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As anyone familiar with bankruptcy would have predicted, the dire predictions of disaster for municipalities seeking bankruptcy protection have proven to be ... let's just say exaggerated. Bloomberg is out with a notable story this morning on Jefferson County's healthy return to the bond market, carrying an investment-grade rating of AA-  within five years of emerging from municipal bankruptcy. This squares with similar accounts of consumers rehabilitating their credit within two to four years of a chapter 7 liquidation-and-discharge (see, for example, here and here). Let's all file this in our "lying liars and their bankruptcy impact lies" file and be prepared to continue to counter this, among the many, many other, bankruptcy scare myths to be debunked.

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Over the past few weeks, at conferences with judges and policymakers in Varna (Bulgaria), Seoul, and Beijing, I've been confronted with a surprising degree of skepticism about personal insolvency systems and fear of opportunistic individuals abusing the ability to evade their debts (especially while hiding assets). I've pointed out the interesting progression identifiable in Europe in recent years of a marked relaxation of such fear of abuse, especially in places like France and most recently Slovakia, which have gone all the way to adopting a very US-like open-access system to immediate discharge. For the real skeptics--and they are numerous in Bulgaria and China, both of whom are considering adopting their first personal insolvency laws--these arguments seem to fall on more or less deaf ears. Detractors put me in a no-win situation by offering one of two rejoinders: (1) the incidence of discovered abuse is low in these systems because debtors are crafty or anti-abuse institutions are weak, or (2) anti-abuse institutions like the means test and restrictive access hurdles are successfully dissuading abusers from seeking access, so we need more--not less--of this kind of effort (which I've criticized as wasteful, unnecessary, and counterproductive). A common third response is the classic "we're different" position--that is, any comparative empirical evidence from elsewhere is irrelevant to the new, entirely unique context of [insert skeptical country's name here].

I've considered launching into some kind of research project to address this skepticism, but I don't think it will help. The situation reminds me of the two most common resistant reactions to empirical research: (1) we already knew that, or (2) that can't be true. The haters are gonna hate, it seems to me. So if the lighthouse is no good, we need to come up with a different approach to assuaging the concerns of policymakers, especially in China, that rampant abuse will not infect a new personal insolvency system and undermine public confidence and payment morality.

I've come to believe institutions are our best strategy. An Insolvency Service or other administrative organ dedicated to rooting out fraud and processing these (mostly) low-value cases in a quick, efficient, low-cost, and minimally formal way seems to be a win-win. It reassures the skeptics that a cop is on the beat, and it avoids allowing formalities, especially court formalities, to bog down these cases. Obviously an agency can get caught up in its own procedures, too (and substance matters, as well, as evidenced by the extremely inefficient German procedure and the hunt for the slightest hint of abuse in the UK's DRO procedure), but it seems to me that diverting personal bankruptcy cases away from the courts somehow is key (including by getting a private trustee to do all the work and engaging the courts only when (rarely) necessary, as in the US and UK). 

But an entirely new agency structure is also expensive, in terms of both monetary expenditure (both initial and ongoing) and personnel development (both recruitment and training). I wonder whether this cure is worse than the disease, and it offers another powerful lever of resistance by abuse-fearing policymakers.

I would greatly welcome any thoughts that others have about the proper way to achieve the closely related goals of (1) assuring skeptics that abuse can and will be laid bare (to the extent reasonably possible) and (2) moving personal insolvency cases through processing quickly and efficiently to a reinvigorating discharge. Many places are struggling with this issue, so I hope a crowdfunding strategy might produce some innovative ideas.

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Normally we say that a law is as strong as its enforcement. On February 7, however, the Consumer Financial Protection Bureau raised questions about the enduring strength of the consumer financial laws in its third Request for Information under Acting Director Mick Mulvaney. This time, the topic is CFPB enforcement. It is not hard to guess where this third "RFI" is headed, insofar as only two new enforcement orders have been entered under Mr. Mulvaney to date. In contrast, from the CFPB's inception through November 2017 (when Mr. Mulvaney took office), the Bureau brought a total of 200 public enforcement actions.

