207 posts categorized "Consumer Finance"

Happy New Year: Shall We Make Some Resolutions?

posted by Nathalie Martin

Welcome to 2013 Credit Slips Readers! It’s time to think about our debtor/creditor future, what to keep and what to leave behind. Sometimes I ask my fellow bloggers if they made any financially-related resolutions but usually everyone say no, so this year, we’ll just make a nice list of resolutions through your comments!   My List:

1. I resolve to read less about the financial crisis (leave it behind, all) and more about other juicy financial news. First, I want to get my hands on Pound Foolish, a new book by Helaine Olen slamming the financial advice industry. Ms. Olsen claims that advisors are not generally on the side of clients but rather on the sides of various people who buy their love. Yes we knew that, but this still might be a good read. Olen exposes the fallacies spun by some of America's current personal-finance celebrities, including  David Bach, a former senior vice president at Morgan Stanley, and his Latte factor theory. Olen also takes on Robert Kiyosaki (Rich Dad, Poor Dad), apropos since one of his companies (Rich Global, LLC) filed for Chapter 11 back in August.

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Gift Cards and Bankruptcy

posted by Adam Levitin

There's a linguistic irony that "gift" is the German word for poison. What, then, should we make of the "gift card"?  

Senator Richard Blumenthal's introduced new legislation, the Gift Card Consumer Protection Act (S.3636) that aims to close up the loopholes in existing gift card regulation and to protect consumers with gift cards when the retailer goes bankrupt. The legislation has a few moving parts:

  • It expands the definition of gift card to include loyalty, award, and promotional gift cards.
  • It would make the prohibition on dormancy, inactivity, and service fees absolute. Currently, the Electronic Funds Transfer Act permits inactivity, dormancy, and service fees for cards that have been inactive for a year, provided disclosure requirements have been met.  
  • It makes the ban on expiration dates on gift cards absolute.  Currently, the EFTA allows cards to expire after 5 years if the expiration date is properly disclosed. 
  • It makes it illegal for bankrupt firms to sell gift cards and for anyone to resell gift cards issued by firms that have been in bankruptcy for more than a week. 
  • The bill creates an automatic stay exception for presentation of gift cards and requires the trustee/debtor in possession to honor gift cards at full value the same as cash. 

It'll be interesting to see what the opposition ends up being to the bill. The bill is dealing with two separate, but related problems.  

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Walmart for Women?

posted by Amy Schmitz

Say what you will about Walmart, but give it credit perhaps for partnering in a project aimed to empower female entrepreneurs.  Walmart's Women's Economic Empowerment Project in partnership with Enactus (a global non-profit organization) has been criticized by some as merely part of a public relations campaign to combat image problems in the wake of sex-discrimination lawsuits.  Regardless of whether that is true, however, the project has provided hundreds of women with workforce training and assistance in creating new businesses or strengthinging exsiting businesses in the United States alone.  The Project connects students with academic and industry leaders throughout the United States and other countries to create and carry out endeavors designed to empower women through education and entrepreneurial action.  

Walmart and Enactus award millions of dollars to fund teams of students and leaders who carry out their proposed plans to empower women.  Plans are selected for funding based on the following stated criteria:

  • "Degree of empowerment achieved for women
  • Media exposure (teams are required to recognize Walmart by name in all Walmart Women’s Economic Empowerment activities pertaining to signage, advertising and media outreach)
  • Project concept, execution, outputs and outcomes"

The "media exposure" component may again raise skepticism regarding Walmart's motives. Nonetheless, the program seems to be producing results so why complain?  Spokespersons for the Project report that hundreds of women in the United States alone have been able to enter or renter the workforce, receive promotions and increase their overall income due to participation in funded projects.  Those interested in the Project or applying for funding should check out the website and decide for themselves.  The application deadline for the next round of funding has closed, but the next round of selections should open soon. 


posted by Amy Schmitz
I have been working for a few years in developing and creating a consumer outreach website at MyConsumerTips.info.  The site is purely non-profit and has no sponsors or advertisers. It aims to simply provide consumers with “consumer tips” that change each day, independent summaries regarding debt-related and other consumer rights, quizzes and polls regarding such issues, and other consumer protection resources. It is user-friendly and interactive. This is part of my larger “Consumer Empowerment”service and experiential learning projects, and outreach endeavors.

Unfortunately, it is tough to gain traction for such non-profit sites without paying for promotions through Google or others. Also, there so many sites that purport to provide consumer resources that individuals suffer information overload and are not sure what to trust.

Hopefully, MyConsumerTips.info will deservedly gain trust, do some good and expand in ways that benefit consumers!  Check it out.

The Gender Divide in Payday Lending

posted by Amy Schmitz

Nathalie Martin has done great work and has posted comments on Creditslips.org regarding payday lending. I also have been interested in how these payday loans prey on consumers with the least resources and power, and have helped consumers with related issues through my outreach work. At the same time, I have had the privilege to have students like Adria Robinson, who take great interest in these consumer issues. Adria Robinson is so passionate about consumer issues that she volunteered to work with me in gathering the latest data on Colorado's payday lending post-passage of its new payday regulations in August of 2010. Thanks to Adria for her help with this post!

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When Squeaky Wheels Get Rusty

posted by Amy Schmitz

Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System.  The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.  

That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty.  Sure, the warranty covered replacement . . . but  not shipping (a la "fine print").  The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments.  Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.

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Layaway Fees Waived

posted by John Pottow

We've posted before about Layaway's resurgence after the Great Recession.  A new development: gearing up for the holiday season, many major retailers are waiving their layaway fees, and consumers are responding positively. Here's KMart's.  Also, embargos on various popular products are now being lifited.  This leads me to belive that Layaway's resurrection (in places where it died) may be long-lasting.  It seems that spending on layaway items has gone up in response to this campaign, which makes me wonder: is this just another way to drive foot traffic as the payments are made?  And if so, is there anything wrong with that?  Layaway, it occurs to me, has financing simplicity of the sort that should make the CFBP dance, so if customers like it, and it prevents consumer debt on excessive interest terms, isn't that a good thing?

