New Rule Expands Military Lending Act

Today, the Department of Defense issued a final rule expanding the scope of the Military Lending Act (MLA).  The MLA was enacted in 2006 and was implemented by DOD rules in 2007.  It prohibited contracting with service members for three types of consumer credit products:  1) closed end payday loans for $2000 or less with a term of 91 or fewer days; 2) closed end auto title loans for a term of 181 days or less; and 3) closed-end tax refund anticipation loans.

The new rule, which will become effective in October 2015, expands the scope of the MLA:

• Imposes a 36% interest rate cap (calculated as the Military Annual Percentage Rate or MAPR) including all interest and fees associated with a loan;
• Prohibits creditors from imposing mandatory arbitration terms on service member borrowers, and prohibits terms that require service members to waive certain other rights;
• Prohibits loans to service members that provide a payroll allotment as a condition for obtaining credit, permit rollover of a payday loan, or use of a security in the form of a post-dated check  or a car title (with some exceptions);
• Expands the definition of "credit" covered by the MLA to include any closed or open-end loan, including car loans but excluding loans secured by real estate;
• Modifies the provisions relating to the optional mechanism a creditor can use to assess whether a consumer is a "covered borrower" under the MLA;
• Modifies disclosures a creditor must provide to a covered borrower;
• Implements the MLA's enforcement provisions.

The DOD consulted (as the MLA required) with a host of federal agencies including the CFPB.  CFPB Director Richard Cordray said "The CFPB strongly supports the Department's efforts to strengthen consumer protections for our nation's military families."  In December 2014, the CFPB issued a report asserting that lenders were exploiting "loopholes" in the MLA.  The CFPB report took aim at "deposit advance products" (see April 2013 CFPB whitepaper,  OCC's supervisory guidance and Federal Reserve Board on these products).  A "deposit advance product" is a loan that a lender makes to a borrower whose deposit account reflects recurring direct deposits.  The borrower promises to repay the principal plus a fee from the next direct deposit. The underwriting basis for the loan is cash flow (the recurring direct deposit) and not an "affordability" analysis of the borrower's ability to repay the loan and also meet other recurring financial obligations.  

In November 2013, the OCC and FDIC issued guidance governing deposit advance products that applied to banks subject to their regulation.  By early 2014,  banks abandoned the business citing the regulations.  The guidance warned banks that they must to take into account the borrower's ability to pay, and that bank examiners would ensure that bank's deposit advance programs comply.

As part of the comment process on the  DOD's rule, the American Banker's Association (ABA)  urged the DOD not to rely on the CFPB's December 2014 study (the Study) and accompanying comment letter.   1) the CFPB did not apply to the Study the "evidence-based" standards it must apply to its own rule making process under the Dodd-Frank Act; and 2) the Study did not support the conclusion that service members are more vulnerable to deposit advance products than the general public.  (Footnote 11 of the Study makes clear that the differential impact identified in the Study was not evaluated against other explanatory variables that might eliminate statistical significance, and that the differential "does not mean that being a servicemember makes a person more likely to use deposit advance products.").  The ABA further noted that the CFPB has not yet issued its own final rules on deposit advance products. (In March 2015, the CFPB released an outline for potential regulation of the payday lending industry).  

It is clear that Americans have a love/hate relationship with payday loans.  According to a study by Pew, 12 million American's spend about $17 billion on payday loans each year.  The DOD rule is a victory for consumer groups who consider deposit advance products to be "predatory" and oppressive.  It's not clear whether the rule is a victory for service members, who will be excluded from credit products that are available to all other Americans.

 

Treasury Requests Information About Online Marketplace Lending

American Banker called 2014 a "Gold Rush" year for online marketplace lending, and named it the innovation of the year.  Online lenders provide a host of different credit products from merchant cash advance services, cash flow-based loans, and term loans.  Other online companies provide loan matching services for potential borrowers, e.g., Biz2Credit, and Fundera.

Yesterday the Treasury Department published a request for information about online marketplace lending.  Fed. Reg. Vol. 80, No. 138, July 20, 2015, 42866.  Treasury describes "online marketplace lending" as "the segment of the financial services industry that uses investment capital and data-driven online platforms to lend directly or indirectly to small businesses and consumers." Treasury wants information about the business models and products offered by online marketplace lenders, the potential for this type of lending to "expand access to credit to historically underserved market segments," and "how the financial regulatory framework should evolve to support the safe growth of this industry." It recognizes three categories of lenders within this industry segment:  1) balance sheet lenders that hold credit risk and are funded by hedge fund or family office investments; 2) online platforms (peer to peer) that sell securities to raise capital to enable third parties to fund borrowers, but do not retain credit risk; and 3) bank affiliated online lenders funded by a commercial bank, and that directly originate loans and assume credit risk.

