Consumer Law & Policy Blog

Paper on the Role of Securitization in Mortgage Renegotiation

Sumit Agarwal and Gene Amromin of the Fed, Itzhak Ben-David of the Ohio State University - Finance Department, Fisher College of Business, Souphala Chomsisengphet of the OCC, and Douglas D. Evanoff, also of the Fed, have written The Role of Securitization in Mortgage Renegotiation.  Here's the abstract:

We study the effects of securitization on post-default renegotiation of residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observes lender renegotiation actions and covers more than 60% of US mortgage market. Exploiting within-servicer variation in this data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rate by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans.

Paper on the History of Credit Reporting

Kenneth Lipartito of Florida International University has written The Narrative and the Algorithm: Genres of Credit Reporting from the Nineteenth Century to Today.  Here's the abstract:

Credit reporting is a contested process whereby parties with distinct interests (borrowers, lenders, and intermediaries) jointly construct the form, method, and style of credit assessment. In contrast to theories that argue information should grow more secure and credit relationships more transparent over time, the conflicted struggle over representation produces different styles or “genres” of credit evaluation that are compromises between the interests of the different parties. Thus, in the United States, trade credit reporting in the nineteenth century evolved an enduring narrative reporting style, incorporating heterogeneous forms of information not easily reducible to a single quantitative score. Lack of institutions for sharing information between creditors, legal precedents, and strong resistance among borrowers to overly intrusive surveillance made the narrative report the best means to handle the diverse business credit market. By contrast, lenders in the consumer credit market established information sharing capabilities, which were enhanced after World War II when banks developed the credit card and card verification systems. Fair credit laws in the 1960s and 70s actually reinforced the move to quantitative scoring based on information shared among creditors, eventually institutionalizing the FICO score as the prime method of consumer credit evaluation.

Prentiss Cox Paper on Property Assessed Clean Energy Financing Programs

Prentiss Cox of Minnesota was particularly impressive at last May's Teaching Consumer Law Conference in Houston.  Now he's written Keeping Pace?: The Case Against Property Assessed Clean Energy Financing Programs.  Here's the abstract:

Property Assessed Clean Energy (“PACE”) is a method of public financing for energy improvements through special assessments on local government property taxes. Interest in PACE exploded from its origination in 2008, with almost half the states rapidly enacted legislation enabling local governments to use their property collection power for this purpose. The growth in PACE is now suspended, and existing programs have been put on hold, in the face of opposition from the federal secondary mortgage market regulators. Governments and environmental advocates supporting PACE have initiated litigation against the federal regulators and are seeking passage of federal legislation to revive the programs. This Article argues that the theory underlying PACE is fundamentally flawed. PACE has been promoted as an alternative to traditional real estate financing that resolves the impediments to homeowners investing in alternative energy and energy efficiency. A careful analysis of these claims demonstrates that PACE in actual practice will operate similarly to most other types of real estate financing, and that the efforts to reconstruct PACE programs through litigation or legislation are misplaced. Instead, PACE programs should be radically restructured or should be considered a creative yet failed experiment offering valuable lessons for future residential energy investment programs.

New NCLC Practice Tools

The National Consumer Law Center has just released 16 new NCLC publications, is accepting web registrations for an upcoming Fair Debt conference, and will conduct a January 20 webinar on auto dealer insolvency's impact on consumers.   

1. Eight NCLC Treatise Updates: Automatic subscribers just received the Winter 2010 Updates. Others can order at www.nclc.org/updates

• Truth in Lending (7th ed. 2010) (2 volumes, 1498 pp.): new laws and rules create substantive requirements for mortgage loans and credit cards  
• Fair Credit Reporting (7th ed. 2010) (1138 pp.)
• Student Loan Law (4th ed. 2010) (694 pp.)
• Repossessions (7th ed. 2010) (860 pp.)
• Consumer Law Pleadings (Website and 2010 Index Guide) (656 pp. guide)
• Consumer Bankruptcy Law and Practice 2010 Supplement (394 pp.
• Unfair and Deceptive Acts and Practices 2010 Supplement (350 pp.)
• Consumer Arbitration Agreements 2010 Supplement (328 pp.)

