Consumer Law & Policy Blog

"Private Student Loans and BAPCPA: Did Four-Year Undergraduates Benefit from the Increased Collectability of Student Loans?"

That's the name of this article by Xiaoling Ang of the Consumer Financial Protection Bureau and law professor Dalie Jimenez. For many years, federally guaranteed student loans have been non-dischargeable in bankruptcy, unless the debtor can show "undue hardship" (which the courts have interpreted very narrowly). Congress later extended that non-dischargeability policy even to entirely private student loans, which gave those loans a preferred status over almost all other unsecured private loans. Here is the abstract:

Since 1976, Congress has progressively amended the bankruptcy laws to treat various kinds of student loans differently from other unsecured debt. Until recently, this differing treatment was restricted to loans insured or originated by federal or state agencies, or by nonprofit institutions. In 2005, student loans originated by private companies — loans that were risk-priced at origination and not backed by the government — were added to the list of educational loans that are presumptively nondischargeable in bankruptcy. This means that unlike personal loans, credit card debt, or virtually any other type of unsecured debt, a debtor needs to prove to a bankruptcy court in a special proceeding that continuing to repay her student loans after bankruptcy would impose an “undue hardship” on her or her dependents. Originally the exception for student loans was justified in terms of preventing fraud and protecting the public fisc and the federal student loan program; neither justification applies to the provision of loans by the private market. The proffered rationale for the latest change was to ensure availability of loans originated by the private market (“private student loans”) to students. Until now, there has been little to no evidence of the effects of this change. We develop and test a theoretical model for the plausible effects of the law change on private student loans granted to students at four-year undergraduate institutions. Using a unique dataset of private student loan originations before and after the 2005 bankruptcy law change, we test that model and its resulting hypotheses using OLS, Oaxaca-Blinder, and matching methods. We find that the overall cost of private student loans at four year undergraduate institutions increased an average of 3.5 basis points as a result of the law change. We also find that the credit score composition of borrowers post-law change skewed towards the lower end of the credit score spectrum but the average borrower credit score only decreased slightly in practical terms. Finally, the volume of loans originated also increased three-fold in the post period, the majority of which is attributable to the law change.

Google to follow in Facebook's footsteps on "Sponsored Stories"

Although Facebook has been sued for the practice (the case is now headed to the Ninth Circuit on our appeal from settlement approval), Google announced late last week that it would soon begin using user images in advertisements.

One silver lining: Google, unlike Facebook, will exempt users under 18, the New York Times reports. Facebook's failure to do the same was the focus of our objections to the settlement of the Facebook case.

Do lawyers like the Consumer Financial Protection Bureau?

by Brian Wolfman

Well at least the debt-collection lawyers don't, as explained in this article by Jenna Greene. According to the incoming head of the debt-collection lawyers' trade group, the CFPB is "the bane of our existence." Here is an except from Greene's article:

When scores of debt-collection lawyers descend on Washington this week for a trade association meeting, they'll find one agency open that many may wish was closed: the Consumer Financial Protection Bureau. In the past year, the bureau, which is independently funded by the Federal Reserve and still open despite the shutdown, has begun overseeing lawyers who represent banks, credit card issuers, automobile finance companies and other creditors in collecting overdue payments from consumers. For the increasingly beleaguered bar, it's a "huge" issue that raises still-unresolved questions of attorney-client privilege and overlap with state bar association authority, said Joann Needleman, president-elect of the National Association of Retail Collection Attorneys, which counts 700 law firms employing 2,000 lawyers as members. The agency, she said, "is the bane of our existence right now."

The article goes on to say that the debt-collection lawyers are seeking relief from Congress in the form of legislation that would exempt "litigation-related activities" from the Fair Debt Collection Act (FDCPA). But what does that have to do with the CFPB? Certain litigation-related activities, and therefore the conduct of certain lawyers, have been covered by the FDCPA under court rulings going back decades. The debt-collection lawyers real concern, I think, is that, with the birth of the CFPB, there's another federal cop on the beat that is giving a high priority to problems associated with debt collection.

