Does Unconscionability Theory Lead to Greater Economic Problems?

Today is the second day of the International Contracts Conference hosted this year by Stetson University College of Law. Professor Xi George Zhou of the University of Sheffield presented his paper, An Economic Perspective on Legal Remedies for Unconscionable Contracts, where he argues that there are disincentives to trade created by unconscionability doctrine, precaution problems and potential abuse of rights. His paper asks whether a higher deterrence model leads to greater economic problems. He proposes that creating an effective remedy for unconscionable behavior may require a legal remedy that is lower, as a high sanction may result in less economic transactions due to precautions employed by traders. Thus, it is impossible to eliminate bad behavior through deterrence alone. In order to use any legal mechanism we need to focus on the effectiveness of the tactic. There are risks to all deterrence models.

Professor Zhou also presented a call for papers for the Society of Legal Scholars Conference September 5-8. This year's topic is Law in Politics, Politics in Law. All papers on any aspect of contract, commercial and consumer law are welcome, whether on topic or not. Paper proposals are due by March 4, 2011 to Professor Zhou at qi.zhou@sheffield.ac.uk.

-jsm

Card Networks Attempting to Block Debit Card Merchant Fee Regulation

In a surprise late addition to the financial reform legislation, Congress required the Federal Reserve to regulate the fees that merchants pay to accept debit cards. The statute requires the regulated rate to include only per transaction costs and certain anti-fraud expenses. In December, the FED put out for comment a proposed rate of 12 cents per transaction, nearly 75% below the current average fee of 44 cents. Current rates are based on a percentage of the sale price.

Merchants were pleased with the FED's proposal. Banks were not, claiming that a fee that low would force them to lose money on debit card programs unless they charged their own customers. (Imagine that.) One bank has filed a constitutional challenge to the legislation, arguing that it constitutes a taking of bank property without just compensation and violates the equal protection clause because only the largest banks will have their rates regulated. The period for comment ends next Tuesday, February 22, and the FED must promulgate a final rate by April 21.

In recent testimony before the House Financial Services Committee, FED Governor Sarah Bloom Raskin explained that board members were "reserving judgment on the final rule" until they can consider all of the comments. Some lawmakers have expressed concern the FED has not adequately considered the cost of fraud prevention. Visa has ramped up a vigorous lobbying campaign, urging Congress to enact new legislation delaying the implementation of the regulation. Observers believe that changes at this point are unlikely. Representative Barney Frank, however, told the press that while he would not support the delay that Visa has requested, he would support instructing the FED to include more factors in the fee calculation.

2011 Sales Survey

I just put the draft of the Sales Survey up on SSRN. It will appear in the Business Lawyer in August or September, but there are some really great cases this year. Yes, some really good examination ideas as well!

- JSM

Suffolk Law Visiting Position

Suffolk University School of Law is seeking potential visiting professors (assistant, associate, or full) to teach a 6 credit-hour Contracts course beginning Fall 2011. Candidates should have significant teaching experience and strong student evaluations. Suffolk University is conveniently located in the center of Boston. If anyone is interested, please feel free to contact Elizabeth Trujillo, Associate Professor, Suffolk University Law School, 120 Tremont Street, Boston, MA 02108-4977 Tel: 617-305-1672; etrujillo@suffolk.edu.

- JSM

Specific Performance, Parol Evidence and the Naughty Monkey

Here is a great case about specific performance, parol evidence and a yacht named the "Naughty Monkey!"

U.C.C. section 2-716 provides a more liberal attitude toward the remedy of specific performance of contracts for the sale of goods than the common law traditionally does, and a concomitant broader view about when the goods are unique. In Naughty Monkey LLC v. Marinemax Northeast LLC, No. C.A. 5095-VCN, 2010 WL 5545409 (Del. Ch. Dec. 23, 2010, the court considered a request for specific performance based on language in a yacht sales contract providing “TRADE VALUE GUARANTEED TO 15% LOSS WITHIN 18 MONTHS (PER ANDREW SCHNEIDER) SUBJ. TO MARINE SURVEY AND FINANCING” (the “Buyer Protection Clause”). Michael Stock (“Stock”) contacted Marinemax Northeast LLC (“Marinemax”) about the purchase of a new boat after seeing their boats at the National Harbor Boat Show. Eventually, Stock purchased a 62-foot Azimut yacht, which he named the Naughty Monkey, for $1,825,000 through an entity he named the Naughty Monkey LLC (“Naughty Monkey”). Concerned about losses on a yacht of this price, Stock negotiated some down side price protection in the form of the Buyer Protection Clause. About a year later, Stock decided that he did not want the Naughty Monkey and proposed that he trade the boat back to Marinemax for a boat for $2900 and Marinemax would make a cash payment to him for $1,633.350, the difference under the contract. Marinemax refused this request, taking the position that the agreement only allowed Stock to trade the Naughty Monkey in toward the purchase of a more expensive yacht. Stock brought suit for specific performance on the contract, as well as damages related to financing, insurance and maintenance costs for the yacht.

The first issue the court considered was the meaning of the Buyer Protection Clause. Without any reference to section 2-202, the court instead initially referenced certain traditional notions of interpretation, namely to “effect to the clear terms of agreements, regardless of the intent of the parties at the time of contract formation” and to use the “customary, ordinary and accepted meaning of the language.” Nevertheless, the court considered extrinsic evidence to select a meaning of the Buyer Protection Clause that neither party argued: that Stock could trade in the Naughty Monkey to Marinemax, but not for cash, toward the purchase of any merchandise, not only boats of higher value.

Turning to the issue of specific performance under section 2-716, the court ruled that a “remedy at law would do complete injustice in this case.” The court observed that having Marinemax pay monetary damages would inevitably deprive it of the benefit of the bargain which would permit it to sell Stock another yacht at retail cost which it only paid wholesale. Similarly, if the court were to give Stock monetary relief then he would get a liquid asset, which is more than he would have received under the agreement. Accordingly, specific performance, was the appropriate remedy.

- JSM

Good Faith in the Termination of Sales Contracts

Courts in several cases addressed claims for breach of contract based on a party’s failure to act in good faith. So, what does good faith require under UCC section 1-304? In the following case, the court did a nice job of tying an arbitration panel's implication of a reasonability requirement in the application of a termination provision in an agreement with the obligation of good faith.

In Burton Corp. v. Shanghai Viquest Precesion Industries Co., Ltd., No. 10 Civ. 3163(DLC), 2010 WL 3024319 (S.D.N.Y. August 03, 2010), the court affirmed an arbitration award in favor of Shanghai Viquest Precesion Industries Co., Ltd. (“Viquest”) to recover for unpaid shipments of snowboard bindings made to Burton Corp. (“Burton”) for use in its snowboards and for wrongful termination of the sales agreement. The agreement permitted Burton to terminate if Viquest’s “financial position pose[d] a risk to Burton's business.” Additionally, the agreement provided that Viquest would, upon request, return Burton’s molds upon termination for any reason. During the term of the agreement and while Burton owed Viquest $1.8 million for unpaid shipments, Burton terminated, claiming financial concerns, and requested return of the molds.