Latest Visa Fraud

posted by Nathalie Martin

A heads up regarding the latest in Visa fraud. Royal Bank received this communication about the newest scam. This is hitting the midwest with a vengance and moving. The trick here is that they provide YOU with all the information, except the one piece they want. The callers do not ask for your card number; they already have it.  By understanding how the VISA & MasterCard telephone Credit Card Scam works, you can avoid this one.

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Payday Loans and the Tribal Sovereignty Model

posted by Nathalie Martin

Think about what happens when you pit tribal sovereign immunity against effective consumer protection laws. In my view, no one wins. Yet payday lenders are now very actively seeking tribes with whom to partner, in order to get the benefits of tribal sovereign immunity.  As one might expect, the payday lenders make out big and in most cases, the tribes get very little, at least so far.

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The Bully Model of Consumer Finance and Litigation

posted by Adam Levitin

There's a fearful symmetry in the consumer finance world. It's a symmetry of bullies between overreaching financial institutions and plaintiff strike suits, as in both, litigation costs present a ceiling, under which there's a license to overreach. 

What does a bully do?  A bully looks and acts tough and claims things to which s/he isn't legally entitled. But as we all know, if you push back against a bully, the bully is likely to back down; the bully doesn't actually want a fight. We see the bully model of consumer finance and the bully model of plaintiff litigation all too frequently. There's no sense, however, that we'd be better off eliminating both. Instead, interest groups look to eliminate one or the other, when the larger problem is in our adjudicative system, which imposes significant costs and delays substantive rulings. 

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Reputational Sanctions in an Age of Internet Manipulation?

posted by Adam Levitin

A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.  

This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things. 

The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

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Learn about Teaching Consumer Law at Houston Law Center May 18-19, 2012

posted by Nathalie Martin

On May 18-19, the Center for Consumer Law at the University of Houston Law Center will hold its sixth bi-annual Teaching Consumer Law Conference. This year’s theme is “Teaching Consumer Law in an Evolving Economy.” I have always enjoyed this conference as it is the only one in the country devoted exclusively to teaching consumer law.  It is designed for those currently teaching consumer law, those interested in teaching, as well as those who just wants to know more about consumer law issues. More than 30 presenters will discuss issues ranging from Fringe Banking, Debt Collection and Advertising, to Foreclosure, Payments and Arbitration.  For example, I will moderate a panel with Max Weinstein of Harvard and fellow blogger Jean Braucher, discussing how to fill unmet need for foreclosure defense through foreclosure defense clinics. There also are several presentations discussing consumer law from an international perspective, as well as discussions of teaching U.S. Housing Policy, foreclosure defense clinics, consumer arbitration, international perspectives, what’s new with the FTC, substantive regulation versus disclosure, and a host of other hot topics.  . Presenters include law faculty, adjunct faculty, and practicing attorneys. For more information and a registration form, go to http://www.peopleslawyer.net/for-the-lawyers.html.  For even more information, call or e-mail Richard M. Alderman, Associate Dean, Dwight Olds Chair, and Director of the Center for Consumer Law, at 713-743-2165 or alderman@Central.UH.EDU.


Platform, Infrastructure, Utility?

posted by Bill Maurer & Stephen Rea

While we’ve been blogging, Stevie has begun his dissertation fieldwork in Korea. He emailed Bill the other day: “Yesterday I opened a bank account here in Seoul, and conducted the entire interaction in Korean. For some reason, I don't get an ATM card, which is really strange. But in all likelihood I had no idea what the teller was trying to say to me, so I might end up getting a card in the mail next week or something. As ‘technophiliac’ as this culture seems to be, cash is still king; outside of the large department stores and global restaurant chains, I don't see any POS terminals.”

There’s hype, there’s reality, and there’s possibility around all the cashlessness claims that follow on the heels of mobile and other digital payment platforms. We want to conclude our guest blogging with a gesture toward some of the possibilities of mobile money--and a challenge for the Credit Slips community.

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Cash as Social Infrastructure

posted by Bill Maurer & Stephen Rea

Sticker in San Francisco: "Of course it's cash-only, it's the Mission."

Overheard: "Oooh, yeah, no, we don't take cards. Because the coffee is, like, local?" (both items courtesy Lana Swartz)

The word “cash” derives from Latinate words referring to “a chest or box for storing money,” not the money itself. The term originally meant the practices of storing, and the objects used to store items of value – not just money -- as well as the act of going to those storage devices to receive money (to “cash” a bill of exchange,, meant to go to the specific box where the money was). Cash as we know it today is more than a store of value and a medium of exchange; it has symbolic, pragmatic and artistic functions. In the US, even before Durbin, small merchants placed an extra surcharge on credit or offered discounts if customers used cash. Research being conducted at the Institute for Money, Technology and Financial Inclusion (IMTFI) is bringing to light a host of social, ritual and religious uses of cash and coin beyond their economic functions. What's their relationship to, say, mobile money? For us, they are design challenges more than anything else (see, e.g., the Royal Canadian Mint's MintChip, or discussions among developers about Google Wallet). Building an infrastructure for digital payments, especially in places that have been cash-only, entails some connection to the existing social infrastructures of cash.

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Cash: Killing It, or Building Bridges to It?

posted by Bill Maurer & Stephen Rea

Much has been written about the inherent riskiness of cash. It is dangerous because it can be lost, stolen, eaten, destroyed, etc. It is dangerous because it is difficult to track, thereby helping to facilitate crime. Many a potboiler plot hinges on a cache of unmarked bills. Anyone remember Trixie Belden? “‘That governess of yours won’t argue when I tell her to leave a fat roll of unmarked bills under a stone at the Autoville entrance tonight. She won’t notify the police either.’ He reached up a grimy hand and touched one of Honey’s shoulder-length curls. ‘Not when I send her a lock of your pretty hair with the note, eh?’” (Julie Campbell, Trixie Belden and the Red Trailer Mystery, New York: Random House Children’s Books, 1950, p.180).