Sharkey Paper on Classwide Punitive Damages

Catherine M. Sharkey of NYU has written The Future of Classwide Punitive Damages, 46 University of Michigan Journal of Law Reform (2013).  Here is the abstract:

 

Conventional wisdom holds that the punitive damages class action is susceptible not only to doctrinal restraints imposed on class actions but also to constitutional due process limitations placed on punitive damages. Thus, it would seem that the prospects for punitive damages classes are even grimmer than for class actions generally.

This conventional picture misunderstands the role of punitive damages and, in particular, the relationship between class actions and punitive damages. It either ignores or underestimates the distinctly societal element of punitive damages, which makes them especially conducive to aggregate treatment. Furthermore, punitive damages classes offer a solution to the constitutional due process problem of juries awarding “classwide” damages in a single-plaintiff case.

Courts’ conceptualization of punitive damages as either individualistic or societal dictates how they decide the certification question. My survey of recent case law reveals that courts taking the plaintiff-focused individualistic view of punitive damages tend to deny class certification, while courts embracing the defendant-focused societal view are more likely to certify a punitive damages class, all else being equal. Therefore, the viability of the punitive damages class depends upon the persuasiveness of the societal conception of punitive damages.

Based on this empirical grounding, I discuss two possibilities for reform. First, state legislatures and courts could affirmatively define the collectivized, societal rationale for punitive damages. Such state legislative measures would likely withstand constitutional scrutiny under Philip Morris USA v. Williams, given the U.S. Supreme Court’s reaffirmation of the primacy of the state’s role in defining the legitimate purposes of punitive damages. Second, federal courts — in the absence of definitive guidance from authoritative sources on state substantive law — could consider the underlying societal rationale for punitive damages in the course of their certification decisions. To do so would not only be permitted, but indeed warranted, by the Rules Enabling Act.

More tax problems in the District

Following up on news of the troubled D.C. tax-lien system, and movement toward reform, there's a report in the Post today whose title aptly sums up the contents: Left in the dark: Despite warnings, D.C. tax office’s address records found rife with errors, preventing bills and critical notices from reaching homeowners. Worth a read.

Another Study Finds Credit CARD Act Saves Consumers Money

Sumit Agarwal of the National University of Singapore, Souphala Chomsisengphet of the Office of the Comptroller of the Currency, Neale Mahoney of Chicago's Booth School of Business and the National Bureau of Economic Research and Johannes Stroebel, an NYU finance professor have written Regulating Consumer Financial Products: Evidence from Credit Cards.  Here is the abstract:

We analyze the effectiveness of consumer financial regulation by considering the 2009 Credit Card Accountability Responsibility and Disclosure (CARD) Act in the United States. Using an unique panel data set covering over 150 million credit card accounts, we find that regulatory limits on credit card fees reduced overall borrowing costs to consumers by an annualized 2.8% of average daily balances, with a decline of more than 10% for consumers with the lowest FICO scores. Consistent with a model of low fee salience and limited market competition, we find no evidence of an offsetting increase in interest charges or a reduction in access to credit. Taken together, we estimate that the CARD Act fee reductions have saved U.S. consumers $20.8 billion per year. We also analyze the CARD Act requirement to disclose the interest savings from paying off balances in 36 months rather than only making minimum payments. We find that this "nudge" increased the number of account holders making the 36-month payment value by 0.5 percentage points, with a similarly sized decrease in the number of account holders paying less than this amount.

NCLC report: Urgent need for reform of state property exemption laws to free up courts and protect basic family assets

A new report from the National Consumer Law Center surveys the property exemption laws of the 50 states, the District of Columbia, Puerto Rico, and the Virgin Islands that protect wages, assets in a bank account, and property from seizure by creditors. No Fresh Start: How States Let Debt Collectors Push Families into Poverty finds that not one jurisdiction’s laws meet basic standards so that debtors can continue to work productively to support themselves and their families.

