Consumer Law & Policy Blog

House Passes Credit Cardholders Bill of Rights

Gov.track.us is reporting that the House passed the Credit Cardholders Bill of Rights, 312-112. You can see the roll call vote here. 

Consumer Groups Win Suit Over Used Vehicle Database

Last February, we blogged about a suit filed by Public Citizen, Consumers for Auto Reliability and Safety, and Consumer Action against the Department of Justice over its 15-year unlawful delay in establishing a used vehicle database. The purpose of the database is to enable consumers to check the validity of a car's title and odometer reading and learn whether the car has been stolen or severely damaged. Yesterday, the consumer groups won!

We will provide more details later, but basically federal district judge Marilyn Hall Patel ordered DOJ to finalize rules fully implementing the database by the end of January, and she rejected all of DOJ's defenses. KGO TV in San Francisco (where the case was filed) has a nice story on the victory, as does the New York Times.  To read the briefs and other filings in the case, go here.

Blaming the CRA

By Alan White

The financial crisis is now being attributed by the Wall Street Journal editors and other right wingers to the Community Reinvestment Act. The CRA requires banks to provide loans and financial services in underserved communities, particularly poor and minority neighborhoods. This blame-the-victim theory does not withstand fact-based analysis.

The blame-the-CRA theory says that the subprime mess was caused by weak-hearted lenders pushed by misguided bureaucrats into making loans to poor people and minorities who can't repay them. Nothing could be further from the truth. First, subprime mortgages that are now defaulting in droves were made mostly by unregulated mortgage bankers with no CRA obligations or oversight. Second, the Alt-A mortgages that are a major part of the crisis were made mostly to middle-and upper-income white borrowers who didn't want to verify income or wanted a bigger loan than a prime lender would offer. Third, loans made by banks to fulfill CRA obligations, even those to very low-income homebuyers, perform quite well. Fourth, the only category of mortgages in which the foreclosure and default rates are not going up is the FHA program, a program that makes loans almost exclusively to low- and moderate-income Americans, many of them African-American and Latino. The bottom line is that it was the design of subprime mortgages, not the selection of borrowers, that caused them to default in massive numbers. Lenders can make sound loans to underserved groups, or they can make overpriced dangerously risky loans.

The only tiny grain of truth in this blame-the-CRA theory is that HUD, under the Bush Administration, agreed to give Fannie Mae and Freddie Mac credit for buying subprime mortgage-backed securities to meet their affordable housing goals. Fannie and Freddie's affordable housing goals are not technically part of the CRA but they are motivated by the same goals. The problem here is not the goal but the means. CRA and consumer advocates consistently opposed counting high-cost, high-risk subprime loans as meeting any bank or GSE's affordable housing goals, but the laissez-faire HUD and OFHEO regulators went along. The same right-wingers now blaming the CRA were praising subprime lending a few years ago as the solution to meet the needs of previously underserved homebuyers. CRA advocates, on the other hand, have never confused subprime lending with community reinvestment.

American (Defense) Bar Association

I am an ABA member. While not the same as saying, “I am Spartacus,” it does carry with it the potential for the scorn of many plaintiff lawyers, who see the ABA as a treehouse for the defense bar that lets us plaintiff types play with them a few times, but mostly pulls up the ladder and does whatever it is that the defense bar does in private.

I tell people that it's arguably worth joining to keep track of what these folks are up to, and that occasionally you get something worthwhile in a publication.

Well, maybe I've been wrong all along.

Every so often, I see something that makes me want to ask for my dues back. This time, it's a relatively small, but telling, editorial action in the latest issue of “Litigation,” the quarterly publication of the ABA's Litigation Section.

The Summer issue contains an excellent article by Gregory Joseph, who writes great articles for the National Law Journal and has his own Complex Litigation blog. Mr. Joseph has always struck me as a lawyer who thinks about jurisprudence and things like that more than how he can write an article to help out his clients.

That's true of the article in Litigation, which is a reasoned analysis of how federal courts have become  litigation hellholes for most plaintiffs.

I enjoyed the article, but I noticed an “Editor's Note” at the top of the article that made it darn clear that the opinions were those of Mr. Joseph and did not “necessarily reflect the views of the Section of Litigation or the Editorial Board” (that being Weaseltongue for “I don't like it but I don't want to ask around to get an actual consensus”). It struck me as odd that the ABA chiefs would take time to, in the words of Mission Impossible just before the tape gets all smoky, disavow all knowledge of his activities.

So I looked at the other articles in the issue to see if the ABA had been as careful with other pieces by other authors, and I discovered that Mr. Joseph's article had been singled out for this peculiar attention.