When Viquest did not return the molds, Burton had to replace the molds and filed an arbitration to recover its cost of replacement as the agreement provided for arbitration of disputes. Viquest counterclaimed for its lost profits due to the early termination. The arbitration panel concluded that Burton could only terminate under the financial clause if it reasonably believed that Viquest’s financial position threatened its prospects, which Burton did not prove. Accordingly, the arbitration panel awarded Viquest its lost profits for the early termination and denied Burton’s request for the cost of replacing the molds as Burton was not itself in conformance with the agreement and owed Viquest substantial sums.

The District Court for the Southern District of New York denied Burton’s request to vacate the arbitration award against it, confirming the award in full. The court treated the reasonableness as derived from the covenant of good faith and fair dealing, citing to the U.C.C. section 1-304 obligation of good faith contained in every contract. The court observed that the obligation of good faith required Burton to have a reasonable basis for terminating the agreement. Moreover, Burton’s failure to pay Viquest for outstanding invoices put pressure on Viquest’s financial condition.


- JSM

The Predominant Purpose Test Still Predominates Mixed Goods/Services Transactions

Here is another little bit from the upcoming Sales Survey in the business lawyer. Here are a couple of nice examples of recent mixed-goods/services transactions under UCC section 2-102. Use of the predominates test has been pretty consistent in cases I've seen of late.

In Blesi-Evans Co. v. Western Mechanical Service, Inc., 72 U.C.C. Rep. Serv. 2d (Callaghan) 115 (W.D.S.D. 2010), the court examined whether a contract for a boiler purchased for installation at the South Dakota School of Mines and Technology (SDSM&T) campus was one for the sale of goods. Western Mechanical Service (Western) had a contract for the replacement of the SDSM&T boiler that required it to pay $500 per day in liquidated damages if the installation was not substantially complete by October 13, 2006. Western ordered the boiler from Blesi-Evans (Blesi), which agreed to also provide start up and training for the boiler. When Blesi failed to deliver the boiler in time to meet the SDSM&T contract, Western installed a temporary boiler. Blesi brought suit for its contract price on the boiler and Western claimed the expense of the temporary boiler. The court correctly ruled that Article 2 governs transactions where goods and services are bundled if the “predominant purpose” of the contract was for the sale of goods and the services are merely incidental. The court noted that Blesi was to provide a boiler, something clearly movable. The court noted that some of the purchase documents failed even to mention the related services and the dispute that actually arose was one related to the provision of the good in a timely manner, not the services.

Similarly in Connie Beale, Inc. v. Plimpton, 2010 WL 398903 (Conn.Super. January 13, 2010), the court considered a claim for breach of an interior decorating contract. Applying the predominant purpose test, the court found a contract for interior design is predominantly one for services, even though the designer would present furniture, upholstery, window coverings, fabrics and flooring to the buyer for consideration. The court noted that “[a] transaction that requires the incorporation of materials does not make it an agreement for a sale . . . .” Moreover, the parties did not label the contract a sale of furnishings, even though decorating services would surely include some goods.

- jsm

2-204 Still Requires Contract Basics

It is the time of the year when I am working on the ABA's Sales Survey of Article 2 cases from 2010. So, I'll pass along a few nice ones here. Perhaps some of these will make good examination questions or just good basics. And the lesson of today's 2010 case, yes, an Article 2 contract still requires a basic agreement at least some definite terms.

While much litigation and scholarly attention surrounding contract formation under Article 2 centers on section 2 207, the decision in Teter v. Glass Onion, Inc., 723 F.Supp.2d 1138 (W.D. Mo. 2010) turned on the application of section 2 204. Gary Teter (“Teter”), an artist who paints historic scenes, met with the owners of the Glass Onion, Inc. (“Glass Onion”), the purchaser of a gallery with which Teter had done business in the past to discuss the continuation of the business relationship with the gallery under Glass Onion’s ownership. Thereafter, the parties had several sales transactions for original paintings by Teter where Glass Onion purchased the paintings and posted an image on its website. After some period of time, however, Teter’s agent advised that to continue the relationship, Glass Onion would need to execute a Dealership Agreement.

When Glass Onion did not become an authorized dealer, Teter’s agent requested that Glass Onion remove images from its web site and advertising. When Glass Onion did not remove the images, Teter brought suit against Glass Onion on various claims related to Glass Onion’s use of Teter’s works in its advertising. Glass Onion brought counterclaims on the grounds that Teter breached a contract to sell art to Glass Onion and provide it a geographic exclusivity. The court granted Teter’s motion for summary judgment on Glass Onion’s counterclaims. The court noted that while section 2-204 permits the making of a contract based on conduct of the parties, the basic elements of an agreement must still be present. While the eight purchases of artwork constituted contracts, the alleged ongoing agreement to sell artwork to Glass Onion for resale on the same terms as the predecessor owner of the gallery was too indefinite and lacked consideration to constitute a contract under section 2-204. Accordingly, Teter was under no firm obligation with Glass Onion or the previous gallery owner to continue selling artwork and could stop selling or refuse to sell paintings to the gallery without recourse.

For similar lines of reasoning, see Key Items, Inc. v. Ultima Diamonds, Inc., No. 09 Civ. 3729(HBP), 2010 WL 3291582 (S.D.N.Y. August 17, 2010) (companies related to buyer were not responsible on unpaid contract to which they were not a party); Harman Invs., Ltd. v. Shah Safari, Inc., No. C10-0216RSL, 2010 WL 3522517 (W.D. Wash. September 07, 2010)(financier was not party to contract for purchase of goods and not liable for non-payment thereon).

- JSM

St. Thomas University Looking for Business Associations Faculty

A plug for my school. We are still looking for a new or lateral Business Associations faculty for next year. With Florida now also testing UCC Articles 3 and 9, I suspect there is more room for commercial law as well as traditional corporate subjects. Here is the ad from Fall. We've filled some slots, but are still looking in the business arena. If you are looking or would like to recommend anyone, please contact me directly at jmartin@stu.edu or hiring chair Tamara Lawson, below.

ST. THOMAS UNIVERSITY SCHOOL OF LAW in Miami, Florida, invites applications from experienced and entry-level candidates for tenure-track positions beginning in the 2011/2012 academic year. The Law School especially seeks candidates in the areas of Business Associations, Wills and Trusts, Constitutional Law, Securities Regulations, Property and Civil Procedure. Applicants must possess a distinguished academic record, a dedication to excellence in teaching, and a demonstrated commitment to scholarship. Consistent with the Law School’s tradition of diversity, members of minority groups and women are especially encouraged to apply. Applicants should send a letter of application and a resume. CONTACT: Professor Tamara Lawson, Chair of the Faculty Recruitment Committee, St. Thomas University School of Law, 16401 NW 37th Avenue, Miami Gardens, Florida 33054. E-MAIL: tlawson@stu.edu. FAX: (305) 623-2390.

