Consumer Law & Policy Blog

A Lowest Common Denominator Approach to Insurance Regulation?

Check out this interesting and scary post by Elizabeth Warren over at Credit Slips.  Here are two key paragraphs to whet your appetite:

The effective repeal of usury laws in the US was accomplished in the quietest possible way:  In 1978, the Supreme Court interpreted an century-old banking law to determine that federally-chartered banks to lend to people in other states so long as they complied with their home state's usury rate.  It wasn't long until the Chairman of Citibank paid a call on the governor of South Dakota, who rammed through a new, high ceiling on interest rates.  Now Citibank was free to charge whatever it wanted--and states lost the right to protect their own citizens.

The usury story is old and famliar to commercial law types, but it is taking on a new importance.  It seems that John McCain wants to borrow the idea for use with insurance regulation.  According to a terrific piece by Robert Gordon in Slate, Senator McCain thinks federal law should be changed so that insurance companies in one state (say, South Dakota) could sell their products in all the other states, even if those insurance products don't meet the local standards for care.  In other words, just as exporting interest rates became a way to deregulate credit cards, exporting health insurance licensing can be a way to deregulate health insurance.

The effective repeal of usury laws in the US was accomplished in the quietest possible way:  In 1978, the Supreme Court interpreted an century-old banking law to determine that federally-chartered banks to lend to people in other states so long as they complied with their home state's usury rate.  It wasn't long until the Chairman of Citibank paid a call on the governor of South Dakota, who rammed through a new, high ceiling on interest rates.  Now Citibank was free to charge whatever it wanted--and states lost the right to protect their own citizens.

The usury story is old and famliar to commercial law types, but it is taking on a new importance.  It seems that John McCain wants to borrow the idea for use with insurance regulation.  According to a terrific piece by Robert Gordon in Slate, Senator McCain thinks federal law should be changed so that insurance companies in one state (say, South Dakota) could sell their products in all the other states, even if those insurance products don't meet the local standards for care.  In other words, just as exporting interest rates became a way to deregulate credit cards, exporting health insurance licensing can be a way to deregulate health insurance.

New Poll: Americans Say "No Thanks" To Binding Arbitration

A new national opinion poll shows widespread disapproval of binding arbitration provisions in consumer contracts and overwhelming support for the Arbitration Fairness Act now pending in Congress.

By five to three, Americans said they disapprove rather than approve of consumer contracts with binding arbitration provisions. When consumers who are initially supportive learn that arbitration means that they give up their right to take the case to court and that the company picks the arbitrator, two in three of the initially supportive consumers also disapprove. When the data is combined, a whopping 81percent of Americans express disapproval of mandatory binding arbitration.

The poll also shows broad support for the proposed Arbitration Fairness Act.  Overall, 64 percent of voters favor the legislation, compared with only 26 percent who oppose it.  Perhaps surprisingly, the poll reveals no statistically significant difference in support among Democrats and Republicans. A detailed memo by the pollsters is provided below the jump.  As the memo notes, this poll casts serious doubt on the contrary results reported in a survey recently released by the Chamber of Commerce's Institute for Legal Reform.

Update on Adam Levitin Paper

On Friday, we blogged about Adam Levitin's paper here.  Professor Levitin has posted to SSRN a significantly revised version of the piece, titled "A Critique of the American Bankers Association's Study on Credit Card Regulation."

Adam Levitin Responds to ABA Study on Regulation of Credit Cards

Adam Levitin of Georgetown has written "All But Accurate: A Critique of the American Bankers Association's Study on Credit Card Regulation." Here's the abstract:

This review article takes issue with three of the main assertions of the American Bankers Association's Study on Credit Card Regulation.

First, this article addresses the ABA Study's claim that credit card pricing is risk-based, benefiting creditworthy consumers with lower costs of credit and subprime consumers with greater access to credit. This article demonstrates that credit card pricing is only marginally risk-based and that consumer benefits are illusory. To the extent that credit card interest rates have declined over the past two decades, it is attributable to issuers' decreased cost of funds. Increased subprime access to credit cards relates to issuers' ability to pass off risk through securitization, and increased credit card access is hardly a boon absent ability to repay debts.

Second, this article shows that contrary to the ABA Study's claims, credit card debt now supplements, rather than replaces other forms of consumer debt. And third, the article takes issue with the ABA Study's assertion that there is no basis for credit card regulation. Instead, seven of the eight standard independent reasons for government regulation apply squarely to credit cards, making regulatory intervention in the credit card market a question of how, not whether.