In the comments on our last post, we can clearly see two poles of the cash debate: cash is for criminals, but digital payment will welcome Big Brother into our wallets. Why so stark a choice? Last year, the Fletcher School held a conference titled, “Killing Cash.” It was framed explicitly in terms of the possibility that “mobile money”—mobile phone enabled payment and money transfer services, like Safaricom Kenya’s much vaunted M-PESA—heralds the possible end of cash and coin. Most of these services work on a prepaid model via the mobile telecommunications network – basically like prepaid airtime minutes for a top-up (not subscription) phone (nice article here on e-money in Central Africa by Andrew Zerzan; short piece here on mobile money regulation). I put cash into the system by visiting an agent. The agent sells me “e-money” in exchange for my cash, and gets a commission. I can now send e-money to another client on the network, who goes to another agent to cash it out (usually without a commission). Or, I leave the value in my mobile wallet, for a little while or for a long time. This is not an “end of cash” scenario, however. It’s an addition of e-money to what had been—for the poor, without access to financial services and digital financial platforms—a cash-only world.

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New Panel Data!

posted by Alan White

The Fed has just released their data from the 2007-2009 panel Survey of Consumer Finances.  The SCF, conducted every three years, includes hundreds of variables on the assets, liabilities, income, and financial product shopping and utilization of American consumers.  Some questions include "what was the most important factor in your decision to refinance your mortgage?" and "during the past year, have you taken out a payday loan?".  The 2007-2009 panel data set is especially valuable because it offers a picture of household finances before and after the Global Financial Crisis; the 2007 survey respondents were resurveyed in 2009.  There is also a separate 2010 SCF survey, but those data have not been released yet. 

Possible research subjects one might explore with this data set include the relative wealth loss of different racial and ethnic groups, what type of consumers chose different types of mortgage loans and other credit products, and how financial product choice interacted with changes in consumer finances as the crisis unfolded.

The Fed staff's own summary of the data is here.  The paper describes wealth losses by wealth category and geographic region, but not by race or ethnicity.

Principal Reduction and Strategic Default

posted by Adam Levitin

Moral hazard, moral hazard, moral hazard....  How often have we heard that as a reason for why principal reductions can't be done.  As if it were the worst thing in the world.  

As an initial matter, we don't have to do principal reduction in a way that creates moral hazard, such as making principal reduction contingent on default and no strings attached. (To put it another way, we don't have to be stupid about the way we do principal reduction.) One solution would be principal reductions contingent on level of negative equity, not on default. Another would be to offer principal reductions only to those who have already defaulted (I don't like this because it penalizes those who kept paying, but the point is that it avoids moral hazard inducement). Another possibility would be to make principal reductions contingent upon paymentshared appreciation, which doesn't have to be a 50-50 split. Instead, it could be that initial appreciation goes all to the lender and then it starts to shift to the borrower. 

But let me suggest something counterintuitive and heterodox. Principal reduction is a case in which we WANT to encourage moral hazard. To understand why, you need to start with the understanding that our goal here is macroeconomic, not moral. The goal is stabilizing the housing market and the the economy, not balancing the moral cosmos and bringing harmony to the Force (not that there's anything wrong with that).

Making principal reduction contingent upon default means that there will be a bunch of people who default just to get the principal reduction. That's a "ruthless" group of people who are quite likely to be strategic defaulters otherwise. They are precisely the people who need to get principal reductions to incentivize them to stay in their homes in order to stabilize the market. We might not like rewarding people who would act opportunistically like this, but if you accept the issue as macroeconomic, not moral, then the results are what matter:  fewer foreclosures and a stabilized housing market.  

Girl Scouts Add Consumer Finance to the Badges

posted by Nathalie Martin

People with young girls may already have heard about this. Girl Scouts has rolled out a few new badges just in time for its 100 year anniversary. The badges have not been changed since 1987. Good bye fashion and makeup, hello Science in Style which covers nanotechnology in fabric and the chemistry of sunscreen. The new badges include thirteen related to financial literacy, that look like this. They include money counts, making choices, money manager, philanthropist, business owner, savvy shopper, budgeting, comparison shopping, financing my dreams, financing my future, on my own, and good credit. The "Financing My Future" badge requires girls to create a plan for paying for college, and the "Financing My Dreams" badge requires demonstrated skill in budgeting. "Good Credit" requires an understanding of the various ways to borrow money and what goes into building a good credit score.

As a daily finance article put it, “most of us understand intuitively that the Girl Scouts of America aren't just about selling cookies. What you might not know is that the green-sashed entrepreneur who preys on your weakness for Thin Mints is also preparing to be your son's boss." That's girl power you can take to the bank!

RDC App for Citibank?

posted by Adam Levitin

Citibank is running commercials featuring the ability to deposit checks remotely via mobile device, a process known as remote deposit capture. Citi isn't the first retail bank to roll out RDC--USAA, for example, has been doing it for a while, but USAA has almost no branches, so checks have to be deposited remotely by their farflung depositor base.

There's no question that RDC will become a standard retail banking feature over the next few years, but I'm still puzzled how RDC will overcome its fundamental security problem:  multiple deposits of the same check. If I write a paper check to you and you deposit it remotely by sending in an image, you can still deposit/cash the physical check  elsewhere.  And you can, in theory, deposit the same check remotely multiple times. Moreover, the ability to deposit remotely means that check forgers don't need to bother obtaining magnetic ink, etc.  

There are things banks can do to limit the fraud risk, but RDC continues to appear very vulnerable to a coordinated kiting scam or other organized attack. I'm not sure what would prevent my cousin Boris in Odessa from making mass deposits of bogus checks and clearing out a whole bunch of accounts before anyone was the wiser, especially if he used a gang of smurfs.  It'll be interesting to see how long it takes before a bank takes a major loss from a RDC scam, if it hasn't happened already.   

[Updated 2.28.11:  Bob Meara, the leading RDC analyst, makes a very good point in the comments that makes me think I should clarify some points in the post, namely who is at risk with RDC.  The risk I was discussing is the risk of the depository banks, where the checks are deposited.  There is also potential risk for the bank on which the check is drawn, but that is a separate risk.  There really isn't much risk that I see for either honest depositors or honest drawers of checks.  If you didn't write the check, you shouldn't be liable, although there may be some hassle in getting your account recredited from a fraudulent draw.  

Instead, the issue here is the risk to the banks themselves, not to the payor or the payee.  There is a risk that the payor bank pays on multiple presentments of the same check, but as Bob Meara notes in his comment, that's an easy enough risk to address with computer systems that will allow only one payment on the same check number and check amount.  