— JSM

Opportunity for Publishing for Commercial Law Profs

For those who didn't attend the Annual Conference in San Francisco or visit the CALI booth or simply haven't heard . . . CALI is also sponsoring fellowships in a program called ELangdell whereby professors submit proposals to CALI for law school text books and supplements and, if accepted, CALI publish the work as a digital e-book in multiple formats. CALI pays $500 per chapter to authors, but gives the books away for free to students. This is a great resource for students and professors in a time where book costs are very high and resources slim. CALI is hoping to both have a nice library of free books itself and, perhaps, to put market pressure on the main publishers regarding their pricing of e-books. Several books are in progress and the beta versions of Doug McFarland’s Civil Procedure text (6th edition) and a chapter on Ethics for Tax lawyers are already available. Other proposed texts are in process.



If you are interested in putting in a proposal for something in the Commercial Law area, contact Deb Quentel at CALI at dquentell@cali.org. The next round of proposals are due by February 2, 2011.

- JSM

Arbitration by Door Posting?

Dan Barnhizer (Michigan State) posted yesterday on the Contracts list serve this photo sent to him from a student that saw it at a Whataburger. The text reads:

"Arbitration Notice"
"By entering these premises, you hereby agree to resolve any and all disputes or claims of any kind whatsoever, which arise from the products, services or premises, by way of binding arbitration, not litigation. No suit or action may be filed in any state or federal court. Any arbitration shall be governed by the FEDERAL ARBITRATION ACT, and administered by the American Mediation Association.
"Arbitration Notice"

Naturally, this raises many questions about consent to abitration, class action arbitrations and rules that might even apply to any such disputes. And, of course, Barnhizer asked "what they do for drive-through customers?"

- JSM

AALS Section on Financial Institutions and Consumer Financial Services

The section program at the Annual Meeting of the Association of American Law Schools in San Francisco on January 7 this year focused on the "post-crisis" landscape. The Call for Papers panel featured papers by William Birdthistle, Jim Hawkins, Adam Levitin, Alan White and Sarah Woo.

One of my favorites on this panel was James Hawkins' (University of Houston) paper on Regulating the Fringe: Reexamining the Link Between Fringe Banking and Financial Distress forthcoming in the Indiana Law Review. Basically Jim argues that products like payday loans, pawn loans, and rent-to-own leases— might not cause as much financial distress to consumers because of the finality involved in these transactions and the amount. As such, perhaps we might reconsider whether regulators should lump these types of transactions with others. At the heart of this is what constitutes financial distress. While I am not a fan of the fringe banking products, Jim's argument that they might require differing treatment in terms of regulation is worth serious consideration. For my part, I part with him in some of the ideas regarding monetary valuation. I remain unconvinced that one person's financial distress is the same as another's due to relative economic means as a whole. For instance, a person of very limited means may experience serious financial distress when their $750 auto is repossessed and they cannot get to work, then loose their employment, etc. While the event of losing the car may have a finality in and of itself that does not continue to plague the consumer, even smaller dollar transactions can have great impact on the lives of many consumers. That aside, the finality of the transaction is worth further thought when considering regulation of fringe banking products, as is the differing impact of the size of these transactions.

- JSM

6th Annual International Conference on Contracts

6th Annual International Conference on Contracts. Stetson University College of Law and Texas Wesleyan School of Law are co-sponsoring the 6th Annual International Conference on Contracts, February 18–19, 2011, at Stetson’s beautiful campus in Gulfport, Florida. Similar to prior contracts conferences held at UNLV, McGeorge, South Texas, Texas Wesleyan, and Gloucester, England, this conference is designed to afford scholars and teach­ers at all experience levels an opportunity to present and discuss recently published papers, forthcoming papers, works in progress, and pedagogical innovations, and to network with colleagues from the United States and around the globe. Stewart Macaulay, Professor of Law Emeritus at the University of Wisconsin, is the keynote speaker. A few places remain available for panelists and moderators at the conference. Proposals for presentations will be considered on a rolling basis until spaces are filled, but no later than January 15. For more information or to register online, visit www.law.stetson.edu/conferences/contracts. Contact person: Associate Dean James Fox fox@law.stetson.edu.

- JSM

What are they teaching kids about finance and budgeting?

My eighth grade daughter just participated in a program on finances and budgeting sponsored by Junior Achievement. A Junior Achievement teen personal finance survey reports that more than half of teens are not confident that they will make sound choices in terms of credit. Moreover, nearly all teens think they should have a credit card by age 21. The survey observes:

“Teens are admitting that they don’t have knowledge of some of the basic money management skills around investing, budgeting and using credit. Despite the alarming numbers, teens overwhelmingly have high hopes for future financial stability. The poll shows we need to do a better job of ensuring our youth are financially literate. JA offers a broad range of age-appropriate financial literacy curricula, from kindergarten through grade 12.”

So, all of this sounds a little dire. Making the work of Junior Achievement even more important, of course. And perhaps a few basic tips from Suzi Orman are in order? Not surprisingly, we talk to our daughter about making wise choices and living within her means. This would include everything from buying items on sale to purchasing used items on sites like Craigslist. We also talk to her about being a good citizen in terms of the environment as well, including walking and biking when possible. That is, not everyone (particularly college students) needs a car.

I was ready to embrace the Junior Achievement concern to educate teenagers, until my daughter started asking me questions about the workbooks her teacher assigned. She understood her profile to be a college student who has a job earning about $30,000 per year. A little unrealistic for a college student, but all right. The program has the student fill out budgets. This is where my daughter had many questions and I simply could not support the choices the program expected. For instance:

1. The workbook not only mandated that she purchase a car (whether she could afford it or not), but also required her to take out a five year loan on the car. In the summer Oprah magazine, Suzi Orman yet again blasted this practice advising against car loans more than 36 months or less (7 Deals You Should Never Make). Basically, perhaps one needs to shop for a less expensive car.


2. The workbook also mandated that she replace $650 of household furnishings and that she must put it on a credit card and pay for it that way. Apparently, no option to save up and buy in cash or to purchase something used.


3. The workbook required an apartment. While the student could get roommates, there was no easy way for the student to select a less costly alternative of living in a college dormitory where utilities, rent and food are typically included.

In the end, I advised her on how to best fill out her worksheets making the least devastating decisions. She did budget for buying household furnishings with cash and saving most of the money as a down-payment for the car. While I might have been fine with this if it was designed to teach teens the devastating impact of debt, there were no comparisons to other models or advise on better decisions. I also wrote a note in the workbook for the teacher asking him not to teach our children that it is fine to enter into these types of credit and financial situations.

The result of all this? The teacher was angry with her when he saw the worksheets and gave her a D for not following the program requirements. She had waited until the last minute to finish this, so her work was not as neat as it should have been, but really? Maybe the teacher will reconsider. In the end, I'd rather her get a D on the junior achievement and an remain solvent for a lifetime. Isn't all this debt part of what lead to the financial crisis?

- JSM

Thanks from Warren Buffet!

