Some comments on our American Prospect essay about having the government pay consumers' credit card interest

by Normal I . Silber and Jeff Sovern

The American Prospect recently published a short essay we wrote suggesting that the federal government pick up the tab for part of consumers’ credit card interest rate payments while the coronavirus rages.  Some very knowledgeable consumer law experts have generously taken the time to give us their reactions to our proposal. We're pasting in some of the comments below (anonymously) and afterwards a very brief response.

Commenter 1: This is an intriguing proposal and I think it has legs.  . . .  My concern of late has been what happens when the various CARE Act provisions cease.  . . .  You wrote that “credit card statements should make clear what consumers would still be on the hook for when the government’s largesse ends.”  . . .  [D]on’t we need some controls on what people have to pay at that point. . .   Distress for many will continue long after the federal programs end.  Even if credit card issuers apply the extant repayment rules, the 1% minimum payment rule will be too much for some consumers—especially those who are still unemployed.

At this point, the most important thing is to help people who are financially destitute.  Later, we will want to focus on increasing demand.  The former requires a targeted approach, and the latter a broad approach, like checks to almost everyone.  I suggest that during this early stage, there should be eligibility requirements for the credit card program. 

Commenter 2: {O]n a micro level, I think it has some merit, particularly easing the ability of financially-strapped households to use credit lines to survive recession (or worse).  . . . In general, I favor targeting those in need, which would mean job programs, more expansive and lasting unemployment comp, easier and greater access to SNAP, etc. rather than subsidizing my use of credit.  Yet we do know that those most heavily burdened by credit card debt, and probably suffering the most economically, are those in the second and third income quintiles.

Commenter 3: Your proposal is a novel way to get money into folks' hands quickly. It's ironic that this solution attempts to use debt to solve a crisis, when debt was the cause of the last financial crisis. . . .  I worry, though, about what happens after the period during which the federal government foots most of the interest. The rules you propose to prevent abuse of borrowers are numerous, and I doubt that the now-toothless CFPB would police or enforce them. I can just imagine some of the shenanigans card lenders will try, such as new fees; misleading credit-card statements that make it hard to determine which debt is subject to which terms; and lender offers to consumers to consolidate their new "COVID debt," plus their old debt, onto new credit cards that provide less-favorable terms in the long run.

Also, how to address the most pressing concern for people who are out of work: paying the rent or mortgage? It's my understanding that mortgage debt can't be paid using other debt such as a credit card—unless it's through a high-interest-rate cash advance.

Commenter 4:  Thanks for coming up with this innovative and compelling proposal.  Let me point out a couple of potential sticking points, some of which can probably be worked out if there is the political will.  But, first, the most obvious problem is reaching people who do not have credit cards.  If, say, one quarter of the population does not currently have a credit card, that probably translates into something closer to half of the people in dire need of funds right now. 

Leaving that problem aside, I think there is an important distinction from a POLITICAL point of view between credit card that was owed before the pandemic hit (say, as of March 1st) and since that time.  Given that the costs of your proposal are going to be borne by more affluent households (and by future generations), these people are not likely to be sympathetic towards debt that was incurred in “normal” times.  They are far more likely to be sympathetic to debt that was incurred due to unforeseen and uncontrollable circumstances.  Thus, I think that it is important for your proposal to separate these two kinds of debt and apply only to the latter.  (An alternative policy proposal could be offered to deal with pre-pandemic debt.)  Another distinction that needs to be clearer in the proposal is between principal and interest payments.  . . . . .By the way, I very much like the idea of splitting the responsibility for interest payments between the government (the majority of the payments) and consumers.  This gives both parties skin in the game.  The consumer is motivated to borrow only what is necessary since they are still paying at least some interest.  Also, because many consumers may already be close to their credit limit and not have $10,000 in “borrowing space,” the fact that the government would be paying the majority of the interest for the next six months could serve as an incentive to banks to increase credit limits for those consumers who are already close to their limit. 

Commenter 5: It seems to me that many households that anticipate a slower, less complete, and more uncertain recovery might favor an approach tilted toward longer-term relief. . . .  A longer-term approach could possibly be accommodated in your proposal by varying the government contribution to interest payments so it increased with the duration of the crisis; also extending the moratorium on monthly card collections beyond your example of a 6 month period.

