Securitization | War on the Home Front

67087Leave a CommentArbitration+Double+Standards2012-01-31+20%3A01%3A58Bob+Lawless

A case out of the Third Circuit demonstrates the frustration that many of us have with the current state of consumer arbitration law. The consumer had purchased a Dell computer that he alleged had design flaws leading to repeated failure of his motherboard. After Dell refused to fix the computer a third time, he brought a class action against Dell for the alleged design defects.

Dell invoked an arbitration clause which read that any dispute "SHALL BE RESOLVED EXCLUSIVELY AND FINALLY BY BINDING ARBITRATION ADMINISTERED BY THE NATIONAL ARBITRATION FORUM (NAF)." This clause was found in "clickware," that is an agreement to which the consumer agreed by checking a box on Dell's web site when he purchased the computer. The capital letters were in the original agreement, presumably to make this language stand out due to its importance. As many readers of this blog will quickly pick up, there is a problem with this language -- because of abuses the National Arbitration Forum agreed to a consent judgment where it would no longer administer consumer arbitrations.

This case should have been easy. Dell offered its customer a "take it or leave it" form contract that Dell drafted. In that contract, Dell specified an arbitral forum that had to stop doing consumer arbitrations because of its abusive practices toward consumers. In its own contract language, Dell made clear that any dispute had to be resolved "exclusively" by the National Arbitration Forum. Because Dell's own contractual language fails to bind the consumer given the unavailability of the National Arbitration Forum, the consumer is not required to bring his claim in arbitration. In dissent, Judge Sloviter makes similar points. The lower court in this case also came to this conclusion.

The majority of the appellate court, however, sets up an outcome where Dell wins where the coin comes up heads and where the consumer loses when the coin comes up tails. The court notes that the word "exclusively" in the arbitration clause could be read to modify "binding arbitration" rather than the forum where the arbitration occurs. Well, I suppose that language could be read that way, but we normally do not go out of our way to construe an ambiguity in favor of the drafter, especially in a consumer form contract.

The majority also makes much of section 5 of the Federal Arbitration Act, but it makes the same mistake that many of my students make coming out of a first-year law school curriculum that is heavy in case analysis. The majority spends a lot of time talking about what courts say about section 5, literally relegating the actual language of section 5 to a footnote (the underlining is mine):

If in the agreement provision be made for a method of naming or appointing an arbitrator or arbitrators or an umpire, such method shall be followed; but if no method be provided therein, or if a method be provided and any party thereto shall fail to avail himself of such method, or if for any other reason there shall be a lapse in the naming of an arbitrator, or arbitrators or umpire, or in filling a vacancy, then upon the application of either party to the controversy the court shall designate and appoint an arbitrator or arbitrators or umpire, as the case may require, who shall act under the said agreement with the same force and effect as if he or they had been specifically named therein; and unless otherwise provided in the agreement the arbitration shall be by a single arbitrator.

Section 5 could be read to allow the court to name an arbitrator on these sorts of facts which, in fairness to the court majority, some courts have done. But, there are at least two questions raised by such an interpretation. On the facts of this case, is there a "lapse in the naming of an arbitrator?" Second, is the National Arbitration Forum even an "arbitrator" within the meaning of the statute. The NAF is an arbitral forum, and the language of the statute as a whole suggests that, where it says "arbitrator," it means the actual human being who will conduct the arbitration. Here, the problem was not a lapse in naming an "arbitrator" but the unavailability of the organization designated to administer the arbitration as chosen by the parties to the contract.

Fair-minded people might see contractual and statutory arguments going both ways, and the majority admits as much. Thus, the majority rests heavily on what we might call a "tie breaker," and it is here where my frustration lies. In reaching its decision, the majority makes six references to the "federal policy favoring arbitration." This seemingly high-minded policy is not exactly a neutral principle. A policy "favoring arbitration" necessarily favors big corporate interests over consumers. It is a policy that is hostile to consumer claims and to class actions. Maybe the court wants to be hostile to such claims, but it is dishonest to dress it up as a neutral appeal to preferring arbitration. One also might wonder where this "policy" comes from such that the court would not be wiser sticking to the "policy" articulated by Congress in the words of the statute.

The application of this so-called policy becomes a "heads I win, tails you lose" rule. When companies get the arbitration clause correct, they can ask the courts to enforce the clause as written. When companies overreach and offer arbitration clauses with enforceabillity issues, they can ask the courts to fix their mistake, construing the clause or law to require arbitration nonetheless. In their extreme application, these principles can undermine public confidence in the courts to treat all parties equally.

Jan

Private Equity Works on Its Image Problem

67025Leave a Comment2012-01-31+15%3A03%3A56Stephen+Lubben

Bloomberg out with an interesting story about how private equity firms are buying single family homes at foreclosure to rent out. It surprises me that there is real interest in what remains a relatively small scale, highly heterogeneous asset. Previous attempts to achieve economies of scale in this area have been disastrous -- see Bank of America.

