More on Personal Debt and Multilevel Marketing Companies

Last year, I posted about John Oliver's segment on Last Week Tonight dissecting multilevel marketing (MLM) companies (aka pyramid schemes), and proposed a link between personal debt, bankruptcy, and MLM companies. Prominent MLM companies include Amway, Herbalife, the relatively new Rodan + Fields, and the even newer (to me, at least) LuLaRoe, through which women sell brightly-colored stretchy women's and kids' clothing. Indeed, posts about LuLaRoe--complete with mom and daughter wearing matching leggings--increasingly are overshadowing posts about Rodan + Fields in my Facebook feed. Since 2010, the MLM industry has grown 30%. LuLaRoe apparently adds 150 retailers a day (a figure unconfirmed by LuLaRoe). This all makes the MLM industry ripe for budget-crushing debt -- and for more news stories about that debts' effects on people's lives.

Quartz recently published such a piece, aptly titled: Multilevel-marketing companies like LuLaRoe are forcing people into debt and psychological crisis. Although the piece is far from a rigorous study of the financial pitfalls of joining a MLM, it is an interesting and entertaining read. It uses LuLaRoe to highlight the reality of MLMs: lots of self-empowerment language and lots of debt. According to an FTC study cited in the piece, 99% of people who join MLMs lose money.

That New Song About Bills

You may have heard it. It was on the radio the last three mornings as I drove to work. It goes, "I got bills I gotta pay, so I'm gonn' work work work every day." It made me think about bankruptcy (naturally). And it is really catchy. The song's simply titled, "Bills," and is LunchMoney Lewis's debut single. The lyrics reference empty fridges, cars not starting, shoes without "soul," praying that cards won't be declined, and, of course, piles of bills. The music video features an adorable girl and her lemonade stand, complete with a credit card reader made out of cardboard.

When asked about the song, Lewis said: "I feel like people relate to 'Bills' no matter where you’re from. Whether you’re very middle class or you’re lower class or you’re in the projects or you’re upper middle class. We all get bills. . . . That’s why I wanted to turn it into something positive, like when you hear 'Bills' it kind of makes you feel happy, you know?" (full interview). The song made me smile, and apparently is rapidly climbing the pop charts.    

Check out the official video for some Friday fun.

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

Are we poor?

If you have kids who talk as much as mine (gee, wonder where they picked up loquacity as a trait), conversations can go nearly anywhere. My boys, ages 9 and 6, are quite interested in money lately, a phenomenon driven in part by the tooth fairy and their discovery of gift cards at a recent birthday party. Here is a recent excerpt:

"Mom, is the reason that I can't have the Lego Batman DC set because we are poor?

"We are not poor."

"Well, if are rich, then why can't I have it?"

"I didn't say we were rich. We aren't rich."

"Mom . . . . [big sigh of frustration] . . . Are we rich or are we poor?"

I recently read the Opposite of Spoiled by Ron Leiber, a NY Times money reporter. He provides straightforward advice on how to handle these questions and more. Even if one takes a slightly different tact with their kids, I completely agree with his main point:  parents should not avoid these conversations because they are uncomfortable or inconvenient or difficult. Kids talk about this stuff and draw conclusions. Creating a conversation is a way to share your values and learn about your children.

Working and Living in the Shadow of Economic Fragility

Credit Slips readers, please note the publication of a new book edited by Marion Crain and Michael Sherraden. The New America Foundation is hosting an event on the book tomorrow, Wednesday, May 28, 2014 at 12:15 EST. Not in Washington, D.C.? The event will be webcast live. 

The book project developed out of a stimulating multi-disciplinary conference at Washington University in St. Louis. Participants had great interest in considering how bankruptcy scholarship fits within the larger universe of research on financial insecurity and inequality. My chapter with Mirya Holman synthesizes the literature on medical problems among bankruptcy filers and presents new results from the 2007 Consumer Bankruptcy Project on coping mechanisms for medical bills, looking more closely at the one in four respondents who reported accepting a payment plan from a medical provider. Not surprisingly, these filers are far more likely than most others to bring identifiable medical debt, and therefore their medical providers, into their bankruptcy cases. We examine how payment plan users employ strategies - including but not limited to fringe and informal borrowing - to manage financial distress before resorting to bankruptcy, and (quite briefly) speculate on the future of medical-related financial distress in an Affordable Care Act world.

Buying Hope

Those interested in The Stakes of Design back in April may appreciate Why We Keep Playing The Lottery. Thanks to The Morning News for alerting readers to the article, and thanks to author Rosecrans Baldwin for co-founding The Morning News, and . . . that's enough.

Numbers image courtesy of Shutterstock

Don't Fancy Games (For Your Kids' Financial Education)? How About The Theatre?

"Make it fun and they will come," Lauren Willis discussed in the instructive post that evaluated the pros and cons of "The Gamification of Financial Education." Meanwhile, in London, a live show has been designed for children as young as five to teach them about the financial system. Interesting story on the show in The Guardian here. Tickets to "Bank On It" (running through the 14th of July) and other information here.   

Money tree image courtesy of Shutterstock 

The Stakes Of Design

That 99% invisible is a vibrant architecture and design podcast might have been beside the point in Credit Slips land -- but for the fact that its current show (Episode 78) focuses on the design and technology of casino slot machines, and the particular profitability of penny slot machines. The short piece is built on the work of M.I.T. professor and anthropologist Natasha Dow Schüll. Lots on the consumer finance and cognitive behavioral side of things; don't expect any mention of bankrupt casinos.

