My Favorite Two Sentences From a Recent Case . . .

Over the past few days, I've been struggling with trying to understand a new NY case involving secured debt. The fact that I had to struggle to understand the transaction made me feel insecure enough (on occasion,  I purport to teach corporate debt), but then when I tried to delve deeper into the case by looking at the underlying contracts (the "Collateral Pledge" Agreement - yuck), I got even more confused and insecure because I found the darn thing utterly incomprehensible.  Indeed, a whole half of that document seemed like it had been drafted for an entirely different type of transaction and the crucial provision that I was looking for didn't even seem to be there. But since I couldn't understand it, I couldn't be sure.  Maybe that provision was buried in some other provision that I couldn't figure out . . .

Then, while wallowing in insecurity, I came across this from a recent bankruptcy case out of the Third Circuit (thank you. Third Circuit blog for making me feel better):

The Third Circuit affirmed a ruling leaving in place a tenant’s favorable lease terms after the landlord declared bankruptcy and was purchased free and clear. Best line: “The Lease is long and neither simple nor direct. Indeed, it is an almost impenetrable web of formulas, defined terms, and cross-references–a ‘bloated morass,’ in the words of the Bankruptcy Court.”

I'm turning now to reading the briefs for the Aurelius v. Puerto Rican Control Board/Commonwealth of Puerto Rico case (oral argument on Monday).  As compared to that Collateral Pledge Agreement, these briefs read like a beautiful novel.  The briefs on both sides are beautifully written, in clear, short and comprehensible sentences.  Maybe litigators should be the ones drafting contracts?

Recommended Reading: Empire of the Fund

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

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

Porter's Modern Consumer Law

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

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

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

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

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

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.

Scarcity of Money? Or Time?

How is it that I never find the time to blog? My answer would be that I simply do not have the time. But of course I have the same hours in a day as my co-bloggers. I could argue that I have more demands on my time, but I know very well that we are all busy. Scarcity, a book by Sendhil Mullainathan and Eldar Shafir, has many lessons for busy people, including those of us who are busy thinking about the difficulties faced by people who have a scarcity of income or disposable income after debt. 

The book looks at scarcity in varied contexts such as time, money, food, friendship. It argues that there is a common logic to situations of scarcity: a mindset that captures our attention and changes how we think. At an optimal level, scarcity can create positive focus. But the same capture of the mind can preoccupy us and make us vulnerable to poor thinking and impulse control. The authors find, for example, that being poor reduces a person's cognitive capacity more than going one full night without sleep.

The implications for those in financial scarcity are powerful, particularly in terms of policy intervention. The authors focus on the need for "slack" in program design; for example, job training programs with modular classes that can be taken out of order so if a person misses a class, they can more easily make up the class rather than falling behind on linear content and having to drop out.

My thinking went to chapter 13 and the debate about a "cushion" in chapter 13 plans. While some judges and trustees permit this (or even insist on it), others see it as an indication of weakness. If you deserve a discharge, you need to learn within limits. The scarcity of a confirmed chapter 13 plan, with its 100% draw on all disposable income, creates a mindset that can itself be harmful. People with some financial slack may, in fact, be better able to build the financial habits and position themselves for the rehabilitation that is bankruptcy's goal. Building financial savings into chapter 13 as a necessary expense would reduce the cognitive burden of bankruptcy and insulate people from the harms of financial scarcity after bankruptcy. The result, according to the research of Mullainathan and Shafir, would be debtors emerging from bankruptcy with better self-control, more focus, and stronger decisionmaking.

Just Punch My Bankruptcy Ticket

That's the title of Denver Law Professor Michael Sousa's new article exploring debtors' evaluations of the pre-filing credit counseling course and the post-filing financial management course mandated by BAPCPA. The data for the article came from in-depth interviews that Sousa conducted with 58 individuals from Colorado who filed under Chapter 7 between 2006 and 2010. Bob Lawless previously posted about another article Sousa wrote based on the interviews that discusses debtors' perceptions of bankruptcy stigma. Like Sousa's previous article, this paper carefully presents the interviews for what they are and what they can reveal about debtors' interactions with these two components of the bankruptcy process.