Warren Buffet wrote a "thank you" letter to the U.S. Government which appeared in the New York Times (see Pretty Good for Government Work). It it, he reminds us that about two years ago our economy was on the brink of disaster. We looked to the government to remedy the situation and it responded with action. I agree with Buffet in this case. While the economy is not where we would like it, where business-oriented regulations are not what we might imagine, and many still lack jobs, the situation is not what it was two years back.

- JSM

Sarah Palin Criticizes Federal Reserve?

Exit elections, but the politics continue. While we ordinarily see the Federal Reserve as supposedly independent in terms of determining monetary policy, Sarah Palin did not pause to take a swipe at the announcement that the Federal Reserve will buy back government bonds (see Sarah Palin Takes Aim At Fed). In fact, she called on the Federal Reserve to "cease and desist." The rationale is that it will cause an unacceptable level of inflation that will erode our jobs and savings. The monetary policy pursued by the Fed raises more issues to me about simply whether it will work. With interest rates historically low, the Federal Reserve has few tools at its disposal to spark the economy. Let Bernanke do his job and let's hope that the Fed can impact the economy positively.

Palin's claim that prices are already rising simply doesn't bear out reality (see Palin Brawls with WSJ Over Inflated Inflation) in an economy where prices are increasing at notably slow rates. Inflation is not particularly high on the list of concerns that the Federal Reserve has currently, but jobs and the health of the economy generally is (See Dallas' Fed's Fisher: Inflation Low on List of worries).

For a discussion of the mixture of politics and the Federal Reserve, see

- JSM

So, What's in Your Wallet?

Katie Porter over at Creditslips did a piece on the cards that those who teach payment law might carry! It is an interesting read. See What's in Our Wallets?

As for me? As those who follow this blog know, I am not a fan of any cards. And, I mean that pretty much universally. From high interest rates to deceptive practices, I just don't like them. My recent dispute over an instance of credit card skimming has only increased my suspicions about card practices, even though the issuer finally capitulated and reversed the fraudulent
charge. Despite my widespread condemnation of cards, I find them necessary. Like others, I am not a fan of debt and prefer paying off balances whenever possible. Yet, having bought a home this summer, I've found a Lowe's card particularly useful! This card issued by GE Money Bank comes with many of the aspects like high interest rates that I dislike about cards. But, having a home that needs appliances and quite a bit of do-it-yourself initiative, Lowe's offers of no interest financing on many 6 and 12 month purchases is a plus. The risk is that if you don't pay off the amount in the time frame the interest is high, but for card users with discipline, the no interest deals are a nice way to spread out large home improvements over several months.

- JSM

Bernanke Speaks in Boston

Fed Chair Ben Bernanke spoke today in Boston at a conference sponsored by the Boston branch of the Federal Reserve Bank about bank policies and options in a low inflation economy (see transcript). Here is the video:

- JSM

Nice Teaching Case: Home Sold Twice

Ben Davis sent this link out to the contracts professors list serve. http://www.msnbc.msn.com/id/39381416/. The case involves a home sold twice . . . apparently by mistake: once as a short sale and then at foreclosure days later. The new owners, thankfully, recorded their deed and bought title insurance, but it has been quite a headache for them. The lender, not surprisingly, is claiming no wrong-doing in the matter.

I am getting ready to start methods of avoidance in the next couple of weeks and will be sure to mention this one to the class.

- JSM

The Newest Identity Thief: Grandma

Identity theft by relatives appears to be on the rise. One young lady was shocked to find out that her 71 year old grandmother opened a credit card in the grand-daughter's name: and did not pay the bill (See, Family Credit Card Fraud). While wrong, the difficulty of the whole matter is obvious. Who wants to put grandma in jail for fraud? Other common identity victims are children, whose parents sometimes open accounts in their names and don't pay (See The Newest Identity Thieves: Parents; All in the Family). Crime and wrong-doing in one's own family is not unheard of. After all, I just taught Gimpel v. Bolstein this week where the family ousted one relative from employment at the family farm after he embezzles some $80,000+. The thief ultimately sues on a claim that his stock is worthless in a company without a job or dividends and the court agrees (at least as to dividends or buying him out). So, stealing in one's own family . . . yes it happens.

Here though, the problem is not only might the relative have to shoulder the financial loss, but sustain damage to their credit score if they don't turn in grandma. Most card issuers require a police report in order to document the account fraud. There is definitely a heavier loss here than presented in Gimpel where the thief lost his job but was not prosecuted . . . and the family farm just lost the money. While I condemn the thieves here, card issuers have some responsibility as well for issuing cards in children's names in the first place. While card issuers have responsibility for fraud, they seem to find clever ways to shift it back to consumers (See credit card skimming).

- JSM

DOJ Sues AmEx, MasterCard, and Visa

The United States Department of Justice, Antitrust Division, has sued American Express, MasterCard, and Visa, alleging that each credit card network imposes anticompetitive rules prohibiting merchants from (1) encouraging customers to use a different form of payment or brand of credit card by offering a discount or any other incentive; and (2) expressing a preference for a particular brand, or informing their customers about the merchant's relative cost to accept, particular card brands. The complaint further alleges that each defendant independently possesses market power and that the merchant restraints thus constitute anticompetitive vertical agreements violating Section 1 of the Sherman Act.

Along with the complaint, the Division filed a proposed consent decree with Visa and MasterCard that broadly prohibits blanket rules that would bar a merchant from incentivizing its customers to use a particular credit card brand or, interestingly, card type. The consent decree defines card type as a category of credit card such as "traditional cards, reward cards, or premium cards." The decree would thus empower merchants not only to steer customers to a particular card brand, but also to steer customers to particular types of cards within a card brand. For example, merchants might attempt to steer card users toward lower priced (for the merchant) traditional cards and away from reward cards. The decree explicitly permits Visa and MasterCard to continue to prohibit merchants from discriminating among particular bank issuers. It also allows the settling defendants to negotiate individual merchant agreements that include the prohibited restraints, so long as acceptance of the card brand is not conditioned on the merchant's agreement to the restraints.

American Express has vowed to fight the case.

By seeking to promote a competitive solution to what many consider unjustifiably high merchant card acceptance fees, the Division has staked out an alternative ground to the regulatory approach to merchant fees that Congress recently imposed for debit cards. The relief sought is cautious, however, in that the card networks may continue to prohibit (1) surcharges for particular brands or card types, and (2) efforts by merchants to discriminate in any way against particular card-issuing banks within the Visa and MasterCard systems.

Making Deposits by Phone

No need to drive to the bank? Making bank deposits using your phone is here for some banks. Chase has been advertising its service (See, Chase IPhone App) and USAA also has it (See USAA Takes Mobile Banking). While the other large banks haven't yet offered the service, it is sure to be the next big thing. The process takes a few minutes since you have to take a photo of the front and back of the check, so I would not recommend it if you have a few of these to do. And, if the photo is not quite clear enough, it can be unsuccessful. But overall, the draw is clear in terms of saving the run to the bank.

Of course, Check 21 makes the digital image of a check the same as the paper version. The digital imaging of checks by consumers will not prevent the banks from processing the check just like any other as the paper check is not needed in any event already. While the process cuts down the float time for the person writing the check, the advantage of saving time at the bank is a draw. I couldn't find the app on the Blackberry, but would bet that it will come along as well in time.