And then I noticed that the great bulk of the law firms who provided authors were defense firms. And the two plaintiff lawyers wrote pieces on Lincoln's Second Inaugural Address and appellate mediation, relatively innocuous enough.

Does this mean that the ABA will not tolerate articles from a plaintiff lawyer? Well, possibly not.

But does it mean that the ABA saw fit to make sure its largely defense firm membership did not think it was endorsing anything as radical as continued access to federal courts? Well, yes it does.

I've heard the ABA moan that it can't get enough plaintiff lawyers as members.

As long as it feels the need to disavow anything vaguely in favor of plaintiffs, it ain't gonna.

It’s all about the Mortgages

By Alan White

Secretary Paulson is trying to solve the freeze-up of the credit markets by buying up the mortgage-backed securities (MBS) that banks are holding and cannot value. Because nobody seems to know whether MBS are worth 10 cents or 90 cents on the dollar, and because every bank, insurance company and brokerage firm owns MBS, nobody is willing to lend to anyone else, lest they turn out to be another Lehman Brothers, leaving their lenders, even overnight money market lenders, with nothing.

Mr. Paulson, in his Sunday morning talk show appearances, brushed aside questions about dealing with foreclosures. Clearly, he feels that the value of MBS is somehow predetermined, although for some reason we cannot ascertain what it is. The point being missed is that the value of MBS has not been established by the Fates. It all depends on the mortgage servicers. The underlying mortgages will take ten years or more to be resolved. They will resolve either into repayment by homeowners or foreclosures and sales of homes. The foreclosure sale route, right now, is producing about 60 cents on the dollar. The percentage recovery from homeowners given a second chance to repay is varying hugely, depending on which mortgage servicer they happen to be working with.

How About a Little Debate on the Massive Bank Bailout?

by Brian Wolfman

Remember the last time government policy was made in the interest of the nation with barely a peep of mainstream protest, as the press went along for the ride? Think early 2003. Yesterday, Alan White on these pages warned against Paulson's Breathtaking Power Grab. Meanwhile, Adam Levitin, over at Credit Slips, acknowledges that "Paulson has asked for a $700 billion mortgage slush fund, no strings attached," but says that "[g]iven where we are, this might be about the only thing possible." Nonetheless, Levitin says that there are still "lots of questions" about the plan and asks seven of them here.

And, In today's Washington Post, Sebastian Mallaby tells us why he thinks the President's plan is a A Bad Bank Rescue. Read the whole thing, starting with this introduction:

With truly extraordinary speed, opinion has swung behind the radical idea that the government should commit hundreds of billions in taxpayer money to purchasing dud loans from banks that aren't actually insolvent. As recently as a week ago, no public official had even mentioned this option. Now the Treasury, the Fed and congressional leaders are promising its enactment within days. The scheme has gone from invisibility to inevitability in the blink of an eye. This is extremely dangerous.

How about a little more debate?

UPDATE: N.Y. Times op-ed guy Paul Krugman says "No Deal."

Paulson's Breathtaking Power Grab

By Alan White

The New York Times has posted a draft of the bill Treasury Secretary Paulson wants Congress to pass next week, handing over the Constitutional appropriation power to him, to the tune of $700 billion. The bill would allow Paulson to purchase any mortgage-related assets (mortgages, securities, real estate) with only two objectives in mind: financial stability and protecting taxpayers. Notably absent from the considerations (which are not enforceable by Congress or the Courts in any case) is protecting homeowners from foreclosure.

The problems with this are too numerous to catalog. While making loans and accepting questionable mortgage assets as collateral is one thing, buying the assets is something else entirely. Treasury bureaucrats will be deciding once and for all how much of a loss (if any: perhaps we'll pay 100 cents on the dollar) investors must absorb. The rest will fall on the taxpayer.

True, the one-step-at-a-time method used in prior weeks may not have satisfied Wall Street, but this new approach is little more than capitulating to Wall Street extortion. If there is a run on money market accounts, by all means provide some (temporary) deposit insurance. If there is a major bank or insurance company going under, by all means arrange an orderly takeover of its assets and back up essential obligations.

Taxpayers bailed out all the savings and loans depositors because we had no choice - their deposits were insured by law. The investors in CDOs and CDOs squared are not entitled to a bailout, and we should not empower the Treasury to provide them with one. Congress should insist that Treasury come back with a more measured approach focusing on the immediate needs of American consumers and businesses, hedge funds excepted.

