Category: Credit & Debit Cards

  • More on Filing Rates

    Posted by

    Ronald Mann

    Following up on my post from Monday, Charles Tabb has posted a new paper on SSRN, Consumer Bankruptcy Filings: Trends and Indicators.  He uses A.O. data through the first half of 2006 and suggests, consistently with my post, that the long-run filing drop will not be as substantial as many seem to think.

    He also looks at the Chapter 7/Chapter 13 mix and notes that the Chapter 13 filing rate is not as high as you would expect given the stated motivation of BAPCPA.  Bill Whitford’s paper in the Illinois symposium offers some good reasons why you would expect the Chapter 13 filings to be low, and I think Charles’s paper buttresses that.  Looking at the weekly Lundquist data to which I referred on Monday, I have a similar take on the Chapter 13 filings.  Although the share of filings has been quite high since BAPCPA, it has been steadily trending downward throughout 2006, getting closer and closer to the pre-BAPCPA filing share.  And the high filing share plainly is an artifact of the preternaturally low level of post-BAPCPA Chapter 7 filings, because the number of Chapter 13 filings after BAPCPA has been much below pre-BAPCPA levels.

    Finally, the last part of Charles’s paper provides a useful catalog that shows how bankruptcy filing rates correlate roughly with several indicators of consumer indebtedness, including such things as total borrowings and credit card delinquencies.  He clearly is on the right track there.  In Charging Ahead I present some detailed data on credit card borrowing and consumer credit, with some multivariate regressions finding that credit card borrowing is significantly related to bankruptcy filings, even when you account for broader borrowing trends.

    Interesting paper worth the read!

  • On the Immovability of Bankruptcy Filings

    Posted by

    Ronald Mann

    Count me in the group that is skeptical about the role of the legal system in influencing overall bankruptcy filing rates. Sure, I can see that the raw filing rates in the United States are a lot higher than they are in other countries. But when you account for factors like level of indebtedness, use of credit cards, and general economic conditions, the apparently large differences between the United States, on the one hand, and the UK and Japan, on the other, seem to disappear. The data suggest that the overwhelming majority of bankruptcy filings are inevitable, and that the principal effect of legal changes is to accelerate or defer the time of filing.


    So I have been watching with interest the trends in filing rates since BAPCPA. The conventional view, of course, is that the filings are much lower than they were before BAPCPA and that the mid-2006 plateau in filings suggests that filings have stabilized at a level less than half of the pre-BAPCPA level.


    But I’m not convinced. It is true, of course, that the filings for 2006 are much lower than they were in 2004 and 2005. Currently they are about 12,000 per week, as compared to 37,000 per week a year ago and 32,000 a week two years ago. It also is true that the 2006 filings seemed to plateau from around the beginning of April to the middle of August, a fact that might suggest stabilization. But neither of those facts tells us ANYTHING about filing trends. During 2004 and 2005, filings per week declined steadily for much of the middle of the year (weeks 10-28), the same period during which filings reached an apparent plateau in 2006. Thus, if we consider annualized filing trends, the mid-year plateau in 2006 in fact might reflect a push back towards the pre-BAPCPA filing level. To illustrate, the figure below shows the 2004 filings (not affected by the passage of BAPCPA), the 2006 filings, and the difference between 2006-2004.  {Apologies for my lack of graphics expertise.}  The trend line superimposed over the difference line suggests that in the first eight months of this year the relative increase in filings has eliminated about one third of the difference between pre-BACPCPA and post-BAPCPA filing levels.


    Graph_gif_1

    For me, the hot issue in the consumer credit literature right now is learning what motivates individuals to file at the TIMES that they file. So the passage of BAPCPA provides a natural experiment to see how the statute affects filing dates. There are two obvious filing trends connected with the passage of the statute. First, the “early filing” effect: a LOT of people filed before BAPCPA who otherwise would have filed later. That effect should depress filing rates after BAPCPA until that effect plays out. Second, the “deferral” effect: the provisions that make filing more costly, more bureaucratic, and more humiliating should defer filings until people are deeper in distress. That effect should depress filings initially but ultimately fade away as well.

    What is most provocative about the data is the long period over which those effects have played out. I would not have expected pre-BAPCPA early filers to have filed a full ten months early. But if we discard that explanation, we have to think that the deferral effect operates over a similarly extended period, so that the steady upward trend in filing rates reflects the period during which  the deferred filings are slowly rising to their “normal” level. If we have not yet reached that level, BAPCPA is deferring some filings more than ten months.

