Ideas about dealing with student-loan debt

We've posted here many times about the massive and growing student-loan debt in this country. Two new pieces might interest our readers.

First, Maine is so interested in getting educated people to move to Maine that it will refund most (and often all) student loan repayments through a state tax credit. The program applies to all Maine workers who graduated college in 2015 or later, even people who move to Maine after having gone to school outside the state. (The program originally applied only to Mainers who received their degrees from a Maine school.) This article explains the program in general terms. Maine's revenue department provides greater detail here.

Second, regarding law-school debt in particular, take a look at Curing the Cost Disease: Legal Education, Legal Services, and the Role of Income-Contingent Loans by law prof John Brooks. Here is the abstract:

The costs of both legal education and legal services have been rising steadily for decades. This is because they share a common root: the constant above-inflation growth in the cost of labor-intensive goods and services known as the “cost disease.” The cost disease story roots cost growth not in market failure or bureaucratic waste, but in natural, even healthy, economic forces—productivity and wage growth. Because the source of this cost growth is productivity growth, the nature of the cost disease is such that an economy as a whole can afford these rising costs. But in a world of deep income inequality, the costs must be socialized, to be shared collectively. In this article for a symposium on financing legal education, I argue that the Income-Driven Repayment program for student loans is a mechanism for partially socializing the costs of both legal education and legal services, while still maintaining the vital independence of both law schools and the bar. I also take a critical look at the Public Service Loan Forgiveness program, counter-intuitively arguing that it has serious flaws in its goal of serving the broader public interest.

DiLorenzo FinTech Article

by Jeff Sovern

My colleague, Vincent DiLorenzo, has written Fintech Lending: A Study of Expectations Versus Market Outcomes, Forthcoming in Review of Banking & Financial Law. Here is the abstract:

This paper documents the expectations for the fintech lending industry, which has emerged in this decade, and compares such expectations to market outcomes. It presents an evidence based analysis for policy making decisions. Part one of the paper explores expectations - possible benefits and risks of fintech lending - through large-scale surveys and interviews of industry, consumer and government stakeholders. Part two of the paper examines market outcomes – benefits and risks that have been realized or failed to materialize, as documented by studies of substantial data sets of various types of fintech loans. This includes examination of expanded access to credit, lower costs, predatory terms, fair lending risks, and lack of transparency. After comparing expectations and outcomes, the paper explores policy implications, particularly the implications for chartering of special purpose national banks by the U.S. Comptroller of the Currency.

Did Glass-Steagall's repeal matter?

That's the topic of as Glass-Steagall's Demise Inevitable and Unimportant? by law prof Arthur Wilmarth. Here's the abstract:

The demise of the Glass-Steagall Act was the result of affirmative policy decisions by federal regulators and Congress, and it was not the inevitable byproduct of market forces. Economic disruptions and financial innovations posed serious challenges to the viability of Glass-Steagall, beginning in the 1970s. However, federal regulators and Congress could have defended Glass-Steagall and made necessary adjustments to preserve its effectiveness. Instead, they supported efforts by large financial institutions to break down Glass-Steagall’s structural barriers, which separated commercial banks from securities firms and insurance companies.

Federal agencies opened a number of loopholes in Glass-Steagall’s barriers during the 1980s and 1990s. However, those loopholes were subject to many restrictions and did not allow banks to establish full-scale affiliations with securities firms and insurance companies. The largest banks needed two major pieces of legislation to achieve their longstanding goal of becoming full-service universal banks. First, big banks and their trade associations persuaded Congress to pass the Gramm-Leach-Bliley Act of 1999 (GLBA). GLBA authorized the creation of financial holding companies that could own banking, securities, and insurance subsidiaries. Second, the financial industry convinced Congress to adopt the Commodity Futures Modernization Act of 2000 (CFMA). CFMA insulated over-the-counter (OTC) derivatives from substantive regulation under both federal and state laws.

The campaigns that led to the enactment of GLBA and CFMA lasted two decades and cost hundreds of millions of dollars. The largest financial institutions and their trade associations would not have pursued those campaigns unless they believed that both statutes would have great importance.

