Consumer Law & Policy Blog

New York Times: Congress Should Enact Credit Cardholders "Bill of Rights"

Today's New York Times editorializes here in favor of the Credit Cardholders "Bill of Rights" pending before Congress. The legislation takes aim at retroactive rate increases, double cycle billing that allows assessment of interest on amounts already paid, multiple over-limit fees, and similar credit card company policies. Rep. Carolyn Maloney (D-NY), a champion of the legislation, has a webpage devoted to the issue, with links to key documents, including the legislation itself.

Times Reports on Responses to the Subprime Crisis, Student Loan Issues, Unauthorized Bank Account Transfers, and More

Bob Tedeschi's Mortgages column in today's Times, "Shying Away From N.Y. Loans," reports on a consequence of the new New York subprime law: making it even harder for subprime borrowers to obtain loans.  An excerpt:

Among other things, borrowers with high-cost loans can block being foreclosed on if they can prove they should not have been offered the loans in the first place.

Fannie Mae and Freddie Mac, the two government-sponsored companies that back most of the nation’s mortgages, have said that as of September they would not buy subprime loans from New York because the new law exposes them to too much risk and cost. “We’re simply not in position to monitor and enforce compliance with all these requirements,” said Brad German, a Freddie Mac spokesman.

Freddie Mac and Fannie Mae back few subprime loans anyway, mortgage industry executives and regulators said, but the announcement left mortgage brokers wondering whether any lenders would touch such mortgages — even community banks that tend to keep loans on their books, rather than sell them to Fannie or Freddie.

On the other hand, Ginnie Mae said it would continue to support such loans. 

Yesterday's Times included "Counseling Students on Loans," about the Education Department requirement for counseling of students when they first apply for a federal loan and what such counseling should entail.  It only we'd had a similar requirement for subprime lending.  It also contained an interview with Asheesh Advani, the president and CEO of Virgin Money, in "Making a Business of Family Loans."  Virgin has originated $350 million in loans since 2001--among family, friends, and business associates.  If a parent, say, wants to lend money to a child as a mortgage, Virgin, for a fee, sets up and administers the loan.  They do the same thing with reverse mortgages so that families can keep the home within the family and avoid paying bank fees.

Friday brought "New York Plans to Sue Student Loan Company."    An excerpt:

The attorney general of New York is preparing a lawsuit against a student loan company, Goal Financial, charging that the lender broke state and federal laws by luring borrowers with iPods, cash and other gifts and that it misled consumers about loan terms and benefits, The New York Times’s Jonathan D. Glater reported, citing a senior official in the office.

Last Saturday, August 30, the Times published "The Bank Account That Sprang a Leak," about $300,000 in unauthorized withdrawals from the JPMorgan Chase elite private banking operation account of Wall Street activist investor Guy Wyser-Pratte.  An accompanying article, "Making Automated Bill Payments is a Cinch (Wait, Not So Fast)," discusses the downside of such automated payments.  An excerpt about the frequency of errors in such payments:

* * * Nacha — the Electronic Payments Association, a nonprofit association that oversees the network that automated payments travel on, says the error rate is 38 for every 100,000 bill payments. This figure counts mistakes that banks report but doesn’t include problems that consumers solve directly through the billers.

And another excerpt about identity theft risks:

Are you risking identity theft or other problems by giving so many companies access to your credit card numbers or bank accounts each month? Some people still think so.

But Bruce Cundiff, director of payments research and consulting for Javelin Strategy and Research, says the nonautomated approach is more problematic. If you’re paying bills one by one each month via your bank’s Web site, you need to worry about whether anyone has installed software on your computer that would capture user names and passwords. And not having paper statements and checks floating around that could be stolen from the mail is a plus as well.

On August 26, the Times reported on another solution to the subprime crisis in "Hoping to Prevent Decay, Communities Are Becoming Home Buyers."  August 24 included a depressing article, Ruins of an American Dream," about Merced, California, which has one of the highest foreclosure rates in the country.  The article explores some of the consequences of the crisis:

In the three years since housing peaked here, the median sales price has fallen by 50 percent. There are thousands of foreclosures on the market. The asking prices on those properties are so low that competitive bidding, a hallmark of the boom, is back.

But almost no homeowner can afford to sell. If you cannot go as low as “the foreclosure price” — the cost of a comparable bank-owned house — real estate agents say you might as well not even bother listing your home.

* * *

Businesses in Merced are struggling. Downtown buildings are festooned with “for lease” signs. Unemployment, consistently high here, rose to 12.1 percent in July.