Sousa's findings generally confirm the limited prior research about the two courses. In fact, they may paint an even grimmer picture of the courses' usefulness. None of the debtors thought the credit counseling to be of any help, and only 2 couples (4 of the 58 debtors, or 7%) thought they had learned anything useful from the financial management course. Indeed, and one of Sousa's more interesting findings, what some debtors took from the credit counseling course contravenes Congress's aim for the course to inform debtors of all their options and thereby convince some debtors to settle their debts outside of bankruptcy. Debtors instead said the course affirmed their decision to file because it showed them how bad their situation was and provided them some psychological comfort in accepting that bankruptcy was the last remaining option.

Living down the Lattes

Credit Slips is a virtual community so very few of you know that I go to Starbucks at least once a day, although a small detail in the pic here was a hint in that direction. It's not a cheap habit, as personal finance writers have observed here and here. But does it drive people to financial ruin, or even indicate a failure of sound financial habits?

I've never thought so. The decades of research on consumer bankruptcy show that the big 3--job problems, medical problems, and family changes--are underlying structural problems. My thoughts on the "latte problem" are now enshrined in print in Helaine Olen's new book, Pound Foolish. It's tone is largely that of an expose, which makes for fun reading, although academics may find some of the research a bit light. But part of the problem that the book reveals is the lack of innovative solutions to improve financial advice. Certainly the CFPB has undertaken this as a major part of its mission. I'd love to hear readers' suggestions for innovative (not more junior high financial education, please) ways to get people to be more critical "consumers" of financial advice and to take the time and effort to make strides toward their financial goals. In the meantime, I'll enjoy my latte and procrastinate on rebalancing my retirement portfolio!

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.

Financial Education in Singapore

As Lauren's work has detailed, there's a veritable financial literacy industry in the United States. The CFPB is even charged with undertaking certain financial literacy initiatives. As it turns out Singapore is a full decade ahead of us on this front.  The government of Singapore has a quite good financial education website.  

National Consumer Protection Week and Disclosure 3.0

It’s National Consumer Protection Week (NCPW)!   Federal, state, local, and nonprofit consumer protection agencies and organizations are making extra efforts to promote consumer awareness. 

First I have to get out of my system thoughts of Tom Lehrer’s song, National Brotherhood Week:

                Step up and shake the hand/Of someone you can’t stand . . .

                It’s only for a week so have no fear/Be grateful that it doesn’t last all year.

But to get back on message, of particular interest to Credit Slips readers is this part of the mission of consumer protection described on the NCPW website:

    "Financial Fraud Scams: American consumers owe a whopping $11.31 trillion dollars in debt and are behind on paying about $1.01 trillion of that amount. Mortgages, student loans, and credit cards account for a large portion of that debt. Consumers are often haunted with huge monthly payments, and fraudsters take advantage of that with debt relief scams, tax scams, and other financial fraud scams. Scams target individuals who are in financial distress, but they fail to fulfill their promises, and typically leave consumers worse off than when they started."

Let me say that Lauren Willis has done a great job on this site recently taking us, patiently and painstakingly, through the many problems with the idea that disclosure can be refined into a digital juggernaut to protect consumers. See here  and here and here.

Disclosure 3.0: Making Disclosure Smarter

What if, instead of making the consumer smarter or the disclosures more comprehensible, as discussed in my last several posts, we made financial product disclosures smarter? For the uninitiated, “smart disclosure,” according to the federal White House Task Force on Smart Disclosure, is “the release of data sets in usable forms that enable consumers to compare and choose between complex services.” The Task Force description continues: “Smart disclosure requires service providers to make data about the full range of their service offerings available in machine-readable formats such that consumers can then use these data to make informed choices about the goods and services they use. While consumers may access the data directly in some cases, the data may also be useful in enabling government agencies or third parties to create online tools for consumer choice.” 

The idea is that both the government and firms will be required to release, in close to real time, complete price, feature, and performance data about products and services offered by the firm or government entity (“product data”) so that consumers can input their own preferences into on-line or mobile app tools (“infomediaries”) that can then recommend the products or services that will best meet those preferences. Kayak for everything! 

Putting Disclosure to the Test: User Comprehension Requirements

Given the limitations of Disclosure 2.0 and Disclosure 2.5 I described in my last posts, what is to be done? To answer this question, we might first ask what financial product disclosure is attempting to achieve. Although disclosure has several aims, one is consumer comprehension to the degree necessary to enable good decisions. Disclosure rules require particular information to be imparted, often in a specified format. What if the law instead allowed firms to disclose whatever truthful and nonmisleading content they choose in whatever format they choose, but required firms to demonstrate, through field-based testing, consumer comprehension of the key facts about the financial product needed to make a good fact-based decision? 