The real risk is to the depository bank.  Banks have to make funds available per a schedule in Reg CC. The problem is that Reg CC sometimes mandates funds availability before checks have cleared--that is before the depository bank knows that the drawer bank will pay on the check.  Thus, the depository bank might pay out on a check, but be unable to collect.  There are ways to reduce the risk exposure here, such as deposit limits, neural networks looking for errant activity, and faster check clearing via electronic processing. (One wonders why check clearing hasn't become real time in most cases...) But the basic problem still remains--banks have to make funds available before they always know if they can collect on the check.  A smart fraudster will try and determine which checks will take the longest time to clear (my guess is that it means checks drawn on small banks) and try to clean out the funds made available before the depository figures out that the check has bounced. ]

Credit for Parenthood (in the Wall Street Journal)

posted by Melissa Jacoby

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here

The Backdrop for BROKE: Consumer Debt Then and Now

posted by Katie Porter

In the introductory chapter of the book, Broke: How Debt Bankrupts the Middle ClassI present some data about consumer debt levels in the United States. As Bob Lawless and others have shown, levels of consumer debt are strongly correlated with bankruptcy filings. While conditions such as unemployment, rising health care costs, and skyrocketing college tuition--and recessions--all create pressures on consumers that lead to borrow, debt is the sine qua non of bankruptcy--the relief offered by the system is the reduction or elimination of debt--not the promise of a good paying job or a strong social safety net. Because bankruptcy is driven by debt, those filings help reveal whether the levels of consumer debt will create serious problems for the economy and American families.

In Broke, I present a figure, courtesy of the San Francisco Fed, that shows the dramatic growth in household debt in real dollars over the last few decades. Reproduced below, the figure shows that the sharp acceleration began in the mid 1980s. E-letter_figure_8 Figure1This is an important point to understanding why recovery is proving difficult from the recession. As I explain in the book, "The consumer debt overhang, however, began long before the financial crisis and the recession. Exhortations about subprime mortgages reflect only a relatively minor piece of a much broader recalibration in the balance sheets of middle-class families. . . . The boom in borrowing spans social classes, racial and ethnic groups, sexes and generations." Broke, pp 4-5. The gray bands on Figure show recessions; this recovery is more difficult, at least in part, because we have an unprecedented gap between income and debt. Is this gap disappearing as a consequence of consumer reluctance to borrower and tightened credit conditions?

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Should the Government or the Market Set Mortgage Down Payments? A New Study

posted by Melissa Jacoby

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

American Capitalism: Profit, But Fairly

posted by Adam Levitin

Adam Davidson wrote up an interesting apologia for Wall Street in the NY Times last week, which I think is ultimately a call for better regulation, rather than bank-hating.  I missed the piece originally, but Yves Smith found it and has nothing good to say about it. I think Yves is a little too harsh on Davidson. I've got issues with parts of the piece, but on different grounds, namely that it efuses to engage on the real issue. The problem isn't financial intermediation.  That's a perfectly fine thing that plays a useful role in society.  

Instead, the problem is when financial intermediaries do not treat the intermediating parties (meaning consumer and investors) fairly. The history of US financial services is nothing short of a history of scandals involving financial institutions variously ripping off investors and consumers. I'm not just talking about those scandals we remember, like Milken or Madoff or the recent slew or even the second tier ones like the Salad Oil scam or all of 1920s mortgage bonds. The history of US financial services is largely a history of unregulated innovation resulting in abuse and then follow-up regulatory reform. Lather, rinse, wash, repeat. 

Davidson argues that the reason to "hate the banks" is that 

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves. 

Davidson misses the mark here a bit. It's not just that the banks get bailed out, meaning that the rules of market discipline don't apply to them. It's that the banks frequently break the rules when applied to others.  It's fine to do foreclosures or hostile takeovers or sell consumers speculative securities. But it's not ok to foreclose without following the law or to profit on insider knowledge on hostile takeovers or or to sell investors "safe" assets when you know they are junk.

The fundamental rule of American capitalism is "profit, but fairly." Whatever one thinks is "fair", I don't think there should be much disagreement that Wall Street too often disregards the second part of this dictum to focus on the first. But take away the "but fairly" and society quickly becomes a Gilded Age baronial kleptocracy, a post-Soviet (or pre-Soviet) Russia. If we want capitalism to work--meaning that there is social stability, pace OWS--market players must play by the rules. This is where the debate needs to be focused:  ensuring that our financial intermediaries play by the rules. 

Continue reading "American Capitalism: Profit, But Fairly" »

The Consumer Finance Pantheon?

posted by Adam Levitin

In putting together a revised syllabus for my consumer finance course this semester, I was struck with how different this nascent field is from established courses like Contracts.  No matter what Contracts casebook one uses to teach, there are a bunch of well-established chestnuts that everyone knows:  Hadley v. Baxendale, for example, or Williams v. Walker-Thomas Furniture, Raffles v. Wichelhaus, Frigaliment, Lucy Lady Duff Gordon, Hawkins v. McGee, or Jacobs & Young v. Kent (and one could go on and on).  It's hard to say the same for Consumer Finance; indeed, I've got very few cases on my syllabus. 

I'm curious what Credit Slips readers think are the leading cases in the consumer finance area.

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Foreclosure Timelines and Mortgage Delinquency: More Evidence from Bankruptcy

posted by Melissa Jacoby

At the end of a lively session yesterday at Duke Law School featuring Professor Stephen Ware of University of Kansas Law School, there was a brief discussion of whether shorter foreclosure timelines and clearer rules would promote more workouts of delinquent mortgages. The aforementioned paper about bankrupt homeowners suggests that the opposite might actually be the case: among homeowners in bankruptcy, longer foreclosure timelines in their home states were associated with a lower probability of foreclosure initiation while shorter timelines were associated with a higher probability of foreclosure initiation.

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What is the Relationship Between Credit Cards and Mortgage Delinquency?

posted by Melissa Jacoby

Previously I mentioned this new paper on homeowners in bankruptcy in the American Bankruptcy Law Journal. The central goal of the paper was to investigate what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. One of the notable findings is that, across all the models, credit access had a significant effect on keeping mortgages current and avoiding foreclosure initiation (specifics listed pp. 302-304). But why?

