I recently published a law review article entitled Grand Theft Auto Loans with Ozy Adams.  It discusses title lending based upon data collected by the State of New Mexico.  This article cover a tremendous amount of ground, but as these things tend to go, I have now heard of two critical topics we should ahve discussed but didn't. 

We do discuss how the loans are almost always interest-only and can only be paid off all at once, not in installments.  We also talka bout how these loans are also typically entirely asset-based, meaning that if a customer has no income at all, she can still take out a large title loan. We also discuss repo rates per loan (between 5% and 22%),  repo rates per customer (between 20 and 70%), total vehicles lost once reclamation is taken into account per customer (between 13% and 60%), interest rates for title loans (most commonly 300% per annum or 25% per month), percentage of auto value lenders will lend on (25-40%), and amount returned to customer from sale proceeds after repossession and sale (next to nothing once the fees are racked up). 

Here are two important things we missed.  First, it seems that the process of repossessing and then having a customer redeem the vehicle is extremely profitable for the lender and very expensive for the client.  Having asked around bit this past week, I am hearing regular stories about this from legal aid offices around the state.  I don’t think I quite realized what a profit center repossession followed by redemption really was.  This also means that in states that report only vehicles ultimately lost to repossession, this added expense/loss is never accounted for and is thus not in the reported repossession numbers. This deserves further study.

Second, above I say the loans can only be paid off in one lump sum.  But I kid you not, folks, that is so wrong!  Reality check:  You can’t pay them off at all!  I do not mean that the customer cannot come up with the money.  What I mean is that the lenders find ways to keep you in the loans even if you show up with the total amount of funds owed.  They will not take checks from banks.  Even if you seemingly pay it off in full, they come up with charges they missed and keep asking for more.  They refuse to release titles.  They try to confuse customers, do not listen to customers, by hook or by crook, they simply will not take the principal to pay off the loan. One friend of mine who runs a CDC has documented these practices over and over again. He has found that unless they feel the law might get involved, the loans never die.

This is something that needs immediate attention.  In fact, if this has been your own or a client’s experience, I hope you write about it here.  In the meantime, spread the word to avoid this form of credit. It is far more dangerous that a payday loan, even if it is half- price interest. 

There's a fearful symmetry in the consumer finance world. It's a symmetry of bullies between overreaching financial institutions and plaintiff strike suits, as in both, litigation costs present a ceiling, under which there's a license to overreach. 

What does a bully do?  A bully looks and acts tough and claims things to which s/he isn't legally entitled. But as we all know, if you push back against a bully, the bully is likely to back down; the bully doesn't actually want a fight. We see the bully model of consumer finance and the bully model of plaintiff litigation all too frequently. There's no sense, however, that we'd be better off eliminating both. Instead, interest groups look to eliminate one or the other, when the larger problem is in our adjudicative system, which imposes significant costs and delays substantive rulings. 

Now for the symmetry. One of the bugbears of the financial services' industry is the plaintiffs' bar. Now, just as there are lots of good, legitimate services provided by financial services companies, so too are there lots of good legitimate services provided by plaintiffs' attorneys. But there's also a category of litigation that looks an awful lot like the bully model of consumer finance:  the strike suit. The flavor de jure seems to be regarding ATM signage. The Electronic Funds Transfer Act requires that ATMs physically disclose the possibility of fees, as well as disclosing so on screen.

It isn't clear if the physical disclosure adds anything to the on-screen disclosure. We know that consumers are exquisitely sensitive to ATM fees in terms of no disclosure vs. on-screen disclosure. We don't know whether additional physical disclosure matters.

In any case, there have been a bunch of suits filed recently under the EFTA over missing signage (query whether there's also a possible UDAP suit). The EFTA has a good faith defense, but the burden of proof for the defense is on the bank. As it happens, no one is looking to see these suits get litigated to that stage. The banks might well win the suit if it were to go to trial, but they'd still bear the costs of doing so.  So they settle for a little more than the plaintiffs' attorneys' fees, as it is cheaper than the cost of litigating and winning. The banks lose in this sort of suit, but it's not clear that consumers win. The ATM signage suits illustrate how the bully model can be reversed and used against financial institutions, not just by them.   

I'm not a fan of the bully model in either context. (Did the name give it away?) But I am more troubled by the lack of awareness of the bully system. Banks argue for legislative changes to limit strike suits (there are House and Senate bills proposing eliminating the physical ATM fee disclosure requirement, again, unclear if that would affect UDAP suits); consumer advocates push back against overcharges. I wonder, however, if we'd accomplish far more by concentrating on lowering the barriers to getting substantive justice--lowering the cost of pushing back against bullies. That's a set of civil procedure reforms that is far outside of my area of expertise, but until and unless we figure out a way to lower the transaction costs of getting justice, there's ample license for bullies.  