  2. Eight Recent NCLC REPORTS Issues (contact publications@nclc.org for back issues or to subscribe):

• Consumer Credit & Usury Ed.: Nov./Dec.: FRB bans yield spread premiums, steering; remedies for TIL credit card violations; Sept/Oct: Mortgage discrimination class litigation; NCUA raises usury cap for small loans; municipalities regulate pay day lenders
• Deceptive Practices & Warranties Ed. Nov./Dec.: Importance of little-known federal record retention requirements; selecting and using a forensic document examiner Sept./Oct.: Implications of FTC's new Mortgage Assistance Relief Services Rule on consumer attorneys; 10 things every attorney should know about CROA
•  Bankruptcy & Foreclosures Ed.: Nov./Dec.: State law mandates of loss mitigation as foreclosure pre-condition; Social Security benefits excluded from projected disposable income in ch. 13 Sept/Oct.: Robosigning just tip of the iceberg; testimony in bankruptcy case signals trouble for mortgage industry
• Debt Collection & Repo Ed: Nov./Dec.: Important new Circuit Court of Appeals FDCPA decisions; courts dismissing debt buyer collection suits Sept./Oct: FDCPA requirements for mortgage loss mitigation process; new Senate and FTC proposals; new FDCPA cases

3. The Fair Debt Collection Practices Conference is in Seattle, March 3-4, 2011. Register online at: www.nclc.org/conferences-training/fair-debt-collection-practices-conference.html. Get up to speed on your first debt collection abuse cases and proceed to more in-depth sessions on developing fair debt collection cases and a fair debt collection law practice. Faculty includes the top Fair Debt Collections Lawyers from across the country. CLE credit.

4. NCLC Webinar Series has resumed: January 20 at 2PM: Dealers Going Out of Business, Leaving Consumers Out of Luck. Contact jhiemenz@nclc.org for this and future webinars. Go to www.nclc.org/conferences-training/webinars.html for FREE downloads of past webinars.

Serwin Paper on History of FTC Privacy Enforcement

Andrew B. Serwin of Foley & Lardner has written The Federal Trade Commission and Privacy: Defining Enforcement and Encouraging the Adoption of Best Practices.  Here's the abstract:

This article examines the history and path of privacy enforcement by the Federal Trade Commission, as well as the FTC's recently issued "Protecting Consumer Privacy in an Era of Rapid Change: A proposed Framework for Businesses and Policymakers", in which the FTC suggested the adoption of best practices, including a "privacy by design" framework. The article examines the history of Section 5 jurisdiction, the privacy enforcement cases by the FTC, the new proposed framework, and proposes that the FTC take the proposed framework and implement it in a way that includes a focus on the sensitivity of data, provides a "safe harbor" from enforcement for businesses that choose to adopt the framework, and link the framework in a meaningful way to existing EU processes, such as Binding Corporate Rules. By combining these elements, the FTC can achieve meaningful and focused self-regulation and provide appropriate protection to consumers, while giving business an incentive to adopt best-practices, and also increase the level of international cooperation regarding privacy.

Does Credit Scoring Produce a Disparate Impact?

That's the title of a paper by Robert B. Avery, Kenneth P. Brevoort , and Glenn B. Canner, all of the Fed. They answer the question in the negative as to race.  Here's the abstract:

The widespread use of credit scoring in the underwriting and pricing of mortgage and consumer credit has raised concerns that the use of these scores may unfairly disadvantage minority populations. A specific concern has been that the independent variables that comprise these models may have a disparate impact on these demographic groups. By "disparate impact" we mean that a variable's predictive power might arise not from its ability to predict future performance within any demographic group, but rather from acting as a surrogate for group membership. Using a unique source of data that combines a nationally representative sample of credit bureau records with demographic information from the Social Security Administration and a demographic information company, we examine the extent to which credit history scores may have such a disparate impact. Our examination yields no evidence of disparate impact by race (or ethnicity) or gender. However, we do find evidence of limited disparate impact by age, in which the use of variables related to an individual's credit history appear to lower the credit scores of older individuals and increase them for the young.

But does everyone in the government agree?  The EEOC recently sued Kaplan, the test prep service, for using credit reports in hiring, which, the EEOC claims, produces a disparate impact on African-Americans.  True, credit scores and credit histories are different, but the scores are based at least in part on the histories.

