Consumer Law & Policy Blog

Arkansas Supreme Court Strikes Down Payday Loan Law

The Arkansas Supreme Court last week struck down the state's Check-Cashers Act, which authorizes and regulates payday lending in the state, as a violation of the state's constitutional ban on usury. The state's constitution prohibits any loan with an interest rate above 17%. Various payday loan contracts authorized by the statute, however, had rates between 168% and 559%, which the Court held to be "clearly and unmistakably usurious" in violation of the state constitution.

Lobbyists Descend on the Treasury Department Seeking a Piece of the Bailout

Yo! Read this front page article in today's New York Times entitled "Lobbyists Swarm the Treasury for a Helping of the Bailout Pie." A few tidbits: (1) The article suggests that much of the bailout's first installment ($350 billion) may be spoken for by entities other than the banks at whom the bailout was supposedly aimed. (2) At least five international law firms have set up "financial rescue shops" to provide advice and to lobby for clients who may want a piece of the pie. (3) American Express has obtained approval to reinvent itself -- it will become a bank holding company -- "making the giant marketer of credit cards eligible for an infusion" of bailout money. Really worth reading.

Today's Fannie/Freddie Relief Plan

By Alan White
The plan to modify loans controlled by Fannie Mae and Freddie Mac announced today, while a step forward, suffers from two major drawbacks.  First, Fannie and Freddie do not hold most of the delinquent subprime and alt-A mortgages, so the plan will affect only about 10% of delinquent homeowners.  Second, as an extension of the FDIC model for modifying IndyMac mortgages, the plan calls only for monthly payment reductions, not for principal reductions.  While it is a good thing to streamline the process, and set an ambitious target of reducing payments to 38% of income (compared with the 55% standard that prevailed in the subprime market), Fannie and Freddie, like the FDIC, are still proposing to defer mortgage debt that far exceeds home prices, rather than writing it off, i.e. kick the can down the road.  We still need to deal with the servicers and investors who control most of the problem mortgages, and we still need to attack the $10 trillion problem of the overleveraged homeowner.

Obama and Antitrust Policy

Check out this interesting article in today's New York Times concerning antitrust policy. In it, lawyer David Boies explains why, in light of the economic crisis, Obama may not follow his ordinary policy preference for tough antitrust enforcement.

New York Appellate Division Says Class Action Incentive Awards Are Not Permitted

By Brian Wolfman

Here's a surprising class action developement: In Flemming v. Barnwell Nursing Home and Health Facilities, Inc., No. 504328 (Oct. 16, 2008), one of New York's intermediate appellate courts has held that New York law prohibits incentive awards for named plaintiffs in class actions. Incentive awards, particularly lavish ones, have been controversial, but federal judges approve them all the time, as do state court judges. The court in Flemming indicated that federal courts approve incentive awards only in "special circumstances," but that is not accurate. As noted, many federal judges approve them routinely. Question: Are there any other appellate courts that have banned them?

The Case for Homeowner Debt Relief

Today's New York Times reports that nearly a quarter of Americans with mortgages owe more than their home's current value.  One example cited in the story is a homeowner with a $630,000 mortgage from 2005 on a home now worth $420,000.  His interest-only mortgage, once the initial period ends, will require monthly payments of $12,000.  On the other hand, a fixed-rate amortizing 30-year mortgage at 6% for the $420,000 actual home value would require payments of $2,500 (plus taxes and insurance.)  Dropping the rate temporarily to 3% could bring the payment down to $1,800, in the event of a bona fide hardship. 

Or, the lender could foreclose.  It would then incur additional interest advances and foreclosure costs or $20,000 to $30,000 or so while holding the property, and perhaps sell it for $350,000 to $400,000 next year, resulting in a loss to investors (that's us) of $250,000 to $310,000, not to mention a loss of all future interest.

Servicers could provide homeowners an incentive to make payments, and hedge against possible return of home price growth, by offering a principal writedown after 12 months of on-time payments, and linking it to a second mortgage for the difference between the old and the modified mortgage.  The second mortgage should be progressively reduced over five years, to provide equity build-up if home prices do not come back to 2005 levels.  Let's swap homeowner debt for equity, just as we have been doing with banks.