So, how do you do it? See this video on how to deposit on an IPhone.

- JSM

Piracy in Mexico takes a Different Twist

One of the aspects or piracy near the Gulf of Aden has been its lucrative commercial nature, the taking of cargo and hostages for ransom (see Fighting Piracy With Private Security Measures). The commercial nature of the piracy has often led to substantial ransoms paid with crews and cargo released afterwards. The possible favorable outcome for individuals lives has led to a sort of capitalistic approach by some pirates (See Ploch, Piracy Off the Horn of Africa). The protocol of piracy off Africa certainly affects the response of governments to the problem of piracy there.

This weekend, though, drug cartel pirates in Mexico killed a jet-skier on a border lake (See, jet-skier and Fox News, Pirates). While this new hot-spot of piracy surely affects businesses on the ground where customers steer clear of the area, it also serves as a reminder of the brutal nature of piracy and that is not a "business"). Pirates, historically, are the enemy of the human race - hostes humani generis - posing a longtime threat to shipping and commerce. The violence in Mexico-U.S. waters is a reminder.

- JSM

Small Business and the Recession

The New York Times did a short piece on small businesses in New York during the recession, focusing on the problems the current environment presents.

- JSM

Check Processing Statistics

I head off to a faculty meeting today for final approval on my Payment Systems course, formerly Commercial Paper here at St. Thomas University. So, I thought being armed with some Federal Reserve statistics could be handy or at least a conversation topic. With the multitude of payment methods available, it seems obvious that the Federal Reserve is processing less checks than it did in the past. But how much less? In 2009, commercial checks processed through the Federal Reserve dropped 10.1% (See Federal Reserve History) to a volume of 8,585 (million items). The 2010 Federal Reserve volume is also down on the year. While not the largest annual drop in recent times (a drop of 12.1% was measured in 2005), the decline does underscore the importance of alternative payment methods. Yet, the death of checks is not in sight, as the amount of checks processed by the Federal Reserve still amounted to $13,759 (billion) in 2009.

So, check processing is down, but still important.

- JSM

Spring Contracts Conference - Reminder

Mark your calendar: The annual spring conference on contract law will be held on February 18 and 19, 2011, at the lovely Stetson Law School. Save the Date!

- JSM

St. Thomas University Looking for Business Faculty

A plug for my school. With Florida now also testing UCC Articles 3 and 9, I suspect there is more room commercial law as well as traditional corporate subjects.

ST. THOMAS UNIVERSITY SCHOOL OF LAW in Miami, Florida, invites applications from experienced and entry-level candidates for tenure-track positions beginning in the 2011/2012 academic year. The Law School especially seeks candidates in the areas of Business Associations, Wills and Trusts, Constitutional Law, Securities Regulations, Property and Civil Procedure. Applicants must possess a distinguished academic record, a dedication to excellence in teaching, and a demonstrated commitment to scholarship. Consistent with the Law School’s tradition of diversity, members of minority groups and women are especially encouraged to apply. Applicants should send a letter of application and a resume. CONTACT: Professor Tamara Lawson, Chair of the Faculty Recruitment Committee, St. Thomas University School of Law, 16401 NW 37th Avenue, Miami Gardens, Florida 33054. E-MAIL: tlawson@stu.edu. FAX: (305) 623-2390.

- JSM

Wall Street: Money Never Sleeps

Is greed still good?




The new movie, Wall Street: Money Never Sleeps never quite answers that one, though Gordon Gekko now dubs it "legal." Went to see this over the weekend and found it great. Perhaps out of sheer nostalgia I would have liked it, but Gekko's condemnation of "speculation" and references to tulip mania reminded me of John Galbraith. Set in the time of the current financial crisis, the movie emphasises the decisions that individuals (such as Susan Sarandon's nurse turned over-leveraged real estate investor) and banks (such as the investment firms peddling bad paper) made that led us to the crisis. Though Gekko, without cash and out peddling a book, is still Gekko, the new twist of creating even larger "bad guys" makes him a bad guy to cheer for. Definitely worth seeing.

- JSM

Credit Card Skimming and Card Issuers Behaving Badly

This past June I attended the CALI Conference, hosted by Rutgers University - Cambden. I stayed in the Philadelphia area for about ten days, since my sister lives there. I have a credit card that I often use for business and did on this particular trip. Not having used the card, which is currently in a locked box in Florida, since that trip, there should be no new charges. Yet, on August 20, 2010 two new charges appeared on my card from convenience stores located well outside of the Philadelphia area. Moreover, the record indicated that the user presented my card for the transactions, which I later learned were made at gas pumps with no receipt or documentation. As the card is here with me in Florida, I know I did not present it in Pennsylvania and that someone replicated my card.

Counterfeiters can replicate your credit card by "skimming" the data information from the card's magnetic strip during an ordinary transaction. (See Visa, Credit Card Fraud). They then use the information to make replica cards and engage in fraudulent transactions. The skimming behavior is just one way that fraud occurs. Of course, TILA 133(a)(1)(B) (Regulation Z 226.12(b)(1))limits the cardholder's liability for unauthorized charges to a maximum of $50 and network rules typically protect the cardholder (me) from liability. See Visa's Zero Liability Policy.

I notified the card issuer, Household Bank, of the unauthorized transactions right away. Within 24 hours, one of the vendors, Wawa, reversed the charge. The other merchant, Turkey Hill gas did not and within 24 hours I received the following email from the card issuer:

This charge represents an automated gas terminal charge. At the time of the
transaction, your credit card was not reported lost or stolen, and this type of
transaction required that your card be present.

In addition, your Account history indicates that this charge is consistent with your spending pattern. For these reasons, we consider this charge to be valid. Although we are unable to assist you, you may pursue this matter further with the merchant.

Note that because the transaction was electronic, we are unable to
provide a receipt.

Unfortunately, we have no recourse to pursue your dispute. Although we are unable to credit your Account, you may still pursue this matter further with the merchant.

If you require additional information, please reply to this message or call us at 1-503-293-4037 and one of our Customer Service Representatives will be glad to help you. To ensure a quick response, please refer to the following reference number: XXXXXXXXX.

For your records, you will receive a separate confirmation letter via
the U.S. Mail.

Sincerely,


Customer Service Department

Knowing I did not authorize the charge, I called the issuer to dispute this denial and to request a new card number. You see, issuers bear the loss generally under network rules in "face-to-face" transactions for unauthorized charges as long as the merchant follows the requisite procedures (often signature and authorization for the transaction). My suspicion is that the issuer would bear the loss in this case, so they wanted to force it back on the consumer. When I called, they told me initially there was nothing they could do, the "documentation" showed that I was in PA and made the charge. I reminded them their own letter said that there was no receipt and the back peddling began. Now, they admitted they were still waiting on a response from the merchant. They had no documentation. They would "reopen" the investigation right away. In addition to talking to them on the phone, I should also respond to the email confirming the conversation.

