Obama Administration Plan to Help Borrowers Takes Shape

The Times is reporting here on some aspects of President Obama's plan to help borrowers facing foreclosure.  An excerpt:

President Obama’s plan to reduce the flood of home foreclosures will include a mix of government inducements and new pressure on lenders to reduce monthly payments for borrowers at risk of losing their houses, according to people knowledgeable about the administration’s thinking.

The plan, to be announced Wednesday, is expected to include government subsidies for reducing a borrower’s interest rate, which a lender would have to match with its own money.

But officials cautioned that subsidies for lower interest rates would not in themselves help many troubled homeowners, because lenders were still likely to view many of those borrowers as bad risks and refuse to restructure their loans. As a result, they have been casting about for sticks as well as carrots to persuade the lenders to take part.

Experian-Based FICO Scores to be Unavailable to Consumers

by Jeff Sovern

Fair Isaac has reported that Experian has terminated their agreement under which FICO credit scores based on Experian's credit data can be made available to consumers, though consumers can still obtain their FICO scores based on TransUnion and Equifax data.  Because Experian also has its own credit score system, VantageScore (a joint venture with Experian's other competitors, Equifax and TransUnion), it competes with Fair Issac, and that may have contributed to the decision; Fair Isaac has also sued Experian in connection with VantageScore.  Coverage in the Times is here.  The Times article states: "Experian itself will continue to sell FICO scores based on its data to lenders, so some banks may make credit decisions, at least in part, on a score that consumers can no longer see." 

This may pose a problem for consumers contemplating borrowing who would like to know their credit score in advance.  Maybe it won't be a big deal because they will still be able to obtain the other credit scores, and the Experian credit report from which the Experian-based FICO score will be drawn is still available.  But to the extent that the Experian-based FICO score is based on factors in the Experian report that are not obvoius to consumers (which could happen; FICO scores are based on a proprietary algorithm which has not been publicly disclosed), consumers could be surprised by rejections from lenders using the Experian-based FICO score.  That seems inconsistent with the trend towards greater transparency of credit information reflected in the 2003 FACTA Act, which mandated that credit bureaus provide consumers with their credit reports without charge at least once a year upon request, though it did not require the credit bureaus to provide credit scores for free.  Congress has a lot on its agenda, but maybe it will turn its attention to this issue at some point. 

Marotta-Wurgler Study Finds Firms With Market Power Don't Impose One-Sided Terms on Consumers in Software License Agreements

Florencia Marotta-Wurgler  of NYU has written Competition and the Quality of Standard Form Contracts: The Case of Software License Agreements, 5 Journal of Empirical Legal Studies (2008).  Here's the abstract:

Standard form contracts are pervasive. Many legal academics believe that they are unfair. Some scholars and some courts have argued that sellers with market power or facing little competitive pressure may impose one-sided standard form terms that limit their obligation to consumers. This paper uses a sample of 647 software license agreements drawn from many distinct segments of the software industry to empirically investigate the relationship between competitive conditions and the quality of standard form contracts. I find little evidence for the concern that firms with market power, as measured by market concentration or firm market share, require consumers to accept particularly one-sided terms; that is, firms in both concentrated and unconcentrated software market segments, and firms with high and low market share, offer similar terms to consumers. The results have implications for the judicial analysis of standard form contract enforceability.

Times Reports on Identity Theft Risks, Foreclosure Crisis, Privacy Policies, and More

by Jeff Sovern

Lots in the Times this week on consumer law issues, so here goes.  Tomorrow's Times will include Bob Tedeschi's Mortgages column, Your Financial Data: How Safe is it? about a Wolters Kluwer Financial Services of Minneapolis survey that found that many smaller lenders transmit consumer financial data in unsecure email, thus exposing borrowers to the risk of identity theft. Meanwhile, today's Times had a story, Some Banks Will Put Off Foreclosures Until March, while they wait for the Obama administration plan, about which Alan blogged earlier today. The Times had a brief story about the Obama administration's attempts to develop such a plan yesterday.

Yesterday the Times also published Agency Skeptical of Internet Privacy Policies.  Here's an excerpt:

The Federal Trade Commission had some sharp words for Internet companies Thursday, saying that they are not explaining to their users clearly enough what information they collect about them and how they use it for advertising.

For now, the commission is sticking to its view that the Internet industry can voluntarily regulate its own privacy practices.

But the tone of the report, and comments by several commission members and staff officials, indicated that if the industry does not move faster, the agency would increase regulation or call for Congress to legislate stricter online privacy rules.

