The title to this post is neither spam nor a joke. A new service, called Prosper Marketplace, gives individual lenders "the privilege to bid" on loaning up to $25,000 to individual borrowers. Building on the success of E-bay, Lending Tree, and, well frankly, Match.com. Prosper allows borrowers to post a picture of themselves and a story of why they want or need money. Borrowers also submit credit information and receive a rating from AA to HR ("high risk".) Borrowers can join "groups" to add to their credibility, such as "Veterans Helping Veterans," "Marquette University Alumni and Friends," and "Teacherloans.com." Prosper charges a modest fee for each loan completed. The Wall Street Journal and Salon have both reported in detail on Prosper.

While it is too early to know if Prosper will live up to its name (the first loans are just hitting the 120 day period after which they can be labeled in default), I think the early interest in the site reflects frustration with the lending industry. Traditional banks are viewed as too slow and stodgy. Credit cards are viewed as overpriced and too aggressive in collection. Prosper’s model is to literally "bank" on people’s interest in each other. The bidding process combats lender greed, and the vetting process forces borrowers to answer very personal questions about why they need the money. Prosper provides a public glimpse at the variety of reasons that people borrow small sums of money, including to fund a wedding, to make up a gap period before college financial aid arrives, and to pay the closing costs on a house purchase. These types of transactions are usually hidden from view because payday lending and credit card data are proprietary and confidential. The willingness of Prosper’s borrowers to share their financial lives is perhaps a reflection of society’s comfort with borrowing money as a routine part of American consumer behavior.

Congress is putting the final touches on a pension reform bill as the House-Senate Conference is ironing its final differences.  This bill deals with some relatively arcane but nontheless vital issues,
especially for workers with traditional defined-benefit pension plans.

When companies make pension promises to workers, they are in effect binding themeselves to pay future debts.  How do we know these promises aren’t pie in the sky that the companies will never be able to pay?  Because the government requires companies to "fund" these future pension obligations.  It does so by making a bunch of actuarial calculations on what these future promises will cost, and how many assets the companies will need to cover them.  When companies don’t have enough assets to cover these liabilities, as set forth in the pension regulators’ formula, their pension plans are deemed "underfunded."

In the big pension reform of the 1980s, Congress gave companies with underfunded pension plans 30 years to make catch-up payments, and even then they only had to reach a target of assets sufficient to cover 90% of pension liabilities.

The new bill clamps down (at least somewhat).  For example, it would require fully funding underfunded pensions within 7 years (the airlines have squalked they’ll fold with that requirement, so will probably get a carve-out exception).  And by "fully funded," they mean it this time: 100% coverage, not just 90%.

Good news for future pensioners (i.e., current workers, i.e., most of us), right?  Not necessarily.  One of the clear results of Congress’s sensible clamp down on underfunded pensions is that other companies will do just what the airlines are doing in bankruptcy: discontinue defined-benefit pension plans for their workers.  When we account honestly for how expensive these plans really are to American businesses, the unfortunate price for our commendable transparency is the unhappy realization that many companies simply can’t afford the promises they’re making (or, more precisely, the promises that were made some time ago).  Whether they were dishonest in making those promises back then, grossly optimistic, or just incompetent is, sadly, now water under the bridge.  Whatever the reason, as the true costs of defined-benfit pension plans set in — and are drawn into the light by the new pension bill which makes them harder to hide — companies will simply get out of defined-benefit plans altogether and move to defined-contribution plans (the fancy name for 401(k)s).  We’ve seen this happening already with historical data gathered by the Survey of Consumer Finance.  So instead of shouldering the huge risk of uncertain future health care costs and longevity increases of a baby-boom population, businesses will pass that risk along to their workers.  If the workers make poor investment decisions and lose all their future pension money, they’ll always have the final, ultimate defined-benefit plan of all: social security.  At least for now.  (That’s an underfunded pension plan that Congress has
so far avoided.)

An article appears In today’s NY Times (reg. req’d) discussing the government’s plans to overhaul financial assistance for hurricane victims. FEMA will give only $500 under its new rules and directly deal with hotels and landlords to control access free housing. The inevitable fraud that followed FEMA’s relief efforts last year has become the favorite subject of those who want to blame the hurricane victims for living in the path of Hurricane Katrina. What is never discussed is how some relatively simple changes to bankruptcy and credit laws would make life easier for victims of natural disasters.

Last year, I wrote an article that found bankruptcy filing rates tend to go up twelve to thirty-six months after a major hurricane. This article appeared in the Nevada Law Journal, although you can read an earlier draft on SSRN. The data show that for every two new bankruptcies that occur in areas unaffected by the hurricane, there are three new bankruptcies in the judicial district where the hurricane made landfall. In addition to the physical and emotional devastation, natural disasters leave people financially distressed as well.

Some simple changes might alleviate a few of the financial problems that natural disasters can cause. For example, after a natural disaster, a victim not only has to find new shelter and transportation but also may be paying off an old house or car that sits under a pile of rubble. In these circumstances, federal law should limit the creditor’s to the value of any insurance recovery. By tying the creditor’s recovery to insurance, the law would create incentives for the creditors to see to it that their debtors had insurance against natural disasters. Other measures would help such as temporary moratoria on debt collections in federally declared natural disaster areas and mediation of debt collection effects. Similar moratoria and mediations played an important role in the farm debt crises of the 1980s. Temporary bans against adverse credit reporting for persons in a natural disaster area would help those affected establish new credit. Immediately after Hurricane Katrine, some lenders flatly refused to extend new credit to anyone in the affected areas, and such natural disaster redlining should be banned. These are just a few ideas and meant to prompt some thinking on the topic.

I am not trying to suggest that credit relief measures should be a substitute for disaster aid. Not everyone has access to credit either before or after a natural disaster. The time has come, however, for a serious discussion on what credit relief measures are appropriate after a natural disaster.