States’ archaic exemption laws fuel the lucrative and fast-growing debt-buyer industry. For example, nine of the nation’s largest debt buyers purchased (for just a few pennies on the dollar) nearly 90 million consumer accounts with a face value of $143 billion, according to a January 2013 Federal Trade Commission (FTC) study. Consumers disputed at least one million of these debts, yet only half of the disputed debts were verifiable at all by the debt buyer. 

Despite the importance of state exempt property laws, this National Consumer Law Center report finds that not one state meets five basic standards:

• Preventing debt collectors from seizing so much of the debtor’s wages that the debtor is pushed below a living wage;
• Allowing the debtor to keep a used car of at least average value;
• Preserving the family’s home—at least a median-value home;
• Preventing seizure and sale of the debtor’s necessary household goods; and
• Preserving at least $1200 in a bank account so that the debtor has minimal funds to pay such essential costs as rent, utilities, and commuting expenses. 

The NCLC report recommends that state exemption laws should be reformed to:

• Preserve the debtor’s ability to work, by protecting a working car, work tools and equipment, and money for commuting and other daily work expenses.
• Protect the family’s housing, necessary household goods, and means of transportation.
• Protect a living wage for working debtors that will meet basic needs and maintain a safe, decent standard of living within the community.
• Protect a reasonable amount of money in bank accounts so that debtors can pay commuting costs as well as upcoming rent and utility bills.
• Protect retirees from destitution by restricting creditors’ ability to seize retirement funds.
• Be automatically updated for inflation.
• Close loopholes that enable some lenders to evade exemption laws. For example, states that allow payday lending enable these lenders to evade state laws that protect wages and exempt benefits from creditors. States that allow lenders to take household goods as collateral enable these lenders to avoid state household good exemptions.
• Be self-enforcing to the extent possible, so that the debtor does not have to file complicated papers or attend court hearings.

Model language for states to achieve these goals is provided in the National Consumer Law Center’s Model Family Financial Protection Act. The model law also includes steps that states can take to reduce the pervasive abuse of the court system by debt buyers. Seizure of debtors’ wages and property would not be such a problem if debt buyers did not churn out such an endless stream of judgments on old, poorly documented debts—many of which are based on mistaken claims. 

By updating exemption laws, states can prevent over-aggressive debt buyers from reducing families to poverty. These protections also benefit the state by keeping workers in the work force, helping families stay together, and reducing the demand on funds for unemployment compensation and social services.

The report includes each state’s overall rating and ratings for the five primary asset-preservation standards as well as appendices with specific exemption information on all 53 jurisdictions. Also included: Recommendations for the minimal exemption amounts that will allow a debtor to continue to work to support a family. 

Should parents be held liable for the consequences of failing to have their kids vaccinated?

Vaccinations generally benefit society. If kids are not vaccinated because their parents won't allow it, the kids may become ill as a result (of course), and the kids may also infect other people. Should parents be held liable for injuries to others caused by exposure to their unvaccinated kids? Liability would not only compensate the injured people but also might encourage parents to ensure that their kids are vaccinated. Law professor Teri Dobbins Baxter addresses these issues in Tort Liability for Parents Who Choose Not to Vaccinate Their Children and Whose Unvaccinated Children Infect Others. Here is the abstract:

This article explores whether parents can or should be civilly liable for damages when (1) their unvaccinated child contracts a disease that would have been prevented by an available and recommended vaccine, and (2) those children infect others who were either vaccinated (but who failed to develop immunity despite the vaccination) or were unable to be vaccinated because of their age or other medical conditions. In the past, concerns about establishing causation have discouraged discussions about liability. However, in several recent cases public health officials have been able to identify the source of outbreaks. Furthermore, outbreaks of diseases that had been virtually eradicated in the United States have erupted, with some traced to children of parents who, against medical advice, chose not to vaccinate their children. The article focuses on the public policy issues to be considered when deciding whether to impose a duty on parents and the scope of such a duty, particularly if parents cannot be legally compelled to vaccinate their children. The discussion emphasizes the privacy and constitutional rights implicated by a parent’s decision not to vaccinate her or his child, as well as the potential impact that exercising those rights may have on other members of society. The article concludes that courts should find that parents have a duty to ensure that their unvaccinated children do not harm others. That duty ordinarily should not require parents to vaccinate their children, but should require parents to take reasonable steps to avoid spreading diseases and causing injury to others. Such a duty does not unduly infringe on privacy rights and is permissible as part of the state’s right to protect the health and safety of its citizens.