Jan

Consumer Friendly Forms for Bankruptcy

By Katie Porter | Securitization-MBS

66742Leave a CommentConsumer+Friendly+Forms+for+Bankruptcy2012-01-30+11%3A21%3A00Katie+Porter

In many respects, bankruptcy is a one-size-fits-all legal process. Yes, there are ample differences in the law (and a world of difference in practice) between the bankruptcy of a large corporation and a typical consumer. But the Bankruptcy Code itself contains plenty of provisions of general applicability. A major example of the one-size-fits-all approach to bankruptcy is the official forms for filing a case. The basic petition and schedules are the same forms for Big Airline Co. and Mr. Joe Blow. The information on the forms is wildly different, with Big Airline Co. listing hundreds or even thousands of creditors, with many more digits in their debts, than Joe Blow. But the form for those debts--Schedule F--is the same form. That may all be changing soon.

The Bankruptcy Rules Committee began a Forms Modernization Project a few years ago, and one of its top agenda items has been creating new forms just for use in consumer bankruptcy cases. Although few people seem to be aware of the effort, a draft version of those new forms is available to the public and to my mind, well worth a look. To see the forms, go here, then click on September 2011, download the file, and look at pp. 189-315 of the PDF (or tab 7.1 if you use the PDF index.) One thing that is obvious from the page numbers in the prior sentence is that the new forms are really long--way longer than the current forms as completed in the typical consumer case. The added length results in part from the development of extensive instructions for each form. Below is an example of a new form with some commentary on its notable new features.

This is the first page of the draft new form for consumer debtors to report their unsecured debts; this would replace the existing Schedule F.

From an aesthetic perspective, note that the form has a larger typeface than the existing form and makes much more use of font characteristics such as bold, underline, boxes, etc. to differentiate content. This is all part of the art of making a form "readable." It also contains lots of little checkboxes rather than columns to hold information like the current form. From a substantive perspective, and before someone makes a comment that I have made a mistake, note that this first page of the form starts by asking the debtor to list priority debts. The form combines Schedules E and F, into a single form for Unsecured Claims. It also lists only the three most common kinds of priority debts in consumer cases--domestic support, taxes, and drunk driving--on the form and uses an "other" box where the debtor could list the kinds of priority debts in Section 507 of the Bankruptcy Code that rarely apply in consumer cases, but frequently come up in businesses cases. This is a great example of how the form departs from one-size-fits-all forms that match where bankruptcy law takes a one-size-fits-all approach in the Bankruptcy Code.

The period for public comment on these forms has not yet begun, and the Bankruptcy Rules Committee may well make changes before then. In future posts, I will say more about what kinds of changes I hope to see and offer some thoughts on whether this initiative is a positive development for the system.

Jan

The GM & Chrysler Success

66571Leave a CommentThe+GM+%26amp%3B+Chrysler+Success2012-01-29+02%3A17%3A16Adam+Levitin

During the State of the Union address, the President crowed about the success of the GM/Chrysler bailouts, noting that these companies were thriving again. An NPR program this evening was holding up GM/Chrysler as a beacon of hope for Kodak, as if bankruptcy were now the fountain of corporate youth.

But this just begs the question of why did the GM/Chrysler bankruptcies work? What made these bankruptcies success stories? NPR raised the question, but had some lame answers, namely that it forced management to make decisions it hadn't wanted to do like cutting loser brands (Saturn, Pontiac). It might have helped focus management decision-making, but that alone can't be the answer, I think. I'm curious to hear readers' thoughts. A few thoughts of my own below the break.

(1) Deleveraging. This one should be obvious. A lot of GM/Chrysler creditors got paid very little, but the 363 sales enabled the firms' good assets to be reployed to companies that were not weighed down with tons of financial leverage and legacy liabilities (CBA terms, retiree benefits, dealerships). Deleveraging, however, only helps if the underlying business is competitive. Apparently it is.

I'm not a car afficianado, but I've got to say that this surprises me. I was not under the impression that GM/Chrysler were turning out particularly great cars in 2007-2008, and I don't have the sense that they're boasting radically different product lines now (I'll find out soon, however, at the DC Auto Show...). But maybe the answer is that they were producing reasonably good cars and now they're able to price them more competitively. Thoughts anyone?

(2) How much of a management shake-up did bankruptcy entail? Perhaps bankruptcy revitalized management. Still, I suspect that what management can do with firms of this size is fairly constrained.

(3) GM/Chrysler did manage to avoid major layoffs of their own employees. But they also closed down a lot of dealerships. In other words, there was major job loss as a result of their bankruptcies. Not as bad as it might have been, but it wasn't a bloodless operation. The job loss from the dealerships, however, was spread out geographically, rather than concentrated in the Rust Belt. So this was akin to amputating a toe to prevent gangrene from spreading. I'd be curious if anyone knows of any figures on the actual job loss.

(4) Did it help to have the government as DIP lender? That is, does public DIP financing actually facilitate reorganizations because the DIP lender's goal is reorganization, rather than maximization of its economic return?

Again, I really am interested in hearing thoughts on this.

Jan

Vee Haf Vays Uf Making You Pay!

66435Leave a CommentVee+Haf+Vays+Uf+Making+You+Pay%212012-01-28+15%3A41%3A12Adam+Levitin

Anna Gelpern's Gunboat Diplomacy post pretty much sums out the leaked German term sheet on Greece. I would only note one other thing--the highly idiosyncratic use of "absolute priority." The Germans seem to have taken the language of Chapter 11 and repurposed it, with absolute priority meaning foreign unsecured creditors get paid in full before anyone else sees a cent. Of course, maybe the Germans really do know how to get blood out of a stone. But in the meantime, I think this is best referred to as Teutonic priority.

