University of Michigan Law School University of Michigan Law School Scholarship Repository Articles Faculty Scholarship 2007 Private Liability for Reckless Consumer Lending John A. E. Pottow University of Michigan Law School, [email protected] Available at: https://repository.law.umich.edu/articles/616 Follow this and additional works at: https://repository.law.umich.edu/articles Part of the Bankruptcy Law Commons, Consumer Protection Law Commons, Legislation Commons, and the Torts Commons Recommended Citation Pottow, John A. E. "Private Liability for Reckless Consumer Lending." U. Ill. L. Rev. 2007, no. 1 (2007): 405-65. This Article is brought to you for free and open access by the Faculty Scholarship at University of Michigan Law School Scholarship Repository. It has been accepted for inclusion in Articles by an authorized administrator of University of Michigan Law School Scholarship Repository. For more information, please contact [email protected]. PRIVATE LIABILITY FOR RECKLESS CONSUMER LENDING John A. E. Pottow* Congress recently enacted amendments to the Bankruptcy Code that possess the overarching theme of cracking down on debtors due to the increasing rate at which individuals have been filing for bank- ruptcy. Taking into account the correlation between the overall rise in consumer credit card debt and the rate of individual bankruptcy fil- ings, the author nevertheless hypothesizes that not all credit card debt is troubling. Instead, the author proposes that the catalyst driving in- dividual bankruptcy rates higher than ever is the level of "bad credit"-orcredit extended to individuals even though there is a rea- sonable likelihood that the individual will be forced to default. While the author recognizes the need to hold individuals accountablefor the debt they incur, he contends that bankruptcy reform should be tar- geted towards those creditors who are partly, if not chiefly, responsi- ble for causing a debtor to default, given creditors' competitive advan- tage in determining the repayment capacity of individuals. To this end, the author explores the idea of imposing private liability on con- sumer lenders who bear primary responsibilityfor a debtor's finan- cial default through a contract defense to collection, or possibly an af- firmative cause of action in tort. Possible consequences of this proposal, such as a reduction in lending activity, are considered and addressed. INTRODUCTION Congress recently passed what it perceived as long overdue reform to the federal consumer bankruptcy laws.' The overarching theme of * Assistant Professor of Law, University of Michigan Law School. Prior drafts were helpfully critiqued by Omri Ben-Shahar, Don Herzog, Jill Horwitz, Reshma Jagsi, Kyle Logue, Ronald Mann, Gil Seinfeld, Elizabeth Warren, Jim White, Chris Brooks Whitman, and Jacob Ziegel. Trevor Broad, Adam Deckinger, Barney Eskandari, and Mike Murphy all provided research assistance, as did Janis Proctor and the staff of the University of Michigan Law School library. Thanks also to Mike Norris, P. J. Omar and other INSOL academics, and Steven R. Jakubowski. Finally, special thanks to partici- pants at presentations at the University of Illinois College of Law and the Canadian Law and Econom- ics Association. 1. Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) of 2005, Pub. L. No. 109-8,119 Stat. 23 (codified as amended in scattered sections of 11 U.S.C.). UNIVERSITY OF ILLINOIS LAW REVIEW [Vol. 2007 these amendments is increased responsibility of debtors to pay back their debts.2 Congress went tough on debtors,3 and it is believed this crack- down will stem the burgeoning number of personal bankruptcy filings in this country.4 Many scholars have opined that these new laws were ill conceived.5 One common complaint is that they are overly cumbersome and will drive up the expense of the consumer bankruptcy system enormously for all participants.6 Compulsory court filings, documentations, calculations, and certifications add much to the cost of a "means test" system for eve- 2. See, e.g., President George W. Bush, Remarks at Signing of Bankruptcy Abuse Prevention Consumer Protection Act (Apr. 20, 2005), available at http://www.whitehouse.gov/news/releases/2005/ 04/20050420-5.html ("[T]oo many people have abused the bankruptcy laws. They've walked away from debts even when they had the ability to repay them.... Under the new law, Americans who have the ability to pay will be required to pay back at least a portion of their debts."). 3. See, e.g., Susan Jensen, A Legislative History of the Bankruptcy Abuse Prevention and Con- sumer Protection Act of 2005, 79 AM. BANKR. L.J. 485 (2005) (chronicling successive legislative pro- posals to toughen bankruptcy laws against debtors). 