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BROKE: A New Book on Consumer Debt and Bankruptcy

posted by Katie Porter

Just in time for New Year's resolutions on 1) reading more, 2) paring back your own debt, and 3) learning more about consumer bankruptcy to help you do your job (if you are a lawyer, judge, or academic, media, etc), the book, Broke: How Debt Bankrupts the Middle Class was released from Stanford University Press.

BrokeThe book makes extensive use of the 2007 Consumer Bankruptcy Project data, providing statistics, analysis, and commentary on consumer bankruptcy and debt topics. I edited the volume, and chapter contributors are many Credit Slips regulars or guest bloggers--Jacob Hacker, Bob Lawless, Kevin Leicht, Angela Littwin, Deborah Thorne, and Elizabeth Warren--along with other top scholars.

In the next few weeks, the chapter authors will blog here at Credit Slips about the research featured in the book, but to whet your appetite, I've included a table of contents for the book after the break. The book is accessible to lay readers but its scholarly focus provides plenty of data to educate and surprise even bankruptcy experts. Working on the book, I certainly learned a great deal about timely and important topics such as how pro se debtors (those without attorneys) fare in bankruptcy, where families go after they lose their homes to foreclosure, how bankruptcy affects couple's marriages, and the ways that bankrupt households differ in their financial straits from other households of concern such as those with low assets or late payments on debt. Of course I'm biased but I think the book provides the most comprehensive overview of the consumer bankruptcy system since the enactment of the 2005 bankruptcy amendments.

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In or Out of Mortgage Trouble? A Study of Bankrupt Homeowners

posted by Melissa Jacoby

This is a newly published paper  in the American Bankruptcy Law Journal that I was lucky to work on with Daniel McCue and Eric Belsky at the Joint Center for Housing Studies at Harvard University. Using previously unexamined data in the 2007 Consumer Bankruptcy Project, we study what makes homeowners more or less likely to have mortgage troubles as they head into bankruptcy. Although much can be said about the econometric analysis, for now I wanted to mention quickly that the paper includes descriptive details about bankrupt homeowners (debtor-reported) such as numbers of missed mortgage payments, use of adjustable rate mortgages, mortgage broker use, mobile homes, and refinancing or home equity lines of credit. So please check it out!   

Buy Here Pay Here Dealerships

posted by Katie Porter

The LA Times did a three-part series this fall on what they call "Buy Here Pay Here" car dealerships. (Here is Part One, Part Two, and Part Three). The name, which was new to me, comes from a common requirement that customers return to the lot to make their loan payments. The high-interest-rate loans are usually for aging, high-mileage vehicles to people with ragged credit. The idea of the "pay here" is to provide ample opportunity for dealers to keep track of the car's--and customer's--whereabouts and to increase the likelihood of repayment by customers.

One year ago (almost to the day), Credit Slips discussed the repossession rates for auto title loans. Unlike buy here/pay here, auto title loans are not to purchase a car but require a person to pledge their car's ownership if a loan is not paid back. Adam Levitin came up with an estimated rate of 14-18% for repossession on auto title loans but emphasized how difficult it was to get such data. Surprisingly to me, the LA Times managed to get the buy here/pay here industry to not just share--but to gloat--about how this business model works. The key data: 1)  About 1 in 4 buyers default. 2) The dealerships make an average profit of 38% on each sale, more than double the profit margin of conventional retail car chains.

Continue reading "Buy Here Pay Here Dealerships" »

The Value(s) of Foreclosure Law Reform?

posted by Melissa Jacoby

As Alan White reported recently, the Uniform Law Commission in the U.S. has named a committee to consider the need for and feasibility of proposing a uniform foreclosure act and to report back to the ULC by early 2012. A letter from the ULC president includes a list of questions that the committee is charged to consider. But what principles will guide their analysis of these questions?

Continue reading "The Value(s) of Foreclosure Law Reform?" »

Change.org Petition Plays Part in BoA Debit Fee Reversal

posted by Nathalie Martin

In early October of 2011, Bank of America announced that it would begin charging its customers an additional $5 users fee for using its debit cards. In my financial literacy class the weekend after the announcement, some students were resigned to it, some furious, but we all vowed to switch banks if we banked at BofA. Yet we all also knew what would happen next, if history was any indication. Other banks would follow suit and eventually we’d all get charged the fee, which would just go up even more over time. It turns out, at least for now, the ending is happier. People mobilized around recent college grad Molly Katchpole’s online petition requesting a reversal of the fees.The petition was brilliant in its simplicity, stating simply this:

I'm writing to express my deep concern over Bank of America's decision to charge customers $5 a month to use their debit cards when making purchases.

The American people bailed out Bank of America during a financial crisis the banks helped create. You paid zero dollars in federal income tax last year. And now your banks profiting, raking in $2 billion in profits last quarter alone. How can you justify squeezing another $60 a year from your debit card customers? This is despicable.

Continue reading "Change.org Petition Plays Part in BoA Debit Fee Reversal" »

Do You Remember How Overdraft Protection, Overdraft Fees, and Free Checking Used To Work?

posted by Nathalie Martin

Calling everyone in the over-40 set to help me remember something. When dealing with those old-fashioned things called “checks,” how did your own overdraft protection used to work?  My recollection is that, back in the day, as long as a person had a certain level of creditworthiness, the bank used to cover your check in a discretionary manner. Then, as I recall, middle class people were encouraged to set up various protections to keep checks from bouncing, such as automatic transfers from savings or a line of credit to cover overdraft accounts.  Why don’t more people use these? Is it because they do not qualify? I keep hearing about $35 and even $39 overdraft fees, on both debit and check transactions, like in the New York Times blog today, and wondering who is paying them. Apparently lots of people, since the $38 billion in overdraft fees earned by lenders in 2009, is double what lenders made off these fees in 2000. Is this the ultimate example of banking for the “haves” versus the “have-nots?”

Continue reading "Do You Remember How Overdraft Protection, Overdraft Fees, and Free Checking Used To Work?" »

OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?

posted by Adam Levitin

The WSJ reports on the latest development in the implementation of the OCC's mortgage servicing fraud consent orders.  It seems that the banks will have OCC approved "independent" foreclosure review consultants (chosen and paid by the banks) review foreclosure files from 2009-2010 and pay homeowners damages if there are any problems found.  

