Debt collectors: Please prove you are not "eager" to garnish stimulus funds by supporting laws to prevent such garnishments

by Jeff Sovern

In  an April 16 letter, ACA International, which describes itself as "The Association of Credit and Collection Professionals," complained  that "Advocacy organizations have made several recent claims that, 'debt collectors are eager to garnish [stimulus] payments – threatening families’ access to food, shelter, and medicine, and endangering public health.'” I'm not sure where the quote in the letter is from--ACA doesn't say, though the letter includes citations to some other statements--but the letter goes on to say "This narrative is inaccurate and shows a clear misunderstanding of the garnishment process and the work of the debt collection industry in general." On the second page, the ACA letter states (I've added emphasis to highlight items that I return to below):

[T]he chance of funds from a stimulus check being subject to a new proceeding or being garnished as a result of a new action taken by the debt collection industry would be extremely rare. This is probably why Congress in its thoughtful determination of who should receive public money and under what circumstances in the Coronavirus Aid, Relief, and Economic Security (CARES Act), did not identify this issue as requiring additional legislative attention. Furthermore, any problems for consumers that arise could be more easily solved through a conversation, rather than in complex legislation. In the rare event that stimulus funds are garnished, consumers have ample opportunity to have those funds returned, particularly if they have been directly impacted by COVID-19.

Notice the use of the word "new" twice in the first sentence in that paragraph. Consumers who lose their stimulus to pre-existing proceedings or garnishment orders have still lost their funds, and thus, in many cases, the ability to obtain food and other necessities. Nor is it clear how "rare" it is for stimulus funds to be garnished. According to the Washington Post, there have already been reports of such garnishments. But if such garnishments are indeed rare, collectors shouldn't lose anything by agreeing to legislation to ban them. As for the opportunity to have the funds returned, is the ACA committing in its letter that if a stimulus payment is somehow seized by a collector, the collector will return it upon request? 

ACA, please join the National Creditors Bar Association in supporting the exemption of stimulus payments from garnishment. Wells Fargo and the Bank of America have also said they won't seize the payments. Your letter says "During this critical time, ACA members remain committed to assisting consumers." Prove it by endorsing rules that would prevent the seizure of stimulus funds from those who need that money to pay for the necessities of life. 

Recommendations for States to stabilize consumer finances during this crisis

The National Consumer Law Center has published a list of recommendations for actions that states can take to reduce the economic impact of COVID-19 on consumers and their families. The document summarizes NCLC's more detailed recommendations on auto finance, credit reporting, criminal justice debt, debt collection, medical debt, mortgage relief, preventing garnishment of stimulus checks, and utility services, with links to those more detailed materials.

A better way to protect the credit records of those who have pandemic-caused defaults

by Jeff Sovern

How should Congress handle the problem of damage to the credit of consumers who default because of the coronavirus pandemic? Congress has already taken its first stab at the problem in Section 4021 of the CARES Act. That provision states that if lenders work out an "accommodation" with consumers under which the lender agrees to forbearance or reduced payments, the lender will continue to report the consumer as current as long as the consumer was current before the accommodation and lives up to the accommodation. The problem with that approach, as others have observed, is that it helps only if the consumer knows to ask for an accommodation, and the lender chooses to grant it. Getting through to lenders at a time when many others are trying to do so and people are working from home can be a challenge. And while some lenders may  grant accommodations in the interest of empathy or good long term customer relations, others may be less, well, accommodating. Lenders also are hurting financially and so may face pressure to collect what they can. In short, this solution is unlikely to be sufficient.

Several legislators have proposed another solution under which furnishers and credit bureaus would not be permitted to report negative information during the crisis. The House bill is here and the Senate version here. This bill too has problems. First, it may not be constitutional. I am no expert on the first amendment limits to reporting truthful speech, but the Supreme Court held unconstitutional a law that limited the dissemination of truthful commercial speech in Sorrell v. IMS Health, Inc. On the other hand, in King v. General Information Services, Inc., the United States District Court for the Eastern District of Pennsylvania upheld the Fair Credit Reporting Act's seven-year limit to reporting negative information in consumer reports. I don't know enough to know if the bill is constitutional, and I'm not sure if anyone does, but if a different approach can be taken that is clearly constitutional, that strikes me as preferable, all other things being equal.