Christopher Peterson at Utah responded to the RFI on behalf of scholars and former regulators, arguing that an efficient marketplace for consumer financial services depends on vigilant enforcement. Without the threat of sanctions, dishonest providers will rationally seek a competitive advantage by deceiving consumers and customers will not be able to do meaningful comparison-shopping. Enforcement ensures that violations by financial services providers do not pay.

Peterson's message is more important than ever, given current efforts to tie CFPB enforcement up in knots. CFPB leadership has floated proposals to make the agency reveal sensitive details about ongoing investigations to targets, curtail the length or scope of CFPB investigations, limit the documents CFPB enforcement can seek, and  restrict cooperation between CFPB enforcement and state attorneys general. In the recent Wells Fargo enforcement order, Mr. Mulvaney even allowed the bank of Pony Express fame to decide how much to pay the consumers it injured. Meanwhile, the agency withdrew a pending enforcement action against payday lenders in federal court at the behest of Mr. Mulvaney, who had previously received contributions from the payday lending industry when he was a Congressman.

Consumers have much to lose from the sleeping potion Mr. Mulvaney has administered to CFPB enforcement. Surely everyone can agree--Democrat or Republican, consumer or industry--that dishonest business practices must not be tolerated. Recognizing that, the last CFPB Director, Richard Cordray, put a priority on vigorous enforcement for deceptive or misleading practices. On his watch, the CFPB's deception cases resulted in almost $10.5 billion dollars in relief to consumers. That's a track record to emulate.

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David Jones, Chief US Bankruptcy Judge of the Southern District of Texas, has just posted a nifty empirical study of the effects of savings plans on the success of Chapter 13 filings. And, yes, part of the cool study is figuring out how to measure what counts as success in a bankruptcy filing.  The study takes advantage of a natural experiment in the Texas courts and has a bunch of fascinating findings, including about the impact of lawyers and legal culture on the choices that end up being made by the subjects of the bankruptcy proceedings.

Part of the reason I know about this study is that David was doing a graduate degree at Duke (in the judicial masters program) and I got to see the project at its inception stage in the thesis workshop that I run with Jack Knight. All of the credit goes to David though (and his wonderful advisor, John de Figueiredo) -- a fact that will be obvious to my fellow slipsters who know that I don't know squat about Chapter 13. But this is a fun study in terms of the design and findings regardless of whether you love Chapter 13 (okay, I realize that everyone else who reads this blog probably does in fact like or love Chapter 13).  It takes a basic fact about the inevitable fluctuations in expenses that almost everyone has to deal with, and tests what happens when these provision is made for these fluctuations ahead of time (versus when it is not).  Savings plans do indeed seem to make a difference; but a bunch of other factors also appear to matter - some of them quite surprising.  Clearly, as David emphasizes at the end of the paper, there is a lot here that is worthy of further investigation (and maybe legislative change).

The abstract for the draft on ssrn (that is forthcoming in the American Bankruptcy Institute's journal) reads:

This paper examines the effects of debtor savings on the viability of chapter 13 bankruptcy plans. The paper further examines the impact of lawyer culture, debtor participation in the bankruptcy process, and judicial activism in the use of the savings program by chapter 13 debtors. Using a data set of randomly selected chapter 13 bankruptcy cases filed in the Southern District of Texas, the analysis demonstrates that while savings has a direct positive impact on the success of chapter 13 plans, the degree of that success is significantly influenced by the views held by debtors' lawyers, chapter 13 trustees, and judges.

 

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The CFPB announced the first new enforcement action since Mulvaneyshchina.  It's a settlement with an installment lender, Security Group, Inc. (d/b/a under a lot of different names) over unfair debt collection practices.  We now know just how badly a firm has to behave to get in trouble with the Mulvaney CFPB:  



If I'm reading this correctly, it sounds as if the debt collectors drove up to drive-thru windows at a fast food restaurants where the consumers worked and dunned them through the drive-thru window.  I imagine it went something like this:  "Where my money, ya lousy deadbeat? Oh, and can I have an Extra Value Meal #2 with a large Coke, please?"  

