Category: Pending and New Legislation

  • Bankruptcy in the Senate, December 4

    Posted by

    Bob Lawless

    I’m in Providence, Rhode Island, for a field hearing of the Senate Judiciary Committee. The hearing is "Credit Cards and Bankruptcy: Opportunities for Reform." The other witness are former Credit Slips guest blogger and attorney for the National Consumer Law Center John Rao, Bankruptcy Judge Thomas Small of the Eastern District for North Carolina, and Professor John Chung of the Roger WIlliams University School of Law. The cab driver from the airport was among the most friendliest I’ve encountered and was pointing out the many fine features of Providence as we drove in. It’s always nice to have your first contact with a place be with someone who is proud of their town.

    One of the topics will be S. 3259, the Consumer Credit Fairness Act introduced by Senators Whitehouse and Durbin. This bill defines a "high cost consumer credit transaction" as one in which the interest and fees create an interest more than 15% higher than the rate on 30-year U.S. Treasury obligations (up to a maximum of 36%). Right now, that would be a credit transaction with an interest rate a little over 18% 19%. The bill then would subordinate to all other claims in a consumer bankruptcy any "high cost consumer credit transaction" and would excuse from the means test any bankruptcy caused by a "high cost consumer credit transaction."

  • The Bailout — another perspective (part 1)

    Posted by

    Stephen Lubben

    First, I want to thank Bob Lawless and the rest of the Credit Slips folks for having me back yet again — I’m getting to be like the guest who would not leave.

    Second, while it might make me part of the "establishment," I’m going to say right from that start that I join those who favor the bailout.

    I also think we need to avoid a whole lot of knee jerk reactions that
    are floating around out there — like the SEC’s ban on short selling, which
    is quickly becoming the Bad Management Protection Act of 2008.  Of course, the notion that the administration can open the door on this issue "just a little" is also equally suspect.

    I view the economy and the larger financial system as being at a Titanic like moment:  post iceberg, per submersion.  It is certainly reasonable to disdain those who got us into this situation, but I’m not going to let my feelings for them get in the way of saving as many people as possible.

    That said, I understand why there is a good deal of skepticism about the bailout.  In part chapter 11 is to blame — there has been almost no effort to explain why AIG is different from Enron, United Airlines, or any other really big corporation that has recently failed.  And the financial industry needs to fess up that it blew its chance to self-regulate the credit default swap market — too many people, even myself to some degree, bought the "trust us, we’re experts" line from ISDA and other market players.

    No wonder people aren’t buying that line in connection with the bailout — especially when the administration has its own credibility problems in this regard in connection with other big, complex projects in the non-financial area.

    More on the chapter 11 issue, and why I think the administration has done a terrible job of selling this but still generally support the bailout, after the jump.  I’ll save my thoughts on the CDS market for another post.

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  • Hearings on Squeezing the American Family

    Posted by

    Bob Lawless

    Yesterday, the Joint Economic Committee of the U.S. Congress (JEC) held a hearing on the economic state of the American family. We’ve got falling real incomes, a mortgage crisis and a housing market in turmoil, record gas prices, and other increases in the costs of living. It’s not going well.

    Among the witness was Credit Slips‘s own Elizabeth Warren who started off with this:

    From 2000 to 2007, measured in real dollars, incomes declined while basic expenses increased sharply. By the time today’s family makes a few basic purchases—housing, health insurance, food, gas, phone—it has about $5800 less than it had back in 2000.

    Warren backs up that statement with numerous charts and statistics that demonstrate how incomes have failed to keep up with the rising cost of living. Her full testimony is here.

  • Consumer Credit Fairness Proposed for the Bankruptcy Code

    Posted by

    Bob Lawless

    On Monday, Senators Whitehouse and Durbin introduced S. 3259, the Consumer Credit Fairness Act. The bill would cut back on some of the worst consumer credit abuses by trimming back on collection rights in bankruptcy.

    The bill begins by defining a "high cost consumer credit transaction" as any extension of credit, including costs and fees, that exceeds the lesser of (a) 15% plus the 30-year Treasury bond rate (a calculation that currently stands at 22.4%) or (b) 36%. There are two consequences that would flow from a transaction that met this definition. First, the creditor in a "high cost consumer credit transaction" would have their claim subordinated to all other claims in the bankruptcy case. Second, any debtor who filed bankruptcy as a result of a "high cost consumer credit transaction" would be exempt from the means test that determines eligibility for chapter 7 bankruptcy.

  • Fewer Frisbees on Tennessee Campuses This Fall

    Posted by

    Katie Porter

    Every fall as the Credit Slips bloggers prepare to begin teaching, we are treated to the sight of tables, tents, and marketing literature aimed at marketing credit cards to college students. This year, those familiar signs won’t be appearing on the campuses of the University of Tennessee system. On May 21, 2008, Tennessee enacted a law prohibiting credit card issuers from recruiting students on campus or through university facilities or student organizations. (There is an exception for "days when there are athletic events" so presumably home football games retain their usefulness for credit card issuers). The bill also requires the University of Tennessee institutions that receives funds from student credit cards or from the use of the school name or logo on credit cards to disclose the amount of money received and how the money was used.