Second, there may be a problem with how the bill's prohibition would work in practice. Suppose someone, call them A, made all their payments during the pandemic. As I understand the bill, it wouldn't prevent credit bureaus from reporting that. Presumably, someone else, call them B, who missed payments would simply have a gap in their credit report. Wouldn't lenders contemplating making a loan to someone understand the difference between A's and B's credit reports? Now lenders may choose to discount defaults during the pandemic anyway, on the theory that they don't indicate a likelihood of defaulting in more normal times, but if that's the case, then the bill would serve no purpose. In short, it seems to me that the bill as written wouldn't prevent lenders from penalizing borrowers who had not met their payment obligations. In fact, it might make things worse for those who, say, make only one late payment. That's because a gap in the information wouldn't enable lenders to determine whether a consumer had defaulted altogether or had had a less damaging problem. That problem might be fixed by barring furnishers and credit bureaus from reporting positive information during that pandemic, but preventing the reporting of truthful positive information is going to be a hard pill to swallow politically.

I think Congress should go in another direction and enact a provision simply barring lenders from taking into account in lending decisions whether consumers who suffered pandemic-caused income losses defaulted in any way during the pandemic. 

Quarantine activity: Spend an hour reading Microsoft's Terms of Service. But you still wouldn't have read it all.

According to the Visual Capitalist, it would take an hour, three minutes, and thirty seconds to read the Microsoft TOS. The web site compares the length of various TOS for popular web sites.

FTC warns against deceptive claims for COVID-19 treatment

The Federal Trade commission has sent warning letters to more than 25 companies to stop making unsubstantiated claims that their products could prevent or treat COVID-19. Fox Business reports here. The FTC's latest press release on the problem is here.

Debt collectors and CARES Act payments

This week, the Treasury Department will begin to send out the $1,200 CARES Act payments that Congress approved in response to the coronavirus crisis. The money will be wired to eligible recipients who previously authorized the IRS to post their refunds through direct deposit. The American Prospect reports, though that "Congress did not exempt CARES Act payments from private debt collection, and the Treasury Department has been reluctant to exempt them through its rulemaking authority. This means that individuals could see their payments transferred from their hands into the hands of their creditors, potentially leaving them with nothing."

The full article is here. And a follow-up article about the Department of Treasury allowing the debt collection is here.

Third annual Consumer Law Scholars Conference (CLSC) will take place on March 4-5, 2021 in Boston

We received the following announcement from the Berkeley Center for Consumer Law and Economic Justice:

 

[T]he THIRD annual Consumer Law Scholars Conference (CLSC) will take place on March 4-5, 2021. And to keep things lively (and a bit more convenient for those on the East Coast), we will be holding next year's Conference at Boston University.

 

The Conference will provide those who publish in the field of Consumer Law the opportunity to share their work with their peers, give and receive constructive feedback, and collaborate in setting a research agenda for the field as a whole. Speakers will include both leading scholars and prominent policymakers.

 

We welcome doctrinal, theoretical, and empirical approaches. Potential topics include the full breadth of issues involving consumers in the marketplace: common law contracts and products liability; UDA(A)P and disclosure laws; food, drug, and public health law; consumer lending, credit reporting, and fintech; loan servicing and debt collection; commercial speech and the First Amendment; federalism, preemption, and sovereign immunity as related to consumer transactions; regulation, supervision, and enforcement by public agencies; private enforcement; the effect of the COVID-19 pandemic, and more.

 

* * * Although the conference is focused on scholarship, practitioners are encouraged to attend.

 

The call for papers will be coming in June.