So now we know:  under the Mulvaney CFPB, there's no dunning at the drive-thru.  And debtor's kids seem to be off-limits too, at least the young ones.  It's good to know that there are still some lines that can't be crossed.    

Seriously, though, there's something that's actually very concerning in the consent order.  The CFPB alleged that the Security Group engaged in "unfair" acts and practices, in violation of 12 USC 5536.  "Unfair" is defined in 12 USC 5531(c)(1) as an act or practice that has three elements:

(1) "causes or is likely to cause substantial injury to consumers"

(2) the injury "is not reasonably avoidable by consumers"; and

(3) the injury "is not outweighed by countervailing benefits to consumers or to competition."  

In other words, "unfair" has a balancing test between the injury to consumer and any benefits to consumers or competition.  But the way the CFPB applied this test in the consent order is flat out wrong:  

The CFPB did a balancing between the injury to consumers and costs and benefits to the defendant.  But the statutory language says nothing about whether there is a less injurious option available to defendants, nor does it require any inquiry into benefit to defendants.  It only requires a balancing of the consumer injury against consumer benefits or competitive benefits. Perhaps one could argue that there is some indirect benefit to consumers or competition from benefits to the defendant (e.g., more aggressive debt collection results in lower costs of credit and greater credit availability, although there's no evidence to suggest that these particular acts have any effect), but that's not what the CFPB alleges.  

I am hoping that this was just carelessness in applying the statute, not a deliberate interpretive choice. But if this is meant as an interpretive choice, it's concerning. First, it is clearly wrong as a matter of plain statutory language (which is puzzling given that the new management at the BCFP are sticklers for being faithful to the statutory language). But more importantly, if this is an interpretive choice, it would set up "unfair" to mean a balancing between harm to consumers and benefit to businesses. Thus, if a business were to make a lot of money by harming consumers only a little bit--say overcharging thousands of consumers $1/month--that would seem to be perfectly "fair" under this interpretation. If so, it's a license for theft. Again, this may well be carelessness, given that it is not consistent with past CFPB policy--the CFPB's Supervision Manual says "An act or practice that causes a small amount of harm to a large number of people may be deemed to cause substantial injury." But if it is something other than mistake, this is very worrying.  

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The fifth hearing in The Weinstein Co. chapter 11 occurred on June 5, 2018. The hearing included discussion about when the sale to Lantern Capital, approved by the court in early May, will actually close. Among other regulatory and transactional hurdles, TWC's lawyers mentioned that it still is not resolved which contracts will be included in the sale, but they hoped the sale would close within the month.

As for matters that resulted in a ruling, I'll briefly mention two.

  1. Sustaining a United States Trustee objection, the court denied the motion for Harvey Weinstein's October 15, 2015 employment contract to be filed under seal, as the standards of 11 U.S.C. § 107 were not satisfied. That contract is now available on the bankruptcy court docket. The document was filed by the Geiss plaintiffs (stemming from alleged sexual misconduct, discussed below) but TWC was the party advocating for sealing.
  2. The court approved the Geiss parties' motion to lift the automatic stay to permit the Geiss action to go forward against TWC, alongside other defendants, in the Southern District of New York, allowing liquidation of those claims. The SDNY district judge presiding over the Geiss action directed the plaintiffs to file the lift-stay motion; hearing transcripts illustrate his aim to minimize duplication of efforts. Part of TWC's argument against lifting the stay was the classic matter of distraction. Applying the relevant case law to the facts, the court observed that while closing the sale was a complicated matter, TWC was neither reorganizing in a traditional sense or seeking to stabilize its operations at this time. And, as in other cases, the distraction argument may be weakened when separate lawyers are handling the non-bankruptcy litigation. Seyfarth Shaw was representing TWC in the Geiss litigation, at least prior to the bankruptcy (leading the firm to successfully seek payment of its prepetition claim out of an insurance policy, over the creditor committee's objection - seek dkt #1000).