* * *

Ms. Harrington challenged Internet companies to explain what they are doing in a section other than its privacy policy.

The commission did not specify what sort of notice companies should give, but it noted that some have proposed methods that are more visible to the average user, like a link right on each advertisement that leads to an explanation of what data the advertiser collects and uses.

“This is about advertising, so these people ought to be creative,” she said.

“We know advertisers can get their messages across when they want to. They darn better want to get this message across: ‘This is what we are collecting and this is how we are using it.’ ”

Thursday's issue included a story about a crime that may become a sad sign of the times: Philadelphia Grand Jury Says Crime Ring Fraudulently Sold 82 Houses.  The ring sold unoccupied houses, thereby injuring both the current and putative owners.   

Wednesday brought A Pill That Promised Too Much about the settlement reached between the FDA and attorneys general with Bayer over allegedly deceptive advertising of the birth control pill, Yaz.  Those using our casebook this semester will be pleased to see that the settlement includes corrective advertising, something discussed in chapter one. 

Senseless Foreclosure Story: Bernanke Home

The Wall Street Journal reports today on the foreclosure sale of Chairman Bernanke's childhood home in South Carolina.  The couple that lost the home, a National Guard soldier and a Wal-Mart store assistant manager, bought it with a subprime mortgage at 10.1% from Option One, the now-defunct H&R Block subprime affiliate.  The $123,000 mortgage required monthly payments of $1,088.  After several job setbacks the couple fell behind and the servicer foreclosed, recently selling the home for $83,000.  If instead of foreclosing, the servicer had offered the couple a modified mortgage at say $90,000 at 5.5% interest, their payment would have been around $510, i.e. half of the prior payment.  The story doesn't provide all the details but this sounds like a loan that could have been saved, for the mutual benefit of the homeowners and the investors, who ended up with a loss of $40,000 plus interest and expenses.

Moral hazard and adverse selection redux

By Alan White

The Administration's foreclosure rescue plan, expected to be announced next week, will have to contend with the bad incentives it will create for mortgage lenders and servicers.  While much ink has been spilled about moral hazard for borrowers, the delay and uncertainty about foreclosure aid has mostly created moral hazard for servicers.  One of the reasons mortgages are not being restructured with principal reductions now is that servicers are waiting for the government bailout.  Why write down a mortgage to make it work, after all, if Uncle Sam will just write you a check to achieve the same goal?  Thus does the promise of subsidy create a hazard that servicers will continue offering unrealistic modifications that increase principal debt, or delay offering any modifications at all.  While there is welcome news this week that some banks are delaying foreclosures in anticipation of the program, the anticipation is also disincentivizing banks from doing the modifications that need to be done.

The second danger is that of adverse selection.  If Treasury will now be guaranteeing losses on modified loans, or subsidizing interest payments, rational servicers will choose the loans with the largest potential losses to nominate for the government program.  Any subsidy going to mortgage lenders and investors has to be very carefully designed to reward only successful and sustainable mortgage modifications.  At a minimum we need foreclosure reduction goals, monthly reports on progress towards the goals, and payments to banks and servicers tied directly to performance in reducing foreclosures and mortgage defaults.

Marotta-Wurgler Study finds Rolling Software License Agreements Are No More One-Sided Than Others

Florencia Marotta-Wurgler of NYU has written Are 'Pay Now, Terms Later' Contracts Worse for Buyers? Evidence from Software License Agreements, 38 J. Legal Studies -- (2009).  Here's the abstract:

The rise of commerce over the Internet and telephone has led to widespread use of "pay now, terms later" or "rolling" standard form contracts, in which buyers are not able to read the standard terms until after they have purchased the product. While some scholars and judges argue that rolling contracts do not merit special attention, others, including consumer advocates, are concerned that sellers take advantage of delayed disclosure by hiding especially unfavorable terms. I find no evidence for this view. In a large sample of software license agreements, I find that software publishers that use rolling contracts for their online sales offer do not offer more one-sided terms than those who make their licenses available prior to purchase. The results suggest that to the extent there are inefficiencies associated with standard form contracts, they are not made worse by delayed disclosure.

Update - January's Subprime Mortgage Modifications

By Alan White

Mortgage modifications in January continued converting risky subprime loans into risky modified loans.  Negative amortization and temporary rate reductions with future rate shock remain common in modifications.  Here is my summary of the January 25 investor reports (covering the 12/26/08 to 1/25/09 period).