    Calls for restricting credit card marketing to students are nothing new (see here and here and here) but I think this is the first law to be enacted that absolutely bans campus marketing. I’m confident the credit industry will challenge the bill, probably on preemption grounds, arguing that as the state of Tennessee lacks authority to regulate national banks. I think that argument should fail. The state isn’t banning credit cards as a matter of general commerce; the legislature is acting in its role as overseer of the state’s educational institutions.  If an institution itself (Rochester Institute of Technology, University of New Mexico) can ban or sharply limit the solicitation of students for credit cards, I think a state legislature can enact the same prohibition for the campuses that it controls.

  • Should We Not Disclose Credit Card Information?

    Posted by

    Mechele Dickerson

    The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

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  • The Future of Mortgage Servicing

    Posted by

    Katie Porter

    In my prior post on mortgage servicing, I talked about the potential of mortgage servicers to be harmful barriers between homeowners and investors, both of whom may want to negotiate a loan modification. Recognizing such a problem raises the question of a solution. U.S. Representative Maxine Waters recently introduced legislation that would profoundly alter the duties of mortgage servicers. The bill, HR 5679, The Foreclosure Prevention and Sound Mortgage Servicing Act of 2008, would prohibit the initiation of a foreclosure if the mortagee or servicer has failed to engage in "reasonable loss mitigation activities." The bill lays out exactly what counts as loss mitigation and offers up non-binding guidance on standards of affordability for loss mitigation. Servicers would have to report data on their loss mitigation activities, disaggregated by the type of mitigation activity (separately accounting for things like modifications, deeds in lieu of foreclosure, or repayment plans).

    The bill also takes aim at the communication problems between servicers and homeowners. The bill requires services to provide a toll-free number that provides borrowers with direct access to a person with the information and authority to fully resolve issues related to loss mitigation and specifies that such a person must be physically located in the United States. Servicers are also required to forward borrower’s information to HUD-certified housing counselors whenever a borrower is 60 days or more overdue.

    In the hearing last week on the bill (which you can watch as an archived webcast), Chairwoman Waters kept returning to a fundamental point–mortgage servicing is an unregulated industry. The witness testimony was essentially unanimous that mortgage servicing has a tremendous impact on American families and on the resolution of the current crisis. Of course, the debate was over whether this regulation was the right approach. The bill hasn’t gotten much publicity yet, but I encourage readers who are interested in the foreclosure crisis to take a look and post their feedback.

  • IRS Should Have Gone for a Baker’s Dozen with RAL

    Posted by

    Katie Porter

    Each year the IRS releases a Dirty Dozen of tax scams. I wish the 2008 list had labeled another practice a scam–refund anticipation loans or RALs. A RAL is a short-term cash advance against an anticipated tax return. Essentially, the taxpayer is paying to access their own money immediately rather than waiting for the IRS to process their refund. There are about 9 million RALs made each year, with APRs ranging from 50% to 500%. Perhaps their high fees are justified by the fact that they are short-term loans. On the other hand, the tax preparers have a lock on this market, which could reduce competition. It seems hard to believe that the risks of nonpayment are very significant when the amount of the refund is being determined during the tax preparation process and the preparer captures the refund directly, rather than relying on voluntary remittance from the debtor.

    The IRS does warn against "dishonest" tax return preparers who "make their money by skimming a portion of their clients’ refunds." Although most leading preparers offer RALs, I think RALs are "making money by skimming clients’ refunds."

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  • Illinois Statute Gives Debtors Less Protection After Bankruptcy?

    Posted by

    Bob Lawless

    A crazy Illinois law demonstrates how bad drafting is not just for the U.S. Congress. State legislatures can do it too! It is my understanding that some Illinois automobile lenders are citing this law (625 ILCS 5/3‑114) as a reason to give some debtors less protection after they filed bankruptcy. Under this reasoning, these debtors are in  worse legal position because of the bankruptcy filing. That can’t be right.

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  • Discussions of the Kind That I Stimulated By My First Post

    Posted by

    James White

    Discussions of the kind that I stimulated by my suggestions on Monday (about what Congress might do) reveal widely different assumptions about the number and type of debtors that will default. Shouldn’t we look for the data? The data might keep conservatives from falling off the cliff to the right and the liberals from falling off on the other side- at last that is my hope. So who are the debtors and how many will default? Those are the questions for investors, legislators and lenders. But the answers are not easy to find, and, with incomplete data, each of us is the captive of his political bias. What about the defaulting debt and about the deserts of the debtors (Fools all? Every one defrauded?)

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