This type of issuer behavior really gets me going! They knew they did not investigate the transaction, but sent a denial right away of the claim I did not authorize the transaction. The "game" here is to send the denials on fraud claims knowing that only some consumers will pick up the phone and complain. Moreover, when I responded to their email as invited, it turned out to be a "no reply" email address. Since the issuer provides no fax number, I submitted yet another message through their online system. Surely this will take my time in following up on a $25 transaction, but I cannot give a pass to a card issuer attempting to avoid its responsibility under TILA and the Visa network rules regarding fraud. And some wonder why we need a Consumer Financial Protection Bureau . . .

- JSM

Elizabeth Warren spoke to CBS

Elizabeth Warren spoke to CBS about the Consumer Financial Protection Agency this morning.

- JSM

Warren on the New Consumer Agency

Elizabeth Warren has been speaking about the new role of the Consumer Financial Protection Agency. Who should be scared? Businesses want to know whether they should be worried about her role. For those that are making money from tricking and trapping people, the new agency will be a problem for them. She's been reaching out to business to let them know that she wants to learn about what will work and wants to "get it right." Basically, we cannot re-build an economy where families cannot pay for goods and services. She's ready to get to work getting the agency up and running.

- JSM

Opportunity for Self Regulation?

The Financial Crisis Inquiry Commission is examining the causes underlying our current financial crisis. The National Commission on the BP Deepwater Horizon Oil Spill and Offshore Drilling is charged with examining the causes and circumstances surrounding the BP oil spill in the Gulf this year. The Consumer Financial Protection Agency's job might be so large that we can only guess what it might tackle first, including credit scoring, student loans, overdrafts and payday loans (See, Six Problems the Consumer Financial Protection Agency Should Tackle First). Business interests oppose government involvement and oversight pretty broadly across the board (see, Fight Over Consumer Agency Looms, Business Groups, Obama Administration Spar Over Corporate Governance, The Case Against Corporate Social Responsibility, Businesses Buy Ads vs. Health Overhaul, US Must Control Deficit).

Yet, isn't there an opportunity here for businesses to engage in increased self oversight and regulation? One of those the best offense is a defense line of thinking. The Financial Services Forum states relative to financial oversight "[t]he Forum will continue to work constructively with the regulators charged with implementation of the legislation to create a financial supervisory framework that ensures institutional safety and soundness and systemic stability, while also meeting the financial needs of American businesses, workers, consumers, and investors." The Business Roundtable's list of Initiatives stresses outright that corporate leadership is the best way to foster trust in corporations. The Business Roundtable's list includes health care and retirement, education, fiscal policy, globalization and environmental concerns.

An aggressive list of priorities without dispute. But has business come through on these fronts? And, I mean not individual companies, but as a group? Despite the commissions investigating, new agencies and increased regulation, there is always an opportunity for business to head off looming problems, whether it is speculation, an innovation like credit derivative swaps poised to cause the next financial crisis or plain overreaching by businesses with consumers.

Self regulation and coordination is not unknown to business generally or to specific industries. Anil Gupta and Lawrence Lad commented "Researchers generally have viewed non-market regulation of firm behavior as synonymous with direct regulation by the government." Industry Self-Regulation: An Economic, Organizational, and Political Analysis. See also, Toffel, Industry Self-Regulation: What's Working (and What's Not)?. The whole idea, of course, is that self-regulation can either supplement or take the place of government regulation. While industries can engage in self-regulation more or less and in different manners, it has its effectiveness.

When I hear of businesses opposed to government regulation of a perceived problem, a common complaint is that government regulation hampers business growth generally, costs a lot and stifles innovation. While I understand that businesses want to make money off of the newest innovation, self regulation would seem to allow the financial community for instance to head off some of the systemic risks of the "innovation," such as the credit derivative swaps. Just because there is money to be made does not mean that it should be made if the "innovation" will lead to over-speculation causing a financial crisis. Yet, government regulation would not seem to always be the most efficient in these cases due to the time involved in establishing oversight of newer financial products.

Michael Toffel argues there are four main facets to self-regulation: "how the rules are designed, who adopts them, whether and how compliance is monitored, and whether these rules actually achieve what they purport to achieve." I agree that these considerations dictate whether the laudatory goals of the Business Roundtable and Financial Services Forum will have any effect on market participant behavior. Self regulation must be meaningful. While the door is open for financial services companies to show leadership on many open regulatory issues, movement is slow. With so much attention being given to opposing Elizabeth Warren as the new head of the Consumer Financial Protection Agency, perhaps business might be better served by turning to the issues (See, Warren's New Job).

- JSM

Teaching Statute of Frauds

Today in Contracts we covered the Statute of Frauds. The casebook, by Burton, includes the case of Cloud Corp. v. Hasbro, Inc., 314 F.3d 289 (7th Cir. 2002), a Posner decision. The case involves a toy, the Wonder World Aquarium, governed by our beloved UCC 2-201's Statute of Frauds. Posner, wanting to find that either the parties satisfied the statute of frauds or some exception applied, lays out a multitude of reasons to find an enforceable contract. Surely a delightful opinion helping the students to see that sometimes the formalism of a rule gives way to the realities of business practices. The dispute involved excess gelled filling produced by Cloud for the Hasbro aquariums, which had no other use. Alas, the Wonder World Aquarium was a passing fad.

- JSM

Commerce Hums Along Even in Hard Economic Times

We hear much news about the trouble with the economy. In today's news alone, there were concerns about cooling in auto manufacturing, losses in technology, slower manufacturing in New York, and double dip risks in Europe. Alongside the financial turmoil and worries, Bloomberg yesterday ran a piece on parents who must not be overly concerned about such things. Apparently, there is quite the market for designer clothing for children, including a $750 Burberry trench coat! Sale of designer coats and jackets for children is expected to be up a whopping 12% this year. Luxury goods generally are expected to be up 10%. Apparently, there are nice Gucci lines for pets as well . . . Not bad in a year with worldwide GDP quite low (see, EU Raises Italian 2010 GDP, Canada's GDP Growth Sets, China's GDP Slows, Oil Spill May End Up Lifting GDP Slightly).

While I am a believer in doing my part for the economy, my group of three kiddos (3, 5 and 13) are not partaking in these really cool clothing options! Not only is this a really lot of money, but my kids grow way too fast for this extravagance! Hope that those who are buying designer children's clothing are not financing the purchases on a credit card. Consumers living beyond their means certainly contributed to the current financial downturn.

- JSM

Two Debit Fee Regulation Issues Emerge as The FED Gathers Information

The financial reform legislation enacted this summer included the Durbin Amendment requiring the FED to regulate fees that banks charge to merchants when consumers use debit cards to make purchases. The legislation gave the FED until April of next year to come up with the specifics of a plan that will ensure that debit card fees reasonably and proportionally reflect the actual costs of running the banks' debit card programs. Bankers have reported that the FED has begun an information gathering process designed to gather information about the banks' debit businesses. Although the situation is sure to evolve in the coming months, there are two questions that are now drawing a lot of attention.