We are  grateful for the thoughtfulness and constructiveness of these reactions.  Here are some of our thoughts about refining the proposal in light of them.

What happens at the end of the relief effort?  If minimum payments are excessive when the program ends, Congress might indeed have to take a look at minimum payment requirements.

Would it help those who don’t need help? The proposal incorporates indirect need-testing because consumers will still be on the hook for their portion of  interest payments and because affluent consumers who pay their credit card bills each month will probably not want to incur even those charges. But if it seems to permit  better-off consumers to take advantage of the program, income eligibility limits might be needed, just as they were for those who will receive stimulus checks under the CARES Act. And leaving open the option to raise or lower the percentage of relief is an excellent refinement.  

Would credit card issuers raise rates and add new fees? Our proposal already would limit increases in interest rates; we agree it should also limit new fees. Abusers would also be cheating the government, which might give rise to prosecutions,  qui tam actions, and bank regulator sanctions, not just actions by the CFPB.

Could you use credit cards to pay off mortgages? We want to think more about whether the proposal should apply to cash advances, which could be used to pay for items for which credit cards are not typically used, like mortgage payments and rent.

What if consumers are near their credit limits? Those who are already near their credit card limits would still benefit from the program because it would subsidize their interest payments on preexisting debt, but probably, being nearly without credit, they would be among those who need additional targeted aid.

Aren’t many of those in deepest need of help those without credit cards? We share the concern with helping those who lack credit cards. As we wrote in the essay, the principle embraced in our program—having government relieve a portion of the interest due-- can be  extended  to auto loans, payday loans and other forms of consumer finance.  Even after doing so, however some needy consumers won’t have any installment debt and other means would be needed to help them, such as reloadable payment cards.

 

 

 

Kamala Harris proposes suspension of credit card interest, fees, penalties

by Jeff Sovern

Here in Medium. This is different from Norm Silber's and my proposal in The American Prospect to have the government pick up some of the interest payments. I'm not sure from the piece whether Harris is urging credit card issuers to do this voluntarily or is calling for legislation. If the latter, I wonder if such a law would be constitutional.

If you can’t pay your mortgage right now ...

As many people are struggling to pay their mortgage during the coronavirus crisis, columnist Michelle Singletary offers advice on resources for people experiencing financial hardship because of the pandemic. Her column is here.

Rich Cordray on what the CFPB should be doing right now to help consumers during the pandemic

Here. I hope Kathy Kraninger is listening.

Looks like companies don't like arbitration so much when consumers actually use it

by Jeff Sovern

That's the inference to be drawn from a must-read article in the NY Times, ‘Scared to Death’ by Arbitration: Companies Drowning in Their Own System. The article points out that arbitrations are taking longer than billed, and companies are refusing to pay arbitration fees.

AN ADDITIONAL NOTE: As Allison noted in an earlier blog post, Susan Antilla had a piece about DoorDash's troublesome arbitration behavior in The American Prospect back in February

Placing Consumers at the Forefront of Relief Efforts

in The American Prospect, my latest op-ed, with Norm Silber. Excerpt:

For the next stimulus package, rather than sending tens of millions of checks to consumers, Congress would do better to strike at the economic crisis by using the existing lending mechanism, right in front of us, that more than three-quarters of us already possess: credit cards. We think that Congress should pass legislation which allow banks on a monthly basis to bill the government for, say, 70 percent of the interest charges on those cards, while requiring banks to defer monthly credit card payments for all consumer cardholders for the length of the coronavirus catastrophe, perhaps as long as six months. We suggest that the benefit be capped at something like $10,000 per consumer as those charges accrue.

Do consumers have refund rights against gyms that have closed because of the coronavirus?

Guest Post by Dee Pridgen:

Consumers who have ongoing memberships at gym or fitness centers may wonder what their rights are when these facilities are shut down by government order during the corona virus pandemic.  While these clubs have contracts with provisions that probably favor the provider, there are some things consumers can do.  Some fitness chains have been willing to negotiate or to offer across the board membership freezes with credits tacked on to the end of the contract to make up for closed periods.  If that doesn’t work, consumers may need to stop payments and try to resist being charged for services not provided.  Some states, such as New York, do have some provisions for consumers to cancel the contract and get a refund if the club cannot provide the promised services.  The past due membership fees could be sent to a debt collector, but consumers should contest charges for non-service, and also contact the state attorney general consumer protection division.  For more, go here and here.   