When is an arbitration clause less unreadable? When it's a hash-it-out clause

by Jeff Sovern

According to standard readability measures, arbitration clauses require a lot of education to understand. The CFPB arbitration study reported that the average arbitration clause was written at a level that required more than two years of college to grasp. A study that I co-authored found that consumers didn't understand arbitration clauses at all. So, as an experiment, I asked my students to try drafting an arbitration clause that was at an eighth grade reading level, using the Flesch-Kincaid Grade Level test. Even that level is beyond the grasp of half of Americans. One of my students, Jay Hedges, came up with a particularly imaginative arbitration clause that reads at a level of 8.9, or just under ninth grade. It has some flaws as a contractual provision, but I thought readers of the blog might find it interesting to read what may be the first Hash-it-Out clause ever written:

“Hash-it-Out” Section: (a)

We want to explain to you how we will fix serious disagreements between us. When you use our product, you agree that we will hash out the argument outside of the courtroom. When we fix our argument outside of court under these rules, the outcome will last forever. We will use this “Hash-it-Out” Section when we disagree about anything in our larger Agreement or the product you bought from us. But if our disagreement gets started in a court that oversees smaller disagreements, we won’t use the “Hash-it-Out” way of fixing our differences. If either of us choose to fix our disagreement outside of court, here are the rules we will play by:

(1) We agree that neither of us gets to fix our argument in court. Also, neither of us get to have a jury decide who wins. We can’t look into each other’s records or files to help out our argument, unless some other set of rules lets us.

(2) When we hash out our disagreement outside of court you don’t get to bring up any other person’s problem with us, even if its similar to yours. Even if a bunch of other people who use our product try to gang up on us, you don’t get to join them if the problem is something we have to fix outside of court.

 (3) Again, we are going to follow the rules laid out here, as well as any other rules added by the Person we choose to help us decide whose argument wins.

(4) Just so we are all clear, the Person who decides whether your argument or our argument wins makes the final decision. But there might be some limited situations where you can keep arguing your point according to a law called the “Federal Arbitration Act.”

 (5) There are certain things you are allowed to do in court that we can’t do outside of court when we “Hash-it-Out.”

(b) Whoever starts our disagreement gets to choose the outside organization we will use to help us hash things out. Usually we will only have two options, either JAMS or the American Arbitration Association (a.k.a. “AAA”). But if these two options don’t want to help us hash things out, then we can agree to use another similar organization. If we can’t agree on a new option, then we will let a court pick one for us. If one of us picks JAMS, then we will follow their rules. JAMS has two sets of rules. If our disagreement is for less than $250,000, then we will use their rules called “Streamlined Arbitration Rules.” But, if we are fighting over $250,000 or more, then we will use their set of rules called “Comprehensive Arbitration Rules.” If one of us picks AAA to help us hash things out then we will use a set of rules called “Commercial Arbitration Rules.” You can check out these rules ahead of time by reaching out to the organizations. To get a hold of JAMS you can call them at 1-800-352-5267 or head to their website at www.jamsadr.com. To contact AAA call them at 1-800-778-7879 or visit their website at www.adr.org.

If we have to hash out a disagreement then we will do so in your area, known as your “federal judicial district.” If you ask us, we will pay the costs to get the disagreement process started. If your argument wins, we will pay for some other costs as well. But we won’t pay for your lawyer, your experts, or your witnesses. If the law requires us to pay for anything else, we will happily do so.

The Person who decides which argument wins will follow that law we mentioned above, the “Federal Arbitration Act.” There is a certain part of that act called “9 U.S.C. §§ 1 through 16,” which will help the decision-maker know what other laws to use. For example, these laws might include ones which say how long either of us has to bring up a disagreement, or laws which say that some facts may be “off-limits” during our disagreement. Once the decision-maker tells us whose argument wins, we can let any court with authority know who won and what the other side has to do to make up for losing.