Ray Brescia Paper on the Robo-Sign Scandal and UDAP Statutes

Raymond H. Brescia of Albany has written Leverage: State Enforcement Actions in the Wake of the Robo-Sign Scandal.  Here's the abstract:

In the fall of 2010, in one of the largest scandals to ever hit the American court system, information gathered from lawsuits across the country revealed that tens of thousands of foreclosure filings were likely fraudulent - if not outright criminal. These revelations sparked a nation-wide investigation by all 50 state attorneys general to assess not only the extent of the scandal and its potential impacts but also potential legal and policy responses to such behavior. One of the tools at the state attorneys general’s disposal that might rein in this behavior includes each state's Unfair and Deceptive Acts and Practices (UDAP) laws. Such laws typically prohibit "unfair" and "deceptive" practices and often give consumers, as well as state attorneys general, the ability to bring affirmative litigation to rein in practices that violate their terms. UDAP laws serve a critical consumer protection function by filling in gaps in the law where other, more targeted statutes might not cover practices that have a harmful impact on consumers. Since their inception, UDAP laws have been used to rein in abusive practices in such areas as used car sales, telemarketing and even the sale of tobacco products. This paper explores the availability of UDAP laws and the remedies they provide to rein in the range of practices revealed in the so-called "robo-sign scandal." It concludes that such practices - the false affidavits, reckless claims and improper notarizations - all violate the essence of most state UDAP laws; accordingly, the remedies available under such laws may be wielded by state attorneys general to halt abusive foreclosure practices throughout the nation. Such remedies include civil penalties, actual and punitive damages, attorney's fees and injunctions. What's more, UDAP actions in light of robo-sign abuses could help chart a path towards a more robust mortgage modification regime, one that would result in principal reduction, which is the clearest path out of the current crisis.

Marotta-Wurlgler Asks if Disclosure Matters

Florencia Marotta-Wurgler of NYU has written Does Disclosure Matter?  Here's the abstract:

Disclosure has long been the preferred regulatory approach to curtail one-sided standard form contract terms. Examples include the Truth in Lending Act, the new "ALI Principles of the Law of Software Contracts," and many other proposals which await Congressional approval. The appeal of disclosure is that it is relatively low cost, improves consumer decision-making and preserves consumer choice. For disclosure to be effective, however, it must increase readership and understanding of contracts to a meaningful rate, and, conditional on readership, contract content must be relevant to purchase decisions. This paper tests both these necessary conditions. We follow the clickstream of 47,399 households to 81 Internet software retailers to measure contract readership as a function of disclosure. We find that making contracts more prominently available does not increase readership in any significant way. In addition, the purchasing behavior of those few consumers who read contracts is unaffected by the one-sidedness of their terms. The results suggest that mandating disclosure online should not on its own be expected to have large effects on contract content.

Highlights from Mobile Payments: Global Markets, Empowered Consumers and New Rules

by Colin Hector & Liz Eraker

Last month,the University of Washington, School of Law and the Samuelson Law, Technology & Public Policy Clinic at U.C. Berkeley Law School convened representatives from regulatory, academic, industry, and public interest communities for a day-long conference exploring the growth of mobile payment, or m-payment, systems. Experts discussed the promises and pitfalls of mobile payment systems in developed and developing markets, and evaluated various regulatory approaches to protecting consumers while ensuring continued innovation in the industry.

Although the conference covered a wide spectrum of topics, three basic questions provided a foundation for much of the discussion. First, to what extent will mobile payment systems develop as an independent payment system? Second, what are the consumer expectations concerning the security and integrity of m-payment systems? Finally, what regulatory models appropriately reflect these expectations while ensuring the continued development of this burgeoning technology?

Detailed highlights of the participants' discussion of these questions after the break.

Continue reading "Highlights from Mobile Payments: Global Markets, Empowered Consumers and New Rules"

Paper on Capping the Costs of Consumer Arbitration

Michelle Eviston and Richard A. Bales, the latter of Northern Kentucky University - Salmon P. Chase College of Law, have written Capping the Costs of Consumer and Employment Arbitration, forthcoming in the University of Toledo Law Review.  Here's the abstract:

Arbitration agreements requiring arbitration but imposing costs of thousands of dollars can effectively make it impossible for consumers and employees to bring their disputes in any forum. The Supreme Court has stated that high costs can make an arbitration agreement unenforceable, but has not articulated clear standards. Lower courts are split two ways on the issue: some courts have adopted a per se approach and others a case-by-case approach. This article argues that the Federal Arbitration Act should be amended to take a third approach: arbitration fees paid by consumers or employees should be limited to what consumers or employees would pay if they litigated their claim.