Slot photo courtesy of Shutterstock.

Many Young People Will Die in Debt, but Hopefully Not From Debt

I had a weird night’s sleep and then openned up my e-mail to find this headline from credit and collection news “Does The Consumer Bureau Harm Those It Claims to Protect? & Study Predicts Millions Will Die In Credit Card Red.” The immediate implication in my drowsy state was that the CFPB was somehow killing people. Wow. As it turns out, these were two headlines from two different stories, first one about how the CFPB was hurting Americans and the overall economy by constricting credit, according to a  Heritage Foundation paper by Diane Katz, available here. 

The second story was by Laura Rolland of the Huffington Post, and contained some grim news from a recent Ohio State Study published in the January issue of the Journal of Economic Recovery. It claims, consistent with informal data from my financial literacy class, that young people are up to their eyeballs in debt. According to Rowley, Millions of young Americans will die in debt to credit card companies. The study data show that people in their late 20s and early 30s (born 1980 to 1984) carry significantly higher credit card debt than older generations and pay it off more slowly, have about $5,700 more than people born 1950 to 1954, and $8,200 more than those born 1920 to 1924. The study even predicts that these young people will continue to charge well into their 70s.

The True Meaning of Black Friday

Nathalie Martin invited readers to skip Black Friday and do a spending fast. Her post caused me to wonder whether we have lost the true meaning of Black Friday. Based on an informal survey, it seems to be the case that people have forgotten why we call the day Black Friday. By "informal survey," of course, I mean I asked my family. That bit of empiricism anecdote is supported by a report from a friend who must remain anonymous because she was watching The View where she heard a similar discussion of the term's origins amid erroneous speculation that it had racial overtones.

Today, some people seem to understand the term "Black Friday" as roughly synonymous with the idea of "Crazy Friday" because of the multitudes swarming the shopping malls to elbow neighbors out of the way in pursuit of bargains. This idea is actually close to the apparent origins of the term, which Ethan Trex at the always wonderful Mental Floss traces to 1960s-era Philadelphia. The day between Thanksgiving and the Army-Navy football game produced bedlam in the city's retail district. And, yes, this means we might be able to pin the blame for Black Friday on the same city that once booed Santa Claus.

Skip the Chaos and Do a Black Friday Spending Fast on November 23, 2012

Perhaps you'll recall that a few years ago on black Friday (the day after thanksgiving), overzealous shoppers trampled a seasonal Wal-Mart worker (meaning a guy who did not even have a regularWal-Mart Job) to death. This is what happens when rampant consumerism meets pack mentality. This year, rather than providing more protection to workers, Wal-Mart plans to allay shoppers’ anxiety about not scoring the big Black Friday deals by opening at 8:00 p.m. on Thanksgiving. Target is  responding in kind by opening at 9:00 p.m. on Thanksgiving, causing the typically minimum-wage workers to lose one of the few days all year they can reliably spend with thier families. 

Before you cut your own turkey day short to hit the stores, consider a few more reasons not to shop.  First, we consumers are finally getting a little economic recovery of our own.  Be it through repayment or write-offs, credit card debt is down.  Why ruin a good trend by buying a bunch of stuff no one wants? Second, most people do not want all the garbage you give them during the holidays.

I invite you to join millions of others on November 23 and stop consuming for 24 hours. Ignore the Black Friday sales and challenge yourself to go cold turkey from consumer culture for one day. As reported on adbusters, you may be rewarded with a life-changing shift of perspective – a glimpse into how to consume less and live more on this precarious planet of ours.  

Couples and Money

Wow, our guest bloggers have been working hard for us and you! Nice job Amy and John.  I myself got a little wrapped up in my intensive financial literacy class this year, and am finally here to report on our experiences. First up, a conversation about couples and money. I hope you readers will join me.

It seems many people are still in financial trouble these days and it’s taking a toll on their relationships. Every so often you hear a crazy statistic about how people (lots of them) lie to their partners about money and also how financial cheating is as serious or more serious than actual cheating.   For example, see this from the Huffington post.  Or this from cnn money. 

I always wonder where and how these pollsters are collecting their data. Are we talking about lying in answers to questions like “did you give your brother $5,000?” or more like “You missed the auto detailing day at work and had your car detailed at the airport instead? Didn’t that cost a lot more?” Aren’t half-truths in response to these two questions two very different things?” I challenge you to keep track of the money lies you tell both big and small and then we can talk about whether they matter or not.

The Gender Divide in Payday Lending

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!

Fine Print Foils

I was delighted to see Melissa Jacoby’s call in September for more poetry on creditslips.org! Therefore, I wish to share the poem I wrote that served as basis for the lyrics to a consumer protest song that accompanies a non-profit consumer outreach film, Fine Print Foils, that I produced a couple of years ago. Why not have fun with consumer protection?

Fine Print Foils
by Amy J. Schmitz

Fine print foils
We do our best
Confusing contracts
We do detest

Companies send us
Sterling “steals”
Promised savings
Offered as “deals”

“Freebies” are false
And contracts change
While rates rise high
Beyond fair range

Consumers caught
In a mindless maze
Seeking solace
Stuck in a haze

Of limited know-how
And lack-luster laws
Needing protection
From companies’ jaws

Yet we have a duty
To watch what we sign
And read terms closely
Not assuming they’re fine

Embrace education
Empowerment grows
Let’s work together
To end contract woes

You can listen to the song via the link: Fine Print Foils song

Winners and Losers in the Squeaky Wheel System

First, I want to thank you for the invitation!  