The AALS Annual Conference and Consumer Law

Last year's AALS Conference had a lot for people interested in consumer law, including an interesting talk by CL&P blogger Richard Alderman on arbitration and presentations by others whose scholarship is regularly mentioned on this blog.  Because this year has been an extraordinary one for consumer law--with consumer issues regularly on the front pages, the new Hope for Homeowners program, revisions to Regulation Z and others on the way, amendments to TILA, and many other events mentioned on this blog and elsewhere--it seemed reasonable to expect the Conference this year to be equally informative.  Alas. that seems not to be the case.  I've been able to find the following two panels of interest to consumer law people (and if I've omitted one, please mention it in the comments): The Section on Aging and the Law has a panel titled "Consumer Protection Law and the Elderly: What's New--What's Needed;" the speakers include consumer law scholar Kurt Eggert, Marguerite Angelari, Carolyn L. Dessin, Paul Greenwood, Shepard Lea Krivinskas, Seymour H. Moskowitz, and Marcia Spira.   On Saturday morning, the Sections on Creditors' and Debtors' Rights and Real Estate Transactions are holding a three-hour long joint program, "Real Estate Transactions in Troubled Times."  The program will include a panel on securitization, another on affordable housing, and a third on bankruptcy modifications of mortgages, and speakers include consumer law people like Kurt Eggert (again), Jean Braucher, Adam Levitin, and Tom Plank, as well as Dennis B. Arnold, A.M. Dickerson, Melissa B. Jacoby, Mark S. Scarberry, Marshall E.Tracht and Moderator Daniel B. Bogart.  A possible third program of interest is the Section on Financial Institutions and Consumer Financial Sevices'  "Does Modern Financial Institution Regulation Work? Relections on Deregulation and Internationalization of Supervisory Standards" but the description makes it sound like it is focused more on the regulatory limits to the structure of financial institutions than consumer law. Speakers include my colleague Vince DiLorenzo, Howell Jackson, Adam J. Levitin, Arthur Wilmarth, Erik Gerding, Saule T. Omarova; Heidi Schooner is the moderator (You can find out more about the Conference here).

Am I greedy to want more than that, this year of all years?  Two programs which address consumer protection from the perspective of sections that normally attend to other matters?  If so, as my co-author Dee Pridgen once pointed out to me (in kinder words), I have only myself to blame.  It's not as if I've ever tried to do anything about it.  So I've been exploring the possibility of starting an AALS Section on Consumer Law.  We would need to get people to sign a petition, but I think that's doable.  The real problem is that to the extent we overlap with other sections--such as the Section on Financial Institutions and Consumer Financial Sevices and the Section on Commercial and Related Consumer Law--we would have to get them either to yield some of their jurisdiction to us, or we would have to yield some to them.  The reason we need a section is that by carving up consumer law among various sections, we end up with years in which consumer law receives less attention than it merits.  I think it's significant that the two sections that are holding consumer protection panels this year are not sections that leap out as being consumer law sections, and that the sections that actually mention "consumer" in their name do not seem to be holding panels devoted to consumer law this year (which is not a criticism of them: their jurisdiction goes beyond consumer law and they can't be expected to ignore the other areas within their scope).  Richard Alderman's Houston Conference is fantastic--and was the birthplace of this blog--but that serves a different purpose from an AALS Section.  An AALS Section would help emphasize the importance of consumer law in legal education, give us more of a reason to attend the annual meeting, and provide a place to meet every year, instead of every other year.  I think it's worthwhile to try, but I would be curious to hear from others. 

Negative Prepayments

By Alan White

That's what mortgage servicers call it when a loan is modified by adding fees and interest to the principal.  Based on reports to investors, I estimate that in September and October $288 million was added to homeowner mortgage balances as a result of modification deals.  While the popular perception of mortgage modifications is that some people are getting "bailed out" or at least getting a break on their loans, the reality is quite different.

In the October investor reports I reviewed, covering about half the subprime and alt-A market, 72% of modifications reported included a "negative prepayment", i.e. upped the loan balance.  The average negative prepayment for these folks was $11,200.  The average amount of debt forgiven for these homeowners?  $97.51. Meanwhile, on loans that were foreclosed and sold, the average loss was $121,000.  For ALL modified loans, the average write-off was $1,914.  Even for the small subset of modified mortgages that did not include any negative prepayment, i.e. the most generous mods, the average write-off was $6,588.

This is insanity.  Servicers (with a few notable exceptions) are preferring to foreclose at a $121,000 loss per loan rather than to forgive more than a few hundred dollars of any homeowner's debt.  While there is much wringing of hands about the fact that many homeowners get "modifications" and then fall behind again, is it any wonder?  We can't really evaluate the success or failure of mortgage modifications that reduce debt, because there have hardly been any yet. 

Ray Brescia on the Social Capital Response to the Subprime Mortgage Crisis

Ray Brescia of Albany has written "Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response," 56 Cleveland St. L. Rev. 271 (2008).  Here's the abstract:

This article explores the extent to which social capital theory can respond to the crisis in the subprime mortgage markets. Building on the groundbreaking theories of Robert Putnam in his book BOWLING ALONE: THE COLLAPSE AND REVIVAL OF AMERICAN COMMUNITY, this article seeks to explore the role of trust and social capital in micro-economic transactions, specifically those involving homeownership in general and the subprime mortgage crisis in particular. The article posits that asymmetries of information, the lack of fiduciary obligations between the mortgage broker and the subprime borrower, the incentives built into the subprime mortgage market as a result of mortgage securitization that promote abusive lending practices, deregulation that led to the influx of subprime mortgage products into communities of color, the limits of anti-discrimination laws to address this influx adequately, and restrictions on refinancing built into securitization agreements have all led to the current crisis. In response to these causes of the current crisis, this article suggests changes to the broker-borrower relationship, the promotion of greater consumer education and the creation of problem-solving courts to address the looming foreclosure crisis.

October 2008 NHTSA and CPSC Recalls

October 2008 vehicle recalls from the National Highway Traffic Safety Administration are here, and October 2008 product safety recalls from the Consumer Product Safety Commission are here.