Speaking of professionals, initial interim fee applications for TWC's professionals for March 19-April 30, 2018 were not on the June 5 agenda, but are on the court docket. TWC has NY counsel and local counsel. Just to give you a sense, Cravath's fee application includes over 3,200 hours billed by 27 attorneys (dkt #929). Richards, Layton & Finger's fee application includes over 1,200 hours billed by 16 attorneys (dkt #932). Plus paraprofessionals at these two firms. Billing separately, of course, are FTI Consulting (dkt #870) and Moelis, the investment banker (dkt #946).

The next hearing in TWC's bankruptcy is scheduled for June 22, 2018. The SDNY Geiss action, in the motion to dismiss phase, is also very much worth watching.

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Mick Mulvaney's entirely classless and petty firing of the CFPB's Consumer Advisory Board (CAB) has been amply covered elsewhere. Having served on the CAB from 2012-2015, however, I've got to comment on the statement by Mulvaney's henchman that “The outspoken members of the Consumer Advisory Board seem more concerned about protecting their taxpayer funded junkets to Washington, D.C., and being wined and dined by the Bureau than protecting consumers.”

Put aside that this statement is gratuitously offensive to a bunch of hard working folks who volunteer their time and expertise. The "junkets" I enjoyed from my CAB service involved flying coach with numerous connecting flights, staying at the Days Inn, being transported around in busses, attending full-day working meetings held in windowless rooms at community college campuses in small cities around the US, and then paying for my own dinner. But I sure made out with the free coffee, pastry, and box lunch. 

What's remarkable here is that Mulvaney's flunky believes that people serve in government or on advisory boards for the perks and self-enrichment.  In a world of Pruitt's first class flights, mattress, and security detail, Carson's dining room set, and Mnuchin and his Marie Antoinette jaunting off to see the eclipse on a military flight, not to mention the President and his emoluments plus tax-payer-funded vacations at his Mar-a-Lago timeshare, well, it's just natural to assume that's how everyone operates.  It's a new twist on "government for the people."  It's really sad that it doesn't enter the Mulvaney's dude's head that maybe some of us actually act out of true volunteerism and a desire to make the country a better place. 

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Credit Slips/IACCL

The End of Bankruptcy

“Bob Rasmussen, call the Chapter 11 Desk.” Two recent decisions, one on each side of the Atlantic, have enshrined contract bankruptcy—or at least the defeat of bankruptcy law by contract.  Although the context for both was international, in principle they could work for domestic cases as well and at last achieve the demise of bankruptcy law proclaimed in the above-titled 2002 article by Rasmussen and Douglas Baird. The analysis is complex, so this brief note will focus on results and implications.

The cases are Bakhshiyeva in London [Bakhshiyeva -and- Sberbank of Russia, et al., [2018] EWHC 59 (Ch).] and Sun Edison in Manhattan [In re SunEdison, 577 B.R. 120 (2017). Their common ground is that a choice of law clause in a contract may trump the applicability of bankruptcy law to that contract. In the hands of any competent lawyer, the result may be party autonomy in the application of bankruptcy law to contractual obligations, making bankruptcy law largely irrelevant.

In the London decision, the Azerbaijani foreign representative had obtained recognition of its reorganization proceeding and thus benefit of the automatic stay of article 20 of the Model Law as enacted in the UK. However, Justice Hildyard held that the rule in a 19th Century case called Gibbs was still in full force and effect: an English choice of law in a contract makes the obligations of that contract nondischargeable in a foreign insolvency case.

Although the opinion contains some hints that the judge thought a 21st Century view might be preferable (including a courteous reference to something I had written), he felt constrained by the English cases—especially the Rubin and Pan Ocean cases—to follow the rule in Gibbs. Thus the moratorium granted by the UK version of the Model Law, which temporarily prevented the enforcement of the contract obligations at issue in the case, could not be extended beyond the close of the reorganization in Azerbaijan. Blessed be the holdouts.