GLBA and CFMA proved to be highly consequential laws. They enabled banking organizations to become much larger and more complex and to offer a far broader range of financial products. They transformed the U.S. financial system from a decentralized system of independent financial sectors into a highly consolidated industry dominated by a small group of giant financial conglomerates. GLBA and CFMA promoted explosive growth in shadow banking, securitization, and OTC derivatives between 2000 and 2007. All three of those markets played key roles in fueling the toxic credit boom and unstable financial conditions that led to the financial crisis of 2007-09.

CFPB expected to cut payday repayment tests in revised rule

Bloomberg reports: 

Payday lenders could escape tighter regulation as the Trump-led Consumer Financial Protection bureau considers eliminating a requirement that they first assess borrowers’ ability to repay loans.

The CFPB is expected to either propose eliminating the rule’s strict ability to repay standards or delaying their effective date so that they can undergo further review, according to multiple sources with knowledge of the rulemaking process.

The full article is here.

Rule to help federal student loan borrowers finally takes effect

We’ve covered before the Department of Education’s recent attempt to gut a rule adopted under the Obama administration to help student loan borrowers and rein in for-profit colleges. The regulation, commonly referred to as the borrower defense rule, was supposed to take effect on July 1, 2017. The Department issued a series of delays, which a D.C. federal court in September held were unlawful.

This week, that same judge rebuffed an industry request for a preliminary injunction against the rule, paving the way for the rule to take effect on Tuesday. Although the industry challenge remains pending, the agency now has a legal obligation to implement the rule, and because of technical requirements in the Higher Education Act, any replacement rule adopted by Secretary DeVos could not possibly take effect before July 2020.

That means borrowers around the country could benefit from the rule for nearly two years at least. The rule cuts off federal funding to schools that use forced arbitration and class-action waivers with their students. It also adopts a formal process for group-based loan discharges for students who attended predatory schools, and mandates automatic loan discharges for students who attend schools that close while they are enrolled and who do not reenroll in a covered program in the following three years.

The judge’s order is here, and coverage by the Associated Press is here.

Issacharoff & Marotta-Wurgler Paper on Trends Leading to Less State Court Caselaw on Electronic and Shrinkwrap Contracts

Samuel Issacharoff and Florencia Marotta-Wurgler, both of NYU, have written The Hollowed Out Common Law. Here's the abstract:

The electronic marketplace poses novel issues for contract law. Contracts created through browsewrap, clickwrap, and shrinkwrap (contracts whose embedded terms are only available after purchase) poorly fit doctrines that emerged from face-to-face offer and acceptance, the mutual execution of a common set of documents, or the rituals of mass market transactions involving physical fine print. Not surprisingly, these contracts of the new electronic marketplace require doctrinal elaboration.

Our Article asks not about the specific resolution of new doctrinal challenges, but about how the common law of contracts will be elaborated. Specifically, the Article begins with empirical observations about the domain of all electronic and shrinkwrap contract cases and makes four critical findings.

First, we document two shifts: One arises from a steady decline in the number of cases adjudicated in state court relative to federal courts, which by 2015 adjudicate the vast majority of cases. The other stems from a rise in class actions, which is intimately tied to the migration of cases to federal court. The result is that today the vast majority of cases are class actions brought in federal court. The increase in class actions is not surprising given the relatively small stakes of most transactions and the little incentive that creates for individual consumer litigation. The increased dominance of the federal forum is in part likely a reflection of the federalization of class action law under the Class Action Fairness Act (CAFA).

Second, the consequence of the dominance of the federal forum is that the common law is being elaborated in federal court in suits arising under diversity jurisdiction. In turn, those federal courts are largely bereft of any state law moorings as they develop the common law of the electronic marketplace. Erie Railroad v. Tompkins notwithstanding, the common law is driven by federal court decisions, building incrementally on each other rather than state law.

Third, the development of common law in federal court means that there is no apex court that can define conclusively the law of any jurisdiction. Diversity jurisdiction allows federal courts to predict how they believe state common law would develop, but binds no state courts in the affected jurisdiction, and does not even bind federal courts in the same Circuit putatively applying the law of another state. Rather than the law resolving hierarchically, we identify a “tournament effect” in which the law settles on one or a few influential decisions, regardless of the state law that the case may have arisen under. Finally, we conjecture that the use of contractual clauses compelling arbitration and forbidding claim aggregation may have affected the number of cases being adjudicated in court and, consequently, depressed the development of publicly-available law in this area.

