Consumer Law & Policy Blog

A Nudge to Make Timely Credit Card Payments

One of the things I love about the new amendments to Regulation Z is that they require that credit card monthly statements have a "Late Payment Warning" next to the payment due date.  The Late Payment Warning advises consumers that failure to pay on time may result in imposition of a late fee and cause an increase in their interest rate.  Proximity to the due date appears likely to increase its effectiveness.  You can see how it looks here.  This seems like the kind of libertarian paternalism urged in Richard H. Thaler and Cass R. Sunstein's book Nudge (about which we blogged here)--a rule that might change behavior for the better but still preserves consumer choice.  It will be interesting to see if this nudge reduces late credit card payments after it is implemented.  I gather that this nudge, together with another, the nearby "Minimum Payment Warning," which gives consumers information about how long it will take to pay off balances if they make only the minimum payments, are products of the 2005 bankruptcy legislation.

Times Articles on Credit and Other Matters

by Jeff Sovern

I have accumulated a huge pile of articles from the New York Times on consumer issues, so here goes an attempt to shrink it somewhat.  Today's Times includes an editorial, A Voice for the Consumer, urging the Obama Administration to reinstate the White House Office of Consumer Affairs.  Today's issue also had an article, The Senator Behind the Window Sticker, on the fiftieth anniversary of the law mandating "Monroney Stickers," the stickers on new car windows.  

Yesterday's edition brought Willing to Deal about the willingness of credit card companies to modify credit card debts, in the interest of collecting something rather than nothing.  An excerpt:

Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.

So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.

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Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

Last Wednesday, December 31, the Times noted that Consumers Union [Was] to Buy Gawker Blog Consumerist.  And going back to last Sunday, December 28, the Times published Gretchen Morgenson's column, A Paper Trail That Often Leads Nowhere, about problems in obtaining mortgage loan modifications and proving that payments have been made.  The article described a Wells Fargo case in which Wells Fargo denied the borrowers' claim that they had made their payments and demanded proof beyond what the borrowers could supply.  An excerpt:

In his opinion, [Judge Sidney B. Brooks] fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers.

The only institution that could have the original checks is Wells Fargo, he concluded.

“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”

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“This dispute might portend a widespread abuse of collection practices or creditor overreaching,” he wrote, “demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices.”

The day before Christmas, the Times printed Rules Set for Mortgage Loan Appraisals, about the new rules agreed to by Fannie and Freddie.  And, switching gears, that same day included an editorial, More Privacy Online, calling Yahoo's decision not to retain personally-identifiable search information for more than 90 days "a welcome step."

Collective Bargaining with Card Issuers?

by Alan White

Happy New Year to all, and may I say, good riddance to 2008 (economically speaking that is).  Yesterday's New York Times has a good story about the relationships between credit card issuers and universities.  Banks offer kickbacks to colleges who sign students up for credit cards, and also have arrangements to link student ID cards with debit card products.  While one could simply express Puritan outrage at the academy's complicity in the consumer debt crisis, it occurs to me that there is an opportunity here.  Those of us associated with higher education institutions who also value consumer protection might consider ways in which universities could set standards for good and bad credit and debit card practices, and insist that products offered to students provide safe and sustainable financial services at fair and transparent prices.  If anyone is aware of any college or university that has already taken steps to set standards for card companies with which it deals, please comment.  

Additional note (thx to Jeff Sovern): US PIRG has a white paper on fair campus credit card marketing practices here.  These provide a useful starting point for schools seriously interested in trying to set a new standard for credit card terms.  I would suggest also giving serious consideration to a similar list of standards for an acceptable debt card and deposit account agreement.