  • Charge-Offs and Bankruptcy Filings

    Posted by

    Bob Lawless

    Chargeoff_2 There was some rumbling that it was odd that both credit card charge-offs and bankruptcies were down over the past year, or at least so I was told. (A "charge-off" occurs when a bank removes the account from its books as uncollectible and takes a loss.) Apparently, the reasoning was that charge-offs were alternatives to bankruptcy. A rise in one would correspond to a decrease in the other. It was not clear to me that this should be the case. It seemed more likely that charge-offs and bankruptcy filings were complementary. More bankruptcies meant more banks would charge-off credit card loans, and charge-offs could indicate future bankruptcy filings.

    A wild thought occurred to me, which was to look at the data and see what the historical trends were. The bankruptcy filing data, although problematic, are readily available from the Administrative Office of the U.S. Courts, and the Federal Reserve tracks the charge-off data. The chart to the right tracks the year-to-year percentage change in the rates of total bankruptcy filings per capita and credit-card charge-offs. The red line represents credit-card charge offs, and the blue dots are for the bankruptcy filing rate. Click on the graphic for a slightly larger image.

    A few comments about the data are in order. First, the data are for 12-month periods ending June 30 of each year. In my own analyses of bankruptcy filing rates, I have always used that period because historical government statistics were computed over that time frame, which coincided with the federal government’s historical fiscal year. Continued use of that convention allows comparability with historical statistics. The credit-card charge-off data were taken from the Federal Reserve and represent seasonally adjusted data of charge-offs at all banks (click here for the data). The bankruptcy filing data are for total bankruptcy filings. It arguably might be better to use the government’s data for nonbusiness filings, but those data are problematic as I have previously blogged and written about with fellow blogger Elizabeth Warren (The Myth of the Disappearing Business Bankruptcy, 93 Cal. L. Rev. 745 (2005)).

    Looking at the graph, two things are readily apparent. First, I need to become more proficient with my statistical software, and second my university did not provide me with a decent graphics editing program (or I am just not any good with the software they did give me). Nevertheless, the graph reveals some interesting patterns. Most substantively, both statistics appear closely related and generally move in the same direction (r = 0.827). Also, credit-card charge-offs have much higher variance than do bankruptcy filings. The peaks and valleys of the charge-off line are much steeper than the corresponding peaks and valleys for the bankruptcy filing data. When charge-offs go down, they go down much more than do bankruptcy filings, and when they go up, they go up much more than bankruptcy filings.

    The higher variance is difficult to explain. A working hypothesis that I have is that bank regulatory cycles somehow interact with bankruptcy filing rates. As regulators push banks to clean up their bad loans, the banks may push people toward bankruptcy. As banks’ balance sheets look better, the regulators lay off, and consumers can borrow easier (and thus stave off bankruptcy for a while longer). That explanation would first show up (presumably) in banks’ charge-off decisions. Right now, it sounds like a great theory, but without data it’s only a theory.

    Credit card delinquency rates should also be related to bankruptcy filing rates. In theory, credit card delinquencies should precede and be predictive of bankruptcy filing trends. I will post soon with data comparing credit card delinquency rates with bankruptcy filings.

  • Students and Credit Cards

    Posted by

    Debb Thorne

    Classes begin here at Ohio University tomorrow. A new group of first year students are headed our way. Most, for the very first time, are out from under their parents’ roof, and, as a result, will experience many new freedoms: the freedom to eat what they want, date whom they want, attend class if they want, sleep as late as they want, do drugs if they want, and…..get credit cards if they want. Here at OU, as predictably as the beautiful foliage in the autumn, the credit card companies set up tables to solicit new (and quite unsuspecting) students. In exchange for some silly thing, such as a tee-shirt, a towel, or a sandwich, students are asked to fill out a credit card application.

    The students are completely ignorant of the "terms of the contract" that they sign. Almost without exception, they have no idea what the APR is. They have never heard of "universal default." And they are shocked when they learn that a cash advance costs them more in interest than a card purchase. I know this because every quarter at least one week in each of my classes is devoted to the potential evils of credit cards. When students learn the truth about the "fine print," they are angry to say the least. They feel set up and exploited. "Why," they ask, "doesn’t someone tell us about this BEFORE we get the credit cards?"

    And I guess that’s the point of this blog. If you know of a young person who is headed off to college, please talk with her or him about the fine print on credit card contracts. And if you don’t understand the fine print yourself, learn it. And then pass that knowledge on to the younger folks. On campuses everywhere, we stress to our students the importance of eating healthy so that they avoid the Freshman Fifteen; we tell them to drink responsibly and in moderation; we stress the importance of safe sex; we discourage them from skipping classes. But seldom do we stress to them how critical it is to keep their credit good and their credit report clean.