Poll finds consumer support for financial regulation

The Philadelphia Tribune report on a new poll that, a decade after the financial crisis, finds that consumers still support financial regulation and related enforcement. Moreover, on payday and car-title lending, "consumer scorn has grown even stronger over the past year for these small-dollar, debt-trap loans that come with triple-digit interest rates."

The full article is here.

CFPB working on regulation to define “abusive” practices

The Dodd-Frank Act prohibits “unfair, deceptive, or abusive” acts and practices by the financial companies regulated under the Act, and gives the Consumer Financial Protection Bureau authority to enforce the prohibition. The Act defines "abusive" as an act or practice that:

(1) Materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) Takes unreasonable advantage of –

(A) a consumer’s lack of understanding of the material risks, costs, or conditions of the product or service;
(B) a consumer’s inability to protect his or her interests in selecting or using a consumer  financial product or service; or
(C) a consumer’s reasonable reliance on a covered person to act in his or her interests.

The Wall Street Journal reports that, CFPB acting director Mick Mulvaney, speaking at a recent conference of mortgage bankers, said that actions that constitute “unfair” and “deceptive” are well established, but that the meaning of “abusive” is not as clear. Therefore, he said, the CFPB is working on a regulation to define “abusive.”

The article continues: “Addressing the bureau’s enforcement approach is the latest step by Mr. Mulvaney to introduce a more industry-friendly approach to policing financial companies.”

The full article is here. (Subscription may be required.)

The CFPB's 2013 bulletin explaining the prohibition against unfair, deceptive, or abusive acts in the context of debt collection is here.

Survey Finds About Half of Surveyed Metastatic Breast Cancer Patients Pursued by Debt Collectors

by Jeff Sovern

A number of sources have reported on a survey of more than one thousand metastatic breast cancer patients presented recently at an American Society of Clinical Oncology (ASCO) symposium that found that debt collectors had contacted about half about cancer care bills. HCP said that 49% had heard from debt collectors while AccountRecovery.net put the percentage at 54. It's unclear how representative the sample is; according to HSN: 

All of the patients who participated were members of the Metastatic Breast Cancer Network advocacy organization. They responded to an email invitation to take the 20-minute online survey. Respondents received a $10 Amazon gift card.

The figures probably say more about the state of health insurance in this country than debt collection.  Nearly all of those surveyed who lacked insurance said they had foregone medical care because of cost.

NerdWallet Report on Disturbing Gaps in CFPB Public Complaint Database

Here, by Brad Wolverton & Alex Richards. I don't want to quote too much, so here is an incomplete excerpt:

The federal watchdog agency created to protect consumers is not regulating two of the country’s fastest-growing financial institutions despite receiving voluminous complaints about them, NerdWallet has found.

Escaping scrutiny are Green Dot Corp. — which partners with Walmart, Apple, Intuit and more than 100,000 retailers — and Credit One Bank, which issues NASCAR credit cards.

A NerdWallet investigation found that many other businesses also are not subject to oversight by the Consumer Financial Protection Bureau despite being the subjects of many complaints.

The lack of supervision means that consumer grievances about the companies do not appear on a public complaint database the bureau set up to help guide consumer decisions.

The absence prevents the CFPB from defending consumers in tens of thousands of disputes and gives the companies an advantage over competitors that are subject to bureau oversight. It also falsely assures consumers about the integrity and service the companies provide.

* * * 

[T]hose disputes are kept on what amounts to a shadow list of complaints that aren’t on the public portal. NerdWallet obtained the list through a Freedom of Information Act request to the government. * * * 

California-based Green Dot Corp. has at least 1,580 complaints across its products. Out of the roughly 5,000 businesses that appear on the public portal, this would place it among the top 2% of companies consumers have complained about the most, NerdWallet’s analysis found.

* * * 

But only five complaints that mention Green Dot show up on the CFPB’s public complaint portal, all filed under different companies’ names.