Consumer Law & Policy Blog

Times Articles on the Use of Marketing Lists to Bilk the Elderly and Coping With Credit Obligations

Last weekend, The New York Times had a pair of front-page articles--both of which were painful to read--that raised consumer law issues.  Sunday's article, "Bilking the Elderly, With a Corporate Assist," described how con artists use lists of elderly consumers obtained from list-sellers to identify elderly consumers who can be swindled.  Two quotes: 

InfoUSA advertised lists of “Elderly Opportunity Seekers,” 3.3 million older people “looking for ways to make money,” and “Suffering Seniors,” 4.7 million people with cancer or Alzheimer’s disease. “Oldies but Goodies” contained 500,000 gamblers over 55 years old, for 8.5 cents apiece. One list said: “These people are gullible. They want to believe that their luck can change.” 

* * *

“Only one kind of customer wants to buy lists of seniors interested in lotteries and sweepstakes: criminals,” said Sgt. Yves Leblanc of the Royal Canadian Mounted Police. “If someone advertises a list by saying it contains gullible or elderly people, it’s like putting out a sign saying ‘Thieves welcome here.’ ”

There's a lot more in the article about one of the victims, the role of the list brokering industry and financial institutions, and efforts by government officials to put a stop to the problem.  One surprising side note: the article reports that the telemarketing industry has grown despite the creation of the "Do Not Call" list.

The article in Saturday's Times, headlined "Couple Learn the High Price of Easy Credit," reported on how one middle-class family juggles their debt payments. 

Payday Loan Store Manager Speaks Out

by Christopher Peterson

The Center for Responsible Lending recently posted a chilling four minute video with Rebecca Flippo, a former payday loan store manager from Virginia. Ms. Flippo explains that the effect of payday lending on low income consumers is "worse than you think." Her comments give a sense of how some borrowers may end up trapped in long term obligations.

Particularly interesting were her comments suggesting that many of her customers mistakenly believed that their loans were cheaper than credit cards. Apparently, her company had a policy of "playing down" the significance of their high annual percentage rates, even though most borrowers ended up with longer term obligations.

Avoiding Foreclosure

   

Today's Washington Post has this lengthy article on strategies for mortgage lenders and borrowers to avoid foreclosure.  One premise of the article is that lenders are willing to work with borrowers because a restructured loan that the borrower can realistically afford is often a better financial deal for lenders than is foreclosure.

What happens when lenders don't care if they are repaid?

by Christopher Peterson

In today's Wall Street Journal, Ted Frank, with the American Enterprise Institute, argues that the current meltdown in the subprime mortgage market justifies neither legislative nor judicial reform. In his view the market is currently adjusting to the problems in mortgage origination.  Everything will work out if we just leave the markets alone because "lenders have every incentive to lend only to those who can repay."

I disagree.  The current legal system creates the incentive for loan brokers and originators to (1)take large commissions and closing costs, (2) pass off bad loans to the secondary market, (3) distribute the revenue from lots of closings to management and employees, (4) wait for the bankruptcy code's preference window to close, then (5) declare bankruptcy when the secondary market tries to exert its recourse options.

Mr. Frank’s analysis ignores the agency costs of front line players in the industry, and it conflates the profitability of loan originating companies with the profits kept by the management of those companies.  While there is nothing inherently wrong with securitization of mortgage loans, or other financial assets, we must accept the reality that the current system of funding subprime mortgages does not preserve the traditional mortgage market’s underwriting incentives.  Instability and predatory lending will persist as long as the secondary market, and in particular, the investment banks that package mortgage backed securities can pass off bad loans to investors without fear of liability.

Two Consumer Lending Articles of Interest

I wanted to alert readers to two articles in today's USA Today, both concerning consumer debt.  This article is about the serious legal and practical difficulties faced by sub-prime mortgage borrowers who want to restructure their debt and avoid foreclosure.  And this article concerns New York Attorney General Andrew Cuomo's on-going antitrust investigation into the student loan market.  The investigation apparently focuses on unearthing exclusionary relationships between colleges and lenders.

