Consumer Law & Policy Blog

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.

Melissa Jacoby on Mortgage Delinquency Management

Melissa B. Jacoby of North Carolina has written "Home Ownership Risk Beyond a Subprime Crisis: The Role of Delinquency Management," 76 Fordham L. Rev. (2008). Here's the abstract:

Public investment in and promotion of homeownership and the home mortgage market often relies on three justifications to supplement shelter goals: to build household wealth and economic self-sufficiency, to generate positive social-psychological states, and to develop stable neighborhoods and communities. Homeownership and mortgage obligations do not inherently further these objectives, however, and sometimes undermine them. The most visible triggers of the recent surge in subprime delinquency have produced calls for emergency foreclosure avoidance interventions (as well as front-end regulatory fixes). Whatever their merit, I contend that a system of mortgage delinquency management should be an enduring component of housing policy. Furtherance of housing and household policy objectives hinges in part on the conditions under which homeownership is obtained, maintained, leveraged, and - in some situations - exited. Given that high leverage or trigger events such as job loss and medical problems play significant roles in mortgage delinquency independent of loan terms, better origination practices cannot eliminate the need for delinquency management.

One function of this brief essay is to identify an existing rough framework for managing delinquency. Legal scholarship should no longer discuss mortgage enforcement primarily in terms of foreclosure law and instead should include other debtor-creditor laws such as bankruptcy, industry loss mitigation efforts, and third-party interventions such as delinquency housing counseling. In terms of analyzing this framework, it is tempting to focus on its impact on mortgage credit cost and access or on the absolute number of homes temporarily saved, but my proposed analysis is based on whether the system honors and furthers the goals of wealth building, positive social psychological states, and community development. Because those ends are not inexorably linked to ownership generally or owning a particular home, a system of delinquency management that honors these objectives should strive to provide fair, transparent, humane, and predictable strategies for home exit as well as for home retention. Although more empirical research is needed, this essay starts the process of analyzing mortgage delinquency management tools in the proposed fashion.

Credit Card Profits Safe, for Now

Fitch Ratings, the people who were so wrong about subprime mortgages, remain guardedly optimistic about credit card profits, and the performance of securitized credit card receivables, expecting credit card yield spread to remain “robust.”

Prime credit card issuers are paying less for their funds, by about 2.5%, as a result of Fed rate cuts. Meanwhile, their yield from credit card customers has gone down only by 36 basis points, i.e. 0.36%. This was accomplished, according to Fitch, because “card issuers have proven adept at managing their yield through pricing initiatives and dynamic strategies implemented to reflect changes in card usage over time. . . . Yield consists of collected finance charges, fees and interchange revenue.” In other words, card issuers are adept at NOT passing cost savings along to consumers.

Charge-offs for unpaid credit card bills are just now returning to the pre-bankruptcy-reform levels of 2005, but are projected to rise rapidly in the coming months. Fitch remains confident that securities rated BBB and above have plenty of built-in loss protection. Even so, I won’t be buying any credit card ABS securities just now.

Elizabeth Warren's Financial Services Product Safety Commission Proposal

Last month Deepak mentioned Elizabeth Warren's proposal for a financial services product safety commission.  You can find her Harvard Magazine article, Making Credit Safer: The Case for Regulation here.  The entire article is worth reading, but here are some excerpts: 

It is impossible to buy a toaster that has a one-in-five chance of bursting into flames and burning down your house. But it is possible to refinance your home with a mortgage that has the same one-in-five chance of putting your family out on the street—and the mortgage won’t even carry a disclosure of that fact. Similarly, it’s impossible for the seller to change the price on a toaster once you have purchased it. But long after the credit-card slip has been signed, your credit-card company can triple the price of the credit you used to finance your purchase, even if you meet all the credit terms. Why are consumers safe when they purchase tangible products with cash, but left at the mercy of their creditors when they sign up for routine financial products like mortgages and credit cards?

The difference between the two markets is regulation. * * *

* * *

* * * Just as the Consumer Product Safety Commission (CPSC) protects buyers of goods and supports a competitive market, a new regulatory agency is needed to protect consumers who use financial products. * * *

* * *

* * * Lenders have deliberately built tricks and traps into some credit products so they can ensnare families in a cycle of high-cost debt.

Creating safer marketplaces is about making certain that the products themselves don’t become the source of trouble. This means that terms hidden in the fine print or obscured with incomprehensible language, reservation of all power to the seller with nothing left for the buyer, and similar tricks have no place in a well-functioning market.

How did financial products get so dangerous? Part of the problem is that disclosure has become a way to obfuscate rather than to inform. In the early 1980s, the typical credit-card contract was a page long; by the early 2000s, that contract had grown to more than 30 pages of incomprehensible text.* * *

* * *

So why not create a Financial Product Safety Commission (FPSC), charged with responsibility to establish guidelines for consumer disclosure, collect and report data about the uses of different financial products, review new products for safety, and require modification of dangerous products before they can be marketed to the public? The agency could review mortgages, credit cards, car loans, and so on. It could also exercise jurisdiction over life insurance and annuity contracts. In effect, the FPSC would evaluate these products to eliminate the hidden tricks that make some of them far more dangerous than others, and ensure that none pose unacceptable risks to consumers.

An FPSC would promote the benefits of free markets by assuring that consumers can enter credit markets confident that the products they purchase meet minimum safety standards. A commission could collect data about which financial products are least understood, what kinds of disclosures are most effective, and which products are most likely to result in consumer default. It could develop nuanced regulatory responses; some credit terms might be banned altogether, while others might be permitted only with clearer disclosure. * * *

Hat tip to Concurring Opinions.  An earlier version of the article appeared in Democracy.

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. 

Credit Card Marketing to College Students

Check out this article in today's Washington Post entitled "Majoring in Plastic -- With Easy Access to Credit Cards, Students Pick Up the Debt Habit Early." We blogged last year on U.S. PIRG's counteroffensive to the credit card companies intense marketing efforts on college campuses.

Mortgage broker compensation

The incentives created by mortgage broker compensation structures, such as yield spread premiums, have been blamed for contributing to the reckless lending in the subprime mortgage market. The Treasury Department and Federal Reserve proposals, as well as various bills in Congress, are all taking aim at broker compensation and supervision. To find out what is going on in the market right now, check out this interesting discussion among brokers over at the Implode-o-Meter about Countrywide's decision, announced yesterday, to limit total broker compensation to 4% of loan amounts.

Fed Hearings on Countrywide merger

The Federal Reserve has announced public hearings in Chicago and Los Angeles on Bank of America's acquisition of Countrywide. The Fed will consider the public benefits and adverse effects of the merger as well as the Community Reinvestment Act performance of the two institutions, before deciding whether to approve the merger under the Bank Holding Company Act. Community groups are likely to appear and raise issues regarding Countrywide's efforts to prevent foreclosures. In many local jurisdictions Countrywide is the single servicer filing the largest number of foreclosures.

PIRG Report on On-Campus Credit Card Marketing

Over at U.S. PIRG's Consumer blog check out this comprehensive post about PIRG's new report on marketing of credit cards on college campuses. The post links to a number of useful items, including the report itself, which you can also find here.