Consumer Law & Policy Blog

Alan Greenspan's The Age of Turbulence

by Jeff Sovern

In my post of yesterday, drawn from the Pittsbugh Post-Gazette essay, I mentioned how Alan Greenspan's book, The Age of Turbulence, doesn't address predatory lending.  In fact, readers searching for references to the many consumer law statutes the Fed interprets or enforces or both--including Truth in Lending, HOEPA, the Consumer Leasing Act, and the Electronic Funds Transfer Act--will largely be disappointed.  I suppose that a book about those subjects would sell fewer copies than the book that Greenspan actually wrote.  And make no mistake: Greenspan's book is a terrific read on his life, economic history, and economic theory.  But to reinforce the point I made yesterday, isn't something wrong when the memoir of the person at the head of what is probably the agency with the greatest power over the rules governing consumer credit transactions gives those rules such short shrift?  Not that I blame Greenspan.  He was appointed to the job because of his mastery of macroeconomics.  But again, shouldn't someone who has mastered the law of consumer credit run the principal agency devoted to that subject?  In other words, at the risk of beating a dead horse, is the Fed the best agency to administer consumer credit laws?

Two other points about the book:  Greenspan notes at one point that bank examiners rarely find bank fraud, and observes that as a rule regulators learn about bank fraud from whistleblowers.  Kind of makes you wonder if bank examiners ever find violations of consumer protection laws.

Finally, Greenspan is an ardent believer in competition and free-market capitalism.  Reading his book is a nice counterpoint to  Reich's Supercapitalism, about which I blogged here earlier this week: one touts the benefits and the other the costs of competition.

Huge Upswing in Credit Card Borrowing

by Christopher Peterson

New fed numbers are out showing Americans sucked down 6.9 billion dollars in new credit card debt, increasing outstanding consumer credit to $2.52 trillion during the month of January. This increase was double the $3.7 billion increase in the previous month of December--despite holiday sales.

This seems like a very ominous development to me. One suspects that this increase in borrowing is causally related to credit tightening in mortgage and home equity lending, and also that consumers facing foreclosure are turning to credit cards to stave off financial collapes. Distressed debtors that are shifting their living expenses into credit card borrowing are going to face high default interest rates and could be setting themselves up for a harder fall.

I hope the credit card lenders have their models figured out. As financial refugees from the mortgage market flee into the waiting arms of credit card lenders, it seems like there is the potential for subprime securitization problems to echo into credit card receivables. January's increase in credit card borrowing makes me wonder if the normally sophisticated credit card lenders' underwriting may finally come up short. Just a tip to all those Norwegian villagers, hedge fund managers, and investment bankers hoping to not look like Bear Sterns: Post-bubble vintage credit card recievable backed securities are a sucker bet.

Check out Patrick Deneen's interesting blog post for more thoughts.

Bushvilles springing up

The Consumerist today features a BBC video making the rounds of the blogosphere. The video reports on tent cities springing up in Southern California, occupied by former homeowners, victims of the foreclosure crisis. Another video report on the phenomenon is here. Reuters wrote a story on the tent cities in December. Today's L.A. Times story details the efforts of Ontario CA officials to keep the population of its tent city under control. Update: Here is a a story about a Nevada family camping out after their home was foreclosed.

We Need a Single Agency to Regulate Consumer Credit Transactions

by Jeff Sovern

Today's edition of the Pittsburgh Post-Gazette has an essay I wrote which they gave the headline "The Private Sector: U.S. Needs Agency to Watch Consumer Credit."  It appears below.  In the version below, I reinserted, in brackets, a sentence that the paper deleted (which may be more meaningful to readers of this Blog than the general public anyway).

As proposals proliferate to address the subprime mortgage crisis, and as the crisis itself spreads beyond subprime loans, it may help to step back and ask a fundamental question: What government agency is responsible for regulating consumer credit transactions?

The answer, unfortunately, is almost as complicated as the mortgage crisis itself -- and that in turn has contributed to the problem.

At the head of the list is the Federal Reserve Board, which has the power to bar some predatory lending practices and also fashions rules governing what lenders have to tell borrowers about loan terms. The theory is that these disclosures will enable consumers to avoid unwise borrowing (worked well, didn't they?).

These disclosure rules are enforced by the Office of the Comptroller of the Currency (OCC), the Fed itself, the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS), the National Credit Union Administration Board (NCUA) and the Federal Trade Commission (FTC), among others. The OCC also claims the power to prohibit some lenders from engaging in predatory lending. The FDIC originated the Bush administration plan to freeze so-called "teaser rates," while the Treasury Department shepherded the plan through.

Confused yet? It gets worse. When states attempted to prohibit predatory lending, the OCC, OTS and NCUA all ruled that the state laws did not apply to federal lenders. Federal courts have upheld this position, while state lenders, which preferred to be free of the state laws, surrendered their state charters and became federal lenders, immunizing them from state law. [Georgia, not to be outdone, provided that its own state predatory lending statute was preempted as to Georgia lenders as well.]