I've posted my thoughts on RadLAX over at Dealbook (along with another column on Dewey if you'd like to check that out too). In short, I noticed Justice Scalia's fascination with cannons too.

As Stephen noted, the Supreme Court has decided the RadLAX case. Although I suspect I won't be the only Credit Slips blogger to comment on the case, I had a few thoughts on the interpretive methods instead of the result. In a short opinion, the Court reached the correct results in what was an easy case. Stephen is absolutely right to describe the lower courts who reached contrary conclusions as "aggressively wrong."

For nonspecialists, bankruptcy experts will excuse a bit of background on the case, which revolved around the right of a creditor to "credit bid" in an asset sale as part of a chapter 11 plan. Outside of bankruptcy, at a foreclosure sale for example, the creditor can simply bid the amount of their debt. If the bank is owed $100,000, it can simply bid the $100,000 debt at the foreclosure sale. Anyone else who wants the property must bid more than $100,000, in cash, thereby paying the bank in full.

Because the bank would not vote for the debtor's plan without credit bidding, the debtor had to use the provisions of the Bankruptcy Code that allow a court to confirm a plan over the objection of a secured creditor like the bank. Paraphrasing, those provisions state the court can confirm the plan if:

1. The bank will be given the collateral,
2. The debtor will sell the property at a sale at which the creditor can credit bid, or
3. The bank gets the "indubitable equivalent" of its collateral.

Seizing on the "or," the debtor essentially said, "We choose option 3, which includes the right to sell property without giving the creditor the right to credit bid." The phrase "indubitable equivalent" is an old bankruptcy term of art for something that is similar to the original collateral. As I tell my students, it is not quite "indubitable" or "equivalent," but in theory something close to it.

The idea that the general phrasing in option 3 allowed the debtor to do something specifically forbidden by option 2 was an ungrammatical and hyper-technical reading against common sense. Writing for a unanimous Court, Justice Scalia rests principally on a canon of construction that general language in a statute cannot override something specifically prohbiited elsewhere. Although bankruptcy scholars had written a lot--and even submitted some amicus briefs--about the history or purpose of credit bidding, the Scalia made short work of those arguments noting that whatever the merits of credit bidding, Congress had spoken.

Scalia's intellectual move of seizing upon a statutory canon of construction is a classic move for his personal interpretive approach. Scalia is a textualist, looking only to the words of a statute, but he is not a naive textualist. He does not believe that words only have one meaning on which everyone would agree. In Scalia's approach, canons can provide neutral rules that can miinimize the idiosyncractic rulings that might happen as judges simply look to statutes and apply their own personal meanings to words. Importantly, clear canons of construction provide advance notice to Congress of how their words will be interpreted. Thus, canons play an important role in Scalia's worldview of having a government of laws, not men. None of this analysis is to suggest that I agree with Scalia's textualism, but rather that I see RadLAX as a piece of Scalia's larger interpretive work, which is an important part of the legacy he has left the legal profession.

Moving to an entirely different perspective, perhaps the most important part of the RadLAX opinion is footnote 2. There, Scalia notes that the United States government has many secured loans through its various programs, and it has an important interest in being able to credit bid because it often lacks the appropriations authority to bid cash in a particular case. In his brief, the Solicitor General made a point of stressing the government's interest in the case.

Although the government's interest may not be important in Scalia's interpretive approach, it probably was an important factor to other justices. The Solicitor General often files briefs in bankruptcy cases, and when he does, it is often to represent the government's interest as a creditor. One should question whether the Solicitor General should solely consider the governmetn's fiscal interest when taking sides in a bankruptcy case before the Supreme Court, as Katie has discussed. And, the Solicitor General's views are often very important to the justices. Thus, RadLAX goes down as another bankruptcy decision where the Solicitor General put a thumb on the scale in favor of creditor interests. Sometimes, as in RadLAX, this is even the right side of the case.

The Supreme Court has affirmed the 7th Circuit in RadLAX. I'm sure Adam, I, and others will have more comments to follow. The 8-0 decision certainly makes me feel a bit more comfortable about those old posts arguing that the 3d Cir. was aggressively wrong.

Credit Slips alumni John Pottow sent me an op-ed from Freep.com. Being an idiot, it took me a while to figure out that this was the Detroit Free Press. John takes on the huge trading loss at J.P. Morgan and the continued need to regulate financial hedging at U.S. banks (no matter what Jamie Dimon says). Check it out.