Disclosure 2.5: Moving from the Lab to the Field

If financial education classes and lab-tested disclosures are unlikely to help consumers in their real-world financial decisions, what about field-tested targeted education/disclosure? Exciting work by Marianne Bertrand and Adair Morse shows that information given to payday borrowers can reduce their future borrowing, holding payday lender behavior static. Although this last caveat seriously limits the external validity of their results, the potential implications of their work are wonderful enough to be deserving of a full description here.

Which Consumer Financial Education Programs Are Most Effective?: Assuming a Fact Not in Evidence

Thank you to the Credit Slips team for inviting me to guest blog.  First I must warn the reader that I am not a real blogger (I’m a bit of a Luddite - I don’t even have a smartphone).  But I’m going to join the 21st Century for a bit here.  Over the next couple of weeks I’ll be sharing my thoughts and some recent research pertinent to modes of consumer financial protection, from financial literacy education to policy defaults to product regulation.  As some of you already know, I have been critical of all of these.  But here I will also suggest some underexplored alternative routes to achieve the same ends of consumer financial well-being that have eluded us in the past.

I'll start today with financial education.  The CFPB would like your comments on “effective financial education approaches that create opportunities for consumers to improve their financial decision making capabilities.”  I thought I had blown up this myth already.  And others keep proving me right.  If you were at this past year’s Boulder Summer Conference on Consumer Financial Decision Making you know that a soon-to-be released exhaustive meta-analysis of past studies demonstrates that financial education does not produce better financial outcomes, and another study using a much larger dataset and a more robust set of controls than past work finds that financial literacy does not lead to improved financial outcomes. 

Stripping Down Bankruptcy Jargon

A Credit Slips commenter recently asked that blog posts explain (or at least spell out) acronyms and specialist terminology. This inspired me to report back on a corporate bankruptcy terminology set that University of North Carolina Law students collaboratively produced last year (technically, a wiki) in business bankruptcy, an advanced transition-to-the-profession seminar. In both comments and emails, Credit Slips readers helped me expand the list of terms (and also offered great ideas for practical writing projects). So thanks again for your contributions, and thanks also to the Spring 2012 seminar alumni - some of whom are practicing bankruptcy law or clerking for bankruptcy courts right now, or headed there soon - who tackled the collaborative vocabulary project, and the entire seminar and its experimental elements, with such great spirit and a 100% perfect attendance record! So, some observations. 

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.

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

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. 

Cash as Social Infrastructure

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.

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!

Girl Scouts Add Consumer Finance to the Badges

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!

Evaluating Mandatory Financial Education in Bankruptcy

In 2005, Congress amended bankruptcy law to require individual debtors with primarily consumer debts to complete an "instructional course on personal financial management" to be eligible to receive a discharge of their debts. Adding financial education as a bankruptcy requirement divided the bankruptcy community, even debtor advocates, judges, academics, and others who almost uniformly did not like the 2005 amendments. Part of the mixed sentiment about the financial education may be that it is hard to dislike something as innocuous-sounding as education (although Professor Lauren Willis makes a good case against it in this article). And there were certainly bigger fish to fry in opposing the 2005 laws. Still, many complained that this was one more example of creditors getting Congress to lard on duties for debtors, driving up the cost and work of obtaining bankruptcy relief and setting up debtors to have their cases dismissed if they tripped up by failing to complete the educational course.

Dr. Deborah Thorne and I have a new study that looks at how debtors themselves feel about the mandatory financial education course. It is a chapter in this book, Consumer Knowledge and Financial Decisions (ed. Douglas Lamdin, Springer, 2012) and available to read here. In the 2007 Consumer Bankruptcy Project, we asked debtors whether they believed that the information from the financial education class 1)would what they learned in the financial education class have helped them avoid bankruptcy originally, and 2) would help them avoid financial trouble in the future. While only 33% thought a financial instruction course similar to the one required of bankruptcy debtors could have helped them avoid filing, 72% thought it would help them avoid future financial trouble. As we report in detail in the chapter, some demographic groups were much more positive about the value of financial education than others.

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?

Are There Things You Can Do Now to Make for a Better Retirement Later?

An  article in this morning’s Wall Street Journal money insert, Ready to Retire? Here is a Five Year Retirement Plan, made me high-tail it to the gym. Thinking about retirement is both scary and fun, and we'va all seen plenty of mistakes made on the way to retirement. Sure, people have failed to save enough, but most of the mistakes I am talking about have nothing to do with money. People just don’t think through how they’ll spend their time in retirement and then they age overnight when they find they have nothing meaningful with which to define themselves, and even nothing to think about when they get up in the morning. This article gives readers hands-on how-to steps for planning retirement, with one part about the money and one part about the rest, for each of the five years prior to retirement.