Most have heard the adage: “The squeaky wheel gets the grease.” We have long known that the “squeaky wheels” who are proactive in pursuing their needs and complaints are most likely to get what they want. That is proper for the most part to the extent that it rewards those who expend the time and resources to pursue their interests. However, this “squeaky wheel system,” or “SWS” for ease of reference, allows businesses to bank on our inertia (laziness) in contracting and ration remedies to only those with the most resources and power. This also may allow businesses to control public information by quieting the squeaky wheel consumers. The SWS can effectively prevent economists’ proposed “informed minority” from policing fairness of contract terms and business practices by alerting the majority about purchase concerns and prompting companies to make contract changes.

This SWS has troubled me, leading to my recent article, Access to Consumer Remedies in the Squeaky Wheel System in volume 39 of the Pepperdine Law Review. This Article uncovers the salience of the SWS and explores its impacts on contract regulation and purchase practices in the consumer marketplace. It also provides a snapshot of empirical data from my own e-survey of Colorado consumers that is relevant to SWS dynamics. The article proposes proportional and efficient means for consumers to access purchase information and contract remedies using online and other low-cost remedy mechanisms. This proposal is by no means the “answer” and I invite other ideas for expanded and equalized remedy mechanisms to help diffuse the SWS,narrow the divide between the consumer “haves” and “have-nots,” and foster better fairness regulation of companies’ contract and claims assistance practices.

Who Built It?

We're seeing the back and forth between the Dems and the GOP about "who built it," whether the economy is a function of both public and private action (as artfully expressed by Elizabeth Warren and clumsily imitated by the President) or purely private Galtian will-to-create entrepreneurship. The only interesting thing about the argument is that there even is an argument. The facts are so overwhelming in support of the Elizabeth Warren version that it's astonishing that anyone would deny that government plays a huge and largely uncontroversial role (police, fire, roads, courts, currency) in making the economy function.  

So why are so many Americans so wedded to the private enterprise story? Why is this the heart of the GOP vision of what American is and should be? Why the insistence on clinging to the lone frontiersman version of America that has never really held true except on the margins?

Zip Codes and Internet Searches Populate Database Mines

Twice now the New York Times has reported on a mysterious company in Arkansas, Acxiom, that has been collecting endless data on all of us but no one is entirely sure what they have or why they have it.  This is why neither NYT story makes perfect sense.  Something is wrong but we do not know enough about what they are doing to know what it is.  Consumers do not get to see their files according to the second article. I cannot write and get what they have on me, nor can you.

The collected data include our incomes, our family compositions, and certainly our geographic locations. The process for mining begins when a store clerk asks us at check-out for our zip codes, or perhaps when we search internet sites and input data there.  From there the sources somehow back into our e-mail and home addresses, our incomes, our buying preferences, our kids’ ages, our pets, and I am not sure what all else. 

Doggie DNA Tests: Waste of Money or Legitimate Tool?

Do mutt-lovers (with admittedly too much time and money on their hands) get anything in exchange for the $75-100 they pay to find out what kind of dog they have? It depends. My advice: before ordering a doggie DNA test over the net, do lots of research. Perhaps just have the vet do it.  If you do order a test over the internet, make sure you pick one that tests for the maximum number of breeds and that gets very high marks from consumers, and carefully read the fine print. Now they tell me, the more mixed your mutt is, the less likely you are to get any info at all from the test. I’ll let you decide if the test was worth my money. Here is the dog:

Toward Cashlessness?

One of my students came across a humorous blog post from February, 2012. Titled, “What your payment method reveals about you,” the author listed a series of unlikely payment actions and a line on the presumed personal characteristics of the payer. The humor appeals to… well, us, anyway, and probably you, too.

Slinging your card down: You've definitely shoved a dog's face away from you because "move."
Slinging cash down: You've consumed alcohol that's involved whipped cream in the past week.
Using your Hello Kitty-themed card: You have many other credit cards.
Handing a bag of nickels and dimes, uncounted: You are nine.

Around the same time, the United States Agency for International Development launched an initiative to replace the use of cash in aid efforts with electronic forms of value transfer:

"If you care about reducing poverty, then you must also care about reducing the reliance on physical cash. We begin a movement to do just that.  USAID Administrator Rajiv Shah is announcing a broad set of reforms [in order to] reduce the development industry’s dependence on cash.  This includes integrating new language into USAID contracts and grants to encourage the use of electronic and mobile payments and launching new programs in 10 countries designed to catalyze the scale of innovative payments platforms."

The USAID “Better Than Cash” program was the culmination of at least a year’s discussion internally and with major donor agencies over the costs of cash for the poor--the heightened risk of theft associated with physical currency, the anonymity of cash, the difficulty in transporting and storing cash for those without access to formal financial institutions. Our own work has been enlisted in this effort, yet we are a bit more circumspect: although there are  very real problems associated with cash, there are also virtues. One of these virtues is that cash is publicly issued, not privately enclosed and tolled like most electronic forms of value transfer, and almost always accepted at par value. We’ll return to this topic as we examine some mobile phone-enabled money transfer and payment systems in the developing world, and regulatory responses to them, that might provide useful models. Over the course of the week, we will look closely at cash and how the debate over cashlessness—at times downright silly—is getting more serious, as at least some major actors shift from “the evils of cash” to “the benefits of an agnostic digital payment platform.” We think this is a consequential shift.