Jan

Greek Gunboat Diplomacy Eupdate and More ECB/EFSF

By Anna Gelpern | Securitization-MBS

66402Leave a Comment2012-01-28+06%3A48%3A41Anna+Gelpern

Someone who wanted to be very mean to the Germans just leaked this document, where they manage to come off as both desperate and inept. The proposal purports to address Greek failure to meet program targets by installing an EU overlord, whose job it would be among other things to pay off the foreign bondholders before funding public services in Greece.

The strategy goes back to the days when imperial gunboats took over debtors' customs houses to pay foreign bondholders, but has been considered impolite in creditor country circles for a century or so. Now it is back as an EU institutional innovation. As for the business of "absolute priority" for foreign creditors, the statement is nonsensical on its face: Greece will enact a law that would make creditors feel "de facto" senior. At best, this would be "de jure," and without a shred of credibility. The actual phrase used--"De facto elimination of the possibility of a default"--surely qualifies for an Oscar nomination.

All this innovating does follow a pattern: take a program that does not work, double down on it, and ratchet up enforcement to the point where no one would ever dream of it. Genius.

And further to my last post, it looks like Richard Barley and Felix Salmon took sides on the EFSF swap possibility a couple of days ago, except that they seem to operate on the assumption (which I shared last May) that EFSF would have to take the loss up front. Now I think that the swap would be worth it even if it only captured the discount for Greece. Phase Two happens when it does.

Jan

The Crisis of Fake Constraints: Greek Denouement Eupdate

By Anna Gelpern | Securitization-MBS

66327Leave a Comment2012-01-28+05%3A50%3A50Anna+Gelpern

Unless Greece and its creditors reach a deal in the next few days, Greece has no money to pay €15 Billion or so due to its bondholders in March.

From the start, this has been a crisis of fake legal and economic constraints masking very real political constraints. In 2010, Greece could have restructured its debt quicker than most sovereigns in modern memory -- or it might have been bailed out, had Europe chosen to go the route of fiscal transfers. Neither of these paths was taken because the European Central Bank was unwilling to countenance the sin of debt restructuring, but member states with money were unwilling to pay for the appearance of collective virtue.

Now that the restructuring is inevitable and the virtue bill unpayable, the fake constraints are back. The ECB holds about €50 of Greek debt, which must go into the restructuring to get enough debt and cashflow relief. But the central bank would not take losses, and remains allergic to triggering credit default swaps (which is more likely to happen if it sits out). Worse, its votes might be needed to (credibly threaten to) amend Greek bonds using retrofit Collective Action Clauses. (See latest from Gulati-Zettelmeyer here.)

There seems to be a simple fix: swap the Greek bonds held by the ECB for bonds of the European Financial Stability Facility at a price that does not cause ECB losses. Then have the EFSF go into the exchange and vote the bonds if it needs to. At a minimum, this captures for Greece the discount at which the ECB bought its bonds. If Europe is unwilling to see the EFSF take a loss from the ECB's purchase price, Greece could conceivably make up the difference with a special bond issue for the EFSF on terms that reflect the specialness of the vehicle and the circumstances.

Freshly downgraded, EFSF debt is not exactly in high demand. An ECB swap would not require it to raise money in the markets. Having a fiscal vehicle take the risk (if not the loss) from a Greek restructuring is more honest and institutionally sensible than leaving it with the monetary authority. At a minimum, it would stop the chatter about monetizing the debt--without the optics of a big new package for Greece.

As precedent, the operation might be healthy for all involved. An EFSF swap would signal the parameters for any future deals involving ECB-held debt: on the one hand, it is not fully preferred, on the other hand, there is a built-in limit to the haircut. There is even a whiff of harnessing the market. (I once heard a story that Latin American debt managers in pre-Brady days had made up "Capture the Discount" t-shirts.)

More broadly there is a decent argument that the EFSF is sui generis--an ad hoc crisis vehicle that can do what no one else can be expected to do. For example, it has never been encumbered by feckless claims of preferred creditor status, unlike the new treaty-based European Stability Mechanism, due out this summer. This is as close as it gets to a credible "just this once".

There is an argument that under some version of best market practice for CACs, EFSF should not be allowed to vote its Greek bonds in an exchange, because Greece is among its shareholders. I think this objection is surmountable, to the extent the EFSF is not controlled by and does not answer to Greece. Here is some analogous reasoning.

All this to say, wait for the next fake constraint to derail what could be a palatable solution to a horrible situation, followed by more suffering for all.

Jan

Break up Bank of America?

By Melissa Jacoby | Securitization-MBS

65939Leave a CommentBreak+up+Bank+of+America%3F2012-01-25+23%3A31%3A20Melissa+Jacoby

Steve's title was subtle, so in case anyone missed it, here are the materials on Public Citizen's website. The petition calls on the Federal Reserve and the Financial Stability Oversight Commission to use their authority under Dodd-Frank to break up Bank of America. (But still check out Steve's analysis on Dealbook!).