Do Poor Cash Customers Subsidize Credit Card Rewards for Affluent Consumers?

Adam Levitin of Georgetown University Law Center argues that they do in a paper titled "Priceless? The Social Costs of Credit Card Merchant Restraints," available at http://ssrn.com/abstract=973970. The abstract is as follows:

Who pays for credit card rewards? This Article demonstrates that credit card rewards programs are funded in part by a highly regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers. In its worst form, food stamp recipients are subsidizing frequent flier miles. The subsidization is created by a set of credit card network rules called "merchant restraints" that combines with a cognitive bias known as the framing effect to limit merchants' ability to price payments systems according to cost.

The Article also shows how the subsidization of credit card use increases the use of credit cards for transacting. A set of cognitive biases amplifies increased transacting usage into an increase in credit card debt. Credit card merchant restraints thus ultimately contribute to credit defaults, reduced consumer savings and purchasing power, inflation, and consumer bankruptcy filings.

There are profound policy implications to the social externalities caused by credit card merchant restraints, including whether private control of essential services like payment systems is appropriate. In light of the negative social externalities of credit card merchant restraints, the Article proposes regulatory or legislative intervention to ban merchant restraint rules.

Here's some blog commentary on the paper.

Elizabeth Warren on the Credit Card Industry

Harvard Law School professor Elizabeth Warren was interviewed by NPR's Terry Gross for today's Fresh Air show. Listen here.

Tax Refund Anticipation Loans: Losing Popularity Perhaps?

By Brian Wolfman

An article from Saturday's New York Times discusses a a National Consumer Law Center report that explains that, perhaps, the word is getting out that tax refund anticipation loans (RALs) -- short-term loans provided by tax preparers and others in anticipation of the borrower's tax refund -- are not such a great deal.  The loans come at effective annual interest rates of as much as 500%, and, besides, the IRS is processing tax refunds very quickly these days - - in about 7 days when the tax return is filed electronically.  Moreover, for low- and moderate-income taxpayers, electronic filing is free.  As the IRS explains here, that means about 70 percent of all taxpayers -– or 95 million taxpayers -- can file their tax returns electronically at no charge.  So, if taxpayers knew that they could get their refunds so quickly, would they really want to pay loan shark rates to have some immediate cash?

Thanks to the terrific work of NCLC, it appears that the word on RALs is getting out.  As the New York Times article explains, between tax year 2004 and tax year 2005, the number of RALs dropped a whopping 22%.

For further information, see my earlier blogs on RALs here and here.  And go here for discussion of an important case before the U.S. Court of Appeals for the Second Circuit concerning whether states' efforts to regulate RALs are preempted by federal law.

Freezing of Exempt Funds

The Christian Science Monitor has an article here about the freezing of exempt funds in bank accounts, the problems the practice causes for consumers, and the resulting legal issues. (Disclosure: the article quotes my colleague, Professor Gina Calabrese).

The “Check Float” Is On Its Way Out

By Brian Wolfman

You probably take advantage of the “check float” from time to time; I know I do.  That’s the idea that you can write a check when there are insufficient funds in your checking account and then deposit money in the account in the next few days, before the check clears, without worrying about bouncing your check.

You may not want to do that anymore.  I was surprised to read in Michele Singletary’s article in today's Washington Post that the “check float”  is on its way out.  Beginning tomorrow, banks can  use new technology that will clear the check -- that is, take the funds out of your account and make them available to the payee -- almost immediately and definitely by the next day.  Singletary explains that this change will not occur on an industry-wide basis overnight because the necessary technological systems and legal protections are not fully in place.

This change will have some advantages to consumers, including when dealing with a payee who will not consummate a transaction until the consumer’s check has cleared.  It may reduce the need in some circumstances for certified checks or money orders.  And retailers will like the new regime, as they will have use of your money sooner.  In any event, beware: The “check float” will become a thing of the past.  Singletary’s article explains the technology that will make this happen.  Definitely worth reading.