Consumer Law & Policy Blog

Alexandrov & Jiménez Article Finds 2005 Bankruptcy Reforms "Failed Miserably" to Help Students

Alexei Alexandrov, formerly of the CFPB, and Dalié Jiménez of Irvine, Connecticut, and Harvard have written Lessons from Bankruptcy Reform in the Private Student Loan Market, 11 Harvard Law & Policy Review (2017).  Here's the abstract:

This article explores the effects of the 2005 bankruptcy amendments in the private student loan market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students. 

Using a novel loan-level administrative dataset from the Consumer Financial Protection Bureau (CFPB) and econometric techniques, we quantify the (a) effect of consumers receiving lower prices as a result of the law and (b) the demand-expansion effect of lower prices leading new consumers to enter the market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students. 

First, we show that BAPCPA did not have a significant effect on the price of loans for the lowest credit score individuals relative to individuals with higher credit scores. In other words, students became effectively unable to discharge their loans in bankruptcy, but did not experience a compensating decrease in price. Second, we do see an increase in loan volumes, but since we do not observe a change in prices and we find that the price elasticity of demand for student loans is not significantly different from zero, we do not attribute this change in originations to a price effect. It is thus easy to argue that BAPCPA was not very helpful to students: they lost the ability to discharge their private student loans, but received no discount in return.

Given these findings, we offer some recommendations to reform how student loans are treated in bankruptcy and to regulate private student loans. First, we join with many others in calling for an amendment to the Bankruptcy Code to treat PSLs in the same way as credit cards or other types of unsecured debt are treated. That is: PSLs should be automatically dischargeable in bankruptcy unless the bankruptcy judge finds that the bankruptcy petition has been filed in bad faith. This is, we think, the simplest and best solution to the problems we identify.

Nonetheless, we recognize that rolling back the protection PSL lenders obtained in 2005 may be a hard sell politically. A number of bills have been proposed attempting to do just that and none have gained much traction. Consequently, we propose an alternative. Given students’ inelastic demand and the fact that PSL lenders are in a better position to know the true likelihood of loan repayment, the CFPB should implement an ability-to-repay rule similar to the one they have implemented in the mortgage markets. In other words, private student loan lenders would incur liability to borrowers if they originated loans without verifying a borrower’s ability to repay that loan. Because this verification is a complex endeavor, we outline some of the features of PSLs that could be packaged as a “qualified PSL,” a safe harbor to the ability-to-repay rule.

Supreme Court to hear case about class arbitration

In addition to taking the case that Brian blogged about below, the Supreme Court this morning granted a petition in Lamps Plus Inc. v. Varella, which raises the question presented:

Whether the Federal Arbitration Act forecloses a state-law interpretation of an arbitration agreement that would authorize class arbitration based solely on general language commonly used in arbitration agreements.

 

FWIW, the cert opp, which my colleague Scott Nelson drafted, frames the questions this way:

1. Did the  court  of  appeals  err  in  construing  the distinctive  language  of  the  arbitration  agreement  at  issue in this case to authorize class arbitration?

2. Did the  court  of  appeals  have  appellate  jurisdiction  over  the  petitioners'  appeal  of  the  district  court's order granting their motion to compel arbitration, directing arbitration to proceed, and dismissing respondent's claims without prejudice?

The Supreme Court's docket, with links to the petition-stage filings, is here. The case will be briefed over the spring and summer, and argued next fall.

Supreme Court grants cert in Google cy pres case: Does this grant put class-action cy pres at risk?

The Supreme Court today granted cert in Frank v. Gaos, No. 17-961, concerning the validity of a cy pres award in a consumer class action against Google. The cert petition, response, reply, and amicus briefs are here. The question presented is

Whether, or in what circumstances, a cy pres award of class action proceeds that provides no direct relief to class members supports class certification and comports with the requirement that a settlement binding class members must be “fair, reasonable, and adequate” [under FRCP 23(e)]"

Tackling obesity through regulation

Lawrence Gostin has written Tackling Obesity and Disease: The Culprit Is Sugar; the Response Is Legal Regulation, which discusses a series of regulatory reforms aimed at reducing sugar consumption. Why? Nearly 40% of the American public is obese, and more than 70% is either obese or overweight. Here is Gostin's abstract:

It is staggering to observe the new normal in America: 37.9 percent of adults are obese, and 70.7 percent are either obese or overweight. One out of every five minors is obese. The real tragedy, of course, is the disability, suffering, and early death that devastates families and communities. But all of society pays, with the annual medical cost estimated at $147 billion. The causal pathways are complex, but if we drill down, sugar is a deeply consequential pathway to obesity, and the single greatest dietary source is sugar-sweetened beverages (SSBs). The copious amount of sugar in the American diet is no accident. Industry practices and regulatory failures have fueled this explosion. Yet there are sensible, effective interventions that would create the conditions for healthier behaviors. What are the key interventions, and how can we overcome the social, political, and constitutional roadblocks? Tobacco control offers a powerful model, suggesting that success requires a suite of interventions working in concert: labeling, warnings, taxation, portion sizes, product formulation, marketing restrictions, and bans in high-risk settings such as schools and hospitals. Each intervention deserves detailed analysis, but I'm kick-starting scholarly and policy conversation by systematically laying out the major legal tools.

The craziness of the 2017 tax cuts

Law prof Michael Graetz has written The 2017 Tax Cuts: How Polarized Politics Produced Precarious Policy. Here's the abstract:

In this lecture, Michael Graetz contends that the new tax law is unstable. This is hardly surprising because it was rushed through Congress in record time with only Republican votes and no ability for public comments on its changes. The new rules create significant new differences in tax burdens based on what kind of business is conducted, where goods and services are bought and sold, whether individual workers are employees or independent contractors, and where people live. Finally, although it was estimated to be a $1.5 trillion tax cut over ten years, it's actual cost is likely to be double that amount, producing unsustainable annual deficits and an unacceptable level of public debt. Footnotes have been omitted here. This article is forthcoming in the Yale Law Journal Forum.

House May Accede to the Senate Version of the Bill Amending the Dodd-Frank Act

The American Banker reports here that House Financial Services Chair Jeb Hensarling may be moving away from insisting on adding to the Senate bill amending Dodd-Frank provisions the House had passed. Hensarling is a key player in the process and so if he goes along with the Senate version, others are likely to agree. Hensarling could still seek additional revisions to Dodd-Frank, including changes in the portions that affect the CFPB, in later bills.

When Has Mulvaney Met With Consumer Advocates? Which Ones?

by Jeff Sovern

During his testimony before the House Financial Services Committee, Acting CFPB Director Mulvaney said that he had met with consumer advocates as much as he has met with industry representatives (or something to that effect; I can't remember the exact words). I've seen reports of Mulvaney meeting with industry groups (see here, for example). But I can't remember any reports of him meeting with consumer advocates. I would be interested in reading or listening to such a report. And in a related note, wouldn't it be informative if he spoke at the Teaching Consumer Law conference? 

Dalié Jiménez Article Argues for "Automatic Bankruptcy" of Longstanding Consumer Debts

Dalié Jiménez of Irvine, Connecticut and Harvard has written Ending Perpetual Debts, 55 Houston Law Review (2018). Here is the abstract:

Consumer debts in the United States can effectively live (and grow) forever: most statutes of limitations do not extinguish them; they can morph into relatives’ obligations after the debtor’s death; and they sometimes rise from the grave even after they have been paid. All the while, interest and fees accrue. There is one sure way to extinguish most debts, however, and that is by filing bankruptcy. This Article explores the practical, philosophical, and economic effects of the current system. It proposes a form of “automatic bankruptcy” for consumer debts: a federal discharge that, by operation of law, would extinguish debts (roughly) seven years after a default, or seven years after a judgment. The Article explores additional features of this proposal including ones designed to ensure it is self-executing, and others that mirror features of the Fair Credit Reporting Act and the discharge provisions of the Bankruptcy Code.

Senate Confirms Five to be FTC Commissioners

by Jeff Sovern

The Hill has the story here. Among the confirmed commissioners is Rohit Chopra, formerly of the Consumer Federation of America and the CFPB, and a strong consumer advocate. The other commissioners would be wise to follow his lead on consumer protection matters.

"Verizon says Yahoo users must waive class-action rights—or stop using Yahoo"

The Ars Technica blog reports that "Verizon is forcing users of Yahoo services to waive their class-action rights and agree to resolve disputes through arbitration. Yahoo users who don't agree to the new terms will be cut off from the services, though Verizon hasn't said exactly when the cutoff date is."

The blog post is here.