Times Pieces on Foreclosure Crisis, Predatory Lending, and Wachovia Telemarketing Case

Yesterday the Times published an editorial on the Bush administration response to the foreclosure crisis, with the noteworthy headline, "Saying No to Everything."  An excerpt:

Even before the House passed a new plan last week to prevent foreclosures, President Bush threatened to veto the bill, calling it “overly burdensome.” The bill is not burdensome enough.

* * *

When Mr. Bush hasn’t been busy saying no to worthy efforts, he has been endorsing Orwellian-named programs that have failed to address the problem effectively. Hope Now, the mortgage industry alliance that pledged a big effort five months ago to modify subprime loans, has barely made a dent. Project Lifeline, announced last February, has yet to release any results. The Times reported last month that another program much touted by Mr. Bush, FHA Secure, has helped fewer than 2,000 homeowners at risk of foreclosure.

The Times has also published a number of other articles in recent weeks that we haven't yet linked to on the blog.  For example, on May 6, the Times reported on a speech by Fed Chair Bernanke in an article headlined "Bernanke Urges Flexibility in Mortgage Regulation."  Some excerpts:

The variety of factors leading to foreclosures makes it more difficult for mortgage lenders to help ailing homeowners, Mr. Bernanke said, noting that “lenders and services will have to develop new and flexible strategies to deal with this issue.”

In response, Mr. Bernanke recommended that government agencies take a more innovative approach to ensure that only qualified buyers take out loans. He urged Congress to provide the Federal Housing Administration, which insures mortgage loans, with “greater latitude” in setting appropriate standards for owners seeking to refinance their mortgages, and to adjust interest rates according to the level of risk of the applicants.

In "Countrywide Admit Errors at Hearing," published May 7, Countrywide acknowledged that its loan officers made mistakes "from time to time" but disputed other charges.  Countrywide promised to hire an outside auditor to review its actions.  Professor Katherine Porter of Iowa testifed:

that mortgage companies and servicers had improperly sought payments without fully disclosing or documenting fees.

In some cases, she said, companies have sought to foreclose on homes even after borrowers discharged their debts through the Chapter 13 bankruptcy process, which allows debtors to keep their homes while working out payment plans.

“The upsetting reality is that the current bankruptcy system routinely forces borrowers to pay bloated amounts and permits mortgage servicers to misbehave without serious consequence,” she told the Senate Judiciary subcommittee on administration oversight and the courts.

Federal law preempts state predatory lending statutes as to federal institutions, but what about when state institutions lend in other states?  Here is an article about a pact New York, New Jersey, and Pennsylvania signed last month providing that state institutions are subject to the predatory lending statutes of their home states when lending in one of the other states that is a party to the compact. 

We  previously blogged here about the case involving Wachovia's allegedly allowing telemarketers to use its accounts to steal millions from depositors. Wachovia and the OCC have now settled the case.  The report is here; Wachovia, while neither admitting nor denying wrongdoing, will pay as much as $144 million.  A case brought by alleged victims of the fraud is still pending.  The settlement's terms have drawn criticism, as reflected in the following excerpt:

Some critics of the settlement’s structure — including Representative Edward J. Markey, a Massachusetts Democrat and a senior member of the House Energy and Commerce Committee — complained that the agreement contained no guarantee that victims would be paid.

Under the terms of the settlement, victims will not automatically receive compensation from Wachovia. Instead, they will have to submit claims through a complicated bureaucracy. Because many of the victims are elderly or poorly educated, it is likely many of them will stymied by these obstacles, Mr. Markey said.

Times Articles on Mortgage Plans

Today's Times reports, in "House Panel Approves Bill to Assist Borrowers," that the House Financial Services Committee, "pushed forward on Thursday with an aggressive effort to help troubled homeowners, approving legislation that would make up to $300 billion in federally insured loans available to refinance the mortgages of borrowers in danger of foreclosure."  The Times summarized the bill as follows:

The Democrats’ legislation seeks to help homeowners by requiring lenders to reduce the principal balances for borrowers at risk of default. The bad loans, typically with high adjustable rates, would be refinanced into more affordable 30-year fixed-rate loans insured by the F.H.A.

The new loans would be limited to no more than 90 percent of a property’s value, based on an updated appraisal. The government would retain a stake in any future sale of the property, worth 3 percent of the initial loan balance or 50 percent of net profit from a sale, whichever is greater.

