Consumer Law & Policy Blog

Times Reports Bad News for Consumers: More Spam and HIgher Interest Rates on Subprime Loans

Today's New York Times has two articles relevant to consumer law.  The first article reports on an increase in the amount of spam getting through spam filters; at the moment, in the seesaw battle between the senders and blockers of spam, it appears that the senders are winning.  It will hardly come as a surprise that the federal CANSPAM statute has not solved the problem.  The second article describes the problems caused subprime borrowers by the rise in interest rates.

Senate Democrats Plan Crackdown on Credit Card Practices

The following excerpt is from an article published on November 30 in CQ Today and is reprinted by permission:

Senate Democrats Plan Crackdown on Credit Card Practices

    A leading Democrat said today he will push to curb “abusive” practices of credit card issuers when his party takes control of Congress next year.

    “Education . . . I’m afraid, isn’t going to be enough,” said Sen. Carl Levin, D-Mich., stressing the need for new legislation and regulation in a speech at the Center for American Progress. “Without that club, without that stick, we’re not going to see reforms coming.”

    Levin pledged to hold hearings on the issue early next year as chairman of the Senate Homeland Security and Governmental Affairs’ Permanent Subcommittee on Investigations. He said he expects Sen. Christopher J. Dodd, D-Conn., who will chair the Senate Banking panel, to introduce legislation, though the timing remains unclear. Levin said he hoped to cosponsor Dodd’s bill.

    Levin took aim at what he described as unfair and confusing practices by credit card issuers, practices he said are used to reap “extraordinary” profits. And he said these fees, interest rate and disclosure practices take advantage of low- and middle-class American families.

    “They’re the brunt of those excesses,” he said.

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Report By NCLC and CFA: Refund Anticipation Loans With A Twist

     The National Consumer Law Center and the Consumer Federation of America have just issued a report exposing new forms of tax refund anticipation loans (RALs), called "pay stub" and "holiday" RALs. The report and the groups' press release explains that consumers now have the opportunity for crushing debt at triple-digit interest rates well before tax season arrives.  The report's conclusion is blunt:  "Pay stub and holiday RALs represent a new and more insidious threat to the tax refunds and Earned Income Tax Credits of low-income taxpayers."  Definitely worth reading.

Study: Bankruptcy filings spike in wake of hurricanes

by Christopher Peterson

Robert Lawless, a bankruptcy professor at the University of Illinois, recently released the results of an interesting new empirical study. The piece, entitled Bankruptcy Filing Rates After a Major Hurricane, tracks consumer and business bankruptcy filings for 36 months in states affected by hurricanes that caused over a billion dollars in damage. Among other results, Lawless finds that "[s]tates primarily affected by hurricanes have an average increase in filing rates that is around fifty percent larger than the increase in unaffected states: for every two new filings in an unaffected state, there are three new filings in the landfall state." Methodologically, I suspect it was difficult to find statistically comparable control groups for an affected state, given the economically significant differences between geographic regions. Lawless does try to deal with this problem by comparing affected bankruptcy districts to unaffected districts with similar historical filing rate patterns. While these results were not statistically significant, they did tentatively corroborate Lawless' statewide comparisons. Interestingly, Professor Lawless' data also appear to suggest that poorer areas have relatively greater post-hurricane bankruptcy filing rate increases than wealthy areas. This seems to make sense since we should expect that lower income communities would have less resources to absorb the financial shocks caused by natural disasters.

The paper is a quick read and promises to buttress common intuitions on the issue. The paper also highlights irony behind the national response to the Katrina disaster. Instead of borrowing money to buy thousands of worthless mobile homes (and give manufacturers a big windfall), the government would probably have been better off adopting reasonable consumer protection law including non-means tested access to the bankruptcy system.

Not So Cute Anymore

by Christopher Peterson

Gary Coleman endeared himself to Americans as a child actor staring in the 80's sitcom "Different Strokes". His cherubic face and affably excitable character reliably delivered punch lines, including especially his signature catchphrase "Whatchoo talkin' 'bout, Willis?"  When his television show ended, Coleman found that his parents and manager had mismanaged his multi-million dollar trust fund, eventually leaving him penniless.

I always felt sympathy for the actor, who suffers from a congenital kidney disease, as he tried to break out of his childhood typecasting and find a satisfying path in life. Still, it raised my eyebrows when I learned that Mr. Coleman had accepted a job as a spokesperson for Cash Call, Inc., a California based finance company that makes high-interest, unsecured loans to consumers in California, Idaho, Nevada, New Mexico, and Utah. In most other states Cash Call also acts as a solicitation agent for First Bank & Trust, Milbank, South Dakota.