Of Babies and Bucks

The Credit Slips bloggers are engaged in a virtual enterprise, which means we sometimes don't see each other for a long time. One of my fellow bloggers recently asked "What's up?" and learned that I had a new baby three months ago. That experience, along with trying to stem the tide of "I want it! I need it!" that comes with having two preschoolers during the holidays, has left me thinking about how we teach children about money, debt, and consumerism.

There apparently is very little research on financial education for children ages 2-7. Chapter 3 in Consumer Knowledge and Financial Decisions (ed. Douglas Lamdin; Springer 2012), explores the relationship between cognitive development and children's understanding of personal finance. I found its identification of the key concepts of personal finance for young children helpful. They list:  numbers, time, income, markets and exchange, institutions, and choice. They also explore how some concepts emphasized in young children, for example being "nice" or "fair", are hard to square with the idea of a financial transaction as a matter of price and market conditions. For me personally, this explained a great deal of the reasons that the Monopoly board game has for generations resulted in children in families fighting with each other!

American Capitalism: Profit, But Fairly

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. 

Consumer Credit Levels Reach Their Lowest Point in over a Year

According to a recent Reuters story, consumers are reluctant to hold debt due to the U.S. Credit rating downgrade and debt problems in Europe. The economy is shaky so people are apparently less willing to carry tons of debt. Consumer credit fell $9.50 billion in August after rising $11.92 billion in July, the report said, which is well below economists’ expectations of a $7.75 billion increase.

Revolving credit, which mostly measures credit card use, dropped $2.27 billion in August after falling $3.56 billion in July. Non-revolving credit, which includes mostly auto loans, fell $7.23 billion, the largest decline since August 2008, after rising $15.48 billion in July.
"Consumers are extraordinarily sensitive to economic conditions and as things started to look a bit more sour, they stopped using their credit card," said Steve Blitz, a senior economist with ITG Investment Research in New York. While this story paints this as a bad thing for the economy as a whole, it speaks well of consumers’ efforts to protect themselves in this economy.

 

Americans are Innumerate and Broke

And not just the ones I tell stories about from my clinical law teaching.  Some of our readers have written in to say that these clients of ours, these title loan and payday loan customers, are idiots or worse yet, should be institutionalized for their stupidity. Most of my stories about our clients have to do with not being able to do complex math.

Now we learn that most consumers think that 36 months is longer than three years.  And these are “regular” Americans, not those dullards who use sub-prime credit.  A study in the Journal of Consumer Research proved that as a result of something called the “unit effect,” no doubt a behavioral bias similar to framing, “people typically fail to realize that the unit of quantitative information is arbitrary.”

As one cool math blog reports, this “unit effect” leads to anomalous conclusions: to most consumers, the difference between an 84-month warranty and a 108-month warranty looks bigger than the difference between a 7-year and a 9-year warranty. A 95 out of 100 rating looks better than 9.5 out of 10. Is it any wonder at all that interest rates stated by the month or bi-monthly make it hard to calculate the cost of credit?

Culture, Attitudes, and Debt

Rather than a post with a lot of (supposed) answers, today I have a post with a lot of questions. My goal is to start a discussion that I hope our insightful readership will take up in the comments.

Lately, I have been thinking a lot about cultural attitudes toward debt. I am not really sure what I mean by "cultural attitudes." The idea is that Bob Lawless, sitting here in Champaign, Illinois, has certain beliefs toward debt--when it is appropriate to use debt, when borrowing is irresponsible, and so forth. These beliefs about debt might differ from someone who had different life experiences because of different socioeconomic circumstances, because of experiences in another country, or because of other differences that broadly travel under the rubric of "culture." There is empirical evidence that, with "culture" defined in this broad way, differences in cultural attitudes toward debt exist.

Google Wallet-Regulatory Implications

Yesterday, Google unveiled its Google Wallet near field communications payment app for Android phones. As far as I can tell, Google Wallet basically stores your payment card information for multiple cards (credit, debit, prepaid) and then lets the phone act as the NFC device instead of a RFID chip in a card. That's not particularly remarkable. What is cool about Google Wallet is that it integrates a loyalty/coupon system (Google Offers) with the payments. I haven't been able to figure out if the loyalty/coupon system integrates locationally-based offers (e.g., GPS in phone says you're 5 blocks from a Home Depot so you get a SMS text message telling you about the proximity and with a link to a digital coupon that has to be used within 2 hours).

The Anti-Consumer Agenda

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

Keeping Up with the Joneses: Credit Score Edition

Do you have good credit? Compared to whom? While your credit price may depend largely on how your credit fares against objective criteria (above 680 to avoid being "subprime," for example), do you ever wonder how you are doing compared to everyone else? Maybe you think the national banks would give credit to a ham sandwich; what you want to know if whether you are  keeping up with the Jones in managing your financial behavior.