First, the legislation included the cost of fraud protection in the costs that the banks should be permitted to recover. Banks are arguing that fraud costs should include the costs of data protection and claims investigation in addition to actual losses. Merchants are questioning the propriety of including costs beyond losses. Another question involves how the FED will deal with the differences across institutions with respect to fraud losses. Will it use average costs, stimulating competition among the banks to lower fraud costs. Or will it try to implement a system that will tie recovery more closely to specific institutions.

Second, the legislation exempts banking institutions with less than $10 billion in assets from the regulation. But most small banks issue debit cards using the Visa and MasterCard system. Will those systems, dominated by larger banking institutions, permit the smaller institutions to recover higher merchant fees than the big banks recover? Small banks became part of the Visa and MasterCard systems for complex reasons. Initially, they played a crucial role developing a critical mass of credit cardholders and especially merchants willing to accept credit cards. By the time the debit card systems became serious business, the smaller banks were less important to the systems' success. But by that time, Visa and MasterCard had grown sufficiently that trying to exclude smaller banks would have been seen as a group boycott potentially violating the antitrust laws. The large banks were content to charge the small banks somewhat higher network fees. Small bankers expect that the Visa and MasterCard networks will limit their debit card merchant fees to the same extent as the large banks. It will be interesting to see, however, if one of the major networks, or perhaps one of the on-line ATM networks, makes a competitive play for smaller banks by offering higher debit card merchant fees than the big banks are permitted to charge. SS

Why Do We Teach Commercial Law?

Among other courses, my new law school home, St. Thomas University in Miami, will have me begin teaching commercial law courses in the spring. St. Thomas has not had a commercial law "die-hard" as regular faculty, but several faculty have taught Sales, Secured Transactions and Commercial Paper from time to time in addition to other courses (for a recent study of course offerings in commercial law, see Mark Roark's Commercial Law Course Survey). Without the dedication of a commercial law faculty member, the course descriptions were not surprisingly out of date.

So, today, I will be off to a curriculum committee meeting to discuss revised course descriptions for the commercial law offerings. This process brings to mind not only Mark's survey of what is being taught, but also Larry Garvin's The Strange Death of Academic Commercial Law, where Larry advocates the rescuing of academic commercial law lest it fall into a void of nothingness crowded out by other new seminars and other nouveau studies. Florida just added articles 3 and 9 to its bar exam (See Florida Bar News), giving commercial law more footing at my law school and more draw to students generally. I hesitate to advocate that we teach a variety of commercial law courses merely because it is examined at bar time. Yet, surely the bar examiners also must believe there is something important here as well.

It is well recognized that so long as we have commerce, there is a need for commercial law. Bar exam or not. We have an obligation to prepare our students for the commercial transactions and disputes that arise naturally in our world of business. Law schools are in "partnership" with the community of judges, businesses, legislatures and communities that expect attorneys who will continue to improve the law and promote new ideas. While there is a temptation in states such as Florida that now test commercial law on the bar exam to teach only what is required on the bar, or for schools in states like Pennsylvania which dropped much of commercial law from its bar exam to not teach it at all, we should resist this urge. There is a richness to the study that goes beyond bar requirements, and is a service to students and community alike.

For my part, I will make my case that the course descriptions here at St. Thomas should go beyond what is required for the Florida bar exam. One of my proposed changes is to rename "Commercial Paper" "Payment Systems," reflecting a course that would go beyond the bar exam's UCC Article 3 to include the multiple ways in which we pay for things in commerce. An intelligent study should include checks, credit cards, debit cards, letters of credit, wire transfers and electronic payment devices, as well as promissory notes and guaranties. Thankfully, I expect the faculty here believes that while we need to prepare students to take a bar exam, our obligation goes deeper than that.

Once I get the course descriptions in order, my next job will be to convince the students that the study is important. I hope to teach Payment Systems here at St. Thomas this Spring. On that score, the bar exam looming before them will help. Once in class, though, I hope they see the richness of the study that affects their own every day lives each time they write a check, pull a card out of their wallet or obtain a student loan. The client needs become more clear to them once they appreciate the importance to ordinary transactions.

So, why do we teach commercial law? The answer is simple. Our students need it personally and professionally. And, the wider community needs them to know it.

- JSM

Business Credit Cards Under the CARD Act

With the restriction from the CARD Act still coming on-line (see More New Credit Card Rules Take Effect), one can expect the card issuers to look for alternate ways to boost their bottom line. Over the weekend, the Wall Street Journal ran a piece "Beware That New Credit Card Offer" highlighting the differences between personal and business credit cards (see also, CARD Act Doesn't Help Small Businesses). The WSJ reported that mailings of applications for business, rather than personal, credit cards are reportedly on the rise. The reason? The Credit Card Accountability and Responsibility Disclosure Act only applies to consumer cards, not business ones.

About 64% of small businesses use credit cards, giving banks a good opportunity to market cards as business cards to avoid the CARD Act's strictures. With applications and pre-approvals up for business cards, it is easy to see how small business owners will need to be savvy about the differences of the cards in their wallet. The advances made with credit cards are simply not universal. Business cards are still subject to the same practices, like interest rate hikes and excessive fees that used to be the norm for consumer cards. It helps businesses to make sure that expenses are deductible for tax reasons (as well as the interest), so their might be incentive to use a business card after all. Aside from possible tax incentives, small business owners might not want to put business debt on personal credit cards as there is a potential for a negative impact on the personal FICO score by increasing the debt to credit ratio.

So, when is a small business issue also a consumer protection issue? One of the lingering problems all along with cards is consumer confusion over terms. The differences in card types are sure to pose problems over time. Moreover, the WSJ reported that some card issuers may be pushing business card applications toward consumers who otherwise would not be looking at these cards and are not likely to understand the differences under the CARD Act. Senator Charles Schumer has already asked the Federal Reserve to look into the practice of marketing business cards to consumers (see Bloomberg). While the CARD Act made headway in the realm of credit card protections, the failure to include business cards may turn out to pose a problem for consumers and small business alike. Pardon my skepticism about the card issuers and their practices, but my expectation is that we will see a rash of business card complaints over deceptive terms.

- JSM

Bernanke Speech in Jackson Hole, Wyoming

In case you missed it, Ben Bernanke spoke at the Kansas City Federal Reserve annual meeting in Jackson Hole, Wyoming (see transcript). The bottom line: Bernanke is not too concerned about the slowdown in growth and we should expect some relief in 2011 and beyond in the economy. Basically, just wait it out and hope for the best.

For a recap of the speech,

Visit msnbc.com for breaking news, world news, and news about the economy

-JSM

More New Credit Card Rules Take Effect

New credit card rules under the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act took effect this week (See Federal Reserve Press Release)! The Fed, in its effort to be more consumer friendly, has put out another "What You Need to Know" about the rules. One of the big improvements is in the area of late payment fees. Under the old system, card issues could charge basically whatever fee they wanted, whether the card holder was late on a $20 payment or a $100 payment. Now, the fee is set at $25, but the card issuer can charge $35 if one of the last six payments was also late or a larger amount if the company can justify the cost for the higher fee. In any event, the fee cannot be higher than the minimum payment due. For instance, if the minimum due was $20, then the fee cannot exceed $20.