More surprising was the ruling in a US-Korean contract case: choice of New York law in a contract permitted exercise of its ipso facto clause, even though that clause would be voided by Korean bankruptcy law. The ruling came in a Double Debtor case in which both parties to the intellectual property license were in bankruptcy in their respective countries. The US proceeding was a liquidating Chapter 11 while the Korean case was apparently a genuine attempt at rehab.

The US debtor had sold its assets and the buyer wanted to reclaim the license from the Korean party by terminating the license according to its terms. The contract was admittedly executory, but apparently the only ground for termination by the US party was the clause giving each party the power to terminate it upon the other’s bankruptcy. Although the court did not mention it, there may have been a realization that a section 365 rejection of the contract by the US debtor could not be used to “vaporize” the grant of the license, to use the term immortalized by Judge Easterbrook in Sunbeam. (Rejection is not an avoiding power!)  Instead, the court gave the US DIP-liquidator the power to use the ipso facto clause to terminate the contract and thus reverse the grant of the license.  The liquidator could thereby maximize the value received by the buyer of the American assets while impoverishing the prospects of the reorganizing Korean debtor.

With great respect for the excellent judges involved, the problem with both these cases is that they permit a contract choice of law to defeat application of a bankruptcy rule that voids contract obligations. The bankruptcy choice of law rule should govern. A terrific article from Singapore makes exactly that point as to the Gibbs rule. Kannan Ramesh, The Gibbs Principle, (2017) 29 SAcLJ 42, ¶21 (making the case for abolishing Gibbs in English and Commonwealth jurisprudence). In a related vein, I have argued that bankruptcy is an exceptional legal tool whose purposes require a broad understanding of the traditional in rem concept of rights “good against the world,” including discharge. Interpretation Internationale, 87 Temp. L. Rev. 739, text at nn. 37-39 (2015).  In particular, the final judicial resolution of contract obligations must be uniformly enforced everywhere or the promise of modified universalism cannot be achieved.

While the full analysis awaits a deeper discussion, the central result of these cases is that the judge in New York must assume that a Chapter 11 confirmed at Battery Park will fail to discharge any English-law contract obligations, while a judge in Fetter Lane in London would logically expect the same as to any contract governed by New York law. That is pure territorialism, sometimes masquerading under the phrase modified universalism. (I am guilty of coining that phrase, although Lord Hoffman is the one who made it famous.) In theory, it could elevate contract over bankruptcy law even domestically.

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Following up on Bob's post earlier this week about the Department of Education's request for information (RFI) regarding evaluating "undue hardship" claims in adversary proceedings to discharge student loans, a group of 23 academics, including myself, also submitted written comments in response. The effort was spearheaded by Slipster Dalié Jiménez.

Our primary recommendation is that the Department establish ten categories of borrower circumstances under which the Department would agree to the borrower’s discharge of federal student loans. As with the ABI Commission on Consumer Bankruptcy's (and the National Bankruptcy Conference's ), our categories are designed to offer objective criteria for when the Department should agree to a discharge of student loans. The overall aim of the proposal is to establish clear, easy-to-verify, dire circumstances that merit the Department’s acquiescence to a student loan discharge and thereby promote the efficient use of taxpayer funds. To this end, we also recommend that the Department accept "reasonable proof" that a borrower fits into one of the ten categories without engaging in formal litigation discovery. Our response also calls on the Department to collect and release more data about federal student loans.

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The Office of Comptroller of the Currency put out a Bulletin this week encouraging banks to make short-term small-dollar installment loans to their customers—basically bank payday loans.  The OCC seems to envision 2-12 month amortizing, level-payment loans, but they're meant to be a payday substitute.  

I suspect many readers of this blog will react with indignation and possibly shock (well, maybe nothing's shocking these days), but I think the issue is more complicated.  Depending on what one sees as being the policy problem posed by payday lending, bank payday lending might make a lot of sense.  Specifically, if one sees the policy issue with payday lending as being its high costs, then bank payday lending (like postal banking) holds out the promise of lower-cost loans. If, however, one sees the policy issue as being about payday borrower’s inability to repay even the principal on their loans, then bank payday lending (or postal payday lending) isn’t a solution at all, but a whitewash. Yet, as we'll see, there's surprising convergence between these positions on the ground in regulatory-land.

