Consumer Law & Policy Blog

Katherine Porter on the Credit Industry's Business Model for Postbankruptcy Lending

Katherine Porter of Iowa and the Credit Slips Blog has an article forthcoming in the Iowa law Review, Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending.  Here's the abstract:

Consumer credit and consumer bankruptcy filings have grown rapidly over the last two decades, and several researchers have attempted to understand the relationship between these two intertwined features of the modern American economy. Teasing out causation is almost impossible, as consumer advocates lay blame on the industry and the industry responds by citing the same data to show consumer misbehavior. Using a novel vantage point, this analysis examines what the credit industry's behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy. The empirical evidence on postbankruptcy credit solicitation belies the industry's characterizations of bankrupt families as opportunistic or strategic actors. Original data from longitudinal interviews with consumer debtors show that many lenders target recent bankrupts, sending these families repeated offers for unsecured and secured loans. The modern credit industry sees bankrupt families as lucrative targets for high-yield lending, a reality that has important implications for developing optimal consumer credit policy and bankruptcy law.

You can download the article at http://ssrn.com/abstract=1004276

Still More in the Times on the Mortgage Meltdown and Lead in Toys

by Jeff Sovern

Three interesting recent pieces in the Times: Today's Times has an editorial, "Moving Ahead on Mortgages," that endorses the FDIC proposal to deal with the foreclosure crisis by freezing interest rates at the introductory teaser rate (I previously linked to the FDIC proposal here).  Friday's issue had a column by Paul Krugman, "A Catastrophe Foretold" about how the mortgage meltdown could have been avoided, in which he refers to the prophetic words of the late Edward A. Gramlich.  An excerpt:

In his final paper, Mr. Gramlich stressed the extent to which unregulated lending is prone to the “abusive lending practices” he mentioned in his 2004 warning. The fact is that many borrowers are ill-equipped to make judgments about “exotic” loans, like subprime loans that offer a low initial “teaser” rate that suddenly jumps after two years, and that include prepayment penalties preventing the borrowers from undoing their mistakes.

Yet such loans were primarily offered to those least able to evaluate them. “Why are the most risky loan products sold to the least sophisticated borrowers?” Mr. Gramlich asked. “The question answers itself — the least sophisticated borrowers are probably duped into taking these products.” And “the predictable result was carnage.”

Mr. Frank is now trying to push through legislation that extends moderate regulation to the subprime market. Despite the scale of the disaster, he’s facing an uphill fight: money still talks in Washington, and the mortgage industry is a huge source of campaign finance. * * *

Finally, on Wednesday, David Leonhardt's Economic Scene column, titled "Lessons Thomas Still Could Learn," reports on lead in toys.  The company which manufactures Thomas toys comes off pretty badly, having first asked customers to pay the cost of returning its dangerous toys to the company, and then having sent the customers who returned the toys a free gift--which was also contaminated with lead.  But there's also good news: the Times bought fifty toys at a Wal-Mart and other stores and had them tested for lead.  No toy exceeded the legal limit for lead and only five--none bought at Wal-Mart--had any lead at all.

FDIC Chair Proposes Solution to Mortgage Problem

Today's Times has an op-ed by Sheila C. Bair, chair of the FDIC, about the mortgage crisis.  Ms. Bair describes "poor lending standards and weak consumer protection [as] the root of the problem."  The solution, in her view, is for servicers to restructure all 2/28 and 3/27 subprime hybrid loans--that is, certain loans with initial low rates that reset to higher rates after two or three years--for borrowers who have "been making timely payments but can't afford the reset payments" as fixed rate loans at the starter rate.

U.S. PIRG's Campus Counteroffensive Against Credit Card Marketers

U.S. PIRG's consumer blog has this informative post about PIRG's new program, just beginning on campuses across the nation, to counter credit card companies' aggressive marketing tactics to college students.  The campaign's logo and tag line -- "Free gifts now.  Huge fees later" -- appear to the left.

Hurricane Katrina's Effect on Foreclosures

A. Brook Overby of Tulane has written an article, Mortgage Foreclosure in Post-Katrina New Orleans, published in the Boston College Law Review, Vol. 48, No. 4, 2007.  Here's the abstract:

Hurricane Katrina, the largest disaster in the history of the United States, caused widespread property destruction throughout the Gulf Coast, but particularly in the city of New Orleans. Although the storm created an environment which facilitated increased mortgage defaults in the area, the Article analyzes data from the Orleans Parish Recorder of Mortgages Office and from the Orleans Parish Civil District Court and concludes that foreclosure filing rates in the year after Katrina in fact decreased significantly from the rates for the corresponding period in the year prior to the storm. This result is contrary to what would normally be expected in a usual mortgage lending market, where an increase in the rate of mortgage default would lead to an increase in the rate of foreclosure.

The Article evaluates in detail the legal and market responses to mortgage default after the storm that contributed to the reduction in foreclosure actions in Orleans Parish in the year after Katrina. Secondary mortgage market initiatives provided the principal means for mortgage relief, because Louisiana debtors received little in the way of formal legal relief. Even though secondary market responses were successful in protecting mortgage debtors after Katrina, their limitations in scope make them inadequate to address the years of financial distress that might likely follow any disaster of the magnitude of Katrina. Thus, while the Katrina experience demonstrates that secondary market interventions can effectively reduce debtor distress after a major disaster, such interventions should not been seen as a substitute for more traditional legal responses to address mortgage debtor distress after disasters or other economic crises.

