CL&P Blog

Posner on Car Title Loans, Predatory Lending, and the Commerce Clause

by Deepak Gupta

Yesterday, Judge Posner issued an opinion that may be of some interest to those following the great debate over predatory lending and behavioral economics. As with many Posner opinions, its significance is of course enhanced by the author's identity. Although it doesn't actually take sides, the opinion devotes an unusual amount of space (for a judicial opinion) to citing and summarizing the leading research on predatory lending, including work by scholars such as Elizabeth Warren and Ronald Mann and consumer advocates such as Jean Ann Fox and Kathleen Keest, as well as their opponents on the right (e.g. Todd Zywicki). The opinion even takes note of the pending legislation to create a Consumer Financial Protection Agency, citing opinions pro and con, again without taking a position. But as we've noted here before, Posner has already taken a position on the legislation in his extrajudicial writings: He doesn't like it, and doesn't feel contrained by his judicial role from saying so.

The case concerns the constitutionality of an Indiana statute regulating car title loans (also known as car title pawns) -- loans with interest rates in the neigborhood of 300%, secured by cash-strapped consumers' vehicle titles, in which a lender advances a fraction of the vehicle's value to the consumer, who forks over a set of car keys to facilitate easy reposession in the event of default.  Indiana strictly regulates such loans through licensing requirements and interest-rate caps. But in neighboring Illinois, thanks to industry influence on state politics, it's a free-for-all. Concerned that Illinois-based lenders were evading the Indiana law by advertising directly to Hoosiers and entering into transactions on Indiana-titled vehicles, Indiana added a "territorial application" provision extending coverage to lenders that advertise to Hoosiers and then enter into transactions with them out of state.

Yesterday's decision strikes down that provision. It acknowledges that there's no economic protectionism or outright discrimination against interstate commerce at work here. Nevertheless, the court relies on a series of decisions forbidding extraterritorial regulation, including the Supreme Court's decision in Healy v. Beer Institute, 491 U.S. 324 (1989). The opinion concedes that Indiana isn't interfering with transactions with residents of another state, as in Healy, but focuses instead on the extraterritorial effect of interference with a commercial activity taking place in another state: "The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause." 

The opinion makes some characteristically Posnerian analogies to illustrate that point, likening the law to an attempt by Indiana to ban its citizens from gambling in Las Vegas. "Of course the loan proceeds were probably spent in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in states that do not ban trans fats from their restaurants."

So much for Indiana's attempt to protect its own consumers from one of the worst forms of predatory lending. But I wonder if Indiana can still get at the problem another way. The opinion notes that the loan company notifies the Indiana DMV of the loan as soon as it was made, so that the lender's security interest is protected against subsequent creditors, and that the repossessions occur in Indiana and the cars are auctioned off in Indiana. Surely Indiana would be well within its rights to regulate such conduct--particularly the use of its own DMV to prioritize the security interest--all of which occurs through the machinery of its own state government or within its own borders.

The case is Midwest Title Loans, Inc. v. Mills.  (Disclosure: Public Citizen, along with several other consumer groups, joined an amicus brief in this case authored by the Center for Responsible Lending.)

Vision Media Requests Injunction Against Blogging That “Cast[s it] in a Negative Light”

When it added Public Citizen’s defense of Julia Forte’s 800Notes.com to the Citizen Media Law Project database  the Project took note of a bizarre motion filed by Vision Media, asking the court to prohibit any public discussion about its lawsuit, including blogging.   The motion is an apparent response to my email to Vision Media’s counsel inviting them respond on this blog to my comments about their lawsuit. 

Apparently not recognizing that Forte’s motion for summary judgment is a public document available to the general public on PACER for $.08 per page (or on RECAP for free), Vision Media objects to Public Citizen’s having posted the motion on our own web site.  According to Vision Media, criticism of its having filed a frivolous lawsuit threatens the reputation of Hugh Downs, with whom Vision Media claims a relationship.  Apparently, Vision Media uses his name in the course of its telephone sales pitch to non-profits, and believes that trotting out his name in a court filing will make its request for a prior restraint seductive.