* * *

Another article published the same day, "That Student Loan, So Hard to Shake," covers some of the consequences of rules making it difficult to discharge student loans in bankruptcy.   Some excerpts:

Without a court order, lenders — or, more likely, collection agents — can garnish up to 15 percent of wages of borrowers who have defaulted on federally guaranteed loans, said Deanne Loonin, a lawyer at the National Consumer Law Center in Boston. Lenders and collection agents can also intercept tax refunds, Social Security payments and even this year’s stimulus checks from the government.

“It’s really unbelievable,” Ms. Loonin said.

DEBTORS can shed credit card debt and other unsecured obligations through bankruptcy but can get out of student loans only if they can show “undue hardship.” That term is not defined by the bankruptcy code and, lawyers said, judges often take a narrow view of its meaning.

* * *

There are some compelling reasons to make it difficult for student borrowers to get out of their debts. Lenders have no collateral, like a house or car, to seize. That makes them riskier.

* * *

“At the time that people graduate from school, almost everybody is technically eligible for bankruptcy because they have debts that exceed their assets,” said Shelly Repp, general counsel at the National Council for Higher Education Loan Programs, whose members include lenders, collection agencies and guarantors. “Why would anyone lend you money if you had the option to walk away?”

But even Sallie Mae, a major source of private loans, is not opposed to modifying the bankruptcy code’s treatment of them, said Mr. Joyce, perhaps by making it possible for students to dump debts in bankruptcy after trying for a specified number of years to pay them off.

Business Week Article on Fed's Credit Card Proposals

Business Week has an article, "Credit Card Rage," about consumer dissatisfaction with credit card interest rate practices and the Fed's proposed rules to rein in some of those practices, including increasing the interest rate on previously-incurred charges.  The article notes that the Fed received more than 56,000 comments on the proposal, a record setting number.  After describing some of the comments, the article discusses responses by credit card issuers:

The five largest credit-card issuing banks say that as much as consumer may enjoy lashing out, they're likely to regret the end result of the rule changes. The new regulations will curtail their ability to "price for risk," the banks say: By being able to change the rates they charge cardholders based on payment history, outstanding debt, and credit score, banks can price in the risk that each individual consumer won't be able to pay off his debt. The alternative is to cut back on low-interest offers for all cardholders, the banks say.

* * *

"We have very real concerns that the proposal will result in higher costs for cardholders across the board," says Peter Garuccio, a spokesman for the American Bankers Assn. (ABA). If the Fed rules rob them of the right to price for risk, all consumers will suffer with higher rates overall and worse teaser rates.

Of course, businesses always make such claims, but that doesn't mean they're not true in this instance.  Still, I wonder what evidence supports the claims.  (HT to Maurice E. Stucke of Tennessee)

Brian McCall on Usury Law

Brian McCall of Oklahoma has written "Unprofitable Lending: Modern Credit Regulation and the Lost Theory of Usury."  Here's the abstract:

With almost daily news stories about the crisis in our credit markets, it seems inevitable that a new political and academic debate about credit regulation is commencing. With Americans paying billions of dollars in finance charges every year and some losing their homes, it is time to ask fundamental questions about the liberality of credit supply and terms. Rather than readjusting usury limits or tinkering with disclosure requirements, it is time to reassess America's philosophy of lending. Although the current socio-economic belief that more credit is better has held dominance for several centuries, history offers an alternative theory. Surprisingly, a serious analysis of this scholastic theory of usury has been virtually absent from academic debates about credit for the past several decades. This article argues that the confusion and ineffectiveness of usury laws could be corrected by a return to the principles of the scholastic theory of usury. This article identifies contemporary academic, political and public dissatisfaction with the current state of credit regulation. It surveys some of the recent data demonstrating the rising levels and costs of consumer debt. Next, the historical approaches to usury that predated the scholastic theory are introduced to set the context for a presentation of the scholastic theory itself. The article outlines the scholastic theory of usury as a synthesis of biblical principles, natural law reasoning and Roman law concepts. The scholastic theory is shown to have developed while remaining true to its core principles from the fourth to the sixteenth century. The new economic environment of the sixteenth century caused some usury theorists to develop a troubling subjective theory of usury which eventually displaced the original principles. After examining this history, the article articulates core principles of the scholastic theory which are then applied to modern commercial and consumer lending transactions. The article concludes that modern credit regulation would greatly benefit from a return to the scholastic principles of usury regulation.