Jan

And Now Featuring Melissa Jacoby

65899Leave a CommentAnd+Now+Featuring+Melissa+Jacoby2012-01-25+20%3A46%3A14Bob+Lawless

On behalf of all the Credit Slips bloggers, it is my pleasure to announce the permanent return of Professor Melissa Jacoby as one of our "Occasionals." For the past several weeks, she had doing some guest posts, but we are very happy that she has agreed to stick around. Melissa is a professor at the University of North Carolina School of Law and a leading expert on bankruptcy law with a number of prominent studies on medical debt as well as housing issues. As one of the founding members of Credit Slips, Melissa is one of the reasons we're here at all. Welcome back.

Jan

Caught up on this line again

65851Leave a CommentCaught+up+on+this+line+again2012-01-25+19%3A28%3A36Stephen+Lubben

Bank of America, OLA, and the problems of oversized financial institutions, up now on Dealbook.

Jan

Fraud Digest | SOTU – Prosecuting Mortgage Document Fraud

By 4closureFraud | Bankruptcy, Foreclosure Fraud, News for the Patriot

65798Leave a Comment2012-01-25+15%3A16%3A224closureFraud

PROSECUTING MORTGAGE DOCUMENT FRAUD In the State of the Union address on January 24, 2012, President Barack Obama announced the creation of a special unit within the Financial Fraud Enforcement Taskforce to deal with mortgage origination and securitization abuses: And tonight, I am asking my Attorney General to create a special unit of federal prosecutors … Read more Related posts:

Jan

Fraud Digest | SOTU – Prosecuting Mortgage Document Fraud

By 4closureFraud | Bankruptcy, Foreclosure Fraud, News for the Patriot

65799Leave a Comment2012-01-25+15%3A16%3A224closureFraud

Jan

OCC | Acting Comptroller John Walsh Talks About Securitization and Derivatives at the American Securitization Forum

By 4closureFraud | Bankruptcy, Foreclosure Fraud, News for the Patriot

65635Leave a Comment2012-01-24+19%3A18%3A164closureFraud

Acting Comptroller of the Currency John Walsh became acting Comptroller of the Currency on August 15, 2010. The Comptroller of the Currency is the chief executive of the Office of the Comptroller of the Currency (OCC), which supervises approximately 2,000 national banks and federal savings associations as well as 50 federal branches and agencies of … Read more No related posts.

Jan

Should the Government or the Market Set Mortgage Down Payments? A New Study

By Melissa Jacoby | Securitization-MBS

65611Leave a Comment2012-01-24+17%3A47%3A18Melissa+Jacoby

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

Jan

And the Wind Blows Wild Again

65388Leave a CommentAnd+the+Wind+Blows+Wild+Again2012-01-23+20%3A31%3A43Stephen+Lubben

I wade into the chapter 11 professional fee debate again, this time in the context of the UST's proposed guidlines for attorneys fees in big cases.

Jan

And the wind blows wild again

65387Leave a CommentAnd+the+wind+blows+wild+again2012-01-23+20%3A31%3A43Stephen+Lubben

I wade into the chapter 11 professional fee debate again, this time in the context of the UST's proposed guidlines for attorneys fees in big cases.

Jan

How to Address Apparent Racial Disparity in the Consumer Bankruptcy System

By Jean Braucher | Securitization-MBS

65135Leave a Comment2012-01-22+02%3A48%3A56Jean+Braucher

The article discussed in the N.Y. Times story today is heavily empirical. It is also deliberately light on the prescriptive. Bob Lawless, Dov Cohen and I did make two modest proposals: (1) that a question about race of the debtor should be included on the form for a bankruptcy petition to make it possible to confirm (or disprove) the finding that African Americans file in chapter 13 at a much higher rate than debtors of other races (about double in the data we have), and (2) that all actors in the bankruptcy system—judges, trustees, attorneys and clients—be educated about the apparent racial disparity and the possibility that subtle racial bias may be producing it. The Times certainly helped with the second one!

Beyond that, we leave it to others and to each of us individually to come up with policy responses. In my view, Henry Hildebrand, a longtime chapter 13 trustee in Tennessee, got the big picture exactly right; he is quoted in the Times story as saying we should “use this study as an indication that we should be attempting to fix what has become a complex, expensive, unproductive system.” He will probably reappraise his views if he finds out that I agree with him! Those of us who participate in or study the system know that its complexity is onerous.

Three key points: Racial disparity is part of a bigger problem with the bankruptcy system, which is that complexity leads to disparate results for the similarly situated as well as additional expense. Also, judges, trustees and the U.S. Department of Justice need to be part of addressing race disparity, and they need to have race data collected in court records to do so most effectively.

The bankruptcy system got dramatically more complex and thus expensive with the 2005 amendments. Race disparity is just one instance of rampant disparity for those in similar financial situations. Complexity, including the possibility that any given debtor is choosing chapter 13 for moral reasons, makes it possible to justify any chapter choice in most cases and tends to mask unfair disparity of various kinds, including by race.

Speaking just for myself, I think we need a single portal to the bankruptcy system for individual debtors. This would make it a lot easier to move toward more similarity of results for the similarly situated and to reduce the cost of administration through simplification. Debtors with higher incomes might be required to pay something out of surplus income to old creditors, and the current standing chapter 13 trustees could be redeployed as the trustees for all individual cases. More of the details of this position are spelled out in my 2006 article, A Fresh Start for Personal Bankruptcy Reform: The Need for Simplification and a Single Portal. http://papers.ssrn.com/sol3/papers.cfm?abstract_id=912561 I have heard that the National Bankruptcy Conference is working on a single chapter approach to consumer bankruptcy, and I wish NBC success in this project, although the difficulty of the politics of attaining any positive change through legislation cannot be overstated.