Other new rules eliminate fees for inactivity and extra fees for violating more than one part of the cardholder agreement on a single transaction.

Another twist is requiring card companies to reevaluate rate increases every six months after an increase and to reduce the rate 45 days after an evaluation, if appropriate. Remember all those rate increases companies passed onto card holders prior to the CARD Act's implementation in 2009? Issurers are supposed to lower rates for consumers if the reason for the increase no longer exists. Basically, the Fed is supposed to monitor compliance. I've not heard of any credit card issuers widespread lowering interest rates, but here's to hoping.

- JSM

New Rules of Bank Fees Now In Effect

Now that August has come around, there are new rules coming online to benefit consumers. One of my favorites is the overdraft protection rules for debit cards coming into effect on August 15, 2010 for existing bank customers (See FRB: New Overdraft Rules). In the past banks often charged a $34+ fee to consumers who use their card for debit purchases or ATM withdrawals when they do not have enough money in their account to cover the cost of the purchase or withdrawal. The new rules require banks to get consumer's consent (which they should not give) for these "programs."

While the big accomplishment here is disclosure with an opt-in system to benefit consumers using debit cards, as always, consumers can still make financial mistakes that result in fees (see, WSJ, Getting Going: Ferreting Out Those Hidden Fees). For instance, just because you don't opt-in to overdraft protection, that doesn't mean you cannot overdraw your account or be charged a fee for doing so. The new rules apply to debt and ATM transaction, so consumers can still overdraw their accounts and be charged fees for check and automatic bill payments. While this system may be much superior to the previous one, consumers must still mind their balances. The new rules don't eliminate overdrafts completely, leaving some protection for transactions that consumers typically want overdraft protection.

Is this enough? One worry is that banks may push consumers into opting in or consumers may simply not understand (see, USA Today, Bank Overdraft Fees). When opening an account at Chase Bank recently, I was asked to opt-in to overdraft on my debit card. While the clerk was not pushy, I was asked if I was "sure" and did I really understand. Oh, yes, I told them. While I did not opt-in, if a consumer does opt-in the rules may not go far enough. A consumer who opts-in won't get the warning at the counter that their account is low. They will just get the fee, even for the $4 cup of coffee, rather than the ability to choose another form of payment.

All and all, this is all good news for consumers, but banks will take a hit in revenue. Wells Fargo is expecting a $500 million loss in revenue for 2010 as a result of the overdraft rules (see, Wells Fargo Sees $500 Mln). Of course, banks will find other ways to make up the lost revenue. Hopefully, the banks will clearly disclose any new fees to consumers and keep fees manageable While simple fee disclosure for me is important, those with low incomes can be faced with the choice of paying fees or not having a checking account. Some have chosen not to have accounts at all. (see, USA Today, Many Shun Bank Accounts). Consumers opting out of banking completely because the fees are either undisclosed or too high is a lingering problem beyond the reach of the new rules.

- JSM

Finally a Homeowner in Florida

Yes, I finally closed on a home in South Florida. Now that the boxes are unpacked (well, mostly), some thoughts on the process. Not to deter any wanting to purchase a home, the real estate market in South Florida is particularly daunting if you are wanting a mortgage (See, South Florida Mortgage Rates At Record Lows, but Who Can Get Them?). And, I was moving to a new area to start new employment adding complication to any mortgage application. The loan approval came less than a week before closing, and I breathed a great sigh of relief that the worst part was over (the tax returns, w-2s, document requests, interviews, etc.).

By the time I closed, though, new lending requirements meant a change in lending product and another round of documents! The closing was also delayed a few days. Since our family's belongings were already en route from two far reaching parts of the country (Oregon and Massachusetts), we were faced with the prospect of furniture arriving before the home closed. While it all worked out well in the end, there was much stress and the specter that it might not close at all. The lender's agent seemed unprepared for the changes in requirements for home mortgages that are ever changing, so that the lender was working last minute on details that should have been addressed much earlier in the process (i.e., calling for employment verifications for all employers for the last 5 years the day before closing). I thought to myself, with all this headache, who would actually want to buy a home in South Florida!

So, what does this all say? It seems to me a sign that changing, strict credit standards will impede the real estate market. (See, Borrowers Hit New Home-Loan Hurdles). While credit standards for home loans may have been too easy, they might now be too hard. Of course, the Florida market still has signs of distress, so it may be one of the last markets to see easing of credit standards in real estate. An excess of care and caution of lenders, though, impedes their own business and the real estate market as a whole, making recovery further off. When I listen to NPR on the drive to the office in the morning and hear reports of the sluggish real estate market, I am not surprised. The core of the problem is confidence in borrowers and the real estate market as a whole. While those in the real estate industry attempt to be optimistic, more marked recovery would seem to require a level of confidence that does not permeate South Florida at this time.

As for me, I'll be finishing off the last of my boxes for another week or so . . . glad that I can now send in that first mortgage payment next month!

- JSM

Tales of a Homeowner Wanna-Be

Part of my adventure of moving to Miami, Florida to join the faculty at St. Thomas University School of Law involves the purchase of a new home. Yes, I've already written about the beginning of this journey (See Tales of a Prospective Homebuyer). That was back in April! So, what is it really like? Three months later? Well, I am just a week out of closing and don't have an "official," "final" loan approval yet for the mortgage. There was the "first application," the phone interview, the mass of financial documents for the last two years, the changing loan terms, the worry over the home appraising (this is South Florida after all).

Other parts of this adventure? I since discovered that the seller had been behind on taxes and the house was listed for auction, but was just brought current in the last two weeks. There is also a pending issue on a leaking roof that I was told was fixed, but when I had the roof re-inspected found out the broken parts were just glued together! My prospective insurance agent raised the hazard insurance premium by 50% on the spot, even though his quote was only two weeks ago (found new insurance agent!). The new challenge is the documentation on the purchase funds for the mortgage lender, which is very particular.

Seriously, the days of no-documentation loans seem to be past, as far as I can see (See, The Basics: No Doc Mortgages, MSN). So, things are naturally hard out there from a loan perspective. Perhaps they should be . . . The large number of foreclosures and short sales out there also make it difficult for home buyers, even though prices can sometimes be favorable. My limited experience in shopping around for lenders indicates that while mortgage rates might be good (See, Mortgage Rates on 30-Year US Loans Fall to Record), the lenders are being more careful than in the past making it harder to purchase even if you want to in this market. But, with the housing market plunging after the government incentives for home buyers ended in April (See, Pending Home Sales Fell off A Cliff, CNN), one might expect things to be easier on buyers.

In some ways it is easier than back in April. For instance, it was much easier to secure a contract on a home than a couple of months ago. But closing is still difficult. While I have every hope that the home will close on time, my skills as a detail, paper-collecting transactional lawyer have served me well! There is now talk of what "time of day" we might be closing, so the hope is that this homeowner wanna-be will actually be just plain homeowner soon.

-jsm