Times Reports on Home Equity Loans, Countrywide Litigation, Subprime Borrowers, and More

Another roundup of article in recent issues of the Times: Friday's Times brought another important installment in "The Debt Trap" series, this one headlined "Home Equity Frenzy Was a Bank Ad Come True," about how banks reframed second mortgages--once seen as a product for those experiencing dire financial problems--as home equity loans.  These loans were presented as ways to use the home as a source of funds for "living richly," and thereby vastly increased consumer indebtedness and reduced the amount of equity Americans have in their homes. 

Today's Times includes Bob Tedeschi's Mortgages column, "Finding Cash in a Home," about an alternative to reverse mortgages which cuts down on the normally high closing costs for reverse mortgages--but because the lender takes out a life insurance policy on the owner, only owners eligible for life insurance can take advantage of it.  In an August 3 column titled "Subprime Loans' Wide Reach," Tedeschi reported on a study by Compliance Technologies that contradicted standard wisdom about subprime loans:

WHILE subprime loans deeply penetrated low-income and minority groups, a new study suggests that more upper-income borrowers and more whites took out such loans than any other groups.

* * * [R]oughly 56 percent [of subprime loans originated in 2006] went to non-Hispanic whites. Affluent borrowers, those with annual income at least 120 percent of their given area’s median income, meanwhile, took out more than 39 percent of the loans.

That seems like a rather low definition of affluent.

Yesterday's Times reported "Judge Rejects Countrywide Settlement" about how a bankruptcy judge rejected the settlement between Countrywide and nearly 300 of its borrowers, saying he wasn't convinced it was fair to the borrowers.  The complaint charges Countrywide with making inaccurate claims, and demanding improper fees, among other things.  Meanwhile, back on August 7, the Times noted that "Connecticut Joins Other States in Suing Countrywide."

On Wednesday, the Times published a short but ominous-sounding piece, "Some New York Loans Shunned," at the tail of a longer article.  Here's an excerpt:

Freddie Mac said Tuesday that it would stop buying subprime loans issued in New York State as a new law takes effect that holds investors accountable for mortgage fraud.

Freddie will not buy loans dated on or after Sept. 1 that meet the state’s subprime definition, the government-chartered company said in a lender bulletin on its Web site. Gov. David A. Paterson of New York signed new foreclosure and lending laws last week that tighten legal protections for borrowers.

The legislation holds mortgage buyers like Freddie liable in ways that “we have no way of monitoring and preventing,” Brad German, a company spokesman, said.

It's not clear how many such loans would be made even if Freddie Mac was willing to buy them: the state law will almost certainly be preempted as to federal lenders, and in the past, lenders have tended to avoid loans labeled as high-interest loans, thus making mini-HOEPA laws effectively usury statutes. 

On Monday the Times ran "Web Privacy on the Radar in Congress," about behavioral marketing.  An excerpt:

On Aug. 1, four top members of the House Committee on Energy and Commerce sent letters ordering 33 cable and Internet companies, including Google, Microsoft, Comcast and Cox Communications, to provide details about their privacy standards. That followed House and Senate hearings last month about privacy and behavioral targeting, in which advertisers show ads to consumers based on their travels around the Web. * * *

As advertisers become more sophisticated about behavioral targeting, and online privacy standards become increasingly varied, regulators and privacy advocates are becoming concerned. A few companies have taken precautionary measures to try to fend off criticism; in the last few days, for instance, both Yahoo and Google have made it easier for people to opt out of targeted ads on their sites. But that may not be enough.

“Some type of omnibus electronic privacy legislation is needed,” said Representative Edward J. Markey, Democrat of Massachusetts, chairman of the House Subcommittee on Telecommunications and the Internet, “regardless of the particular technologies or companies involved.”

Back on August 6, the Times ran an editorial,"Listen to the 56,000," about the response to the Fed's call for comments on its proposed rules on credit cards.  Excerpts:

This anguished deluge should send a clear message to leaders in Washington. The Federal Reserve should swiftly adopt its proposed rules against unfair or deceptive credit card practices. But the real burden to curb these abuses falls on Congress.

For too long, members of Congress have shirked the responsibility to ensure fair lending to credit card customers and have listened more intently to the banking lobbyists. A low point came in 2005, when Congress passed a bankruptcy law that was badly tilted against borrowers. * * *

Ronald Mann, a Columbia Law School professor, has argued that the law creates a “sweat box of credit card debt.” 