This three-way relationship brought a couple of thoughts to mind:

First, lenders have a tendency to focus on economics when they talk about public policy. Discussions of usury law, disclosure law, and bankruptcy seem to inexorably turn to concepts like opportunity costs, Pareto optimal outcomes, and regulatory distortion. The intellectual contributions of behavioral economists are generally scorned or minimized. But lenders do seem to rely on psychology when they talk to their customers. Mr. Coleman is valuable to Cash Call and First Bank & Trust because of his notoriety. It is not as though loans from by a firm endorsed by Gary Coleman are better or cheaper loans. Rather they employ him because he is salient in the minds of millions of people who watched him on television back in the good-ole’ days. Mr. Coleman reminds us that things don’t always work out, and that even former TV super-stars do not need to feel bad about borrowing money from a shady company like Cash Call now and then. (Go to ripoffreport.com and search under "Cash Call" for a long list of upset customers, including this one or this one.) Mr. Coleman is an ideal spokesman for a company that wishes its customers to lower their guard. After all, who wouldn’t trust cuddly, little "Arnold" from TV?

A second point. In an essay forthcoming in the American Law Review, I question the wisdom of granting federal preemption to agents of chartered depository institutions. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, independent agents of national banks and thrifts should be regarded as beyond the regulatory and legislative oversight of state governments. The FDIC is considering an attempt to grant similar powers to state banks, such as First Bank & Trust, Milbank, South Dakota. Federal regulators have explained that state governments should not be allowed to regulate national banks and thrifts simply because the financial institutions chose to deliver services through an agent. But as Cash Call’s relationship with First Bank & Trust demonstrates, non-depository agents will always tend to have less incentive to forego predatory behavior than a depository institution with closer oversight, greater capital requirements, and relatively greater investment in reputational capital. If First Bank & Trust wants to use Gary Coleman to peddle their high-interest loans, shouldn’t they be required to hire him directly, rather than hiding behind an agent?

In the end perhaps Mr. Coleman still deserves our empathy. I suspect he is being used yet again.

Consumer Debt, the Military, and Iraq

by Deepak Gupta

What could the increasing level of consumer indebtedness in the United States possibly have to do with the security situation in Iraq?

Well, according to a disturbing new Associated Press report, "Thousands of U.S. troops are being barred from overseas duty because they are so deep in debt they are considered security risks."

The number of troops held back has climbed dramatically in the past few years. And while they appear to represent a very small percentage of all U.S. military personnel, the increase is occurring at a time when the armed forces are stretched thin by the wars in Iraq and Afghanistan . . .

The Pentagon contends financial problems can distract personnel from their duties or make them vulnerable to bribery and treason. As a result, those who fall heavily into debt can be stripped of the security clearances they need to go overseas.

While the number of revoked clearances has surged since the beginning of the Iraq war, military officials say there is no evidence that service members are deliberately running up debts to stay out of harm's way . . .

The problem is attributed to a lack of financial smarts among recruits; reckless spending among those exhilarated to make it home alive from a tour of duty; and the profusion of "payday lenders" — businesses that allow military personnel to borrow against their next paycheck at extremely high interest rates.

New Guidelines on Exotic Loans

by Jeff Sovern

An article in today's New York Times reports on predictions that new federal lending guidelines will reduce the number of borrowers who take out interest-only loans and adjustable-rate mortgages with payment options.  The Guidelines apply to so-called exotic loans and call for disclosure of, for example, possible increases in monthly payments (listed in the Guidelines under the heading "Payment Shock") and prepayment penalties.  If the predictions come true, that would suggest that better-informed consumers would rather not use such loans.  It would also support the notion that the Truth-in-Lending disclosures aren't enough to inform at least some consumers. 

New GAO Study: Credit Card Late Fees Up, Disclosure Down

An extensive new study by the Government Accountability Office, the investigative arm of Congress, shows that late fees for credit-card payments have jumped, but card issuers have done a poor job of explaining their policies on fees and penalties to consumers. The report examined:

(1) How card fees and other practices have evolved and how cardholders have been affected, (2) how effectively these pricing practices are disclosed to cardholders, (3) the extent to which penalty charges contribute to cardholder bankruptcies, and (4) card issuers' revenues and profitability. Among other things, GAO analyzed disclosures from popular cards; obtained data on rates and fees paid on cardholder accounts from 6 large issuers; employed a usability consultant to analyze and test disclosures; interviewed a sample of consumers selected to represent a range of education and income levels; and analyzed academic and regulatory studies on bankruptcy and card issuer revenues.

The GAO report describes the fees, interest rates and disclosure practices of 28 popular credit cards. It found that late fees averaged $34, up from $13 in 1995, while some credit-card issuers impose penalty interest rates of more than 30 percent on consumers who pay late or exceed the credit limit.