The professionals in the bankruptcy system are on the whole a very conscientious, self-critical and public-spirited group, committed to equal justice, and I expect that judges, trustees, and attorneys will rally to take on the challenge of eliminating any unjustified racial disparities, even without a needed legislative overhaul to simplify the system. The consumer debtor attorneys who took the time to answer our survey based on a vignette have already helped greatly; they volunteered their time to improve the bankruptcy system, knowing that we were interested in the mechanisms of chapter choice.

In our article, we did not have any data to examine the role of bankruptcy judges and trustees in producing racial disparity in chapter choice, but that does not mean they are off the hook. Judges and trustees are important players in the system, and they can influence the recommendations of attorneys. They need to be part of the solution, and they will want to be. Furthermore, the U.S. Department of Justice, particularly its Executive Office for the U.S. Trustees, should be involved in addressing this issue. Monitoring by judges, trustees and DOJ would be made easier by having information about race in the paperwork of cases.

The U.S. court system should start collecting race information from debtors on their bankruptcy petitions. This is not an uncontroversial position, for privacy reasons. Race, like the Social Security numbers already collected on petitions, should be kept private. But race information needs to be available to trustees and judges in each case. For the public, the race information should be in aggregate form only, matched with other data points collected by the U.S. Court system. Having race information about the full census of cases would be the best way to confirm or disprove the finding of disproportionate use of chapter 13 by African Americans.

In discussions with bankruptcy lawyers and other professionals about the article, I’ve found that some say they knew about the race disparity already because they have seen it with their own eyes in meetings of creditors required in each case. These professionals told me they see a higher proportion of African American debtors in the chapter 13 meetings than in the chapter 7 meetings. This seems to be most evident in the South and other areas where the black population is large and thus the disparity is more apparent. The racial disparity appears to exist, however, across regions even where the minority population is very small. In a complex system, however, those who have witnessed racial disparity in chapter choice don’t know for sure if there is a good justification, for example the possibility that African Americans have more of a commitment than other debtors to repayment and for that reason choose chapter 13 more often. But because of the importance of attorneys in guiding a complex choice, an obvious factor to study is their influence through their chapter choice recommendations. In our vignette study we found that these recommendations accounted for two-thirds of the racial disparity seen in a study of real world cases (in which African Americans used chapter 13 at about twice the rate of debtors of other races).

Bob, Dov and I of course encourage examination of our methodology, which is why we chose to place the article in a peer-reviewed journal. Academics are probably going to do a better job of finding flaws than most practicing attorneys. We tried very hard to be rigorous in our methods and account for hypotheses for justified race disparity in use of chapter 13. The vignette used figures for income and expenses that are close to national medians of bankruptcy debtors. Also, in the real world study’s data, controlling for homeownership, income and many other factors did not explain the race disparity. We also looked at available data on results in chapter 13, and we found that African American debtors are not getting better results, so that does not explain why they are filing more in that chapter. African Americans actually propose slightly higher percentage payments to unsecured creditors than debtors of other races. African Americans also have higher dismissal rates for their chapter 13 cases.

We are not saying, as some seem to think, that chapter 13 is always financially worse than chapter 7 for any given debtor, white, African American or of another race. Even when no discharge is obtained, a chapter 13 can buy more time to stave off foreclosure long enough to relocate. Chapter 13 also can be preferable for other reasons that lawyers legitimately take into account, for example, to strip junior liens with no collateral value to support them, to pay nondischargeable, priority debts such as child support and taxes in the plan ahead of other unsecured debts, to make up arrearages on secured loans in attempts to save a home or car (although this feature may be overused, because saving the collateral may not be feasible), to reserve conversion to chapter 7 for a discharge there later if finances deteriorate further, and to pay attorneys’ fees over time, among others. But the ways in which chapter 13 can be better for particular debtors do not appear to explain the wide race disparity in its use since all these reasons apply across race and since several apply only to homeowners, a factor for which we controlled.

Jan

Race and Chapter 13

65011Leave a CommentRace+and+Chapter+132012-01-21+15%3A31%3A37Bob+Lawless

As Adam noted in his kind post, the New York Times today featured our study, "Race, Attorney Influence, and Bankruptcy Chapter Choice." My co-authors are Credit Slips blogger Jean Braucher, a law professor at the University of Arizona, and Dov Cohen, a professor at the University of Illinois who holds a cross appointment in psychology and law. And, we all express many thanks to the NYT reporter, Tara Siegel Bernard, who spent a lot of time slogging through the statistics and legal intricacies in our study.

In a nutshell, the study reports real-world data from the Consumer Bankruptcy Project showing that, among bankrupcy filers, blacks file chapter 13 at higher rates than all other races. The effect is large -- for example, blacks even had a higher chapter 13 rate (54.6%) than homeowners (47.1%). The second part of the study showed that, in a random sample, bankruptcy attorneys were more likely to recommend chapter 13 for a hypothetical couple named "Reggie & Latisha" who went to the African Methodist Episcopal Church as compared to "Todd & Allison" who went to the United Methodist Church. Also, attorneys were more likely to see "Reggie & Latisha" as having good values and being more competent when they expressed a preference for chapter 13.