Mortgage modifications increased in January 2009, but payment and balance increases still predominate.  There were 23,224 mortgage modifications in January in a database of 3.4 million subprime and alt-A mortgages, up from 20,391 in December and 19,112 in November.  Modifications increasing loan balances still dominate, with 89% of modifications involving some capitalization of arrears, and only 12% involving any write-offs of principal, interest or fees (See data tables).  Monthly payment reductions accounted for 49% of all modifications, essentially unchanged from November and December, while 13% of modifications did not change the payment and 38% increased the payment.

                  Investors lost $3.8 billion from foreclosure sales, compared with $73 million from write-downs in connection with mortgage modifications.  Looking only at the 12% of modified loans with write-offs, the average write-off was $26,000, or about 13.5% of the original loan amount.  For liquidated foreclosures, the average loss was $130,000, representing about 61% of the original loan amount.  There were more than ten times as many foreclosure liquidations as modifications with any write-off.  The ratio of foreclosure losses in dollars to modification write-downs was 52 to 1. (table 8). 

Journal of Consumer Education Now Available Online

The Journal of Consumer Education (JCE) is now available as a full-text electronic journal beginning with Volume 1 here.  As a sample of its issues, here is the table of contents for volume 24, dated 2007:

• Gift Card Practices and Policies: A Multiphase Analysis
  Elizabeth B. Carroll and Susan A. Reichelt

• Financial Education for Bankrupt Families: Attitudes and Needs      
  Deborah Thorne and Katherine Porter

• Measuring Financial Planning Personality Type Based on the Stages of Change
  Jean M. Lown

• Consumer Response to Corporate Scandal: The Case of Martha Stewart
  Sarah Roberto, Wendy Reiboldt, David Schult, and Lydia Sondhi

• Bringing an Emerging Consumer Issue to the Classroom: The Bisphenol-A (BPA) Controversy
  Russell N. James III and Diann C. Moorman

• The Impact of Financial Education Workshops for Teachers on Students' Economic Achievement
  John R. Swinton, Thomas W. De Berry, Benjamin Scafidi, and Howard C. Woodard

• Mandatory and Incentive-Based Adult Financial Education Programs: Opportunities for Consumer Educators
  Barbara O'Neill

New Javelin Report Finds 22% Increase in Identity Theft Victims

by Jeff Sovern

Javelin's latest identity fraud survey, released yesterday, contains, at best, mixed news on the progress made in preventing and detecting identity fraud.  Here's the first paragraph of the press release:

The 2009 Identity Fraud Survey Report – released today by Javelin Strategy & Research (www.javelinstrategy.com) – confirms that the number of identity fraud victims has increased 22 percent to 9.9 million adults in the United States, while the total annual fraud amount only increased slightly by seven percent to $48 billion over the past year. The report found detection and resolution efforts are working well—consumers and businesses are detecting and resolving fraud more quickly. As a result the mean consumer costs of identity fraud plummeted by 31 percent to $496 per incident in 2008. The study also found that women were 26 percent more likely to be victims of identity fraud than men this past year.

So what does this say about the effectiveness of the 2003 FACTA Act, which was aimed in large part at identity theft?  It's too soon to be certain, but so far FACTA does not seem like an adequate solution to the problem of identity theft.  There are at least three reasons it's hard to be certain. First, many of the regulations FACTA directed regulators to draft took years to produce and become effective, so it's probably too soon to evaluate them.  Second, the state of the economy is likely to have driven more people to take up identity theft, and that alone may be responsible for some of the increase.  And third, because some of the FACTA provisions increase the likelihood that identity theft victims will learn about the crime more quickly, it may be that some of the increase in consumers reporting their victimization is in part a function of earlier or increased awareness that identity theft has occurred (the Javelin study is based on telephone interviews).  So it's too soon to give up on FACTA, but so far FACTA is not looking promising as an identity theft preventative.  

Where FACTA seems likely to have succeeded is in reducing the mean losses caused by identity theft.  For example, the fraud alert provisions and rules requiring credit bureaus to provide consumers free annual credit reports--which may have helped consumers detect identity fraud more quickly--might have contributed to the reduction in mean losses.  But then again, perhaps some of the reduction in losses is attributable to greater public awareness of identiy theft.  Reducing the average loss caused by identity fraud is a worthy accomplishment, but less worthy than preventing the losses in the first place.  My own view remains that the best way to prevent identity theft from occurring is to impose liability on credit bureaus and furnishers of information for reporting errors, to give them an incentive to improve accuracy, as stated in The Jewel of Their Souls: Preventing Identity Theft Through Loss Allocation Rules, 64 University of Pittsburgh Law Review 343 (2003) (as I mentioned in a post on Sunday).