Experian provides a chance to test your credit against your neighbors with its National Score Index. (Hat tip to Harvard student Mazen Elfakhani for letting me know about this). Using this tool, you type in your zip code and out pops the "score index," the average credit score based on a representative sample of consumers, for the nation, region, state, and your area. You also get comparable figures on other credit statistics like debt, late payments, and credit inquiries.

The areas are pretty broadly defined, like "Boston area," so you can't really see how you compare to the Jones family on your street. But it's still kind of fun, especially for someone like me who seems to move all the time. This year, Cambridge, MA: 715 score; last year, El Cerrito, CA: 708; prior years, Iowa City: 721. How am I doing? That will have to wait for another blog post; I'm definitely not paying Experian for my credit score.Remember that what you are entitled to one time per year for free is your credit report, not your score. That site: www.annualcreditreport.com, and as the FTC explains, there are lot of imposter sites and efforts to get people to pay for their credit scores when they are only trying to access the free report.

What Do Giving to Charity and Having Sex Have in Common?

Both light up the same pleasure responders in the brain. In other words, it feels good to give! Plus, it is not too late to get a 2010 tax break for a good cause. With over 1.4 billion people currently living below the international poverty line of $1.15 a day, there is also plenty of need.   I was moved to blog about this topic after reading about Betty Londergan, who responded to her job loss by giving $100 a day for 365 days, and then blogging about it. There are more extreme stories too, like the one about the Salwen couple in Atlanta who sold their big house, gave away half the proceeds, and moved into a smaller one. And then there are the rest of us … who just might just be willing to give up a new toothbrush holder or shoe caddy so someone with nothing can have something. 

Holiday Gifts from the Heart

Buy it, sack it, take it home.

Wrap it, unwrap it, look for a place to put it.

Clean it, move it, throw it in a land fill.

Sorry, but I hate this time of year.  We make such a huge carbon footprint, not to mention spending a lot of money we don’t necessarily want to spend. But that’s the culture right?   Newsweek magazine’s Dec. 6^th 2010 edition reports that we Americans can’t get over the urge to splurge, and that we have frugality fatigue.  We are reportedly sick and tired of depriving ourselves.  Wow, that was fast.  How long did the frugality movement last?

What's in Our Wallets?

Capital One made the slogan famous, but it's more fun when it's not just a hypothetical question. Many of the Credit Slipsters research at least some kinds of payments, such as credit cards, and some of us teach payment systems courses in law schools. If, and perhaps it is a big if, you think that means we know something about payment systems, I thought it might be revealing to see how we do or do not translate our knowledge to our own behavior as consumers. So I polled the Credit Slipsters, and a few other people who teach payments law (some of whose responses will appear in comments to this post), and here is what they said about what they carry and how they pay.

I'll go first: I have an LL Bean Visa credit card. I like it because it is offered by Barclays rather than a TARP rescued gigantic card issuer, and perhaps not unrelatedly, because it has very low fees, such as a $15 late fee. I usually pay in full but sometimes I procrastinate (anybody who reads this blog will know this about me already). I also find the free shipping/returns/monogramming is a reward that I actually use, whereas with airline miles they just accumulated and whenever I wanted to use them all the seats were gone. I also have a Visa branded debit card issued by a local bank in Iowa. If possible, I always enter my PIN with this to save the merchant some money (interchange fees for PIN-based debit are cheaper than signature (Visa/MC) debit). If I had to guess, I would say that I use debit and credit each about half the time, but probably use the credit card primarily for travel, which tends to be large ticket items, such as hotel and airline tickets. I also make regular use of one stored value/prepaid/gift card, which is at Starbucks. It has a budgeting effect--when it's out at the end of the month, I at least pause before reloading the card. If you think I'm not exactly the most rational actor in the world, keep reading! 

Make Your Home Finance Audit Fun While Fighting Back Against Bank Fees

The article Katie posted on bank fees was right on. The fees have gotten so creative that we invented a new household game to combat them, in which we compete for a pre-determined prize.  The prize makes it fun.  We do a competitive home finance audit over a glass of wine or two on the 5th or the 6th of the month, once the statements are all complete on line. Today is the 6th. Game on!! Stewart and I like competition.  To play, we scour all bank and credit card statements as well as certain purchases. The prize goes to the one that incurred the least interest or fees of any kind on anything, except the home mortgage. If there are no fees at all, no one wins the prize, but we both win!

Real Housewives of New Jersey Bankruptcy

OK, I'm way, way late on this story, but I thought it was worth a few lines.  Teresa Guidice, one of the Real Housewives of New Jersey has filed a Chapter 7.  Here's the petition for all you financial voyuers.  It's a nice window on the noveau lifestyle, and reasonably comparable to the other Real Housewives' petition (the White House crashing Salahis').  

Bank of America Settlement -- A Sign of True Progress?

In my last post I noted the beginnings of some positive movement by consumer protection agencies that have been largely dormant and, in some cases like the United States Trustee program, actively anti-consumer. A few weeks ago, as Katie Porter noted in a recent post, Bank of America (BOA) reached a settlement with the Federal Trade Commission with respect to certain mortgage overcharges, including overcharges in bankruptcy, on mortgages formerly serviced by Countrywide Mortgage. The settlement requires reimbursement to consumers who were overcharged. BOA, in addition to agreeing not to lie, steal, or file documents without reviewing them, will also have to follow notice procedures similar to those that are already required or are likely to be required for all mortgage companies once new Bankruptcy Rule 3002.1 becomes effective in December, 2011. The United States Trustee (UST) Program assisted the FTC in its efforts.  This settlement is the first significant positive result of increased UST scrutiny of mortgage lenders, although the extent of the UST’s participation is not known.