CFPB announces it won't hold credit bureaus and furnishers of information to the FCRA 30 day investigation deadlines . . .

by Jeff Sovern

. .  . during the pandemic as long as they act in good faith, according to a Policy Statement. The Policy Statement shouldn't affect private enforcement of the deadlines for investigating errors in consumer reports, however.

NCLC: How to ensure that COVID-19 stimulus checks aren't grabbed by debt collectors

Read U.S. Treasury Must Protect Stimulus Payments From Garnishment by Debt Collectors from the National Consumer Law Center. Here's an excerpt:

The Coronavirus Aid, Relief, and Economic Security (CARES) Act provides for payments to individuals up to $1,200 so that people can pay for food, rent, utilities, medicine, and other basic necessities.  The CARES Act protects stimulus checks from being reduced to pay certain debts owed to federal and state governments but does not specifically address garnishment or bank offsets for other debts. Instead, it gives Treasury the authority to issue rules and guidance to carry out the purposes of the stimulus payments.

Coding the payments as federal benefits will serve these important purposes:

• • The payments will be available for food, medicine, utilities, and rent as Congress intended and will not be seized by debt collectors, depriving recipients of the ability to pay for essentials.
  • Banks already have systems in place that will automatically protect the payments so there is no need to develop additional procedures.
  • Banks will not have to deal with irate customers when desperately needed funds disappear.
  • State governments and courts will not have to issue emergency orders to protect these payments, or handle disputes about them, putting banks in the middle.
  • People can provide direct deposit information to the Treasury Department without fear of losing their funds so they can receive their payments quickly and safely. Otherwise, consumer advocates, legal services offices, credit counselors, and others will be forced to counsel struggling families to avoid direct deposit and wait for a paper check.
  • The Treasury Department will have far fewer requests for paper checks to deliver stimulus payments.

Coronavirus puts credit ratings at risk

U.S. Public Interest Research Group's Ed Mierzwinski  and Sabrina Clevenger write that the effects of coronavirus "will send credit reports in a downward spiral" and explain how Congress can help. Their op-ed in USA Today is here.

Massachusetts regulation prohibits creditors from debt collection that requires people to leave their homes

Massachusetts Attorney General Maura Healey on Friday announced that her office has filed an emergency regulation that prohibits creditors from engaging in methods of debt collection that can require people to leave their homes during the COVID-19 pandemic.

Healey said the regulation, 940 CMR 35.00, is designed to protect consumers from unfair and deceptive debt collection practices during the outbreak of COVID-19, the disease caused by the new coronavirus. It is effective immediately and will remain in effect for 90 days or until the state of emergency declared by the governor is over.

In addition to prohibiting the filing new lawsuits against Massachusetts consumers, visiting their homes or places of work, or repossessing their cars, the regulation prohibits debt collection agencies and debt buyers from making unsolicited debt collection telephone calls to consumers.

Conservative/industry CFPB Taskforce on consumer laws issues request for information

by Jeff Sovern

Earlier this year, the CFPB created a Taskforce to make "recommendations for ways to improve and strengthen consumer financial laws and regulations." The Taskforce is chaired  by George Mason professor Todd Zwyicki and its other members are J. Howard Beales III, Thomas A. Durkin, William C. MacLeod, and Jean Noonan.  As far as I can tell, all the Taskforce members are white Washington, D.C. area folks. They have tended in the past to take conservative positions on consumer law, or represented the industry, or both. I certainly do not mean to suggest that the members of the Taskforce are not qualified to serve on it, nor am I suggesting that any member of the Taskforce will not act in good faith. But a Taskforce that included consumer advocates and more diversity would be more likely to offer a balanced approach to consumer protection and elicit support for its proposals from both sides of the aisle. [Disclosure: I applied to serve on the Taskforce but my application was denied.] 

Another point about the Taskforce: it is to give its final report no later than January of 2021. In other words, if a Democrat wins the presidency this fall, is inaugurated January 20, 2021, immediately fires Director Kraninger (a power the president might or might not have after  SCOTUS decides Seila Law), and names an acting director, the likelihood is that the Taskforce's report would already have been submitted.  