This proposal really worries me.  It's hard to imagine that the banks will part with any money unless they receive releases--broad releases--from the homeowners.  The homeowners, however, will not typically have legal representation and will lack the ability adequately value their claims against the banks. $100 for a complete release?  Why not?  

Continue reading "OCC Servicing Settlement--Will Homeowners Get Screwed (Again)?" »

Are Corporations People Too?

posted by Adam Levitin

The "corporations are people, my friend" line was quite the momement. But as bad as it sounded, Mitt had a theoretical point. People (as well as other corporations) own corporations and people work for corporations.  The problem isn't that there aren't people at the end of the line behind corporations. The problem is that it's a minority of (primarily wealthier)people.  

According to the Federal Reserve's 2007 Survey of Consumer Finances, only 17.9% of families held stocks, 11.4% hold mutual funds, and 52.6% hold retirement accounts that likely hold a lot of stocks and mutual fund assets.   

I haven't been able to find data on the percentage of people employed by corporations, but it's assuredly large. That said, it's hard to imagine that corporate tax breaks would generally result in higher salaries for most employees rather than higher dividends for shareholders. The competition to attract capital is likely fiercer than the competition to attract labor (and certainly for semi-skilled or unskilled labor), which would mean that corporate tax breaks would benefit shareholders (a minority of people) and highly skilled labor (again a minority that probably doesn't need a lot of help).  So maybe a more accurate phrase for Mitt is "corporations are wealthy people, my friend". 

Relying on Disclosure When it is Least Likely to Matter

posted by Daniel Schwarcz

I’ve argued in my posts so far that transparency in property/casualty insurance markets is woefully inadequate.  Transparency, however, is not always a particularly good solution to a regulatory problem. The most visible controversy in the property/casualty insurance industry in the last decade illustrates this point nicely.  

That controversy involved the payment by insurers to independent insurance agents of “contingent commissions.”  These commissions are essentially year-end bonuses to agents based on the volume and/or profitability of the business sent to the insurer.  Such commissions create obvious conflicts of interest for ostensibly independent agents – the carrier who is best for the consumer may not be the carrier who maximizes an agent’s contingent compensation.  In response to this risk, numerous insurance jurisdictions, as well as the National Association of Insurance Commissioners, embraced disclosure requirements for insurance agents.  

Unfortunately, the regulatory problems created by contingent commissions are particularly resistant to disclosure-based responses.  To understand why, it is helpful to realize that contingent commissions are simply a specific example of a general phenomenon in which market intermediaries extract side payments from other professionals for steering business to them.  Yield-spread premiums – whereby lending institutions pay bonuses to mortgage originators depending on the rate of interest paid by the borrower – are another example. 

Such trilateral dilemmas, as Howell Jackson has dubbed them, are generally unresponsive to disclosure-based solutions.  Indeed, it is for this very reason that Dodd-Frank abandons a disclosure-based approach to yield-spread premiums in favor of an outright ban.  

Continue reading "Relying on Disclosure When it is Least Likely to Matter" »

Responsible Lending as an Emerging International Norm

posted by Jean Braucher

The International Association of Consumer Law, with participants present from six continents, has been meeting at Brunel University in West London the last few days, hearing presentations from regulators, industry representatives, consumer advocates, and academics.   http://qwww.brunel.ac.uk/bls/research/events/ne_41734   Not surprisingly, regulation of consumer credit has been a prime focus, giving some perspective on US struggles to achieve more effective consumer financial protection. 

Professor Iain Ramsay of the University of Kent in the UK reported on initiatives for international cooperation to enhance consumer financial protection.   The G20, World Bank, Financial Stability Board, and Organization for Economic Co-operation and Development are all on board with this goal, seeing it as an essential part of a program to ensure that the international financial system is safe and sound.  The OECD is expected to issue draft principles of consumer financial protection soon, and comments will be invited.  Given the primarily prudential role of these organizations, balance from other sectors will be important.

Ramsay raised an underlying and overlooked question:   what is the economic and social value of consumer credit?

Continue reading "Responsible Lending as an Emerging International Norm" »

Still Not Working Abroad

posted by Stephen Lubben

I've previously posted about my frustrations at being stranded abroad without a functioning credit card -- particularly at train stations -- and the refusal of American credit cards to adopt a technology that has been in my building laundry room for years.

So I was quite excited to read in this morning's Times that Chase has begun to offer "chip and pin" cards. As Katie has previously noted, I use a Chase British Airways Visa. So I called them up all excited, hoping to get a card before my summer family vacation, only to be told that only private banking clients were getting chip and pin cards.

The customer service agent seemed entirely perplexed when I said "your loss." The inability to get somebody to supply a product that consumers demand is almost enough to undermine my faith in the invisible hand.

The Three Consumer Banking Systems

posted by Adam Levitin

For the past couple of years we've heard a lot about shadow banking versus traditional banking. But this dichotomy treats the traditional banking system as a unitary whole. That's hardly the case for consumer banking. The United States currently has three consumer banking systems. They have somewhat separate regulation and market segments, but they are fundamentally in competition with each other. 

The first system is the too-big-to-fail commercial banks. They are almost all structured as national banks, regulated by the Office of the Comptroller of the Currency. The second system are the community banks and credit unions.  They tend to be regulated by the FDIC and NCUA, but also by the Fed or state banking supervisors.  And the third system are the nonbank finance companies (payday lenders, title lenders, even pawn, etc).

Despite the competition between these sectors, they have cooperated to a surprising degree recently, particularly community banks and credit unions with commercial banks. For example, on both bankrutpcy cramdown and the Durbin Amendment, there were carve-outs for small institutions (<$10B net assets), but the small banks still fought furiously despite being exempted. I'm frankly puzzled why they are willing to carry water for the big boys (do they want to be part of the club?). Maybe someone will explain in the comments. But below the break I'll lay out the case for why the smaller banks should actually be strongly supportive of recent consumer finance regulatory initiatives. 

Continue reading "The Three Consumer Banking Systems" »

The Anti-Consumer Agenda

posted by Adam Levitin

I often find myself annoyed by left-wing (and occassionally right-wing) anti-business screeds that decry corporations, big business, etc.  I don't find anything inherently troubling about corporate form or business size, and I have no problem with profit-motivated actors (individual or corporate), so long as they play fair. Mindless attacks on the business community have the unfortunate effect of undermining perceived validity of more targeted, thoughtful concerns through a guilt-by-association phenomenon. 

