments against lenders, in part because lenders did not do some of the things mentioned above all along.

On High -Cost Lending:

6. The CFPB will announce its long-awaited payday lending rules, which will apply to all high-cost loans, including payday loans, title loans, and high-cost installment loans.  These new rules will go a long way (though perhaps not all the way) to curbing high-cost lending abuses and protecting consumers from the debt trap. After all, the bureau is called the Consumer Financial Protection Bureau. Lenders will not like the rules much and may even sue over them but they won’t have a high-cost leg to stand on.

Is a 36% Cap Radical?

I was pleased to see today’s New York Times editorial entitled “A Rate Cap for All Consumer Loans.”  It created a very public description of an industry indiscretion involving loaning money to the military at over 36%. Those loans are illegal because a federal law makes it so, a law that passed with broad and deep bipartisan support because trapping military personnel in high-cost loans interferes with military readiness and thus threatens national security. This editorial, not in some fringe publication, but rather the New York Times, argues that we all deserve the same protections from high cost loans.  I agree (in this recent article), and think the time is right to start listening to people and not industry on this topic.

Is a federal 36% cap radical? Historically, 36% would seem heinously high. Plus, if 36% is radical, why does much of the U.S.‘s eastern seaboard's state law forbid consumer loans with interest rates of over 36%? Are these radical states? The public favors a hard cap, over and over again in every study,  regardless of politics. Hearing politicians support consumer loans with 500% or even 1,000% interest, is so mysterious it makes me want to look at their list of campaign contributors.  Remember, real people over political contributions. We elect politicians and pay their salaries. In turn, they speak for us. Do you like what they are saying?

Hacking and Systemic Financial Armageddon

The revelation that 76 million JPMorgan Chase consumer accounts were compromised by hacking should be scaring the heck out of us. The Chase hacking is a red flag that hacking poses a real systemic risk to our banking system, and a national security risk as well. Frankly, I find this stuff a lot scarier than either ISIS or our still largely unregulated shadow banking space.  

Consider this nightmare scenario:  what if the hackers had just zeroed out all of those 76 million Chase accounts and wipes out months of transaction history making it impossible to determine exactly how much money was in the accounts at the time they were zeroed out? The money wouldn't even have to be stolen.  Just the account records changed.  What would happen then?

Apple Pay and the CFPB

Apple Pay has been getting a lot of attention, and I hope to do a longer post on it, but for now let me highlight one possible issue that does not seem to have gotten any attention. I think Apple may have just become a regulated financial institution, unwittingly. Basically, I think Apple is now a "service provider" for purposes of the Consumer Financial Protection Act, which means Apple is subject to CFPB examination and UDAAP. 

Toward a Universal Ability to Repay Requirement

The latest consumer financial product to come under the regulatory microscope is subprime auto lending, which has seen a boom in the last few years.  The subprime auto market's boom underscores a real problem in consumer financial regulation: different consumer financial products have developed different substantive regulatory regimes that are not justified by differences in the products. Most fundamentally, we have an ability-to-repay requirement for mortgages, a different ability-to-pay requirement for credit cards, and nothing else for other products. In light of the changes in all consumer finance markets, in which securitization and sweatbox lending have undermined the traditional lender-borrower partnership that encouraged responsible lending, it is time to consider a universal ability-to-repay requirement for consumer credit. 

Criminal Law and Financial Distress

I commend to Slips readers Alex Tabarrok's post over at Marginal Revolution entitled "Ferguson and the Modern Debtor’s Prison." 

Bad Paper: Chasing Debt from Wall Street to the Underworld

That's the name of a new book by Jake Halpern coming out in October. The New York Times has an excerpt on their site. If the excerpt is anything like the book, it's going to be gripping.

What's even cooler is that someone actually created a video game based on the book. Or at least on the debt collector business part of the book. You can play as a debtor or a debt collector and see the story through. It's web-based image-and-text but really well done (just some minor innacuracies).

 

A Bubble in Deceptive, Abusive Subprime Auto Lending?

In a long story in today's edition, the New York Times is reporting a bubble in often deceptive and abusive subprime auto lending on unaffordable terms, including very high rates of interest.  Although not quite the threat to the overall economy that the subprime mortgage bubble created eight or nine years ago, this apparent new bubble in lending for used vehicles has some similar features (targeting vulnerable consumers, lax underwriting, securitization, investors seeking high returns) and is causing significant pain for low income and unsophisticated borrowers.  A few regulators are mentioned in the story, but oversight so far seems to have been lax.

CFPB: Let Consumers Make Their Complaints Public; All Rejoice

This week the CFPB announced it's seeking public comments on a proposed policy that would allow consumers who file a complaint with the agency to share all of the (non-personally identifying) details of that complaint with the public as part of its Consumer Complaint Database. (Right now the database only identifies the financial product complained about, name of the company, and a category identifying the topic of the complaint).

As a researcher, I am beyond thrilled at the possibility of being able to drill down into the details of complaints. This might allow us to go even further than the CFPB or Ian Ayres and others did last year in analyzing the complaint database. 

Good players in the consumer finance space should be thrilled too: more data will allow us to really separate those who are doing right by consumers from those who aren't. It would allow the public or researchers to decide for themselves whether someone was making a mountain out of a molehill or if was identifying a real problem in their complaint. The fact that we currently don't have transparecy into complaints is a common (and justified) complaint by the debt collection industry. The CFPB is also proposing to make public the institution's response to the complaint (at their option). Anyone could then evaluate whether they think particular industries/institutions are responding appropriately to complaints. 

Being Unbanked, Part 1

Note from Katie Porter: This guest post is from Jennifer Song, senior staff attorney at the California Monitor Program. Jennifer pitched in and attended this workshop, and I hope Credit Slips readers will enjoy hearing about her experiences in a short series of posts. 

Last week, I, Jennifer Song, had the opportunity to join FinX/LA 2014:  Connecting to the Consumer Financial Experience.  Hosted by the Center for Financial Services Innovation as part of their three-day conference on consumer financial services,  FinX was an “in-the-field activity” that promised to give participants a “deeper understanding of the complexity of consumers’ financial lives in accessing financial services.” 

Upon arriving at the conference, we were placed into groups of four and given worksheets. The tasks to complete included cashing a personal check, cashing a pay check, purchasing a general purpose reloadable card and reloading the card, purchasing a money order, inquiring about auto title loans, etc.  We were given a little over two hours to complete these tasks in lower income areas throughout Los Angeles. With only a quick slideshow of interesting facts and a pep talk, we set off on our journey. 

While I will share my experience and how it shaped my thinking on low-income banking, I want to start by identifying factors that may have prevented me from fully experiencing and understanding the challenges facing the under banked and unbanked. First, we were traveled in groups of four; most people using these services do not travel in packs or with an entourage, and are not able to consult each other about transactions.  Second, while we were told to “dress down” in order to “blend in” while performing these transactions, I do not believe we were fooling anyone at the shops we visited.  Third, and perhaps the most glaring contrast, was that we were chauffeured around Los Angeles in a town car to perform these transactions. While I assume there is access to public transportation in or around these financial centers, Los Angeles is notorious for being difficult to navigate via the public transportation system (did you even know it has a subway?) Many of the financial centers were clustered together but major banking institutions were noticeably absent in these areas.