4. Annual nonbusiness filings rose from 287,570 in 1980 to 2,039,214 in 2005. See American Bankruptcy Institute, Annual Business and Non-business Filings by Year (1980-2005), available at http://www.abiworld.org/AMAMTemplate.cfm?Section=home&Template=/cm/contentdisplay.cfm&c ontentid=35631. In the words of an illustrative legislator, "Bankruptcies of convenience are driving this increase [in bankruptcy filings]. Bankruptcy was never meant to be a financial planning tool, but increasingly today, it is becoming a first stop rather than a last resort...." Bankruptcy Reform and FinancialServices Issues: Hearing Before the S. Comm. on Banking, 106th Cong. 6 (1999) (prepared testimony of Rep. Rick Boucher). In passing the bankruptcy bill, Congress was fixated on the sharp rise in bankruptcy filings. For example, consider the statistical spouting of Rep. George W. Gekas, who was the House Subcommittee on Commercial and Administrative Law's Chairman: The bankruptcy crisis is epidemic. A record 1.3 million or more Americans are expected to declare bankruptcy this year, more than double the number of a decade ago, with losses expected to reach $40 billion.... More than 1.1 million Americans filed for bankruptcy last year, more than triple the number of 1980. Ironically, despite the current economic boom, the bankruptcy rate per household so far in the 1990's is nearly eight times higher than the rate of the economically depressed 1930's, and it is climbing every year. National Bankruptcy Review Commission Report: Hearing Before the Subcomm. on Commercial and Admin. Law of the H. Comm. on the Judiciary,105th Cong. 2 (1997) [hereinafter NBRC Report Hear- ing] (statement of Rep. George W. Gekas, Chairman, Subcomm. on Commercial and Admin. Law of the H. Comm. on the Judiciary). Ironically, Gekas' championship of the bankruptcy bill in part proved his undoing, as he was the only incumbent Republican to lose his reelection bid in the 2002 redistricting. Many in Congress, in- cluding Gekas, felt that the cause of this "epidemic" was lack of bankruptcy stigma and the general moral decay of debtors. See id. The proposal presented in this article-to restrict the supply of abu- sive consumer credit-will help meet what is contended was Congress' goal of reducing the explosion of consumer bankruptcy filings. This is so even though it targets a cause of that explosion (the abuse of creditors) different from what many in Congress apparently thought was the cause (the abuse of debtors). See generally John Poirier, Personal Bankruptcy Cases Rise Despite Reforms, REUTERS (June 12, 2006) ("'Some people think that merely reducing the number of filings regardless of who they are and what kinds of problems they have is a success'...." (quoting Professor Melissa Jacoby)). 5. Letter from Bankruptcy and Commercial Law Professors to Senators Specter and Leahy, (Feb. 16, 2005), available at http://www.abiworld.org/pdfs/LawProfsLetter.pdf. 6. Some may see this as a benefit. Cf. James J. White, Professor, University of Michigan Law School, Keynote Address at the University of Missouri Interdisciplinary Perspectives on Bankruptcy Reform Symposium (Feb. 24-25, 2006) (noting cost increases were likely intentional). No. 1] PRIVATE LIABILITY FOR RECKLESS LENDING ryone- a means test that many concede will catch only a few miscreants.7 That is a sound critique of the law, but it is widely shared. The purpose of this article is to take the more pointed position that the reforms were wrongheaded in their entire antidebtor approach in the first place. This stance is not out of sympathy for debtors. It is an objec- tion based on efficiency, fairness, and (to a certain extent) legislative in- tent. If one accepts Congress' apparent premise that the number of per- sonal bankruptcy filings in the United States is too high,8 and if one believes, as recent data demonstrate, that consumer bankruptcies vary as a function of personal credit card debt,9 a better strategy would have been-and would still be-to crack down on creditors, not debtors, in or- der to curtail the number of filings. Instead of, or at least in addition to, targeting debtors, Congress should fix its sights on creditors: paradig- matically, institutional high-rate (subprime) consumer credit card lend- 10 ers. Implementing this notion of creditor-focused reform, this article proposes that Congress should consider establishing privately enforce- able legal remedies against consumer lenders who bear primary respon- sibility for a debtor's financial default. 1 "Reckless credit" should be- come a legally recognized defense to collection on such undesirable loan contracts, and possibly even an affirmative cause of action in tort. 2 The 7. See Marianne B. Culhane & Michaela M. White, Taking the New Consumer Bankruptcy Model for a Test Drive: Means-Testing Real Chapter 7 Debtors, 7 AM. BANKR. INST. L. REv. 27, 54 (1999). & See NBRC Report Hearing,supra note 4 and accompanying text. 9. See, e.g., Lawrence M. Ausubel, Credit Card Defaults, Credit Card Profits, and Bankruptcy, 71 AM. BANKR. LJ 249,254 (1997). 10. While the correlation between consumer debt generally and bankruptcy might imply the analysis of this article should apply to all forms of consumer debt, the stronger correlation between credit card debt and bankruptcy makes the focus of discussion on credit card lenders appropriate.