The Beginning of a Return to Consumer Protection?

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

The CFPB Auto Dealer Exemption--A Reminder of the Why We Should be Worried

It looks like auto dealers are going to get their carve out from the CFPB.  I can't think of a policy argument for exempting auto dealers; maybe someone will provide one in the comments.  The used car dealer has long been the poster child for sharp dealing.  But it's worth reviewing the consumer protection problems with auto dealers, so that we realize what practices are being exempted from potential future regulatory oversight.  

White House Dinner Crashers' Bankruptcy

Some of the news reports on the White House dinner crashers (Tariq and Michaela Salahi) have noted that they own a winery that filed for Chapter 11 (reorganization) bankruptcy and then converted to Chapter 7 (liquidation) bankruptcy. My prurient interest was engaged, so I tracked down the petitions and relevant filings (linked below).  What follows is my attempt to sort out the Salahi family's business doings, as well as some musings about where we should really look for bankruptcy abuse--small business filings where the business is the alter ego of the owner, but where corporate law might not allow veil piercing.  In these cases the sophisticated creditors get personal guarantees, but the tax authorities, tort creditors, and unsophisticated creditors get screwed by the corporate form.

As far as I can tell, however, from the PACER filings, this part of the story has been misreported.  There are two separate, but apparently affiliated entities that filed for bankruptcy separately.  First, Oasis Vineyards, Inc., filed for Chapter 11 in December of 2008.  Oasis Vineyards has three shareholders:  Mr. Salahi (5%), his mother (40%, also president of Oasis Vineyards), and his father (55%).  The petition schedules assets of $333K and liabilities of $1.9M.  Tariq Salahi, a Salahi Family limited partnership, Oasis Enterprises, Inc., and Salahi's parents are listed as codebtors (cosignors or guarantors) of various obligations.

In April 2009, the US Trustee filed a motion to convert the case to Chapter 7 liquidation or have it dismissed because the debtor failed to file its monthly operating reports and had not filed a plan of reorganization.  (This is pretty standard; it appears that several monthly operating reports were subsequently filed simultaneously.)  The court has postponed ruling on the motion to convert or dismiss because of the death of the debtor's counsel.

Second, Oasis Enterprises, Inc., a/k/a Oasis Winery, of which Tariq Salahi is the president and sole shareholder, filed for Chapter 7 bankruptcy in February 2009.  That case is still pending.  The scheduled assets are $339K and liabilities oare $982K. The petition states that Oasis Enterprise's income fell from $1.7M in 2007 to a mere $35,000 in 2008.  Ouch.  In 2008, a bank repossessed a $150K Aston-Martin car (resulting in a $85K deficiency) and a $90K Carver 350 Mariner Boat from Oasis Enterprises (resulting in a $56K deficiency judgment).

Unresolved Access Issues

Yesterday’s post on means-measuring versus means-testing offered a positive perspective on the Canadian bankruptcy reforms.  The focus was on debtors who are currently able to access the bankruptcy system and how this will change with the enactment of the reforms.  Unlike the American system, the Canadian surplus payment requirements do not impose additional front-end administrative and financial burdens that in themselves will prevent the poorest of potential bankrupts from accessing the bankruptcy system. However, a number of obstacles hinder access to the bankruptcy process for the poorest debtors.  In particular, such debtors will have difficulty paying the approximately $1800 in costs associated with the administration of a bankruptcy.  The reforms go some way to address this concern by providing a mechanism for the bankrupt to reach an agreement with the trustee to continue paying for bankruptcy services after the bankruptcy period. 

Professor Saul Schwartz of Carleton University and I have been working on issues around debt, low-income households and insolvency remedies for some time now.  Jason Kilborn blogged about our 2007 article at: http://www.creditslips.org/creditslips/2007/04/bankruptcy_for_.html.  In that article, we pointed out that, for two reasons, the conventional wisdom is that the poor are not likely to have needed the insolvency system. First, creditors are reluctant to extend credit to the poor because the risks of non-payment are high. Not having been able to borrow, the poor are not over-indebted and are therefore not in need of bankruptcy protection. Second, some poor debtors - lone parents on social assistance for example - are judgment-proof meaning that judgments for money recoveries obtained by their creditors are of no effect because these debtors do not have sufficient non-exempt property or income to satisfy the judgment.

Overspenders to Face Tax Audits?

A recent article in the Wall Street Journal reported on a new effort by the IRS to catch tax cheats. The IRS is going to compare data on mortgage-interest payments provided by financial institutions with homeowners' declarations of income on tax returns. The idea is that people must have more income than they reported to the IRS if they are able to make their mortgage payments, the bulk of which for homeowners with new loans from purchase or refinance, will be payments toward interest. Using data from 2005, the Treasury inspector general said that "tens of thousands of homeowners who paid more than $20,000 in mortgage interest" reported income that appeared "insufficient" to have covered their mortgage payments and basic living expenses. I don't doubt that fact, but I see an alternate hypothesis to explain the situation. These families are accurately reporting their income, but they are just spending more than they earn. They have houses they cannot afford, and they use Capital One to finance their basic living expenses so their income dollars can go to mortgage payments. Back in 2003-005 when these data were gathered, the credit market was loose and many families made up shortfalls in monthly living using credit cards, or in some instances, doing a cash-out refinance, and then living off the cash, expecting the housing market to sustain this strategy. Relying on debt to make ends meet has always carried risks, including bankruptcy risk. Should we add the risk of a tax audit to the reasons that families need to keep income and expenses in alignment?