New Consumer Regulation: Education and Disclosure Is Not Enough

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?

On the Road Again

I'm off to the 2010 William J. O'Neill Great Lakes Regional Bankruptcy Institute in Cleveland. Tomorrow, attendees have the privilege sad duty of holding down their lunches while hearing me speak about bankruptcy filers. The whole conference is supposed to be a great event, and I'm looking forward to it. I'm sorry that I haven't posted on it further in advance. If I have a few moments, I'll post on any interesting developments that come out of the conference.

HAMP--Is It Really All About the Money?

Are mortgage servicers really refusing to modify mortgage loans solely because of all of the "ancillary fees" they can generate from a completed foreclosure? Is the problem really all about the money or is there something more to it?

The New York Times reported about ten days ago that the HAMP mortgage servicers were reluctant to engage consumers in modifications because the companies collect such lucrative fees on delinquent mortgage loans. There is certainly a substantial body of evidence to support the "lucrative fees" disincentive theories. For example, the Federal Reserve Bank of Boston recently shed some light on this problem with a new study that concluded that only 3% of the seriously delinquent mortgages had been modified due to the "the simple fact that the lenders expect to recover more from a foreclosure that from a modified loan." And, the number of reported bankruptcy cases where mortgage servicers have been sanctioned for imposing unlawful, illegal and unreasonable "collateral and ancillary fees" is substantial and perhaps monumental in their numbers.

Does Anybody Know If Credit or Foreclosure Counseling Helps?

The infusion of millions of dollars to pay "counselors" to forestall foreclosures on behalf of consumers who are delinquent on their mortgage payments seems as American as apple pie and should perhaps help some homeowners. These dollars are split among neighborhood non profits, specialized housing counseling organizations and a considerable amount has flowed to providers that have historically spent most of their time counseling consumers with credit card delinquencies. A group of United Way supported family and children service agencies also receive some of these funds.

Anecdotal reports indicate that the housing counselors are a cut above the historic credit card counselors. The credit card counseling industry agencies were mostly begun by creditors and their funding has always been supported by payments from creditors. The housing counseling organizations began with funds from HUD and the Ford Foundation and the extensive new dollars have come from the Federal government through a central organization called Neighbor Works. The neighborhood organizations obtain their funding all over the lot. The cultures of the various organizations differ a good deal among themselves and between the various types of providers.

Anticipating Refund Anticipation Loans

I've clearly become predictable in my posts, as someone recently wrote to me wondering where is my annual tax-time rant against refund anticipation loans (RALs). In fact, I have written about them twice before on Credit Slips, here and here. But I think this annual lending "opportunity" deserves another round of criticism; this is a bad product that just won't seem to die. The number of RALs held fairly steady between 2006 and 2007, around 9 million loans.

RALS are 1 to 2 week loans administered by tax preparers and banks working together. The loans are secured by the taxpayer's expected refund.  In their new report on RALS, the National Consumer Law Center and the Consumer Federation of America find that a typical RAL is about $3,000 and carries an APR of 77% to 140%. While the high APR for a RAL makes it similar to other short-term loans such as payday loans, there are some unique justifications for regulating or discouraging RALs that go beyond the high price paid by consumers.

Getting to Know Suze

Last spring, during our Debtor World conference here at the University of Illinois, it was a pleasure to get to know James Scurlock, the director/producer/writer of Maxed Out. If you have not see the movie, now is a good time. WIth the credit crisis now crashing down, Scurlock has to at least be a nominee in the "I Saw It Coming" category. Scurlock has a column at Slate entitled, "If You Suze Like We Knew Suze, You Wouldn't Listen to Her Advice." Check it out.

Suze Orman's defenders have risen to her defense in the comments to Scurlock's column, slamming Scurlock for daring to question her. Scurlock started his column with an Orman quote: "'Tell me what I need to know,' people often say to me. 'Here is what you need to know,' I answer." My sense is that Orman doesn't sell financial advice as much as she sells a sense of security. Scurlock's column tells people that Orman may not have all the answers, and one of the surest ways to incur someone's scorn is to tell them the world is a more complicated place than he or she would like to believe.