Bush Administration Seeks Bailout of U.S. Financial Markets

by Brian Wolfman

The Washington Post strikes again, with more than a dozen articles today on the U.S. financial crisis and the Bush Administration's non-laissez faire approach to fixing it. To give you a flavor, the lead article, entitled "Historic Market Bailout Set in Motion," begins as follows:

"The Bush administration yesterday proposed a historic $500 billion bailout of financial firms that would let the government rather than the cold judgment of the marketplace decide the winners and losers from the crisis that has shaken the U.S. economy for the past year."

I wonder if President Bush now thinks he should have lost confidence in "the cold judgment of the marketplace" a little sooner than he did. I'm not being facetious; I truly wonder whether, given an opportunity to turn back the clock, he would have pushed for banking and other controls far sooner than he did, or whether his overall faith in the market remains the same.

Here are links to today's other Washington Post pieces:

Five Days That Transformed Wall Street (a chart taking the reader through this tumultuous week event by event)

Transcript: Bush Remarks on Financial Crisis

Bush Press Conference (video of Pres. Bush explaining why massive government intervention was required)

Congress Members Seek Details

Bailout Is As Big As Budget for the Pentagon  (Wow!)

Convincing Congress -- A Joint Decision to Act: It Must Be Big and Fast

Tossing Aside History, Convention, and a Few Cliches

U.S. Stock Markets Soar on Financial Rescue Plan

What the Candidates Can Do

Bush Urges Congress to Enact Rescue Plan

On Alert in Asia -- Japan, China Locked In by Investments

Mortgage Finance -- 4 Fannie Executives Quit; Pay Revamped
 

Public Citizen and EFF file amicus brief opposing Jones Day trademark strike suit

by Paul Alan Levy

In a previous post, I discussed abusive trademark claims put forward by Jones Day seeking to suppress speech on the BlockShopper web site about two of its associates that it did not like.  Defendants’ motion to dismiss is due to be filed today, and I teamed up with Corynne McSherry at the Electronic Frontier Foundation to write an amicus brief, filed today , that explains many of the reasons why Jones Day’s law suit cannot be sustained.  Public Knowledge and Citizen Media Law Project are also on the brief.

We argue that there is no infringement claim because the exhibits contradict the allegations of likelihood of confusion (indeed, the notion that anyone would be confused is preposterous); that when fundamental First Amendment rights are at stake the plaintiff must do more than make conclusory allegations of likelihood of confusion; and that BlockShopper made nominative fair use.  We argue that there is no dilution claim because Jones Day is not a famous mark now that the cause of action for niche fame has been eliminated and the complaint does not properly allege famousness, and that all three statutory exemptions from dilution – noncommercial use, news reporting, and fair use – apply in this case.

Times Article Which Raises Questions About Responsibility for Loan Losses

As bailouts proliferate, today's Times has a particularly interesting article on the impact of the mortgage crisis on one family: "Coming Up Short: The Pain of Selling a Home for Less Than the Loan."  Mike and Linda Kelly of Central Valley, California owe $300,000 on their home and want to sell it.  The best offer they could get is $220,000, or $80,000 short of what they owe.  The lender, CitiMortgage, agreed to a sale at that price, but at the last minute told the Kellys they would still have to pay $40,000 over the next 20 years, at the rate of $166 a month.  In essence, the Kellys and Citi would split the loss, except that since the Kellys would have 20 years to pay their share, Citi would bear more than half the loss.  The Kellys asked if their share could be cut to $20,000, but before Citi responded, the buyer pulled out.  One of the interesting things about the article is it conveys a sense that the Kellys feel entitled to walk away from their debt without paying it (though you can never be sure about these things because you don't know what they said to the reporter that didn't get quoted in the article).  Thus, the article includes the following:

Feeling trapped, the Kellys are increasingly angry at Citi and other financial firms. “They damaged our economy and don’t take any of the responsibility, not really,” Mrs. Kelly said. Nevertheless, on Aug. 26, she mailed in the September mortgage payment.

Yes, Citi damaged the economy--and it looks like Citi is taking a loss because of its loan to the Kellys--but don't the Kellys also have some responsibility for their choices?  Is this a situation where the Kellys think that if their home had appreciated in value, they should keep the increase, and if it declines, the bank should bear the loss?  This doesn't look like a case in which the borrower was deceived into taking out a mortgage: Mr. Kelly works in financial services, which suggests some understanding of finance (though since the article doesn't say exactly what he does, it's impossible to be certain; Mrs. Kelly seems not to work but volunteers at a blood bank).  But there's an even sadder postscript: Mr. Kelly was laid off shortly after the Kellys sent in their September payment.