The CFPB's website explains that "The taskforce is in part inspired by an earlier commission established by the Consumer Credit Protection Act (Act) in 1968." But that commission seems very different from the Taskforce in several respects. For one thing, the Commission did not issue its final report until 1972, three years after it was fully constituted. For another, its membership included notable consumer advocates, such as Senator William Proxmire and Representative Leonor K. Sullivan, though it also included industry representatives, such as Ira Millstein and conservatives like Senator John Tower. In other words, the Commission included more ideological diversity and took more time to consider its report. In addition, the Commission was created by an act of Congress, rather than an agency director who has frequently declined to comment on statutes during her testimony before Congress, stating instead that her job is to implement them.

In any event, the Taskforce has now issued a request for information, and you can read it here. It will be interesting to see both what responses it elicits and how the Taskforce treats them.

Consumer protections announced in response to COVID-19

The National Consumer Law Center has posted a compilation of "major consumer protections announced in response to COVID-19," including suspensions on foreclosures, evictions, terminations on telecommunications and utility service, elimination of interest, and forbearance on student loan payments. The webpage is here.

States urge online retailers to crack down on coronavirus price gouging

A bipartisan group of state attorneys general on Wednesday sent letters to major online retailers urging them crack down on price gouging on their online platforms amid the spread of coronavirus. The 34 attorneys general asked Amazon, Craigslist, eBay, Facebook and Walmart build tools to detect price spikes and create landing pages for people to report cases of price gouging. The letter cited several examples of price gouging related to coronavirus, including prices of hand sanitizer and face masks.

The Hill has the story, here.

CFPB: Protecting your finances during the Coronavirus Pandemic

The Consumer Financial Protection Bureau has posted Protecting your finances during the Coronavirus Pandemic.

Can ProctorU Be Trusted With Students' Personal Data?

One of the hard lessons that I have learned over my years of practice is that, although some lawyers believe that they can increase the in terrorem effect of a complaint or a demand letter by piling on claims, the net effect of adding silly assertions can be to make things worse for your own client and not better.  That may be true as well of the demand letter recently sent by David Vance Lucas of Bradley Arant Boult Cummings on behalf of their client, ProctorU.

Criticisms and Demand Letter

The saga begins with a faculty association at the University of California at Santa Barbara, which heard about a potential problem with the data-sharing policies of ProctorU, a business that provides internet-based test monitoring services. The group took a look at the ProctorU privacy policies and did not like what they saw – in their view, it provided too little specificity about the limitations on data-sharing, and no protection for the data in the event that ProctorU were to go into bankruptcy or merge, possibly without restrictions on use of the data. And online discussions by students subject to ProctorU monitoring have shared a variety of concerns about the creepy nature of ProctorU’s interventions; the students were plainly worried about the attending possibility of data accumulation. The faculty association voiced its concerns in a letter to the leadership of the University of California at Santa Barbara, urging them to stop using ProctorU and to avoid using “any other private service that either sells or makes students’ data available to third parties.” The letter was discussed in a story in the school’s student newspaper.

Bloomberg: Bill would require credit bureaus to stop listing negative items during pandemic

by Jeff Sovern

Evan Weinberger reports here. The bill's text is not yet available at Govtrack. I wonder if the bill would also apply to consumers who have not lost their jobs or had hours cut back because of the pandemic, and if so, what incentives it would create for them. 

AFT and SBPC Student Loan Repayment Webinar

The Student Borrower Protection Center (SBPC) and the American Federation of Teachers (AFT) are co-hosting a webinar focusing on student loan repayment during the coronavirus pandemic. More information and registration here.

Norm Silber: Consumers should use their gift cards in light of the coronavirus

Hofstra's Norm Silber, who studied gift cards and other merchant cash substitutes for his article, Merchant Authorized Consumer Cash Substitutes, 14 University of Virginia Law & Business Review (2019), urges consumers to spend their gift cards online. He points out that

[A] gift card always involves insolvency risks, but the problem has never been as serious as it is now-- in the case of the coronavirus pandemic.  When consumers buy gift cards, they are usually making unsecured loans at zero interest to retailers. 

In 2015, they loaded $5 billion on to Starbucks cards, for example, a number has grown since then. The average consumer last year had outstanding loans to retailers that have been estimated at about $214.   A list of the popular gift cards includes many that are in little or no apparent danger; but there are many that may well be, especially if the imperatives of social distancing continue into the summer and fall—which appears extremely likely, sitting here now. 

