The Myth of the Rational Borrower, Part Two

Ted Janger & Susan Block-Lieb posted part two of “The Myth of the Rational Borrower” at Credit Slips yesterday. It’s a lot of consumer science geek speak, but pretty insightful into the borrower’s mind.

Here’s what I take away from this installment: Even if borrowers do use a pseudo-logical approach to the decision to borrow, their logic is illogical, and it also fails to take into account some of the most important considerations a borrower should be thinking about.

St. Paul Gets the ACLU’s Dander Up Over New Home Inspection Policy

St. Paul apparently intends to start inspecting one- and two-unit rental properties periodically. Previously, inspections were either at the request of a tenant or (I assume) in the course of landlord licensing. According to the ACLU, periodic inspections violate tenants’ right to be free of unlawful searches and seizures.

True, probably, but they also protect tenants from landlords who can’t keep up with St. Paul city ordinances and safety codes. I certainly understand the ACLU’s perspective, but I wonder if they have a constructive suggestion to help better protect tenants from negligent landlords.

Chase Gets the Jump on the Senate, Ends Double-Cycle Billing

Consumerist linked to this report about Chase Bank’s decision to end double-cycle billing. Says Chase’s chief marketing officer, “In our continuing review of customer feedback, we found that this practice was difficult to understand.”

To say the least. Basically, they billing every two months, instead of every month. The only clear reason was that it resulted in higher fees to Chase. Of course, the change came just before Senator Christopher Dodd announced hearings on credit card industry practices. One wonders if Chase didn’t have insider information and caught the PR wave early.

Minnesota Realtor Stole the Identities of Five People to Get ~$3 Million Worth of Property

One of the victims of Miss “Ida Mae James” this Star Tribune article, came to see me a few months ago. For various reasons, we decided not to bring a civil lawsuit, but in any case, it is good to see the Hennepin County Attorney’s Office taking the initiative and pursuing a lawsuit like this. Too often prosecutors’ offices and police throw up their hands and say “it’s a civil matter” rather than do the work to prosecute.

Kudos especially to Elizabeth Johnson, the assistant Hennepin County Attorney who, although not mentioned in the article, took it on herself to work up the case and do a large part of the research and investigation to put the case together.

Article no longer available at

Do Payday Lenders Target Certain Demographics?

Hot on the heels of the foreclosure over-exposure in the news, consumer attention seems to have shifted to payday lending. Consumerist mashed together a map of payday loan centers with a map of census information, and the result is clear: payday lenders do, indeed, target less-than-affluent neighborhoods.

This shouldn’t surprise anyone, however, although it might cause us some consternation. The concentration in less-than-affluent neighborhoods should be unsurprising for the same reason that you won’t find an Aldi grocery store in an upper-middle-class neighborhood: lack of customers. Payday lending is a “subprime” market for unsecured and risky credit. There are few subprime borrowers in wealthier neighborhoods, where people have the credit score to get, say, a credit card with a bargain rate of, say, 19% APR, and don’t have to stomach the 300-1,000% APRs charged by payday loan centers.

Required Reading For the Fed

In the wake of Donald Morgan’s staff report for the Fed, I have been thinking a lot about predatory lending, and more particularly about the myth of the rational borrower in a rational marketplace that Morgan seems to rely on in “Defining and Detecting Predatory Lending.” Lo and behold, along comes Credit Slips with a two-part essay on “The Myth of the Rational Borrower” in which new contributors Ted Janger & Susan Block-Lieb comment on a world of “rational lenders and irrational borrowers,” and test their theories against the backdrop of bankruptcy reform.

They also linked to their excellent law review article of a similar name, “The Myth of the Rational Borrower: Rationality, Behaviorism, and the Misguided ‘Reform’ of Bankruptcy Law.” We skimmed the abstract, but since bankrupcty law makes us sleepy, that’s about all we could get through.

So we don’t know if it supports our response to Mr. Morgan or not, but it appears to, and we look forward to Part Two of the professors’ blog posting, which we hope will be easier for a relative layperson to digest.

The Problems with Inclusionary Housing

The San Francisco Chronicle ran a feature last Friday on the surprises that may be in store for a new homeowner in an “inclusionary housing” unit. Inclusionary housing is a popular form of affordable housing that is designed to integrate affordable housing into “regular” housing. For example, if a builder puts in a 10-unit apartment building, one or two of those units would be subsidized as affordable housing.

Of course, this means that, while a tenant or owner may pay less for rent or a mortgage than the rest of the building, they share the rest of the fees. Overall, we think inclusionary housing schemes are positive, but as this article shows, there may be a few surprises, and tenants and owners need to be prepared.

Is the Payday Lending Industry Welfare Enhancing, or is it Predatory?

Last week we blogged about the Fed staff article “Defining and Detecting Predatory Lending”, by Donald P. Morgan. At the time, however, we did not have an actual copy of the article in our hot little hands. Now we do. As we said before, the article posits that the availability of credit is welfare enhancing, and that, since payday loans increase the availability of credit to consumers of modest means, the payday lending industry is welfare enhancing.

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Fairway Trails Apartments to Pay $50,000 to Settle Fair Housing Case

According to an article in the Detroit News last week, Fairway Trails Apartments in Ypsilanti, Michigan, will pay $50,000 to settle a lawsuit brought by a disabled man who asked to delay his rent payment by a few days to coincide with the arrival of his Social Security check.

The lawsuit alleged that Fairway Trails retaliated by attempting to evict Harry Tyus, 58, when he asked for the late rent payment. Mr. Tyus went to Fair Housing Center of Southeastern Michigan, who worked with the U.S. Department of Justice throughout the claim process at HUD (PDF link) and in U.S. District Court (PDF link).

As a point of clarification, the case involved retaliation. A landlord may not retaliate when a tenant requests a reasonable accomodation, whether or not the accomodation requested was reasonable or based on a qualifying disability. Congress decided that the reasonableness of a request should be determined by HUD or the courts, not individual landlords.

Minnesota Attorney General Proposes Criminal Penalties for Consumer Predators

The findings come from a panel convened by Attorney General Lori Swanson and chaired by Prentiss Cox, professor at the University of Minnesota Law School. The suggestions to add criminal penalties on top of already-available civil ones is a result of the startling rise in foreclosures we have been reporting on at length.

The possible problem with the criminal sanctions is that many police departments lack the expertise to prosecute such claims, particularly because they involve so many thorny legal issues. The Attorney General only prosecutes “big” cases as a general rule, and so this will likely provide little deterrence to small-time predatory lenders. However, any additional remedies for consumers is a welcome change.

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