Jennifer Martin Paper on Self-Help Repossession

Jennifer S. Martin of St. Thomas has written The Repo Man Did What? A Secured Creditor's Article 9 Right to Repossess Collateral and When Lenders Have Liability for Repossessions Gone Awry, 28-5 Commercial Damages Reporter 1 (2013). Here's the abstract:

 

This Article observes that there is not a clear consensus among courts in how to describe the scope and nature of a breach of the peace when a lender elects self-help repossession and things go awry. That does not mean that courts have not deduced some guideposts that parties can use in deciding whether to proceed with self-help repossession. Relevant considerations for the reasonableness of the repossession arguably fall into several components: “(1) where the repossession took place, (2) whether the debtor consented to the repossession, (3) the reaction of third parties, (4) what premises were entered into in order to repossess the collateral, and (5) whether the lender deceived the debtor.” Yet, there is no firm consensus on these core considerations or how they might be applied or weighed. Due to the factual nature of the inquiry, courts (and lenders) are seemingly left with making decisions as to matters involving repossessions, breach of the peace and remedies in general on a case by case basis.

This lack of consensus in approaching self-help repossessions undermines uniformity, which ultimately underscores the policy of the Code and subjects both lenders and borrows to unpredictable outcomes. This Article argues that while amendment of Article 9 is not always needed or desired to achieve an adequate level of uniformity in UCC cases, this objective can be satisfied by employing an approach to breach of peace that recognizes a limited right of self-help that a lender can only exercise when it can ensure that no violence will occur or is likely to occur as a result of the repossession. Courts should not overextend self-help repossession under the mistaken overreliance on the lender’s property interest where the lender can use the judicial repossession mechanism of section 9-609 in all cases. That is, a lender is not always entitled to self-help repossession upon default.

Article on Behavioral Economics and Consumer Credit

Ryan Bubb and Richard H. Pildes, both of NYU, have written How Behavioral Economics Trims Its Sails and Why, 127 Harvard Law Review (2014).  Here's the abstract:

This article argues that the preference of behavioral law and economics (BLE) for regulatory approaches that preserve “freedom of choice” has led to incomplete policy analysis and ineffective policy.  BLE has been broadly regarded as among the most promising new developments in public policymaking theory and practice.  As social science, BLE offers hope that better understanding of actual human behavior will provide a sounder foundation for the design of regulation.  As politics, BLE offers a possible political consensus built around minimalist forms of government action commonly known as nudges that preserve freedom of choice. But these two seductive dimensions of BLE are in much deeper tension than previously recognized.  Put simply, it would be surprising if the main policy implications of evidence documenting the failure of individual choice were a turn toward regulatory instruments that preserve individual choice.  

More specifically, taking the implications of behavioral social science fully into account suggests at least three routes that BLE does not adequately pursue.  First, the “choice preserving” policies in which BLE is so heavily invested are not likely to be effective enough in important policy contexts – ironically, for reasons BLE itself identifies.  Second, the default rules so central to BLE are often better viewed as preserving the illusion of choice.  In practice, they effectively function as implicit mandates.  This illusion affects policymakers as well:  the view that people can always opt out has led policymakers to set these defaults at the wrong levels.  Third, BLE has neglected the ways in which behavioral market failures interact with traditional market failures. In areas like green energy, fuel economy, and environmental regulation, BLE has missed the implications of this interaction for policy design.  A more complete framework generates policy prescriptions beyond both nudges and neoclassical economic prescriptions. 

We illustrate the limits of BLE’s commitment to freedom of choice by analyzing three of the most important areas for current policy: retirement savings, consumer credit, and environmental protection.