Times Reports on Spam, Telemarketing, Credit Discrimination, Credit Card Legislation, and More

I've fallen behind on my reading of the Times, but here's an attempt to make up for that.  Today's "What's Online" column has several pieces relevant to consumer law.  The column opens  by noting that Symantec's monthly State of Spam report observed an increase in spam in September. The increase is due in part to spam offering loans and homes in response to the Fed's rate cut.  So much for CAN-SPAM.  The column goes on to describe something reported on consumerist.com (which occasionally picks up our postings and is listed on our blog roll at left): DirecTV claims the right to make "informational calls" to consumers on its Do-Not-Call list to give consumers "an opportunity to change [their] do-not-call preference."  Finally, according to Geoff Williams of Entrepreneur.com, telemarketing is among ten industries likely to die in the next decade.  That contrasts with earlier reports that telemarketing has grown since adoption of the Do-Not-Call rule.

In other recent stories, the Times reported here that the N.A.A.C.P. has filed suit against eleven mortgage lenders for steering African-Americans to subprime loans even though they could have qualified for prime rates.  The suit is founded on ECOA and the Fair Housing Act, and the plaintiffs are seeking to have it certified as a class action.  An editorial in yesterday's issue, titled "Common Sense and Credit Cards" praises bills that would outlaw universal default and limit credit card marketing to college students.  It calls for Congress to look at school-themed credit cards offered by alumni associations.  Finally, just to prove that identity thieves spare no one, here's a report on the victimization of the billionaire Mayor Bloomberg.

Mortgage Assistance Program For Home Buyers Who Lack Credit History

  Today's Washington Post has this story about CitiMortgage's $200 million pilot program in the Washington, D.C. area to provide mortgage assistance of about $100,000 each to 2000 home buyers who lack credit history, and would otherwise find the cost of credit unmanageable.  The program will be managed by a D.C. non-profit organization and has the support of the D.C. government.

Final Defense Department Regulations On Loans To Service Members Go Into Effect

  Final Defense Department regulations implementing federal legislation to curb predatory lending aimed at service members and their families went into effect yesterday, October 1, 2007.  The legislation was intended, among other things, to limit short-term interest rates charged to military families.  But the implementing regulations carve out large exceptions, including credit cards and other open-end credit, causing consumer advocates to charge that the DoD has created a road map for evading Congressional intent.  The Washington Post has this story on the new rules.  The CL&P Blog has covered the issue extensively here, here, and here.  Read the Defense Department's press release here.  To view the final Defense Department regulations, go here. 

How Do Low-Income Consumers Feel About Access To Credit

Angela K. Littwin of Harvard discusses that question in a forthcoming article in the Texas Law Review titled "Beyond Usury: A Study of Credit Card Use and Preference Among Low-Income Consumers."  Here's the abstract:

The question of whether to re-impose usury restrictions lies at the heart of the debates over consumer credit regulation. Advocates of interest rate regulations argue that creditors are exploiting low-income borrowers, making huge profits while they lure these families into financial traps from which they can never emerge. Opponents of regulation note the benefits of expanding credit to low-income consumers. This debate has continued for more than two decades, but until now no one has asked the affected families their views about access to credit or what safety features they would welcome. This paper presents original data from a study of low-income women. The findings suggest that usury regulation may be an unnecessarily blunt instrument to provide protection for low-income families, as low-income families themselves can identify credit protection devices that would be more nuanced and more useful.

You can download it at http://ssrn.com/abstract=968330.

Times Reports on Mortgages, Regulation of the Toy Industry, Junk Mail, and More

Another weekend, another collection of articles on consumer law issues from the Times.  Today's issue contains the "About New York" column by Jim Dwyer, headlined "Fighting an Outbreak of Mortgages Too Good to Be True," about the Foreclosure Prevention Project at South Brooklyn Legal Services.  The column reports on an offer one client, Tilton Jack, received for a one percent mortgage.  An excerpt:

In fact, the rate was 1 percent — but for one day. On the second day, it increased to 8.13 percent. Now, it is 8.77 percent. But those jumps are not what is sending his mortgage into a financial death spiral.

Under the terms, Mr. Jack’s monthly payment is set as if the mortgage cost just 1 percent, even though it is much more. So the seemingly low rate is a trap: every month, the unpaid interest is being piled onto his principal. When it reaches 110 percent of the original loan, the payments will be adjusted to the full 8.77 percent — on the principal that has been swollen by the unpaid interest.

“The principal has been increasing ever since he got the loan, and his payments will go from $1,100 a month to over $3,000,” said Navid Vazire, a lawyer with the Foreclosure Prevention Project who is representing Mr. Jack.

If only lenders used their imaginations for something more constructive than end-runs around the TILA disclosure rules.

Yesterday's issue contained an article titled "Toy Makers Seek Standards for U.S. Safety" about calls by toy manufacturers for federal regulation.  The stated goal is to reassure consumers about safety.  This contrasts with an editorial in Thursday's paper titled "Consumers Left in the Cold" which criticized Mattel for thinking "that the nation’s threadbare consumer protections are still too stringent and should best be ignored."  The editorial noted that Mattel has been fined by the Consumer Product Safety Commission for failing to report hazards timely.  The editorial also castigated the Bush administration's treatment of the CPSC. 

Thursday's paper contained several interesting articles on consumer issues, including one titled, ""Democrats Prepare Bills to Tighten Loan Rules."  Among the proposals:  barring mortgage brokers from steering borrowers who could qualify for prime loans to more expensive subprime loan and bans on hidden brokerage fees (a.k.a. yield-spread premiums) and prepayment penalties.  Another article, headlined, "Panel Questions Financial Advisers for the Elderly,"  reported on a congressional hearing.  Finally, "For-Profit Crusade Against Junk Mail" describes organizations trying to cut down on junk mail, including efforts to create a "do not mail" list similar to the "do not call" list.