Curiously, neither our papers, nor my previous blog post, said anything about Downs, the former host of 20/20.   One wonders how Downs would feel if he knew about Vision Media’s hiding behind his name as an excuse for censorship, too.

Vision Media's motion falsely claims that Forte herself has criticized Vision Media on her message board, when in fact all of the criticisms there are made by anonymous posters.

We have responded to Vision Media’s motion, explaining that a prior restraint is not justified by concerns about the business impact of being criticized.  We will again invite Vision Media’s counsel to respond. 

What Payment Schedule Governs When the TILA Disclosure Statement Conflicts with the Note?

by Jeff Sovern

Over the last couple of days, I've blogged about how for adjustable loans, the Fed's Commentary directs lenders to state in the Truth in Lending disclosure statement monthly payment figures that assume that interest rates remain unchanged for decades.  One consequence of that is that once the change date arrives the numbers in the disclosure statement will differ from the numbers dictated by the note.  So which monthly payment is the borrower obliged to make?  My intuitive answer was that the note governs: after all, it's more specific and the TILA statement is merely a required disclosure, not necessarily part of the contract.  But on reflection, I'm not sure that's right.  From the consumer's perspective, the disclosure statement probably looks to be just as much a part of the contract as any other document the consumer signs.  It comes from the lender, and so the consumer wouldn't necessarily know that it's a government-mandated document (and even if the consumer did know that, I'm not sure it would make a difference).  The disclosure statement purports to tell the consumer the consumer's payment obligations so it seems anomalous to say the consumer shouldn't be able to rely on it.  That would also permit lenders to perform a sort of bait and switch, in that they could bait the consumer into borrowing with a disclosure statement that states one "price" (the monthly payments), but then switch the consumer to a higher monthly payment, as determined by the note.  Moreover, the idea behind the disclosure statement is that it's intended to tell the borrower what the borrower needs to know, which permits the borrower to skip reading the note (which, in any event, is likely to be incomprehensible).  It seems strange to say that the borrower can substitute reading the disclosure statement for reading the note, but that the note controls when the two conflict, so really the borrower should read the note anyway, but the note is unreadable so the borrower is out of luck.  While it may seem unfair to lenders to bind them to the numbers in the disclosure statement, it's not as if those numbers are a surprise to the lenders; they are the ones to prepare the disclosure statement.  If all this is right (and it kind of seems crazy that it could be, but it also seems crazy that it wouldn't be), we could see some big class actions brought against lenders using adjustable loans.  To make matters worse for the lenders, if the corrrect figure is the one in the disclosure statement, debt collectors trying to collect the amount determined by the note against defaulting borrowers risk violating the Fair Debt Collection Practices Act for misrepresenting the amount of the debt. 

More on How the Fed's TILA Disclosures Misled the Subprime Borrowers

by Jeff Sovern

Yesterday I blogged about how the Fed's Commentary directs lenders making Truth in Lending disclosures for adjustable loans to assume that interest rates will remain the same as they are at the date of closing.  Unfortunately, this direction infects many of the TILA disclosures.  Thus, the two most significant closed end disclosures--the ones that are required to be more conspicuous than any other under 12 C.F.R. § 226.17(a)(2)--are the finance charge and APR.  But because these disclosures are based on an imaginary interest rate, there is no reason to think that they are accurately stated on TILA disclosure forms. Indeed, any number which depends on the interest rate after the time of the first adjustment is likely to be wrong.  That means that the total of payments is also wrong, and of course, as I blogged about yesterday, the monthly payments.  The irony is that, according to the survey we conducted, it appears few borrowers pay attention to the disclosures, as I report in Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers.  So maybe it doesn't matter that the numbers are wrong.  But then, if TILA doesn't protect consumers, what will?