Bankers, pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers...in 16th Century Holland

It's pretty amazing how the status of some professions has changed over time.  I came across this astounding passage in Simon Schama's The Embarassment of Riches:  An Interpretation of Dutch Culture in the Golden Age (now you know what I read for fun): 

"Bankers were excluded from communion by an ordinance of 1581, joining a list of other shady occupations---pawnbrokers, actors, jugglers, acrobats, quacks, and brothel keepers---that were disqualified from receiving God's grace.  Their wives were permitted to join the Lord's Supper, but only on condition that they publicly declared their repugnance for their husband's profession!  Their families shared the taint and were only permitted to join communion after a public profession of distaste for dealing in money.  It was not until 1658 that the States of Holland [the representatives of the estates of nobles and commoners to the court of Holland] persuaded the church to withdraw this humiliating prohibition on "lombards."

That's a remarkable shunning of those in finance by a culture that was absolutely obsessed with material goods of every sort (tulips, satin, brocade, damasks, gold, silver, pearls, etc.).  There's a long history of religious discomfort with finance, but to see this in as commercial of an early modern culture as there was surprised me. 

In Favor of the Consumer Financial Protection Agency (CFPA)

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

Shared Suffering in Airports and in Bankruptcy

Warning:  this is one of my odder posts.  Today I got a postcard in the mail encouraging me to sign up for Flyclear, a private service that for a mere $174 annual membership will provide me with a special ID card that will let me go through special airport security lines super fast.  The card works at almost 19 airports.  

I really dislike this product.  It bothers me in a visceral way because it is horrifically inegalitarian and undermines a basic civic value of shared suffering from war.  Airport security lines suck, but this is a national cost imposed by terrorism.  (I'll leave aside the issue of whether airport security lines are a sensible or the best response.)  And there is something really wrong about the costs of terrorism being borne disproportionately by American depending on their economic means.  We're all in this together and should have to shoulder the burdens alike.  It very much bothers me that TSA (or public airport administrations) is willing to countenance this sort of product.  

Flyclear is analogous to letting rich people pay to avoid the draft.  Sure, we did it in the Civil War.  For a few hundred dollars (a lot of money then), you could buy the life of a poor Irish or German immigrant who would go and live a miserable camp life and possibly be killed or maimed in your place.  In Vietnam we did it through the backdoor--rich, connected folks could get themselves places in higher education or seminaries and "Ho Chi Minh yeshivas" or fled abroad (or got into cushy air national guard units).  Maybe this doesn't bother you, but it really gets under my skin.    

I am aware of some of the counter arguments about why Flyclear is a good thing: the more people who are in Flyclear lines, the shorter the lines are for everyone else.  Flyclear lets people choose how they want to bear the burdens of terrorism, be it in their wallet or by waiting in a line.  And maybe Flyclear pays something to TSA, which thereby benefits all the rest of us.  There are responses to all of these arguments, but even if one were to concede their validity, none of them, to my mind, comes close to counterbalancing the erosion of the shared suffering principle.  

This is, of course, a bankruptcy blog, and don't worry, there's a connection with FlyClear.  Shared suffering is a key bankruptcy principle too, of course.  Unsecureds get paid pro rata.  But sophisticated creditors can opt out of this shared suffering by becoming secured or better yet entering into transactions that are not covered by the automatic stay.  

The problems that this creates in bankruptcy are the same that it creates with the "war on terror" (can we find a better phrase now for goodness sake?).  When some folks can opt out of the suffering of a war,but still have a voice in the politics of the war, it will affect how the war is prosecuted, and possibly not in a way that benefits the country overall.  Likewise, if a creditor is not bound by the stay or is secured, the creditor might not act in a way that maximizes value overall (Kaldor-Hicks efficiency) or even maximizes value in a way that doesn't make anyone worse off (Pareto efficiency).  

Let me be clear--I don't think Flyclear will destroy republican virtues.  But the sense of shared community, be it in bankruptcy or in airports, can undergo a death of a thousand cuts, and Flyclear is just another little cut.  

It's Still the Economy

You can't be serious! Federal Reserve chairman Ben Bernanke says what anybody with a passing interest in economics already knows -- that it will take time for the economy to turn the corner -- and the market tanks. The market seemed punch drunk on the massive stabilization packages -- $2.5 trillion and counting -- that the industrialized world was showering on failing financial institutions. A mere 36 hours later, though, Wall Street realized that it cannot regain its strength without a healthy Main Street. It was a weakening labor market, following a bursting housing bubble, that contributed to the massive foreclosure wave and to the crisis. No amount of tinkering with the stabilization package will detract from the fact that people and businesses need more income, not loans, to pay their bills and to invest in their future. It should be clear by now to everybody, even extremely myopic financial markets, that the next policy step lies in helping U.S. businesses and families back on their feet through a well designed second economic stimulus.

The Moral Hazard of Treasury's "Equity" Injection

Treasury Secretary Paulson is jawboning banks to use the Treasury's capital injection to lend, rather than to just sit on the funds. This is very telling about the way Treasury sees the financial crisis and should concern us because it sets up a moral hazard and papers over the looming problem of the US economy: consumer overleverage.