But business and consumer interests often diverge. Now, it should hardly be controversial that there is an unequal playing field between businesses and consumers. Generally, businesses know more about their products than consumers and have more bargaining power than consumers. (Yes, there are information assymetries running the opposite way, which is a particularly salient problem for credit and insurance products.) For many businesses, it is important to maintain this assymetry of information and bargaining power, as there's profit in it.

In theory, and I emphasize in theory, competition should eliminate many of the problems these assymetries create for consumers, but there's no such thing as a perfect, complete market, just varying degrees of market imperfection, so competition alone cannot be relied upon to solve everything. What, if anything else, should be done is an open question, but when one looks at a range of seemingly unconnected recent public policy issues, a troubling common theme emerges.

Instead of a laboratory of experiements to help level the b2c playing field, we see a different trend emerging:  a distinct anti-consumer agenda that aims to reduce consumer bargaining power and information.  Consider the common theme that runs through the following issues: 

  • AT&T v. Concepcion (waiver of class actions in arbitrations)
  • Attempts to bust up public employee unions (and attacks on unions in general, such as the failure of Card Check legislation)
  • Citizens United (corporate speech rights)
  • Attempts to retain the current corrupt swipe fee system (failure of antitrust)
  • Attacks on public health insurance (prohibition on Medicare bargaining over prescription drug prices and the death of the public option)
  • Attempts to first kill off and now to maim the Consumer Financial Protection Bureau

Continue reading "The Anti-Consumer Agenda" »

Skin in the Game-True Sale Implications

posted by Adam Levitin

There's a proposed joint federal rulemaking on the Dodd-Frank Act asset securitization risk retention requirements that would mandate some form of "skin-in-the-game" in most asset securitizations.  The proposed rule making provides a number of options for acceptable risk retention, and some exemptions from the requirement, but I think it raises a more fundamental problem for asset securitization, namely whether it will be possible to get clean true sale opinions with federally mandated risk retention.

The economics of many securitization deals hinge on the transfer of assets to the securitization vehicle being a "true sale," meaning that they are property of the securitization vehicle and not the assets' originator (or aggregator) and thus bankruptcy remote in the sense that they cannot be claimed as part of the originator or aggregator's bankruptcy estate.  (What constitutes a sale is arguably slightly different for bankruptcy, tax, accounting, and bank regulatory purposes, but that's not really germane here.)  Investors like securitized assets precisely because the assets are (in theory) impervious to the fate of the originator or aggregator.  (Obviously that isn't true if the originator/aggregator services or provides maintenance or warranties for the securitized asset.) 

Perhaps the most fundamental aspect of a sale is the transfer of risk and reward associated with an asset. If I transfer a mortgage on Blackacre to Prince William, but bear risk on the performance of the mortgage, it's questionable whether I have sold the mortgage to him or merely loaned or leased it to him. The federal risk retention requirements make this issue hairier.  If I am on the hook for the first 5% of the losses (or 5% of the total losses), could a bankruptcy trustee come after that mortgage as an asset of the estate? The fact that the 5% stake (vertical or first loss) is mandated by federal securities law strikes me as irrelevant to the true sale question, which is not a securities law issue, and on which Dodd-Frank takes no stance. If the transaction involves too much risk retention for whatever reason, regulatory requirement or voluntary deal design, there might be problems with the sale treatment.  I'd be curious if anyone's been thinking about this potential problem. 

"Free" Checking

posted by Katie Porter

With banks under pressure from the CARD Act's regulation of fees and the pending implementation of price limits on interchange fees under the Durbin amendment to Dodd-Frank, the scary tales are periodically resurfacing about how government is about to cause the death of "free checking," this great perk that consumers have enjoyed at the bank's largesse in recent years. As Adam Levitin wrote here at Credit Slips several months ago, free checking is often far from free. Adam focuses on the kinds of behavior requirements to obtain a free account, like maintaining a certain balance and having direct deposit.

Continue reading ""Free" Checking" »

The Most Important Consumer Product

posted by Stephen Lubben

Going to stray out of my comfort zone for a moment to comment on and clarify a recent post I saw over at Felix Salmon's place. In short, Felix notes how confusing most retirement investment documents are, and hopes for action by the new Consumer Financial Protection Bureau.

If only. CFPB can do debt and payment systems (checking accounts), but can't do investments or insurance--where arguably the need is even greater. Congress saw to that with §1027 of Dodd-Frank. See, e.g., subparts (f), (i), and (g).

Allocating Scarce Dollars: Payment Hierachy

posted by Katie Porter

When Americans have fewer dollars, creditors need to position themselves at the top of the pile to get paid each month. This is called payment hierarchy, and traditionally mortgage creditors have been at the top and unsecured creditors, and perhaps ubiquitous credit card creditors, near the bottom. At the Consumer Financial Protection Bureau conference on the anniversary of the CARD Act, I learned that the payment hierarchy has been upended. In 2010, consumers are paying their credit cards ahead of their mortgages. (Click on CFPB conference link above, then click on "Credit Card Profitability" by Credit Suisse and go to slide 7 to see the full data). Two key explanations for this change: 1) people may be more willing to risk losing their home when its value is plummeting and they are not certain they can hang onto it, and 2) credit card companies reduced the amount of credit lines and closed old accounts, making people more concerned about "preserving" their good standing with their credit card company. Another way to think about this is that homes used to be families' piggy banks, tapped when it is time to send a child off to college or do a home renovation. With no equity, Americans need to rely more on the credit card as their safety net. Unemployment rates are high, the economy remains fragile, medical costs are uncertain. In this economy, it seems entirely rational and reasonable to me for families to highly prize access to unsecured credit from cards.

When there are too many unsecured creditors to go around, however, how do consumers chose who gets their scarce dollars? A new research paper, Winning the Battle but Losing the War: The Psychology of Debt Management, uses a series of experiments to explore this question. The authors find that consumers focus on making payments that reduce the number of open accounts, which the researchers call "debt account aversion," rather than solely on paying off the debt with the highest cost interest rate. The latter would ultimately reduce the total cost of credit, an approach that the researchers term "perfectly rational."  In a series of stylized debt games played by students, not even one student consistently repaid in multiple rounds of the game all of their available cash to the open debt account with the highest interest rate. The pattern of debt account aversion--using some cash to pay off small accounts--held across a variety of conditions, although the researchers find some interventions that reduce the practice, such as prominently highlighting the amount of interest accumulated on each debt between rounds. But is debt account aversion really a "mistake"? Should policymakers be discouraging this behavioral trait?