The editorial also noted that the House Financial Services Committee had voted for a cardholder's bill of rights, but that banks oppose it.

Moving right along, here is an article about deceptive advertising of "free" credit reports that end up costing money.  And finally, an article that may scare some, "If You Run a Red Light, Will Everyone Know?" reports on a web site, www.CriminalSearches.com that enables people to conduct free searches to see who has a criminal record.

Paper on Whether Consumers Learn to Avoid Triggering Credit Card Fees

Sumit Agarwal, John C. Driscoll, both of the Fed, Xavier Gabaix of NYU's Stern School, and David Laibson of Harvard's Economics Department have written "Learning in the Credit Card Market."  Here's the abstract:

Agents with more experience make better choices. We measure learning dynamics using a panel with four million monthly credit card statements. We study add-on fees, specifically cash advance, late payment, and overlimit fees. New credit card accounts generate fee payments of $15 per month. Through negative feedback - i.e. paying a fee - consumers learn to avoid triggering future fees. Paying a fee last month reduces the likelihood of paying a fee in the current month by about 40%. Controlling for account fixed effects, monthly fee payments fall by 75% during the first three years of account life. We find that learning is not monotonic. Knowledge effectively depreciates about 10% per month, implying that learning displays a strong recency effect.

The Questionable "Services" of Debt Settlement Firms

by Greg Beck

David Giacalone has an eye-opening post on debt solutions services, which, for a fee, offer to negotiate with creditors to reduce a consumer's debt. One such service is NetDebt, a for-profit company that promises to reduce consumers' debt by ("in some cases") as much as 50%. In return, NetDebt charges a fee of 15% of the total debt turned over to the company, plus a "small" $50 monthly fee.

Consumers who sign up for the service are referred to a law firm, Contego Law, which claims to be "nationally recognized for its consumer protection practices" (the firm considers debt settlement to be one of these practices). NetDebt's website describes the process that follows:

Once you enroll in the program, you will immediately stop paying your creditors, and instead deposit your monthly payments into a trust account that's established by the law firm. From that point on, the attorneys take over everything. Since your creditors will not be receiving monthly payments, your accounts will become past due, but in a controlled environment. When your accounts are past due, your creditors become very willing to accept significantly less than the balance owed and will settle the account. Once there is sufficient money in your trust account, the attorney will settle with the first creditor, and that process will continue until all of your accounts are paid off and reflect a zero balance.

David asks the question: Is 15% plus $50 per month an excessive fee for a firm to charge for this service?

Must Read: New York Times Series on Consumer Debt

I'd bet you are tired of hearing that this or that is a "must read." But if you are interested in American consumer debt, you really will want to read this article in today's New York Times. It's the beginning of a series on the topic, complete with online video and interactive features. Get this: The average American household has about $118,000 in debt but saves only $392 per year (an unbelievably low .4% of disposable income), the lowest level since the Great Depression. In the 1940's, annual household savings were $12,807, or 26% of household income. In 1957, 42% of households had no debt; today, that figure is 26%. In 1961, 53% of homeowners had no mortgage debt; today, 31%. And, in 1967, 6% of households carried a credit card balance while 40% do so so today. The average American family today has 13 credit cards and over $8500 in credit card debt.

Lab Experiment on Whether Payday Lending Helps Consumers Survive Financial Setbacks

Bart J. Wilson of George Mason, David W. Findlay and James W. Meehan both of Colby, Charissa P. Wellford, and Karl Schurter of Virginia have teamed up to write "An Experimental Analysis of the Demand for Payday Loans."  Here's the abstract:

The payday loan industry is one of the fastest growing segments of the consumer financial services market in the United States. The purpose of our study is to design an environment similar to the one that payday loan customers face. We then conduct a laboratory experiment to examine what effect, if any, the existence of payday loans has on individuals' abilities to manage and to survive financial setbacks. Our primary objective is to examine whether access to payday loans improves or worsens the likelihood of survival in our experiment. We also test the degree to which people's use of payday loans affects their ability to survive financial shocks. We find that payday loans help the subjects to absorb expenditure shocks and, therefore, survive. However, subjects whose demand for payday loans exceeds a certain threshold level are at a greater risk than a corresponding subject in the treatment in which payday loans do not exist.

More on Possible Federal Government Measures to Prop Up Fannie and Freddie

This Reuters story has a bit more on government plans to rescue Fannie Mae and Freddie Mac if necessary. Here is Treasury Secretary Paulson's official statement on topic. And U.S. PIRG's Consumer Blog has this to say.