A Comment on HUD's New RESPA Regulations

Last month, when HUD came out with its new RESPA regs, we blogged about it here.  I've been going through the regs more carefully in connection with an update to our casebook that my co-authors and I are preparing (we're hoping to get something out in time for the spring semester), and I am struck once again by what an improvement the new Good Faith Estimate appears to be over the former form, in most respects.  HUD did extensive consumer testing of the new form and alternatives, and it shows.  The form comes in somewhat long at four pages, but I guess HUD thought that struck the right balance between information overload and leaving out important information.  I suspect the new form will do as good a job as can be done in acquainting consumers with the terms of their loans--at least, those consumers who learn from reading such forms .  The one uncertainty I have about the form is the disclosure of yield-spread-premiums.  YSPs are the fees mortgage brokers charge their borrowers that are then added to the principal of the loan.  YSPs don't seem objectionable in principle, but in practice they have been subject to abuse.  Brokers have sometimes charged huge fees--ostenstibly for securing a lower interest rate--and studies have shown that people of color often get charged higher YSPs than whites.  It appears that YSPs have enabled brokers to obtain much larger compensation than other forms of compensation, and under the former form, it's easy to see why.  The old HUD-1, provided at settlement, disclosed the yield-spread premium under the heading “POC,” or “payment outside closing.”  Few consumers knew what this meant.  The new form discloses, on the second page, the orginator’s origination charge, and describes it as the “charge for getting this loan for you.”  So far, so good.  Presumably consumers who see a high number in that line will negotiate for a lower fee or else switch brokers.  A second block then states the credit the consumer receives for the interest rate, which is described as reducing the settlement charges; and the charge the consumer pays for the interest rate, which is described as increasing the settlement charges.  I find that confusing.  I think, though I'm not sure, that the credit will reflect the YSP, since the YSP is added to the principal, and so is not included in the settlement charges.  I wonder if consumers will read a high total, and then see the YSP styled as a credit, and think it's OK then because it's a credit.  But again I'm not sure.  Let's hope HUD's consumer testing reflects what consumers understand in the real world, and that I'm wrong.

Norm Silber on Late Payment Fees

One of my favorite writers on consumer law, Norm Silber of Hofstra, has written Late Charges, Regular Billing, and Reasonable Consumers: A Rationale for a Late Payment Act, 83 Chicago Kent L. Rev. 855 (2008).  Here's the abstract:

This essay considers the reasonable behavior of consumers in relation to law and the policies that tolerate the assessment of late payment penalties, fees, and surcharges. Attention is trained principally on the inadequately-regulated cycle of creditor billing and debtor repayment practices, rather than on excessively high fees. The focus here is on the credit card issuers and, to a lesser degree, the wireless telecommunication vendors. Problems associated with late fee billing cycles cut a wide swath of billing for recurring debt repayment, however. A variety of different demands on consumers imposed sector-by-sector interact to magnify the consumers' difficulties.

Part I addresses the multitude of ways that billers can impose late fee charges. This Part also identifies those deficiencies in legal regimes that aid and abet those who send out bills, by acquiescing to strategies that induce late fee revenue. Part II considers some information-processing and other cognitive difficulties that arise from the late payment regime, and contends that unearned redistribution from consumers to billers results from such incoherence and confusion, and also results in general welfare losses. Part III reviews existing statutory and common-law causes of action through which consumers might hope to recover from billers who intentionally or recklessly diminish the likelihood that deadlines will be met. Part IV proposes a Late Payment Act that illustrates the type of approach that could be adopted on a state - or nation - wide basis to address several of the key shortcomings.

New Credit Card Rules Expected to be Adopted Tomorrow

Reuters reports here that the Fed, the Office of Thrift Supervision, and the National Credit Union Administration are expected to adopt the regs, which run about 1,000 pages, tomorrow.  The regs are expected to bar double-cycle billing, universal default, and to limit the ability of credit card issuers to increase rates on balances.

Worst yet to come?

The New York Times published a gloomy anonymous email from a banker castigating his own industry yesterday.  The banker predicts further bank collapses as more credit card receivables go into default. The banker makes the point that credit card divisions in banks rely on stated income and assets in much the same way that the mortgage industry relied on "liar" loans and are continuing to aggressively market high cost debt to those that cannot repay it.

In general, my impression has been that credit card lenders have been more sophisticated in managing default risk because they lacked the cushion of collateral. Moreover, unlike mortgages, credit card portfolios were not so obviously exposed to an asset bubble.  Still, as the recession spreads and Congress continues to sharpen moral hazard with financial institution give-aways (irrespective past consumer abuse) one cant help but wonder.

Michael S. Barr et al. on Behaviorally Informed Home Mortgage Regulation

Michael S. Barr of Michigan, Sendhil Mullainathan of Harvard's Economics Department and the National Bureau of Economic Research (NBER), and Eldar Shafir of Princeton have co-authored "Behaviorally Informed Home Mortgage Regulation."  Here's the abstract:

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Credit Cards -- Less Purchasing Power

In response to current market conditions, the credit card companies are greatly reducing credit limits and increasing fees.  Check out this comprehensive article in today's Washington Post.

Payday Lending Intitiatives Rejected

The Center for Responsible Lending is reporting that voters rejected ballot initiatives in Arizona and Ohio that would have enabled or extended the legality of payday lending.