Continue reading "Allocating Scarce Dollars: Payment Hierachy" »

New Consumer Regulation: Education and Disclosure Is Not Enough

posted by Ethan Cohen-Cole

Elizabeth Warren’s appointment as special advisor to the president was widely hailed as an achievement for consumer advocates. Professor Warren has long been a strong advocate of the middle class and famously compared financial products to flaming toasters.

The creation of a new agency brings new possibilities and new risks for consumer advocates. Most importantly will be the agency’s approach to regulation. In a two-part posting, I will comment on two key aspects of the new agency’s direction. The first revolves around understanding of consumer behavior and the second around firm behavior.

Part 1:

A core component of the CFPB mission is based around the idea that banks provided risky products to consumers that didn’t understand them. There is abundant evidence that consumers didn’t understand the products they bought; however, it’s far from clear that this is a sufficient role for the CFPB. I’ll argue here that in addition to disclosures, education and information, we need explicit regulation of the products as well.

Effectively, this boils down to a simple question: if banks want to offer a risky product (a flaming toaster) to consumers that fully understand its dangers, should the bank be permitted to offer it?

Continue reading "New Consumer Regulation: Education and Disclosure Is Not Enough" »

Modern Redlining in Historical Context

posted by Ethan Cohen-Cole

A paper that I wrote while an employee of the Federal Reserve System a couple years back documents the presence of ‘redlining’ in the issue of credit cards. Credit Slips picked it up here (link).

(To ensure there are no misunderstandings, this paper did not and does not represent the views of the Federal Reserve Bank of Boston or the Federal Reserve System; in fact, both entities did their utmost to prevent its release) ... continue…

To be more specific: I find that credit issuers use the racial composition of a neighborhood in determining how much credit to give to individuals that live in it. I use the term ‘redlining’ with historical reference: this idea is that particular areas have been identified as high risk. What I find is that the ‘high risk’ areas are highly correlated with the presence of minorities.

I’ll be clear, I cannot definitely prove that lenders use race—I’m an economist, not a lawyer! Regardless, I’ll present the point that the practice is still redlining even if lenders never use race, but use location-based information that is correlated with race.

Continue reading "Modern Redlining in Historical Context" »

They Really Did Know the Loans Were Bad…

posted by Ethan Cohen-Cole

A firm which few know of – Clayton holdings—will likely soon be at the center of a wide variety of lawsuits and individual complaints. Clayton’s job was to validate the innards of mortgage backed securities (MBS) when made available for sale. The typical setup would have an issuer of a MBS call Clayton and ask them to take a 10 percent sample of the loans, and evaluate whether the loans met the portfolio criteria (had documents been filed, credit scores as reported, etc.). If the loans were incorrect, they could either be taken from the pool and replaced with a good one, an exception made, or a substitute placed into the sample and evaluated instead.

Clayton holdings staff testified last month that 255,802 mortgages out of 911,000 evaluated did not meet portfolio screening criteria. The bank underwriters waived more than 100,000 of them (>39%); that is, even though the mortgages failed the criteria, the banks included them in the MBS pools anyway.

So much for the idea that the issuers didn’t know the loans were bad…

Am I Paying for My House or the Brooklyn Bridge?

posted by Ethan Cohen-Cole

The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?

1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).

2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.

I have a new suggestion:

3. Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account. 

Continue reading "Am I Paying for My House or the Brooklyn Bridge?" »

Mad About Debt

posted by Alan White

Exit polls tell us that the economy was forefront in the minds of yesterday's voters, but also that the national debt was high on the list of concerns.  The deep personal anxiety about the national debt surely is not just civic worry about Uncle Sam's credit rating.  Americans are in some measure projecting their own debt anxieties onto the government.  While one in three voter's family has experienced a job loss, household debt is affecting nearly everyone.

Nearly four years into the crisis (formerly called the subprime mortgage crisis) we are still suffering a massive hangover from the debt binge of the last decade.  In ten years household debt exploded from five and a half trillion to nearly fourteen trillion dollars.  From the onset of the crisis in 2007 through June 2010 mortgage debt and all the rest (credit cards, student loans) has inched down painfully slowly.  It would take thirty years at the present rate to bring household debt back to something like its 2000 levels.  Folks seeking mortgage workouts, over a million of them, are paying an average of 80% of gross income for debt service.  Students are graduating college with six-figure debt.

Continue reading "Mad About Debt" »

The Shadow Consumer Bankruptcy System

posted by Alan White

    Bankruptcy filings have not risen at anything like the rate at which consumer debt defaults have risen since 2007.  Part of the explanation may lie in the shadow bankruptcy system, a network of alternative service providers who purport to save debt-burdened consumers from the bankruptcy court.  While consumers being sued on delinquent credit cards and mortgages receive solicitations in the mail from bankruptcy attorneys, they are also deluged with a variety of other offers of aid.  These range from foreclosure rescue scams to a wide range of legitimate and dubious debt advice and counseling services, to debt elimination and debt settlement schemes.  While pondering this post I searched in the usual places for any good empirical data on the number of consumers participating in non-profit counseling, or the number of customers enticed by those who promise to make debt disappear, with no success.   We don't seem to know how many debtors go to these debt advice services.

Continue reading "The Shadow Consumer Bankruptcy System" »

Empirical Caution: A Lesson from Auto Title Loans

posted by Adam Levitin

A few weeks ago there was some nice discussion about Jim Hawkin's article on fringe banking.  Natalie questioned whether Jim's assumptions about payday lending correspond with empirical reality. Similarly, it's worth pointing out that the data Jim relies on regarding auto title lending aren't what he or even his source thought they represented.  

I make this observation not to ding Jim's paper, but to raise a really troubling problem for all academics: how to deal with data from other scholars' empirical work?  

Continue reading "Empirical Caution: A Lesson from Auto Title Loans" »


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