More Competition Isn’t Necessarily a Good Thing in Payday Lending

Mick Mulvaney, who claims to be the Acting Director of the CFPB, praised the OCC’s Bulletin, stating that “In any market, robust competition is a win for consumers.” Mick has learned his free market dogma 101, but while it’s generically true, it does not always hold “in any market," and happens to be totally wrong in the payday context. (Shouldn't someone who claims to be the CFPB Director know a little more about the product markets the CFPB regulates?)

Normally we think of competition as good for consumers because competition pushes down prices and pushes out bad practices.  But that outcome depends on a number of assumptions that do not always hold true.  Three are applicable here.   

First, greater competition will help consumer welfare only if consumers are sensitive to price and practice differences among competitors.  If consumer demand is not price elastic, then competition doesn’t improve consumer welfare. 

Second, greater competition will help consumer welfare only if there is non-monopolistic competition—that is the products offered by competitors need to be reasonably good substitutes for each other.  To the extent that a loan from lender A is not really a substitute for a loan from lenders B or C, then the presence of additional competitors in the market may not matter for consumer welfare.

And third, greater competition will help consumer welfare only if there is competitive equilibrium in which lenders have the ability to lower prices while remaining profitable enough to attract capital. All are questionable for payday lending. 

Let's drill down on these three points.  

Price Elasticity of Payday Borrowers

Payday borrowers do not exhibit price elasticity in their demand, at least below usury caps.  Part of this is because payday borrowers are generally in financial distress.  Their concern is dealing with an immediate problem—fixing a car or fridge or avoiding a power disconnect or funeral expenses—and the marginal dollar cost variation between lenders is of little concern relative to whether they can get approved for a loan and how quickly and how conveniently.  The cost of the loan is a worry for another time.  There’s considerable price variation in payday loans across state lines, and the pricing does not seem to affect demand. Indeed, in the seven states that do not have usury caps for payday lending, lenders pricing varies considerably, suggesting that there is not price competition (see Figure 1 here)—if there were, one would expect prices to coalesce on the lowest market-clearing price. 

Monopolistic Competition Among Payday Lenders

Competition among payday lenders also often seems like monopolistic competition—that is the products are not true substitutes for each other.  At first glimpse this would seem preposterous—the product is a loan—money—the must fungible product in the world.  But a payday borrower doesn’t see a loan from the payday lender 1 mile away as interchangeable with one from a lender 15 miles away.  Geographic proximity—convenience—is an important factor for payday borrowers.  Transportation (and possibly child care) costs figure into borrowing decisions, particularly when the price differences between loans are small, say $10.  A payday loan in East St. Louis, Illinois is going to be cheaper than one in St. Louis, Missouri, but for a low-income borrower, the added time and cost of traveling to East St. Louis may rationally not be worthwhile.  Thus, payday products are distinguished in part on geographic location, and that adds an element of monopolistic competition to the industry, which means that more competitors do not necessarily translate into improved consumer welfare. 

(Yes, there’s on-line lending, but it suffers from an adverse selection problem, and the lead generation system means that competition is for obtaining the lead, not for the borrower’s business, and it’s not clear that on-line lending really substitutes for store-front.)

Payday Lenders' Cost Structure Means that More Competition Results in Higher Prices

Competition in the payday market is also marked by quasi-cannibalistic competition.  There are some 20,000 payday lenders in the US, concentrated in 36 states.  Barriers to entry are minimal, in contrast to banking.  There is a limited borrower base, however, and the result is that the typical payday lending storefront has less than 500 unique customers per year.  That’s determinative of the economics of payday lending because the lenders have high fixed costs—rent, utilities, labor—that have to be amortized over a very small borrower base.  The result is that lenders have to keep prices relatively high in order to cover their costs and attract capital.  Payday is not an industry with outsized profit margins (and why would it be given the low barriers to entry?). 