(c) This “Hash-it-Out” Section of the larger Agreement between the two of us applies even if you make get more of our product or if you quit using our product altogether. The “Hash-it-Out” Section of our larger Agreement will follow the laws of our authorities. We will follow the laws of the federal government. We will follow the law we’ve mentioned a couple of times now, the “Federal Arbitration Act.” And we will follow Ohio law. The “Hash-it-Out” Section will follow all of these laws, even though some of them might be in disagreement. But we won’t follow Ohio law if it conflicts with federal law or the “Hash-it-Out” Section of our Agreement. Also, there are certain people covered by the “Military Lending Act” who this “Hash-it-Out” Section won’t apply to.

If a court or other authority says any part of this “Hash-it-Out” Section of our larger Agreement can’t be used anymore, then we aren’t going to use this “Hash-it-Out” Section at all. In that case, we will keep using the rest of our larger Agreement. Even if our larger Agreement says something else, we will either use all of the “Hash-it-Out” Section or none of it.

You should know that the government has special protections for members of the Armed Forces and their families who use our product. Usually members of the Armed Forces and their families can’t be charged more than 36% each year for our product. This maximum 36% yearly charge includes a number of things. First, this yearly charge includes the costs of an insurance which will cover whatever you owe in certain situations when you yourself can’t pay. Second, this yearly charge maximum includes the costs of any extras you buy with our product. Third, this yearly charge maximum will include fees for most applications. And finally, this yearly charge maximum will include any fees for participating. If you want someone to tell you want this paragraph says out loud, then call 1-877-292-1682.

In any event, if anyone knows of an arbitration clause written at an eighth grade reading level or less, I would love to see it.

Matt Edwards article on mortgage fraud

Matthew A. Edwards of Baruch has written The Concept and Federal Crime of Mortgage Fraud, 57 American Criminal Law Review (2020).

Here is the abstract:

The impact of mortgage fraud on the United States financial and economic system during the past twenty years has been severe and enduring. Nothing illustrates this fact better than the 2007–2008 financial crisis. Scholars and policymakers are convinced that the explosion in so-called liar’s loans, which were securitized and sold to investors, played a key role in either causing or ex-acerbating the housing bubble and financial meltdown that led to the Great Recession.

Unfortunately, efforts to understand and address the problem of mortgage fraud are undermined by fundamental confusion regarding the nature of mortgage fraud as a federal criminal offense. Some of this confusion is due to the fact that there is no single federal mortgage fraud statute. Thus, almost every legal actor relies on the FBI’s definition of mortgage fraud. Surprisingly, however, the influential FBI definition is plainly inconsistent in key respects with elements of the federal criminal statutes most often used to punish mortgage fraud. We should be concerned that the FBI, which investigates mortgage fraud, cannot get the basic definition of the crime of mortgage fraud right — and that scholars and commentators uncritically accept and use that problematic definition.

This Article provides scholars and lawmakers with an understanding of the meaning of mortgage fraud as a federal crime. In particular, it makes three practical contributions to public policy discourse regarding mortgage fraud. First, this Article distinguishes mortgage origination fraud from securities fraud involving mortgage-backed securities and other financial crimes related to the housing market. Second, this Article urges care in the use of the term “fraud.” Not every misstatement in a mortgage application is fraud. Scholars who write about fraudulent mortgage loans must acknowledge that loan documents cannot have mens rea and that not all mortgage application falsehoods warrant the imposition of criminal liability. Most importantly, this Article demonstrates why scholars and policymakers should take great care before using the FBI’s deeply flawed definition of mortgage fraud.

JPMorgan Chase raising standards for giving mortgages

by Jeff Sovern

So Reuters reports here. According to the report, "customers applying for a new mortgage will need a credit score of at least 700, and will be required to make a down payment equal to 20% of the home’s value." One implication is that JPMorgan Chase at least suspects that traditional credit scores are less reliable indicators of default risks than they used to be and so wants to be protected against a greater risk of default. I don't know how many people are moving forward with plans to buy homes and take out mortgages these days anyway. I wonder if lenders are still complaining about the qualified mortgage rules in this new environment.