How the Fed's Disclosures Misled the Subprime Borrowers About Their Monthly Payments

by Jeff Sovern

Yesterday the Pittsburgh Post-Gazette ran a piece I wrote about how the Fed's TILA disclosures misled the subprime borrowers.  Because of space constraints, the Post- Gazette had to cut the piece; I've posted it below in its original form:

Only part of the story of how the Fed contributed to the economic crisis has been told.  The part that has not received attention involves the Fed's failure to enable subprime borrowers to tell what their monthly payments would be.  Obviously, borrowers who cannot predict their monthly payments cannot predict whether they will be able to make those payments,

The story starts more than forty years ago, when Congress passed the Truth in Lending Act (TILA).  TILA requires that key loan terms be boiled down to a single comprehensible page, so borrowers can make the right loan decisions.  Congress also directed the Federal Reserve to create rules to make that happen.

Fast-forward to the eighties, when adjustable-rate loans became common.  It is impossible to know at the time the borrower takes out such loans what future payments will be, because by definition with such loans payments change from time to time.  So regulators adopted a two-prong strategy. First, soon after the borrower applied for the loan, the lender would provide the borrower with some disclosures.  Later, at the closing, the borrower would see the final loan terms.  The problem for the many subprime borrowers who took out adjustable-rate loans is that the first of these disclosures was of only limited value, while the second was actually misleading.

Take the early disclosures.  The Fed's model form gives borrowers a historical example of how payments shift over time.  But the form notes that the rates it assumes may be different from the borrower's actual rates. That means borrowers cannot tell from the form what their payments will be.  In addition, the form is based not on the borrower's actual loan amount, but on a $10,000 loan.  Not many subprime loans were for $10,000.

The final loan disclosures are even worse.  To see why, imagine that you took out one common form of subprime loan, in which you received a low "teaser" rate for the first two years, after which the rate would adjust every six months, typically to a higher rate.  The Fed's arcane Commentary directs lenders to assume that interest rates at the time of the future adjustments will be whatever they were at the time of the loan closing.  So the TILA form might show a low monthly payment for the first two years--the teaser rate--followed by 28 years of a somewhat higher monthly payment which never changes again.  This is misleading in two ways.  First, if interest rates were generally low at the time of the closing but higher at the time of the adjustments after the two years expired, the actual payments could be much higher than the TILA form showed.  Second, while the TILA form might show that payments would be unchanged for 28 years, in fact they could change every six months, wreaking more budgetary havoc.  And unlike the early disclosures, this form did not indicate that the actual numbers might be different from those shown.  No wonder so many borrowers defaulted.

Perhaps some borrowers turned to the loan agreements to figure out what their payments would be.  But these contracts are even more bewildering, with references to LIBOR and change dates and long complicated clauses. Some agreements spell out in one place how the payments are determined, and then carry an "adjustable rate rider" with another formula for calculating the payments.

Maybe other borrowers turned to their mortgage brokers.  Now many loan originators are honest, but not all are, which may explain why one study found that the overwhelming majority of borrowers with adjustable loans in one part of Chicago thought their rates were fixed: according to the study the originators "neglected to mention that the terms for which the rate was 'fixed' was limited to 12 to 36 months."

What is the solution?  The Fed should not be in the consumer protection business.  It makes about as much sense for an agency tasked with managing monetary policy to protect consumers as it does for it to protect the environment.  Just as we have a separate Environmental Protection Agency, we need a separate Consumer Financial Protection Agency, something the House of Representatives has now voted for.  Tellingly, it was Congress, not the Fed, that last year changed the law to require lenders to tell borrowers what their highest monthly payments might be.  But Congress, preoccupied with other matters, cannot micro-manage consumer protection laws. Neither, apparently, can the Fed.

The Post-Gazette's version can be found here, under the headline "Adjustable mortgage a pig in a poke."  I've elaborated on this in my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers.  I plan to post more on this subject in the coming days. 