How this market will be regulated remains up in the air.  Treasury noted that the CFPB has "broad authority governing standards that may apply to a variety of consumer loans issued through this segment."  In March 2015, the CFPB announced it was considering proposing rules governing payday, vehicle title, deposit advance and certain other high cost installment and open-end loans (specifically loans with a term of 45 days or less and an APR greater than 36%, or lower than 36% if the loan provides for repayment from the borrower's deposit account or paycheck or creates a PMSI in a vehicle).  Treasury noted that potential CFPB rules are "outside the scope" of its request for information and that Treasury is interested in information on online marketplace lenders not covered in the CFPB's proposed rules.  Treasury's RFI notes that the "framework" by which CFPB will regulate consumer loans issued through an online marketplace lender "is currently under discussion" and "the CFPB may ultimately change the scope of any proposed or final CFPB regulation."

Puerto Rico's Problem: How the Politics Breaks

The Wall Street Journal reported yesterday that the "Puerto Rico problem" has U.S. politicians, particularly GOP presidential hopefuls, stumped.  Hillary Clinton, Bernie Sanders and Martin O'Malley have all issued statements backing the pending federal legislation that would open chapter 9 bankruptcy to Puerto Rico's utilities and other public debt issuers.  The legislation is stuck in the House.  Democrats Charles Schumer of New York and Richard Blumenthal of Connecticut may introduce similar legislation in the Senate.

For Republicans, the next step is tricky.  Mutual and hedge fund creditors hold Puerto Rican debt and they want to avoid any write down of their debt-- a likely outcome if Puerto Rican debt issuers can use chapter 9.  On the other hand, about 1 million Puerto Ricans who reside in Florida and many want some federal action.  29 electoral votes are on the table.  Republicans running for president need to be seen as pro Puerto Rico, with compassion for Puerto Rican people and their economic future.  But that is hard to do without appearing to support a "bailout" for Puerto Rico.

Republican Congressman Tom Marino (R. PA) is head of the judiciary panel considering the chapter 9 relief bill in the House.  WSJ reports that he said the fate of the bill depends on whether Puerto Rico first puts together an "austerity plan" for the future.

Reading on Screen vs. Book

According to a report published in December 2009 by the Global Information Industry Center, Americans consumed information outside of work for about 1.3 trillion person/hours in 2008, for an average of almost 12 hours, 100,500 words and 34 gigabytes for an average person on an average day.  The report analyzed consumption of more than 20 sources of information from old fashioned (paper newspapers and books) to new (computer games, satellite radio, and internet video).

The study defined "information" as flows of data delivered to people.  So "information" includes video, with 1.3 zettabytes (a million million gigabytes) from television and about 2 zettabytes from computer games.   Radio and TV dominate  as sources of information, for about 60 percent of the hours expended in consuming information.  But computers have had a huge effect on information consumption.   Before widespread use of computers, information was usually consumed passively (with the exception of telephone).  Reading as a means of consuming information was hit hard by TV.  But reading as a source of information tripled from 1980 to 2008 because reading is how we consume information on the internet.

A 2005 study about reading behavior in the digital environment by Ziming Liu (available online in the Journal of Documentation) concludes that screen-based reading is different than reading text on paper.  People reading on screen tend to spend more time browsing and scanning, and reading more selectively.  They spend less time on in-depth, concentrated reading.

I've noticed a difference for myself between reading the screen and reading text on paper.  The screen is the best for fast access to a wide range of related information.  But, when I need to break down complicated information and really learn it for long term use, the screen is no match for paper.  I had thought my longing for paper and a squeaky yellow highlighter to go with it was nothing more than habit-- an old-fashioned vestige of the way I learned to consume information.  But scientists who research how we consume information by reading are beginning to learn about intrinsic differences in the two modes.  The trick seems to be matching the mode to the text.  The screen is great for Facebook, but not so much for Ulysses.

Puerto Rico's Debt - Update

WSJ today reported that Puerto Rico Electric Power Authority (PREPA) and its bondholders are close to a deal that would cover the $400 million plus due to bondholders and avoid default.

Yesterday, Dealbook ran "The Bonds that Broke Puerto Rico" offering an explanation of how Puerto Rico could issue "enough debt to crush it."  The answer:  "a confluence of factors, including American investors' desire to avoid taxes; the mutual fund industry's practice of competing on the basis of yield; complacency about the practice of long-term borrowing to plug holes in budgets; and laws [Puerto Rican] that supposedly give bond buyers ironclad guarantees."  

MoneyBeat ran  Puerto Rico's Crisis Deals a Blow to Municipal-Bond Funds providing more detail on the impact of Puerto Rico's debt problems on the municipal bond market.   Puerto Rico's $3.5 billion in general-obligation bonds issued in 2014 had a yield of 8.7%, compared to the yield on 10-year U.S. treasury notes which was around 2-3% over the same period.   Interest on Puerto Rican bonds is federal and state tax free for investors in every state.  Interest on other municipal bonds is exempt from federal tax, but exempt from state tax only if the investor lives in the state that issued the bonds.  Single-state municipal bond funds have used Puerto Rican bonds to diversify and boost yield.

Why Don't We Care About Puerto Rico?