Here is a list published not long ago in a WalletHub report:

Target; Walmart; Sephora; eBay; Home Depot; Ikea; iTunes; Starbucks; Costco; Chick-Fil-A; Netflix McDonald's; Fandango; Chipotle; Rei; Old Navy; H&M; Disney; Google Play; Best Buy; Macy’s; Lowe’s; Subway; Amazon; Gamestop; Nordstrom; Nike; Kohl's; T.J. Maxx; Apple Store; Cabelas; Visa; Ticketmaster; Whole Foods; Forever 21; Applebees; Olive Garden; Taco Bell; American Airlines; JCPenney; Texas Roadhouse; Red Lobster; Cinemark; Michaels; American Express; Mastercard; Dunkin Donuts; Hobby Lobby; Etsy; Shell

My suggestion is for consumers to spend their gift cards online—and as soon as possible in the case of companies whose profitability depends on social intimacy.  Doing so will also help the retailers.

New FDA cigarette-pack graphic warnings finalized; slated to go into effect 2021

Jacqueline Howard of CNN explains here that "the US Food and Drug Administration issued a final rule Tuesday that requires tobacco companies to place new graphic health warnings on cigarette packages and in advertisements. Beginning on June 18, 2021, the new cigarette health warnings will be required on cigarette packages and in advertisements, occupying the top 50% of the area on the front and back panels of packages and at least 20% of the area at the top of cigarette ads, according to the FDA." 

Here's RJ Reynold's predicable (and immoral) response: "We support the goal of reinforcing and sustaining the near universal public awareness of the dangers of smoking, but attempting to shock cigarette smokers away from making an informed choice through the use of grotesque pictorial warnings is poor public health policy as well as an unconstitutional violation of free speech."

Here are the proposed graphic warnings:

Norm Silber on what Katrina can teach us about the coronavirus and consumer protection

After Katrina, Norm Silber wrote an article, Debts, Disasters, and Delinquencies: The Case for a Mandatory Force Majeure Provision in Consumer Credit Agreements, and for a Consumer Credit Insurance Fund, 34 New York University Review of Law and Social Change 1 (2010), which has lessons for consumer protection as we grapple with the coronavirus.  Here are his thoughtful comments about the cornoavirus:

What can we predict based upon the Katrina experience? 

First, that shut-downs,  lay-offs, and isolations  have already created a  perfect storm—great reductions in consumer income, spikes in emergency consumer expenditures--costs for medical supplies, hotels, day care, and so much more-- and higher food prices, not to speak of food shortages. 

Second, consumer credit balances are going to shoot up, and these will create very large interest charges, very soon.   Consumers will soon be making only  minimum payments on their balances, and they will be using their credit cards to withdraw cash and buy food; they will surely hit their credit limits and unless consumers have premium cards they will hit over-the-limit fees. 

Third, the relief provided in Congressional bills will not be going to pay off credit card balances; from what we have heard it  will pay if anything for sick leaves. 

Fourth, because of reduced employment and over-the-limit dings and missed payments, credit scores will undoubtedly be adversely affected, and this will be through no fault of consumers; if what happened during Katrina and Sandy is any guide, the credit reporting agencies will not make any distinction between scores affected by the virus and other behavior that indicates inability or unwillingness to pay. 

Fifth, access to almost every sort of  consumer credit will be harder—the terms of the credit and the difficulty in getting it.

Sixth, people will die in hospitals and their families will have bills to pay.  Some of these people will be breadwinners.

Seventh,  credit card issuers will “generously” allow some debtors to skip payments, but exceedingly few of them will forgive the interest that results from skipping them. 

Eighth, we can expect a rise in consumer bankruptcies, even though credit-balance bankruptcies are not going to be simple to file for.

Ninth, and this is where my proposal hits, we could at least do something now and for the future.  We could work for a law which pays interest charges for consumers during the length of this current catastrophe, and adopt my proposal to mandate a force majeure clause in consumer credit agreements in future ones. To avoid moral hazard, to avoid the incentive to charge excessively, Congress should cover a high percentage-- but not all-- of the credit card interest charges incurred during the catastrophe. The long term fix is laid out in the article. 