Borrowers would have to demonstrate the ability to repay the new loan, and if they default, they will forfeit the property. Democrats say the plan could help as many as 1.5 million homeowners.

Yesterday's Times reported here on a proposal by Sheila C. Bair, the head of the FDIC "to permit the Treasury Department to lend directly to as many as a million homeowners to help ease the housing crisis."  The paper observes that the "Bush administration and Congress reacted coolly to" the proposal.  Meanwhile, a report on Wednesday, "Who is Getting the Mortgage Aid?," on the FHA Secure program, stated that "Fewer than 2,000 homeowners at risk of foreclosure have been helped by a Federal Housing Administration program that President Bush promised would help homeowners who had fallen behind on their mortgage payments, federal housing statistics show."  And earlier this week, on Monday, the lead article in the Times, titled "Lenders Fight Stricter Rules on Mortgages," reported on opposition to the Fed's proposed subprime mortgage lending regulations.  Some excerpts:

* * * One common industry criticism is that at a time of tight credit, tighter rules could make many mortgages more expensive by creating more paperwork and potentially exposing lenders to more lawsuits.

To the chagrin of consumer groups that have complained that the proposed rules are not strong enough, the industry’s criticism has already prompted the Fed to consider narrowing the scope of the plan so it applies to fewer loans.

* * *

Earlier this month, as the comment period was about to close, the Fed was deluged with more than 5,000 comments, mostly from lenders who said the proposals could affect loans that have not presented problems. Some bankers and brokers also said the rules would discourage them from lending to some creditworthy borrowers.

Rent-a-Center reconsiders hunger aid

Rent-a-Center, the publicly-traded rent to own chain, is having some second thoughts about its charitable donations to an Ohio food bank. Second Harvest signed on to the Ohio Coalition for Responsible Lending, which favors stricter regulation of credit, including payday loans and rent-to-own sales. The organization's director hastened to withdraw from the coalition. The credit industry continues to oppose all forms of regulation, no matter what.

New Consumer Caucus; Credit Card Hearing

Reps. Carolyn Maloney (D-NY) and Keith Ellison (D-MN) launched a new Consumer Justice Caucus on Wednesday. [Weak economy may add appeal to fledgling consumer caucus, The Hill]

Senator Carl Levin (D-MI) has an interesting blog post at Talkingpointsmemo.com about his testimony yesterday on credit card abuses before the House of Representatives. We previewed that hearing in a previous post. You can read Senator Levin's testimony and that of other witnesses at the hearing here.

Hearing on Credit Card Consumer Protections

The Financial Institutions and Consumer Credit Subcommittee (Chairman Maloney, D-N.Y.) of the House Financial Services Committee is scheduled to hold a hearing tomorrow titled "The Credit Cardholders' Bill of Rights: Providing New Protections for Consumers.  The hearing is on HR 5244, described as a bill to amend the Truth in Lending Act to establish fair and transparent practices relating to the extension of credit under an open end consumer credit plan, and for other purposes.  The witnesses scheduled to appear include: Sen. Ron Wyden, D-Ore.; Sen. Carl Levin, D-Mich; credit card abuse victims Steven Autrey, Susan Wones, Marvin Weatherspoon, Stephen M. Strachan; Sandra Braunstein, director of the Federal Reserve’s Consumer Affairs Division; Marty Gruenberg, the FDIC’s deputy director; Julie Williams, the OCC’s deputy director and general counsel; John Bowman, the OTS’s general counsel; John Carey, Citi Cards’s chief administrative officer and executive vice president, Larry Sharnak, American Express’s executive vice president and general manager; Carlos Minetti, Discover Financial Services’s executive vice president; Travis B. Plunkett Consumer Federation of America’s legislative director; Linda Sherry of Consumer Action; and Ed Mierzwinski of U.S. Public Interest Research Group. 

Fed's Mortgage Regulations

By Alan White

Greetings from ORD! Yes, I'm on American, trying to get to Dallas. TV cameras are everywhere, and I have a bit of time on my hands. HT to the Trib for the photo of our rebooking line.

The comment period for the Fed's proposed regulation on unfair and deceptive practices in the mortgage market closed on Tuesday. So far 1,062 comments are logged, and there are more coming (including mine.) Congress is unlikely to move mortgage reform legislation in this election year, particularly legislation that the President would sign. The Fed's new rules, due to be finalized some time this year, will be the first serious effort to impose some order in the lately deregulated mortgage market. How much of the problem will they solve?