As I said in the NYT article, "I don’t think there is any overt conspiracy, but when you have a complex system, these biases can play out and the people within the system don’t see the pattern because nobody is in charge of looking at these big issues.” This is an important point. We have no data suggesting that some persons sat down and decided this is the way the system should be. One of the things that always impresses me whenever I attend conferences with bankruptcy attorneys is their dedication to making bankruptcy work better for their clients. I always come back energized from these conferences with ideas about how to make my research better. SImilarly, it is my hope that our article will result in a professional dialogue about when chapter 7 or chapter 13 is appropriate for a client. And, that can only be a good thing for anyone who finds themselves in need of bankruptcy.

The full study is forthcoming in the Journal of Empirical Legal Studies. The working paper version is available on the Social Science Research Network (SSRN). And, a shorter version of the study reporting the real-world data appears as a chapter in the book, Broke: How Debt Bankrupts the Middle Class, which was edited by Credit Slips blogger Katie Porter.

In the coming days, I'll try to put up a few posts talking about the study in more detail. If anyone has any questions about the study, please post them in the comments (preferably after reading the study), and I'll do my best to answer them.

Jan

Race and Chapter 13

65010Leave a CommentRace+and+Chapter+132012-01-21+15%3A31%3A37Bob+Lawless

Jan

Kudos to Jean Braucher and Bob Lawless!

64995Leave a Comment2012-01-21+14%3A29%3A55Adam+Levitin

A new study by Credit Slips own Jean Braucher and Bob Lawless (with Dov Cohen) on race and bankruptcy filings received very prominent and well-deserved page A1 coverage in the New York Times. It's a fabulous study, and it's wonderful to see it getting such great media attention.

Jan

Payday Loans are First Target of New Consumer Protection Chief

By Nathalie Martin | Securitization-MBS

64594Leave a Comment2012-01-19+17%3A04%3A34Nathalie+Martin

Richard Cordray’s first CFPB hearing will be held today and will focus on the practices of payday lenders. Seventeen states and the District of Columbia already outlaw payday loans, but in all of the others, lenders can and do charge 400% interest or more, on loans against consumers' next paycheck. Under terms of the 2010 Dodd-Frank Act, the CFPB could not regulate payday lenders or other nonbank entities that provide financial products until its director was in place. As Republican senators were blocking Cordray's confirmation, President Barack Obama used a recess appointment to install him last month. Cordray's first order of business was to launch the bureau's nonbank supervision program, from which today's hearing springs. Consumer advocates are very hopeful that the CFPB will use its authority to scrutinize industry loan records and marketing materials and gauge their compliance with federal laws. According to Jean Ann Fox of the Consumer Federation of America, consumer groups also hope that the CFPB will develop new rules regarding industry practices deemed unfair, deceptive and abusive.

Carter Doughtery of Bloomberg News just posted a more detailed description of the CFPB's current inquiry into payday lending.

Jan

Kindle and ePub Versions of Bankruptcy Code (Updated)

52114Leave a Comment2012-01-19+16%3A44%3A00Bob+Lawless

One of my crack research assistants, Scott Cromar, put together electronic versions of the U.S. Bankruptcy Code and Federal Rules of Bankruptcy Procedure (FRBP) that can be read using Amazon Kindle or an ePub reader. Because these books were assembled using public-domain materials from the U.S. government, we are making them available free of charge. Keep reading after the page break for links and more information.

We have versions both with and without the historical and revision notes for the Bankruptcy Code. Whether you want the full version will depend on your tolerance for these sometimes-lengthy materials at the end of each Code section. You can download the different versions from these links:

There are a few caveats for use of these files. First, we have produced these files from the U.S. government versions and believe them to be accurate, but we have not proofread the files or compared them to the originals. Use them at your own risk.

Second, these files are provided without technical assistance. You can find lots of web pages explaining how to use individual Kindle or ePub files. For example, here is an example about the Amazon Kindle and here is an example for an ePub file. If you find the files useful and want to show your appreciation, the best thing you can do is thank the dean of the University of Illinois College of Law, Bruce Smith, for making available the resources for these sorts of projects that help support the profession.

UPDATE (1/19/2012): I've bumped this post temporarily back to the top of the blog to note that new files have been uploaded to reflect the amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 11, 2011. The links now take you to the new files.

UPDATE (12/09/11): New files have been uploaded to reflect a Creative Commons license.

Jan

SOPA, PIPA, and Us

64351Leave a CommentSOPA%2C+PIPA%2C+and+Us2012-01-18+17%3A39%3A40Bob+Lawless

Given what a small part of the web we are, it seemed a little melodramatic for Credit Slips to go dark over the proposed Stop Online Piracy Act (SOPA) and Protect IP Act (PIPA). It did seem appropriate at least to add my own voice to the opposition.

If you are not familiar with these heavy-handed attempts to police intellectual property piracy, plenty of information is available from Wikipedia here (and, yes, that link still works today, January 18). Some of the provisions in these acts could have implications for small sites such as this.

Although the government should stop the theft of intellectual property, these proposed laws go way too far, sacrificing too much freedom in the name of property rights. In particular, it disappoints me that some senators who have been champions of consumer protection have put themselves on the wrong side of this issue. Specifically, Senators Patrick Leahy, Sherrod Brown, Dick Durbin, Charles Schumer, Al Franken, and Sheldon Whitehouse are listed on THOMAS as sponsors or co-sponsors of PIPA (S. 968). It would be great to see these senators lead a retreat from these onerous pieces of legislation.

