Other Consumer Financial Transactions

At the University of Memphis Symposium, a panel on consumer financial transactions addressed a number of issues, including how consumer issues are related to crisis containment and general regulatory reforms. The panel was moderated by Professor Adam Feibelman, University of North Carolina School of Law.

Professor Donna Harkness, who supervises the Elder Law Clinic at University of Memphis, spoke to consumer issues presented by the elderly, who typically have a fixed income. This group, Harkness explained are often targets for fraud and overreaching. Many of the programs pitched to elders are not always those that are appropriate for retirees. Moreover, credit card debt has become a problem for the elderly, including co-signing for credit cards and other loan instruments with younger relatives. According to a Federal Reserve study, the elderly had the greatest increase in consumer debt in recent years. Moreover, much of the disclosure on lending products, even where required, is not always understood by the elderly. Professor Harkness argued that lending practices to the elderly need reform to curb lending to those who cannot possibly repay the amounts. Professor Harkness advocated for a capping of late fees that go on indefinitely, universal default provisions, mandatory arbitration and more stringent consumer protections generally. Of course, the convenience users may end up paying more.

Bankruptcy Judge David S. Kennedy spoke about bankruptcy and the housing crisis. In particularly, the Homeowner Affordability and Stability Plan just announced designed to make mortgages more affordable, reach at-risk homeowners and address declining neighborhood values. As to bankruptcy modifications of home mortgages, the so called "cramdown," Judge Kennedy predicted that the initiative will succeeed, perhaps soon. Several bills are pending already (H.R. 200, H.R. 225 and S. 61). CitiGroup and about twenty state attorneys general are supporting the measures.

Judge Kennedy argued that bankruptcy judges already do write-downs on second homes, vacation homes and other real estate. As such, this is something bankruptcy judges already have experience doing. The bills would allow judges to extend the loan term, change the interest and write down the amount of the secured portion of the loan to the home value. The unsecured portion of the home loan would be folded into a debtor's other unsecured debt and eventually discharged if a Chapter 13 plan is completed. Ultimately, Judge Kennedy observed, the other unsecured creditors may complain the loudest as the total amount of unsecured debt in a Chapter 13 plan will increase.

All of this comes down to what Americans can afford. A serious consideration must be had about how we extend credit and how we fix credit issues for consumers. I agree with Judge Kennedy that the sky will not fall if mortgage cramdowns are allowed and will Professor Harkness that more needs to be done for the elderly. With respect to bankruptcy, lenders might be more likely to come to the table earlier if a bankruptcy judge is waiting in the wings.

I want to thank everyone at University of Memphis School of law for hosting this Symposium. Special thanks to Symposium Editor Jera Bradshaw for her efforts to make this happen today so successfully and Baker Donnelson P.C. and First Tennessee for their support of the program.

— JSM

Keynote Speech by John Dearie of Financial Services Forum

Over at University of Memphis' Symposium on Financial Services Reform, John Dearie of the Financial Services Forum gave the keynote speech. Mr. Dearie agreed with earlier presenters that we must first decide what is to be regulated and, second, determine what is the point of regulation. That is, what are the objectives to be obtained.

Mr. Dearie discussed the changes in financial products that have altered our marketplace and urged that a number of factors require consideration in establishing a new supervisory framework. Among those:

• Global financial systems. The global nature of our marketplace requires consideration due to the interconnectedness of markets.
• Innovation. Mr. Dearie also cautioned against putting financial institutions in a "regulatory box." As such, the supervisory function can only be successful if innovation is not discouraged or impacted in a way that impairs competitiveness.
• Risk. The supervisory objective to help identify and manage risk and be responsive to changes in the marketplace to ensure safety and soundness.
• Cost. Moreover, the cost of the supervisory system must be considered. Mr. Dearie argued that the American supervisory system costs many times over that of other countries, such as the U.K.

How to accomplish this? Rather than scrapping the current structure, Dearie's plan is dubbed GLBA plus (named after the 1999 Gramm-Leach-Bliley Financial Services Modernization Act, Pub.L. 106-102) Federal, state and local supervision would continue under this model. This plan would preserve the specialization of current regulatory agencies. Regarding federal bank examinations, bank examination powers should be consolidated into one agency, the Office of the Comptroller of the Currency (with the Office of Thrift Supervision folded into the OCC). To the extent that non-traditional entities do not have an existing designated regulator, like hedge funds, such entities would only have intervention in an emergency. The Federal Reserve would remain as an overseer of the financial system as a whole as an umbrella supervisor. This will result in: lower costs; focus on a single regulator for the financial system as a whole; comprehensive supervision; preservation of regulatory specialization; more consistency; increased principles based supervision; and more likelihood of political success.

So, will this work? The mood at the Symposium was mixed. There is a lot to like about having the Federal Reserve keeping an eye on the financial system as a whole. After that, though, it gets a bit murky on how state and federal agencies might coordinate particular challenges. This is not intended to be overly critical of Mr. Dearie's position, as he is just thinking this through himself and how financial products will develop is uncertain to all. The GLBA plus proposal might be a modest regulatory fix with big results or merely perpetuate a system of limited oversight without substantial changes. For the time, it is good to have the discussion take place to ensure that attempts are made not only toward the current, but also any future crisis.

— JSM

University of Memphis Symposium on Financial Services Reform

Today I am at the University of Memphis Symposium on Financial Services Reform. One of the early speakers was Professor Saule Omarova, from University of North Carolina School of Law. Her paper, co-authored with Professor Adam Feibelman, also from UNC, "Risks, Rules and Institutions" takes up the Treasury Blueprint's proposals for reforming our regulatory structure. Professor Omarova advocates a triple peaks framework for financial regulation: a market regulator (the Federal Reserve), a supervisory regulator and a market conduct regulator. Professor Omarova urges that regulatory action should be taken up soon before political and market will lapses when the immediate crisis is contained.

Crisis prevention is oft put off, but is an important part of addressing the underpinnings of the reasons that have led to the current crisis. The general framework is important because many of the particular financial products that contributed to the current crisis will not present in the same way, but different products can create problems. Prior to restructuring the financial industry, greater understanding of the current (and perhaps future) activities that might lead to market failures is needed. Our past notions of industry business may not lead to the optimal structure. The main concern is that in the rush to act, we might make the wrong regulatory choices.

I tend to agree that the political will to make change may be overshadowed by the fighting of the crisis itself. Moreover, financial products change over time. We really don't know how these products will be packaged in the future. Securitization itself, for instance, might not be the root of the financial problems. Rather, the way in which securitization has been used and the particular modelling of risks.

Professor Amarova's paper will appear in the Memphis Law Review.

— JSM