Late Sunday, Puerto Rico's governor announced that the U.S. territory would likely default on $72 billion in debt. Yesterday, the White House said that the Treasury Department will offer advice, but there will be no "bailout." Rather, the White House urged Congress to pass legislation that would amend the Bankruptcy Code so Puerto Rico could reorganize its debts under chapter 9. Chapter 9 is available only to municipalities (defined as a "political subdivision or public agency or instrumentality of a state," 11 USC 101(40)), and only when state law specifically permits the municipality to use it. Puerto Rico is a U.S. Territory, not a municipality or a State, and thus is not eligible to seek relief in chapter 9.

Detroit filed for relief under chapter 9 in July 2013.  Puerto Rico's $72 billion is about 4 times bigger than Detroit's $18 billion debt problem.  Detroit confirmed a plan of debt adjustment in November 2014.  Retired Bankruptcy Judge Steven Rhodes presided over Detroit's bankruptcy and is now working to assist Puerto Rico.  "It's exactly like Detroit," he said.

There is some support in Congress for a bill offered by Puerto Rico's non-voting Congressman to open chapter 9 to Puerto Rico.  Supporters of the bill say that extending chapter 9 would be consistent with federal bankruptcy policy and would offer Puerto Rico an orderly way to extend debt maturities, reduce the principal or interest rates, or refinance with new loans.  A chapter 9 bankruptcy proceeding is not a federal taxpayer-funded bailout.  It would provide a judicial forum to consider which creditor groups and other stakeholders feel which part of the pain of Puerto Rico's debt problem. The legislation met opposition from Republicans who say they are worried that offering Puerto Rico a chance to restructure its debts in a federal bankruptcy case would relieve the Puerto Rican government from responsibility for decades of fiscal mismanagement, and disrupt the expectations of creditors who incurred debt in reliance on the current law.  Of course that's exactly what happened in Detroit.

About a third of the population of Puerto Rico relies on government support to survive.  Government workers make up about a quarter of the work force.  Just 41% of Puerto Ricans are working or looking for work (compare to 63% on the mainland). To raise revenue, in 2014, the government raised taxes, $1.3 billion in new taxes.  Public debt as a percentage of GDP is 64.9%; for Haiti it is 21.3%.  With an economic situation as grim as this, it's hard to imagine that even a chapter 9 proceeding could result in a plan to put Puerto Rico's economy back on track.  

Puerto Rico is an economic disaster area. So why the lack of  federal interest in the Puerto Rican debt problem?  Perhaps Puerto Ricans don't matter because Americans don't think of Puerto Ricans as "Americans."  But they are as American as the citizens of Detroit.  The term "United States" includes the 50 states. DC and Puerto Rico, Guam and the Virgin Islands.  8 USC 1101 (a)(38).  Puerto Ricans are US citizens and can move and work anywhere in the US without passports or green cards.   And move they did.  An August 2014 Pew report showed that from mid 2010 to 2013, more Puerto Ricans left the island than during the entire decades of the 1970's, 80's and 90's. The recent migrants are less educated than those who stayed, and are more likely to hold less skilled jobs.  640,000 Puerto Rican voters make up about 10% of the population of central Florida.  Although residents of Puerto Rico do not have voting representation in the U.S. Congress and are not entitled to electoral votes in a Presidential election, the votes of Puerto Ricans who live on the mainland count in local and national politics.  In Florida, Puerto Ricans are 28 percent of Hispanic registered voters with real political clout in that state and in the 2016 Presidential race.  (When Obama won Florida over Romney in the 2012 presidential election, he did so by a margin of 74,000 votes.)  So, Puerto Ricans in Florida matter.  But, nobody seems too concerned about the Puerto Ricans in Puerto Rico.

What's in Your Wallet?

Consider these findings by Scott Fulford, Claire Greene and William Murdock III, Federal Reserve Bank of Boston as part of their study of U.S. consumers' holdings of $1 bills based on data from the 2012 Diary of Consumer Payment Choice, a national online survey tracking payments made by participants over a three day period during October 2012.  2,467 people ages 18-94 participated in the survey and reported 12,647 transactions for combined spending of $453,655.

• About 64% of adults 18 years or older start the day with at least one dollar bill on their person.  The median holding is two dollar bills; the mean is slightly below three dollar bills.  Hardly anyone had more than ten dollar bills in his or her pocket.   To compare, the median holding in cash (all bill denominations) is $27.  The mean is larger at $62 dollars.  Some people carry a large amount of cash.
• For consumers who hold some cash on their persons, 71% of the consumers who started the day with no dollar bills ended the day with none.
• Around 50% of consumers make at least one transaction with cash on any given day.
• Consumers appear to be managing their dollar bills actively.  Consumers who start the day with few dollar bills tend to acquire some during the day.  Consumers with many dollar bills at the start of the day tend to end the day with fewer dollars.
• People who make a transaction during a day tend to gain one dollar bills in larger numbers than they lose dollar bills.  The median gain of dollar bills over the course of a day is three bills; the median loss is two bills.