Those are my personal views as blog administrator. And, that is probably a point we don't emphasize enough on this blog -- everyone is speaking for himself or herself only.

Jan

Bankruptcy, Backwards

63888Leave a CommentBankruptcy%2C+Backwards2012-01-16+19%3A42%3A29Adam+Levitin

Credit Slips Own Anna Gelpern has a great new article in the Yale Law Journal that very much deserves a plug. It's called "Bankruptcy, Backwards: The Problem of Quasi-Sovereign Debt." The article deals with the problems of financial distress for quasi-sovereigns, like US states or even to some degree EU member states. As Anna points out, bankruptcy seems to mean all things to all people, and as a result framing discussions of how to deal with quasi-sovereign debt---where there is no bankruptcy regime of any sort--quickly devolves into debates about existing bankruptcy systems, like US Chapter 9, rather than starting from the unique problems of quasi-sovereign debtors and then figuring out what sort of financial restructuring system might make sense.

I highly recommend the article, particularly for those of us who don't regularly deal with sovereign debt issues. There's a strange divide in practice and scholarship between domestic bankruptcy and sovereign debt restructuring. A few people (David Skeel, Steven Schwarcz, Bob Rasmussen, e.g.) have written in both areas, but they remain pretty separate fields. Anna's insights from the sovereign debt field are very useful for domestic bankruptcy scholars, as they help us step back and see the larger picture of what is going on.

Jan

American Capitalism: Profit, But Fairly

63836Leave a Comment2012-01-16+15%3A47%3A34Adam+Levitin

Adam Davidson wrote up an interesting apologia for Wall Street in the NY Times last week, which I think is ultimately a call for better regulation, rather than bank-hating. I missed the piece originally, but Yves Smith found it and has nothing good to say about it. I think Yves is a little too harsh on Davidson. I've got issues with parts of the piece, but on different grounds, namely that it efuses to engage on the real issue. The problem isn't financial intermediation. That's a perfectly fine thing that plays a useful role in society.

Instead, the problem is when financial intermediaries do not treat the intermediating parties (meaning consumer and investors) fairly. The history of US financial services is nothing short of a history of scandals involving financial institutions variously ripping off investors and consumers. I'm not just talking about those scandals we remember, like Milken or Madoff or the recent slew or even the second tier ones like the Salad Oil scam or all of 1920s mortgage bonds. The history of US financial services is largely a history of unregulated innovation resulting in abuse and then follow-up regulatory reform. Lather, rinse, wash, repeat.

Davidson argues that the reason to "hate the banks" is that

Wall Street firms enforce the cold rules of capitalism: hostile takeovers, foreclosures, fee increases, defaults. But those rules clearly do not apply to the largest banks themselves.

Davidson misses the mark here a bit. It's not just that the banks get bailed out, meaning that the rules of market discipline don't apply to them. It's that the banks frequently break the rules when applied to others. It's fine to do foreclosures or hostile takeovers or sell consumers speculative securities. But it's not ok to foreclose without following the law or to profit on insider knowledge on hostile takeovers or or to sell investors "safe" assets when you know they are junk.

The fundamental rule of American capitalism is "profit, but fairly." Whatever one thinks is "fair", I don't think there should be much disagreement that Wall Street too often disregards the second part of this dictum to focus on the first. But take away the "but fairly" and society quickly becomes a Gilded Age baronial kleptocracy, a post-Soviet (or pre-Soviet) Russia. If we want capitalism to work--meaning that there is social stability, pace OWS--market players must play by the rules. This is where the debate needs to be focused: ensuring that our financial intermediaries play by the rules.

Davidson could use a little work on his history. Consider his arguments about the importance of Wall Street for fighting poverty, innovation, funding socially beneficial projects, and for the existence of the middle class. All seem quite debatable to me.

The Poor Would Stay Poor?

Davison argues that Wall Street has helped the poor:

In the U.S., we use credit cards, mortgages, credit scores, securitized loans and other Wall Street innovations to do the miraculous: to persuade some institution with a lot of money to hand it over to someone who doesn’t have that much.

This is just ridiculous. First, the poor still generally do not get credit and when they do, it is of dubious value to them. For the poor, credit may help with today's problem, but it becomes tomorrow's problem, not least because of the terms on which it is offered, which are often based as much on market power, not risk-based pricing. Second, it often isn't Wall Street that's funding the loans--it is investors, with Wall Street taking a commission, meaning no skin-in-the-game. The result is what we saw in the housing bubble--Wall Street fleecing investors by brokering unsustainable loans to homeowners. Finally, Davidson presents no case that any of these innovations help the poor. If you want to look at programs that have been successful at raising living standards and eradicating poverty in the US, you need to look at government programs like the TVA (which for all of its controversy resulted in electricity and employment and a decline in malaria in the Tennessee valley).

Innovation?

We have seen some innovation in consumer finance over the past century, no doubt. As for innovation, how much has really benefitted consumers, as opposed to benefitting Wall Street? No doubt we have much greater convenience in payments due to plastic and ACH. But what else? The payment-option ARM? Yes, an innovation. But a good one? Credit life insurance? Cash-out refinancings? We have Paul Volcker's famous comment that the last major innovation in consumer finance was the ATM. I'd say that's more or less correct. Consider the cutting edge innovations of today--mobile payments, contactless, etc. None of them are game changers.