Toward a World with Rational National Consumer Credit Public Policies

The current economic downturn started in the consumer credit area. One of the glaring failures during the build up of the factors that led to the current mess was the lack of sufficient economic or sociological analysis from within the academic communities. There are simply too few funded prestigious institutions that study consumer credit issues. It is interesting that law school bankruptcy professors who operate outside of funded centers and may or may not have credentials in economics and sociology have provided a significant percentage of the analysis that does exist. The current economic recession is hurting many many people and will hurt many more before it comes to rest, but perhaps one benefit to which it could give rise would be more regular and effective analysis of the micro and macro economic and sociological issues that inhere in the supply and demand sides of the consumer credit world, including housing finance, car finance and credit card debt. Such an analysis might lead to a more well informed public and more well informed legislators and other public policy makers. We need this in the United States and the rest of the world. 

As a starting point let’s think about the spending and borrowing habits of both Americans and of the hundreds of millions of potential likely consumers and spenders in China and India and other emerging Asian economies. Ronald Mann has written insightfully about the preferences for debit or credit cards in Japan and Korea and perhaps now it is time to look at China and India, particularly since the numbers of people who will have either money in their pockets or credit available to them is so staggering.

Playing in Peoria

President Bush visited Peoria, Illinois, today for a fund-raising luncheon for the local Republican congressional candidate. From the coverage in the local paper (the Peoria Journal-Star):

Kent and Kristin Boyer of Peoria Heights decided to purchase the $500 tickets to the fund-raiser instead of buying the new water heater they needed.

Maybe I should update my last post and make it "What Can You Buy for $500?"

Comments are open, but let's go easy on the Peoria area. Some of my best friends grew up there, although it was Peoria proper, not the contiguous and indistinguishable Peoria Heights.

What Can You Buy for $5?

Thanks to the always interesting The Consumerist, a project called, "the Five Dollar Comparison" caught my eye. It's a photo stream on Flickr that asks people to show what five dollars (or its equivalent) can buy around the world. (The project also seems to have its own web site, but I could not get it to come up.) Did you know that five dollars can buy 13 lottery tickets in Wales, a package of ham in Helsinki, or a can of air in Los Angeles? I didn't, but I do now--and my life is better for it. Yes, I must lead a boring life.

Debtors Anonymous?

I wanted to pass along an interesting story I saw a few weeks ago in the WSJ about support groups for debtors.  They had such names as the "Sunday Morning Club" and  "Girls Just Wanna Have Funds."  These groups, to me, serve as an indicator that debt has become a socio-cultural phenomenon akin to addiction, such that people now feel the need to have support groups to confront and combat their problems.  I also note a lot seem church-based.  I suspect these are more organic and less slick than. e.g, current commercialized debt gurus.  Here's my lingering question: what do the credit card lenders have to say about them?  I suspect they'll proffer support, the way brewers encourage "responsible drinking," but I can't help but wonder whether secretly they can't stand them...

Consumerism and the Environment: What Would Jesus Buy and Subsequently Throw Away?

Sorry, Morgan Spurlock, had to steal that one. One key to meaningful financial literacy education is that a person has to really care about something to work for it. If you take the time to let it sink in, people can see financial literacy education as a way to consciously choose a course of action that is counter to the prevailing culture of consumerism, and that gives them back their time and their lives. For some, this will resonate, especially younger people.

Yesterday, I was handed a free sample of a Starbucks mocha-something-or-other while in line at Target.  It was my first taste of Starbucks coffee.  I am too cheap for Starbucks. I don’t have cable T.V. I do not choose to live in a home resembling Hadrian's Villa, because I’d have to work at a different kind of job to do all that and don’t want to. These are the kinds of choices I want to help people make.

I used to have more expensive tastes, but realized that one thing they aren’t making any more is more hours in a day. It takes a lot of time to care for expensive stuff. Most things we buy will either end up (1) in our homes or offices where we must dust, move, organize, or otherwise take valuable time caring for, (2)in a landfill somewhere, or (3)in the used items market and then in someone else’s closet or home, after we paid retail for them. Since I don’t want to pay retail for something that ends up in someone else’s house, I see no alternative but to forego…even in the case of shoes.

Credit Card Debt Absent the Mortgage Bubble

We tend to view credit card debt and mortgage debt in isolation, but its important to remember that the two are highly fungible. This means that when consumers leveraged up with mortgage debt in recent years, the were partially deleveraging their card debt. This means that but for the mortgage bubble, we'd be seeing much higher levels of credit card debt (and that's where we're headed).

The mortgage bubble of the past few years was largely a refinancing bubble, not a purchase money bubble (much less a first-time homebuyer bubble). When people refinanced, they were not just refinancing their mortgages. They were also refinancing their credit card debt. Or, more precisely, they were converting their unsecured high interest credit card debt into lower interest, but secured, mortgage debt. There was a brilliant framing in the subprime pitch—pay off your 22% CC debt with a 9% mortgage. Seems like a no-brainer when pitched that way. There were some folks who refinanced multiple times, each time paying off thousands, if not tens of thousands of dollars of credit card debt (and other non-mortgage debt).

This has an important implication that has escaped notice.

Should We Not Disclose Credit Card Information?

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.