Those in attendance at Charles Tabb’s excellent symposium on BAPCPA this past spring in Chicago will recall a discussion we had on this topic prompted by my article, which is also being published in the Illinois Law Review, on this very theme — "Reckless Lending: Time for a New Lender Liability?"
Here is a link to the symposium web page, although I do not know whether they have the articles available for downloading yet: Illinois Law Review. My article explores the various policy arugments in favor of — and some non-trivial ones against — creditor liability in this area. It’s an idea which traces a pedigree back to the inimitable Vern Countryman. Those who can’t wait to read the article may be interested to know at the outset that because the idea has so many complicated ramifications, I also propose a "gentler" version than outright tort liability. That is of an affirmative defense to a collection proceeding, but no independent cause of action for consequential damages.
Comments
5 responses to “Tort Liability in Consumer Credit Article”
Tort of reckless lending??
Let’s see. Do lenders have incentives not to lend to people who can’t repay?
Sure, since such people tend not to repay.
Do lenders devote substantial effort to figuring out who can repay?
Sure, that’s what credit scoring is about.
So, we have incentives not to overlend, and a market response.
Now how about borrowers.
Do borrowers who can’t repay have incentives to borrow?
Sure, they get the money and don’t pay it back.
Somehow, the business of advising borrowers on whether they should not borrow has never taken off.
So, the incentives problem seems to be that we have incentives to overborrow.
So maybe what we need is a tort of reckless borrowing.
But, these people can’t repay, so that won’t work.
Let’s make it a crime instead, and throw them in jail until they repay.
Wait, we tried that a while back, and it didn’t work well. People in jails had trouble earning money to repay their debts.
So maybe let’s throw them in jail for a shorter time? The more they recklessly borrow, the higher the sentence. We’ll send the biggest overborrowers to jail for, oh, five years at least. Bernie Ebbers and the like. Little guys will just face misdemeanor charges, and be slapped on the wrist and told not to do it again.
Bernie
Mr. Pottow – Without your article, I can’t comment on it. As mentioned in another post, however, I do think that raising “negligent lending” defensively is a possibility. I have done so in foreclosure cases in which the lender has loaned money under horrid circumstances. I’ve never had to rely exclusively on that defense because I routinely joined all of the players into my cases and was able to get settle all without proceeding just against the lender.
I might be an interesting tack to take in marshallng actions instituted by a credit card judgment creditor, or other actions in which the lender is seeking any type of equitable relief.
My mind is split on the idea. I will say that it will take a really good set of facts to sell the idea to any judge. This is especailly true because so many of these claims are in lower courts which look to clear their dockets, not clog them further. For anyone trying the claim, I would strongly caution against doing so without the very best of facts.
Just as an aside, here is a link to a site discussing the DOD report on predatory lending and the armed services.
http://www.responsiblelending.org/
Bernie — Thanks for the post! I started out with where you are as a first-blush take on the issue, but as I analyzed it in more depth I became increasingly persauded by Ronald Mann’s modeling of the supply-side dynamics of the market. That is, I disagree (for largely the reasons he explains about “sweatboxing”) that the lenders’ incentives lie in only lending to people who can fully amortize their loans. On the contrary, the lenders’ incentive is to profit, which does not necessarily translate into requring full amortization based on the way they structure their fees. (As for your demand-side conjecture of incentive to overborrow, I’ll leave that for the empiricits to see whether supported by available data.) You should have a read of Mann’s piece — it’s really quite interesting. John.
In prosecuting predatory mortgage lending cases, it became apparent that the lending industry has taken a very short term view when it comes to lending standards. Many times I heard in depositions or through the grapevine that the origination department was eyeing loan volume, not loan quality. Collection was another department’s problem. Origination volume, not portfolio quality, is the engine which drives bonus plans. In the mortgage industry, given that the secondary market absorbs most of the loans originated, originating lenders seldom have to live with their underwriting decisions. This may not translate as well into the credit card industry, but given that most lenders work in both lines, overall ideology has to infect both markets.