Supercapitalism

by Jeff Sovern

I recently finished Robert B. Reich's fascinating book Supercapitalism.  Reich, who served in the Clinton cabinet, pulls together a number of themes into a coherent, and depressing, whole.  He argues that the marketplace is far more competitive than it once was, as a result of which corporations constantly try to offer the best product they can at the lowest possible price--to attract consumers--and to pay the highest possible return on investments--to attract investors.  So far, so good.  But the need to compete forces corporations to ignore all other values other than making profits, so that they can't, for example, as they once did, attend to the needs of other stakeholders, such as employees, the communities (or countries) in which they are located, or goals of consumers other than those that will cause consumers to buy their products.  The result is outsourcing, loss of jobs, and numerous other ills.  Reich argues that to the extent corporations do focus on other goals, they will increase their costs--thus driving consumers to other products--and reduce their profits--thus causing investors to put their money elsewhere.  That happens in part because other corporations which attend only to the bottom line will step in to steal the sales of corporations with more generous hearts, but higher costs.  Reich points out that as consumers and investors, people benefit from this, but as employees and citizens, they suffer.

Reich's view is that corporations are entitled to do all this as long as they follow the rules, and that government should act as a check on inappropriate behavior.  Corporations, he believes, cannot and should not be expected to assume government's responsibilty to pursue public goals.  Their job is to make money for shareholders.  But, he goes on to say, businesses affect the rules under which they operate by making campaign contributions, lobbying, etc.  Legislators competing for contributions can't afford to alienate these contributors, and so write the rules in ways that aid business.  To create the illusion that they are cracking down on improper corporate behavior, legislators hold hearings and scold corporate malefactors--but don't enact, or even introduce, legislation that would change the rules in such a way as to cause businesses to behave differently. 

Reich gives numerous examples of this behavior and traces its historical development.  He also offers policy prescriptions for dealing with it.  It's a terrific book, and one that sheds considerable light on many of the problems with the marketplace and society today.  And at the end of the day, it raises an important question: do voters want changes that will cause consumers to pay more and investors to accept less in pursuit of other goals or would we rather have things as they are?

Due Diligence Disregarded

Scott Reckard of the LA Times just wrote an excellent investigative report on due diligence, or the absence of it, in the securitization of subprime mortgages. He interviewed former employees of Clayton Holdings and Bohan Group, companies hired by securities firms to scrutinize subprime loan files on behalf of investors. While the pressure to originate and securitize led to the suppression of loan problems by reviewers, the article also notes that Wall Street investors increasingly relied on higher interest rates and prepayment penalties to substitute for careful mortgage underwriting.

From the Consumerist: "Credit Card Victims Muzzled"

On Friday, Alan White posted here about Congress's unusual demand that four consumers waive their rights to privacy in their financial histories before being allowed to testify before the House Financial Services Committee on the abusive credit card practices that they experienced. The testimony was to be given in conjunction with Congress's consideration of pending legislation known as the the Credit Cardholders' Bill of Rights. The consumers were not willing to sign the waiver and so did not testify. The Consumerist now has posted this discussion of the topic, including the written testimony that one of the consumers would have given had he not declined to testify. The post also includes a synopsis of the pending legislation.

What Happened to the Arbitration Clauses in the Subprime Litigation?

Last week, Alan blogged here about the Navigant Consulting Report on suits by consumers, among others, against subprime lenders.  The Times covered the report today in an article here.  I'm wondering how borrowers have been able to file these suits.  Did the loan agreements not include arbitration clauses?  If they did, how have the borrowers managed to get around them?  Or is it just that the lenders haven't yet moved to dismiss on the ground that the matter should be heard by an arbitrator?  Anyone know?

Shmuel Becher Papers on Consumer Contracts

Shmuel I. Becher has two papers on consumer contracts.  One is Behavioral Science and Consumer Standard Form Contracts, 68 Louisiana Law Review, available at http://ssrn.com/abstract=1016002. Here's the abstract:

Asymmetric information is a serious threat to the market of consumer standard form contracts. Yet, legislatures, courts, and market-forces do not provide an adequate solution to this threat. This Article argues that a considerable part of this failure is due to the fact that important and relevant social science insights regarding consumers' behavior is widely overlooked. This gap results in the prevalence of unfair or inefficient consumer form contract provisions. More profoundly, it entails that current approaches towards consumer contracts are fundamentally flawed and bound to reach erratic and sometimes unjust conclusions.

Cognitive biases and consumers' actual behavioral patterns should have an important role - descriptively and normatively - in the law of consumer contracts. This Article explains how psychological phenomena contribute (i) to consumers' tendency not to read form contracts even when by doing so they fail to maximize their utility; (ii) to consumers' inability to evaluate correctly contract terms once they do read them; and as a result (iii) to sellers' capability of manipulating consumers.

The end point of this discussion is twofold: First, it seeks to expand our understanding regarding the inadequacy of current approaches to consumer contracts and the harm that consumers are exposed to when actual behavioral patterns are ignored. Secondly, it provides policy makers with better insights as to the way in which contract law should design the alternative approach to consumer contracts.

Richard "Dickie" Scruggs Pleads Guilty To Federal Crime

  Well-known Mississippi plaintiffs' lawyer Richard "Dickie" Scruggs has pleaded guilty to a federal crime arising from a November 2007 indictment alleging that Scruggs bribed a state court judge. The Jackson, Mississippi Clarion-Ledger reports on the story here.  Here's the plea agreement.