 

 

 

Trump waives interest on government student loans, but payments won't change

by Jeff Sovern

Yesterday, as part of his response to the coronavirus, President Trump announced that he was temporarily waiving "interest on all student loans held by federal government agencies." According to the NY Times, monthly payments won't change. Instead, the monthly payments will go to reducing the principal, which will ultimately reduce the amount students owe. Consequently, borrowers might not experience any immediate benefits from the waiver, but it will help them down the road. Forbes has more here. I'm not sure what this has to do with defeating the coronavirus, but I'm sure student loan borrowers will be grateful. One caveat: I don't know where the Times and Forbes got their information.

Why few legislators are interested in Trump's proposal to suspend the payroll tax

Trump tweeted yesterday that "Only [suspending the payroll tax] will make a big difference!" (my emphasis). Yet Congress appears uninterested. And Trump himself just endorsed Nancy Pelosi's bill, which doesn't touch the payroll tax. For more on why, on policy grounds, Trump didn't get his way, read Why Trump isn’t getting the payroll-tax cut he wanted for the coronavirus by Amber Phillips at the Washington Post.

What implications does the coronavirus have for consumers and consumer protection ?

by Jeff Sovern

The coronavirus is already having an impact on consumers and consumer protection. Some initial observations:

• The FTC and FDA have sent warning letters to companies reportedly making deceptive or unsupported claims about their products' ability to treat the coronanvirus. It's good that they're on the job.
• There have been reports of discrimination against Asians caused by the virus, though I don't know if any of those incidents have taken place in the consumer context.
• My searches for coronavirus, virus, and covid-19 didn't produce any relevant hits on the CFPB's web site. The virus does seem likely to have consumer financial implications, however. For example, as people with student loans are laid off or suffer declines in income, they need to decide what to do about their student loan payments.  Those who qualify for Income Driven Repayment would be better off opting for that over forbearance, and they need to be told that; the CFPB has sued at least one student loan servicer, because, the Bureau claims, the servicer has a history of not so advising borrowers when IDR is in the borrower's best interest.
• Some consumers will probably turn to payday lenders, and many of those will get caught in debt traps if their income doesn't bounce back quickly, and maybe even if it does. Consumers need to be warned about that risk.
• If people borrow more or miss payments, credit reports will be less favorable. But drops in credit scores attributable to the virus may not be correct in indicating that particular consumers are more of a credit risk, because the cornoavirus seems like such an idiosyncratic event (at least, we hope it is). If that's true, will credit scores go down more than they should and be less predictive?
• More people will have debts go into collection, which could lead to more violations of debt collection laws. 
• If the US follows Italy and closes non-essential businesses, it will be interesting to see what effects follow from closing brick and mortar financial service providers (e.g., storefront payday lenders, pawn shops, check-cashing outlets, and the like), though some financial services should still be available online and even in Italy some bank branches have reportedly stayed open.
• Businesses that collect information about consumers may be able to figure out which consumers have the virus, which will have privacy implications. For example, Google knows what things people search for on its search engine, where people go if they have Google Maps on their phones, even when they are not using the app (did someone go to a doctor, hospital, drugstore?), and so on.

This is just a quick survey off the top of my head. If you have any other thoughts, please add them in the comments.

Congress has overturned Betsy DeVos's rule drastically limiting student-loan debt relief

Will Trump sign or veto? That topic is addressed in this article by CNN's Katie Lobosco. For other coverage, go here and here. This NYT's piece by Erica Green and Stacy Cowley does a nice job explaining the restrictive DeVos rule. Here's an excerpt from the CNN article:

Senate Republicans joined Democrats Wednesday to overturn a rule backed by Education Secretary Betsy DeVos that would have limited the student debt relief granted to people defrauded by for-profit colleges — an unusual bipartisan move to undo a Trump administration initiative to weaken an Obama-era policy. In a 53-42 vote, 10 Republicans joined Democrats to pass the resolution, which was first approved by the Democratic-held House in January. It will now go to President Donald Trump, who can either sign the bill or decide to stand with DeVos by vetoing the legislation and letting her rule go into place as was expected on July 1. A policy statement issued by the administration last month said that the President's advisers would recommend that he veto the resolution. Congress does not have the votes to overturn the President's veto.