Regulation Cannot Depend on Irrational Markets

At this point, it is all too clear that financial markets can get things wrong. This is not an isolated phenomenon. No, getting it wrong tends to be the name of the game for financial markets. Understanding that financial markets regularly underestimate or overestimate the risks of investing is crucial to the proper design of financial market regulations.

This is a Financial Crisis like Any Other – Treat it Like One

I wanted to thank Bob Lawless, Elizabeth Warren and Credit Slips to invite me back as guest blogger. It seems an appropriate time to discuss topics in two of my areas of expertise -- financial crises and retirement income security -- as they are directly related to the current financial turmoil.

The markets are crashing. This is a standard financial crisis, as many other countries experienced over the past twenty or so years. In a crisis four risks materialize: default risk, maturity risk, interest rate risk, and exchange rate risk. We are spared from the last one since the dollar dropped well before this crisis. The problem is that we are not adequately addressing the remaining risks.

Enjoyable but not Educational? Debtor Financial Management

In May, the Executive Office for the U.S. Trustee released another of the studies mandated by the new bankruptcy law. I expressed optimism in this symposium piece that this research may be a bright spot to emerge from BAPCPA but the results so far have been quite mixed (the pretty good and the awful). The latest study purports to evaluate the postbankruptcy financial education that all individuals with consumer debts are required to complete to receive a discharge. The study considered three curricula: one developed by the Chapter 13 trustees (TEN), one developed a private credit counseling agency, and the EOUST's own program.

Across these providers, 97 percent of bankruptcy debtors reported that they would recommend the program to others and 97 percent agreed with the statement that their overall ability to manage their finances had improved as a result of the educational course. This is consistent with a finding from the Consumer Bankruptcy Project that Dr. Deborah Thorne and I reported here--debtors seem to believe that financial education is useful. However, there were very, very few measurable improvements in debtor's actual financial knowledge after the course and only about 22 percent of debtors who could be interviewed three months later had adopted any recommended change to their financial practices. The findings seem to suggest that while financial education makes people feel optimistic about their financial prospects, it may have a much, much more limited effect on knowledge and behavior. The policy take-away remains ambiguous. Like so many other things, whether bankruptcy financial education continues will probably turn more on politics and public perception than hard evidence in either direction.

Financial Literacy Education Under Attack: Man’s Search for Meaning

As a provider of financial literacy education, I read with great interest Professor Lauren Willis’ recent article Against Financial Literacy Education. It is a creative, must-read for anyone interested in the subject and adds greatly to the literature in this area.

Professor Willis is rightly concerned about financial literacy education being used as a proxy for meaningful reform. She also doubts whether it works, noting that credit industries support it but would clearly lose if it did work. She also claims that most financial products (she focuses on investments not credit) are now so complex that no one can help us understand them. We just need good advisors, she implicitly claims, not our own educational framework. I appreciate her work because it helps me know what to watch out for and compensate for. I reach different conclusions, however. I think financial literacy can work, if it is carefully designed to be meaningful. Otherwise it is worthless, I agree.

Meaningful consumer credit regulation would certainly be far better for society than financial literacy education, if we could only pick one, but we can have both. Plus, education, if it works, can be passed on from generation to generation and no one can take it away from us, whereas consumer protection laws (as we have seen) come and go like the wind.

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.

The Very Big Men Who Sort Out Debt

During the last session this morning, Professor Stephen Lea (University of Exeter) provided a psychological perspective on debt in poor households in Britain. He initially listed the people he believes to be the cast of characters involved in debt. First, there are consumers, and their friends and families. On the creditor side, he made a distinction between business creditors (like utilities) and credit businesses (banks, debt collection agencies – whom he labels "the very big men who are left to sort out the mess"). Because of England’s long tradition of credit counseling, he also included credit counselors in the cast.

Is Financial Education a Good Idea and Whose Idea Is It Anyway?

Educators find it hard to be against education, and I am no exception to that rule. But some evidence from JumpStart Coalition, which promotes financial education for young people, is cause for pause. Its last survey of high school students, conducted among 5775 12th graders in 37 states in 2006, found that those who had taken a financial literacy course actually did slightly worse on its financial literacy test than students who had not taken a course. See www.jumpstart.org/fileuptemp/2006GeneralReleaseFinal%202.doc (Thanks to Professor Lauren Willis of Loyola of Los Angeles School of Law for pointing out this information in an excellent presentation on financial literacy education at the Association of American Law Schools annual meeting in NYC earlier this month.)