Paper Arguing Against Privacy

Thomas M. Lenard of the Technology Policy Institute and Paul H. Rubin of Emory University - Department of Economics have written In Defense of Data: Information and the Costs of Privacy.  Here's the abstract:

The commercial use of information on the Internet has produced substantial benefits for consumers. But, as the use of information online has increased, so have concerns about privacy. In this paper we argue that acting on those concerns would be counterproductive. Far from a 'free lunch,' more privacy implies less information available for producing benefits for consumers, including targeted advertising and the valuable web services it supports, e.g. search engines, email, and social networks. Concerns about privacy may also be misguided. Most data collected about individuals is anonymous, and reducing legitimate uses of online information is not likely to reduce identity theft. Firms appear to be responsive to consumers’ privacy preferences, which also points to a properly functioning market. Our analysis suggests that proposals to restrict the amount of information available would not yield net benefits for consumers.

Vision Media TV Tries to Evade Section 230 Immunity to Squelch Criticism

by Paul Alan Levy

In several posts on this blog, Greg Beck and I have written about the crucial role played by section 230 of the Communications Decency Act in fostering free speech online — and consumer commentary and criticism in particular —  by protecting Internet Service Providers against liability for content posted by their users. A new lawsuit by Vision Media Television Group seeks to evade that protection.

Over the years, various publications have reported claims about deceptive sales techniques used by a Florida company named Vision Media Television.  Vision Media denies these reports and indeed claims that they are defamatory, but didn't sue the New York Times, Consumers Union or other publications that have carried the reports. Instead, it has apparently been trying to sanitize its reputation by trying to intimidate bloggers who, it hopes, can't afford to defend themselves.

Search engine competition on user privacy?

by Paul Alan Levy

In the wake of Google's bold move toward the possibility of closing down its China operations over the Chinese government's demands for censorship coupled with its support for hacking, Microsoft has opened up a new front in the competition with Google by promising to delete the entire IP address for search queries after six months.

Google's move.  Nice to see this sort of competition.

The Fight for the CFPA Continues

The Times reports that President Obama met with Senator Dodd yesterday to push for the CFPA.  Over the weekend, Times columnist Gretchen Morgenson wrote a piece, Credit Cards and Reluctant Regulators, about how credit card companies are doing an end run around the Credit CARD Act restraints and how it falls to the OCC, rather than a CFPA to protect consumers.  The entire column is worth a read, but here's an excerpt:

[S]uch attempts by card issuers [should] be met with an aggressive regulatory response.

That, however, would be a lot to ask, given that the Office of the Comptroller of the Currency is tasked with enforcing the new rules at most card issuers. This institution not only failed in its oversight of risky practices at Citigroup, to cite just one case — it more recently objected to one of the sound credit card rules the Fed is putting into effect.

“The O.C.C. to the end fought the rules and tried to get huge exceptions, carrying water again for the large banks they were regulating,” said Travis B. Plunkett, legislative director for the Consumer Federation of America. “Now they have to enforce this law that they disagreed with.”

* * *

For years, consumer protection has been of little interest to the major financial regulatory agencies, with the exception of the F.D.I.C.

THERE is no reason to believe that this mind-set will change, given that the same folks who failed to rein in abusive practices years ago are still in place at these shops. And it is just plain boneheaded to entrust consumer protection to agencies run by people who seem to care more about the interests of the financial institutions they regulate.

Opponents of the Consumer Financial Protection Agency, which is part of the financial reform working its way through Congress, say that such a thing smacks of “the nanny state.” But isn’t that preferable to “the pirate state” that brought this economy to its knees?

FHA Issues New Standards for Home Loans

Last December, we blogged here that the Federal Housing Administration was proposing tougher standards for home loans. The New York Times reports here that the FDA will today finalize those rules, which include higher premiums for mortgage insurance and tougher limits on the amount that the seller can contribute to the buyer's closing costs.