  • Products Liability for Credit Cards?

    Posted by

    Bob Lawless

    Someone once observed that "the argument for reregulation of consumer lending is a lot like the argument for regulating any other useful but potentially dangerous product." That someone was fellow Credit Slips blogger Elizabeth Warren in her book (with Amelia Warren Tyagi), The Two-Income Trap: Why Middle Class Mothers & Fathers Are Going Broke (Basic Books 2003). Warren & Tyagi continue, "Predatory loans may not set houses on fire the way a faulty toaster might, but they steal people’s homes all the same." Just like we regulate toasters for consumer safety, an argument can be made that we should do the same for consumer lending.

    In a similar vein, a student note in the most recent issue of the University of Illinois Law Review explores the doctrinal underpinnings for potential products liability claims against credit card issuers. The cite is Adam Goldstein, Note, Why "It Pays" to "Leave Home Without It": Examining the Legal Culpability of Credit Card Issuers Under Tort Principles of Products Liability, 2006 U. Ill. L. Rev. 827. Is products liabilty a viable theory against the credit card industry? Even if there seems to be only a remote chance that a court would actually order a credit card company to pay damages, will we see credit card companies begin to take ameliorative steps like fast-food and alcoholic beverage companies did in response to similarly remote threats of liability?

  • Fed Says We’re All Doing Great with Credit Cards

    Posted by

    Elizabeth Warren

    The Federal Reserve has issued a new report on whether credit card practices might have something to do with people getting into financial trouble (short version: no problems, market is working fine). 

    Ronald Mann has written terrific response.  Check it out.   

  • Payroll Debit Cards

    Posted by

    Bob Lawless

    An administrative snafu at my university led to me receiving my latest payroll on a debit card. Those accustomed to large universities will see nothing unusual in that. Universities exist mainly to propagate bureaucracy, often making research and teaching seem like an afterthought. I have experienced–and I am not making this up–a Committee on Committees and a Committee to Decide Which Time Classes Should Meet. This payroll debit card seemed like another good story about university bureaucracy to tell around the campfire at the next academic conference I attended.

    The only novelty about the payroll debit card was my idea it was a novelty. Payroll debit cards already are a big thing. They can be great for employers because they reduce the expense and hassle of processing paper checks. They can be great for companies selling payroll debit card services because they mean more business and more funds on which they do not have to pay interest. It is just  not always clear that payroll debit cards are great for employees, and it is not always clear that every employee has a choice. I can have my next paycheck sent to my bank account via direct deposit. For part-time or low-wage workers, they may have no choice but to accept a debit card for their pay.

    Payroll debit cards are being pushed big-time by the consumer financial services industry. Do a Google search for "payroll debit cards", and you will find plenty of industry web sites extolling their virtues. (Add the word "consumer" to the search if you want to find web sites discussing some of the pitfalls.) Payroll debit cards are advertised as being cheaper than a bank account, but it is not clear that is always the case. Payroll debit cards are like any other debit card, and fees are charged at ATMs for using them (although the first withdrawal from a payroll debit card is sometimes free). Any other fee that one might get for a debit card also can apply to a payroll debit card.

    There are potential issues with payroll debit cards. First, not all payroll debit card companies are banks, and if the payroll debit card company goes bust, employees could get caught in a legal fight between their employer and the company. There also are questions about what happens if the debit card is lost, although a recent rulemaking from the Federal Reserve subjecting payroll debit cards to the same regulation as ordinary debit cards probably answers the questions and limits the consumer’s losses.

    The consumer financial services industry markets payroll debit cards as especially useful for the "unbanked," persons who do not maintain a regular bank account. Payroll debit cards certainly seem a better solution than check cashing operations with high fees, but payroll debit cards raise policy issues for those interested in consumer finance. I have an open mind whether, on balance, payroll debit cards are a positive development. Read the advertising literature for payroll debit cards, and you will
    see convenience, convenience, convenience. In other words, payroll debit cards make it
    easier for consumers to spend, spend, spend and for a particularly unsophisticated segment of the consumer market. Do payroll debit cards discourage saving? If so, do we really need another fee-based payment system that discourages consumer savings? What are the true out-of-pocket costs of payroll debit cards? Is existing regulation adequate to meet the challenge of payroll debit cards?