There are many possible explanations for the JumpStart survey result. JumpStart also found that kids from more affluent families did better on the test. It is not surprising that factors and influences other than taking a course have a lot to do with learning about finances. It is also possible that the courses the students took were not very good, either in the content or teaching methods.

JumpStart’s list of "corporate partners" gives you a pretty good idea of who wants to promote the idea of "financial literacy."  http://www.jumpstart.org/advisor.cfm  The many financial institutions on this long list presumably think financial education will not have much effect on the willingness of consumers to pay lots of interest and fees on high balances of various kinds of debt. Rather than push for financial education, maybe financial institutions should work on offering simpler products that are easier to understand and compare.

Is Cheaper Better?

As part of the 2005 amendments, consumer bankruptcy debtors must complete a financial education course to receive a bankruptcy discharge. The requirement was controversial among law professors, with some seeing the requirement as one of very few reforms that could help consumers and others viewing it primarily as a cumbersome obstacle designed to deter filings or increase the hassle and expense of bankruptcy.  As John Rao noted in his excellent post on the topic, the quality of this education left a lot to be desired. Specifically, he noted that the courses were not tailored to the particular educational needs of bankrupt families. Guestblogger Nathalie Martin shared her experiences as a financial educator on just why tailored education is vitally important.

I have no evidence that these problems have been remedied, but I can report that at least bankrupt families won't have to pay as much for their under-education in the future. I've recently gotten notices from two financial education providers, both of whom are approved nationwide by the United States Trustee. The respective costs of the services are $25 and $15. This is a dramatic drop in price from the $50 that most providers initially charged. Do you get what you pay for? Or is this a good cost-savings for consumers? The most interesting thing about both advertisements was that neither of them contained ANY mention of the quality of their course--no mention of curricular content; quality of intructors; or pedagogical methods. Instead, the programs emphasized their low cost--and non-educational features such as their acceptance of credit cards, and their immediate certificate delivery. If even the financial educators aren't competing on quality--or perceive that doing so is of no use--I think we should be pessimistic that bankruptcy financial education is going to delivery on its promise at any price. 

Financial Education: Money Talk Hits a Sore Spot

Money is a touchy subject. No matter how much you try to make discussions about how to preserve it, how much importance to place on it, etc, value neutral and nonjudgmental, people have issues.

I spend most of my free time these days trying to keep people off economic death row. While some of this work involves reviving a workable bankruptcy system, much more relates to prevention through financial education. I also believe that any financial education class must be very carefully crafted to fit the specific audience. Age and income are huge variables, so you can’t just teach a cookie cutter curriculum.

I teach a two-day financial literacy class to UNM undergrads and law students, and would love to share the details with anyone out there who is interested. Here is a start: http://lawschool.unm.edu/faculty/martin/fl-1.php.  Karen Gross gave me the idea and I have built on it. But, this year I was asked to do one hour on the topic for first year students, in part because they are in such terrible financial condition. Because the class in which this is taught is comprised of 9 sub-sections, I had the pleasure of having eight of my colleagues attend this class. We started with basic compounding interest hypos, including one exercise in which one person gave up one $4.50 latte a day for 10 years, saved, $18,000, invested it at 8% and held it for 30 years, ending up with over $150,000! We then saw the math moving in the other direction with credit card debts, learned a bit about credit reporting and scoring, a bit about bad car deals, and then broke up into groups to think of ways to economize. The students enjoyed this last part, even if some of the suggestions (selling plasma, getting paid to be in drug tests, finding a sugar mama/daddy,  or giving up long-distance relationships), were a bit extreme.

Students enjoyed the class but many of my colleagues had issues. "Wasn't it unfair to tell students they could reasonably expect to earn 8% on investments?" Um, no. "Don’t they need to use credit cards to build credit?" Uh….not really, no. "What is wrong with a car lease if you’ll be getting a new car every two years anyway?" "And expensive car payments? So what? Why does the total cost of interest matter if on a cash flow basis, you are fine. Isn’t it all about the cash flow?" These last two are stumpers all right. I guess I am both greedier and simpler than most people. I like to drive it till it dies, earn interest, not pay interest, etc.

This does tell you though that it is hard to listen to advice about money that is geared to a different crowd. Cash flow is the issue if retirement is fully funded and the kids are out of college. Otherwise, I can't imagine how a little extra dough lying around could be a bad thing…

Comments, anyone? What information would be useful in a class like this?