Beyond that, let's give credit where it's due. Some of the greatest innovation has been by the government, not by Wall Street. Securitization, in its modern form, is a government invention (Ginnie Mae!). Likewise, the 30-year fixed-rate mortgage is a government creation (a genesis from the HOLC to the FHA to the VA). Suburban housing--financed originally by the FHA. Other innovations have been made possible only because of implicit governmental backing (e.g., money market mutual funds, which also benefit from an accounting treatment exception). Par clearing payment systems (meaning when you pay $100, the payee gets $100 credited, not $90), are a function of the Federal Reserve.

No Awesome Things?

Davidson is on his strongest ground when he argues that but for Wall Street, lots of cool projects would never be funded. No Facebook, no Apple, no mobile phones, etc. I can't disagree with him that businesses need funding, and that financial intermediation by Wall Street enables this to happen on a much larger scale than otherwise. But whether it is being done fairly is another question, and that's where my issue lies.

This is not my particular area of academic focus, so others may have better examples, but consider IPOs, which are the intermediation par excellence, of shifting funding from limited private sources to public sources. That's fine, but the intermediaries frequently engage in insider trading on the IPOs. And again, remember that government plays a role in all of this, with support for small businesses, ranging from tax breaks for partnerships and S-corporations to SBA-loan guarantees and industry specific (e.g., solar) loan guarantees.

No Middle Class?

What about the "there would be no middle class" meme? This is a very debatable counterhistory. Consumer credit enabled greater consumption by the middle class, but consumer credit isn't free. It just shifts consumption between time periods. The US had a well-established middle class by the end of the 19th century (and arguably much earlier). It grew substantially in the 20th century, but the GI Bills and post-War employment boom and unionization had as much to do with that as anything.

Still, consumer credit played a role, but that role can't be attributed solely to Wall Street. The original consumer credit wasn't Wall Street. It was companies like Singer Sewing Machines or Sears Roebuck and employer- and community-based credit unions. Banks didn't do consumer finance for quite a while. If you look at the source of mortgage loans historically, the "household sector" was a major provider well into the 1950s, meaning that you would get a mortgage from the rich guy down the street or from your uncle, etc., rather than from a bank. As for other financial services, they can, have been, and are often provided not by the private sector, but by the government. Recall that we had a US Postal Service Bank from 1911-1968, that at one point had 20% of deposits and innovated deposit by mail (the postal bank was the Republican counter-proposal to federal deposit insurance!). Most of the rest of the world still has postal banking systems. (Yes, I'm working on a project about this.) The government supports payment systems via the Fed, and housing finance via deposit insurance, FHA, VA, FHLBs, and Fannie/Freddie.

This is hardly a system of pure private capitalism. And if government is going to be assuming some of the risks, it will, not surprisingly dictate some of the terms on which services are offered, both to manage its risk and to further its policies; government support comes with strings attached.

Bottom line here is that the benefits of increasingly specialized financial intermediation are questionable, and the role of government in financial intermediation and development is often overlooked. Privatized financial intermediation often means privatization of gains and socialization of losses, as we have recently seen. More critically, though, absent vigorous regulation, it easily dissolves into a system of profit über alles, in which rules of fair play (and we can debate just what those should be) are disregarded as inconvenient. For capitalism to work in a democracy, it is necessary that everyone play by the rules of the game.

Jan

Twinkies at Risk

By Nathalie Martin | Securitization-MBS

63353Leave a CommentTwinkies+at+Risk2012-01-14+01%3A00%3A51Nathalie+Martin

At least it’s not Tastykakes, right Philadelphians? But seriously, historians with a sweet tooth should be feeling a little uneasy after Hostess’ chapter 11 last week, precipitated by runaway pension and medical benefits claims and a tough economy. Tough is right. If people are too broke to buy Twinkies, things really have reached an all-time low.Interstate Bakeries, which owns Hostess brands, claims to have over $950 million in pension claims.

Twinkies have an interesting history. According to wikipedia, Twinkies were invented in Schiller Park, Illinois in 1930 by James Alexander Dewar, a baker for the Continental Baking Company. Realizing that several machines used to make cream-filled strawberry shortcake sat idle when strawberries were out of season, Dewar conceived a snack cake filled with banana cream, which he dubbed the Twinkie. He said he came up with the name when he saw a billboard in St. Louis for "Twinkle Toe Shoes". During World War II, bananas were rationed and the company was forced to switch to vanilla cream. This change proved popular, and banana-cream Twinkies were never widely re-introduced.

In 1988, Fruit and Cream Twinkies were introduced with a strawberry filling swirled into the cream. However, the product never caught on and was soon dropped. Vanilla's dominance over banana flavoring would be challenged in 2005, following a month-long promotion of the movie King Kong. Hostess saw its Twinkie sales rise 2 percent during the promotion, and in 2007 permanently restored the banana-cream Twinkie to its snack lineup.

Twinkie sales for the year ended December 25, 2011 were 36 million packages, down almost 2% from the prior year. Hostess claims that more customers are choosing healthier foods, implying that it may need to invent a healthy Twinkie in order to avoid liquidation and attract new investors.

Jan

The Consumer Finance Pantheon?