This means that more competition is actually a bad thing in payday lending.  To the extent there are more lenders competing for the same limited customer base, it will force prices up in order for lenders to cover their fixed costs with smaller borrower bases.

The best evidence of this is what happened in Colorado after it undertook payday reforms in 2010.  Colorado’s reforms resulted in roughly half of payday lenders going out of business.  But consumer demand did not slacken.  That meant that the surviving payday lenders had twice the business as before, and because of larger per store customer bases, they were able to amortize their costs over a larger population, which had the result of lowering costs.  This suggests that encouraging more competition in payday lending might be exactly the wrong idea. 

But there’s a catch. The Colorado reforms didn’t change the institutional landscape of lenders.  All of the Colorado lenders were still dealing with the same cost structure of storefront payday lending.  If banks start making small dollar installment loans per the OCC Bulletin, the new entrants to the market would have a different (and lower) cost structure.  Instead of just increasing the number of storefront payday lenders, all with the same high fixed costs, bank payday lending would bring a new type of competitor into the market, and the marginal additional costs for a bank to do payday lending are relatively small, particularly if it is lending to its own depositors.  There’s no additional overhead involved, the cost of funds is minimal (the loans are very small), which basically leaves the credit losses, but bank payday credit losses are likely to be lower (and to the extent payday is substituting for overdraft, no different).  In this regard, bank payday lending is a LOT more promising than postal banking.  The Post Office would have much greater additional operational costs than banks, not to mention the problematic politics. 

What this means is that bank payday lending will likely result in more competition, but competition with a lower cost structure.  If so, that would seem to really squeeze storefront lenders. (An alternative possibility is that banks skim the lowest risk payday customers, but that would leave the customers most likely to rollover their loans--the most profitable ones--in the storefront payday system.). 

And yet there remains the first two issues:  payday borrowers aren’t particularly focused on cost, but on the ease (including geography) and speed of obtaining funds, which results in monopolistic competition.  Bank payday loans aren’t going to be a competitive product unless they can match storefront payday loans on those dimensions.  They might be able to with on-line approval and immediate funding to deposit accounts.  (If the borrower wants to get cash, however, it’s a different matter).

What this all means is that bank payday might result in lower costs for payday loans. I don’t know that it’s going to result in 36% APR payday loans, but even if it’s 100% APR that’s a lot cheaper than prevailing rates.  And if the competition from banks means that some storefront payday lenders go out of business, it will mean that the surviving storefront lenders will have larger customer bases and then more room for price competition.  More price competition is a good thing, but I’m skeptical about the magnitude of the consumer welfare benefit, both in terms of number of consumers and savings per consumer.  Yet this sort of marginal improvement in consumer welfare might be missing the point, depending on how one sees the policy issues involved with payday lending. 

Is the Problem with Payday Loans Their Cost or Borrowers’ Lack of Ability to Repay Principal?

If the policy issue with payday lending is the cost of the loans, then any proposals that would bring down cost make sense in broad terms—more competition via bank payday loans, post banking, limiting entry into the market, or capping fees at much lower levels. But if the policy issue is that borrowers can’t afford to repay the loans irrespective of the fees, then cost-reduction proposals look like Titanic deck-chair reshuffles.  In other words, depending on the diagnosis, there’s a marginalist approach and a maximalist approach, and the OCC bulletin is definitely in the marginalist camp. 

Curiously, the CPFB’s Payday Rule is of two minds on this.  On the one hand it is structured as an ability-to-repay rule.  But then there are safeharbors from the Rule’s ability-to-repay requirement that are keyed to price or longer repayment term, among other things.  I think the way to understand this is that the CFPB recognized that the problem with payday loans is not the cost, but the lack of borrower repayment capacity, but at the same time recognized that there is a level of demand for small-dollar credit because people often have emergencies and can't make ends meet.  So the CFPB's position seems to be an attempt to compromise and say, "no loans without ability to repay...unless the loan isn't on terms that are too onerous or too likely to result in a cascade of debt." That seems like a result that isn't so different from the OCC Bulletin. 

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