BORROWING IN THE SHADOW OF DEATH: ANOTHER LOOK AT PROBATE LENDING.

• Author: Horton, David

TABLE OF CONTENTS INTRODUCTION 2449 I. BORROWING ON THE FRINGES 2455 A. The Rise of Fringe Finance 2455 1. Tax Refund Anticipation Loans 2457 2. Payday Loans 2460 3. Pension Loans 2466 B. Probate Loans 2470 II. EMPIRICALLY ASSESSING PROBATE LOANS 2475 A. Methodology 2476 2479 1. The Market for Inheritance Rights 2479 2. Characteristics of Estates with Loans 2482 3. Repayment and Interest Rates 2488 4. Judicial Intervention 2489 III. POLICY IMPLICATIONS 2494 A. Legislation 2494 B. Usury Laws and the TILA 2499 2506 CONCLUSION 2511 INTRODUCTION

In 2008, a woman named Carolyn Chubbuck signed a tidy holographic will that divided her assets among her surviving descendants. (1) A year later, she died, leaving three daughters, Kristina (age twenty-eight), Stefani (age twenty-one), and Jamie (age twenty). (2) Her estate began the probate process in Hayward, California. (3)

But then something happened that altered the distribution of Carolyn's property. Kristina assigned $23,100 of her expected inheritance to an entity called Heir Advance Company, Inc. (HAC) in return for an immediate payment of $15,000. (4) Just thirteen days later, Kristina traded an additional $38,500 of her mother's legacy to HAC for a lump sum of $25,000. (5) As the probate case continued, Kristina borrowed eight more times, surrendering a total of $173,510 of inheritance rights and collecting $116,480. (6) Likewise, Stefani executed seven agreements, selling a $144,080 share of the estate for $97,440, (7) and Jamie signed eleven contracts, relinquishing $ 131,670 and receiving $78,500. (8) The final such transaction, in which Kristina sold a $7500 cut of the estate for $5000, occurred just twenty days before the court granted the petition for final distribution and the lenders were repaid. (9) If it had been a conventional loan, its annual percentage rate (APR) would have been 913 percent.

Carolyn Chubbuck's estate offers a glimpse into a blind spot in a divisive industry. For decades, there has been fierce debate over so-called "fringe" lending. (10) Traditionally, usury laws capped APRs at around 10 percent, (11) and the Truth in Lending Act (TILA) required creditors to conspicuously disclose their loans' key terms. (12) But near the end of the twentieth century, businesses designed several cash advance products that attempted to slip between the cracks of orthodox consumer protection regulation. These alternative forms of finance--including tax refund anticipation loans, (13) payday loans, (14) and pension loans (15)--have received sustained attention from litigants, academics, journalists, and advocacy groups. (16) Recently, Congress, agencies, and state legislatures have taken aggressive steps to regulate them. (17)

Conversely, inheritance-buying firms like HAC have flown beneath the radar. Until recently, a grand total of one magazine article and two newspaper columns had mentioned the practice. (18) Even more remarkably, probate lending exists in a legal vacuum. There is no authority on whether these agreements are usurious. (19) Likewise, just one state, California, has a statute that addresses probate lending. (20) Thus, although $59 trillion will flow from the dead to the living over the course of the next fifty years--the largest posthumous wealth transfer in history (21)--borrowing against a decedent's estate is the most unstudied and unregulated species of fringe finance.

In 2016, a coauthor and I published an article called Probate Lending, which began to fill this gap. (22) We used a dataset that I had previously assembled of all 594 testate and intestate administrations stemming from deaths that occurred in 2007 in Alameda County, California. (23) Because California requires probate lenders to file their contracts in the judicial record, we were able to examine information that would normally be private, such as the amounts borrowed and repaid and the length of time between the advance and the end of the probate case. (24) We found seventy-seven loans, in which firms paid $808,500 to acquire $1,378,786 in decedents' assets. (25)

This companion Article picks up where Probate Lending left off. It augments the research I used to cowrite Probate Lending with a study of every new matter that came on calendar in Alameda County between March 1, 2009, and December 31, 2010. This additional sample increases the total size of my dataset to 2100 estates and 291 loans. It leaves little doubt that probate lending is a lucrative business. Indeed, the ten different firms in my data entered into deals with borrowers from a dozen states, obtaining nearly $5 million in property.

In addition, this Article situates probate lending within the larger debate over fringe finance. Probate Lending compared probate lenders to litigation lenders (companies that buy a stake in a pending civil lawsuit). (26) This Article goes further by considering how probate loans stack up against a variety of fringe products, including tax refund anticipation loans, payday loans, and pension loans. The Article contends that many of the fairness concerns that have prompted courts and policymakers to regulate these arrangements (27) also plague probate lending. For instance, because probate lenders charge markups of thousands of dollars, but only wait an average of about fifteen months until the estate closes, the mean APR in my dataset is a sky-high 50 percent. (28) Moreover, consumers are ill-equipped to assess the pros and cons of a probate loan. Unlike lenders, who routinely participate in probate, most heirs and beneficiaries are unfamiliar with the process. For these reasons, governmental intervention into the market for inheritance rights is necessary.

The Article then considers how to regulate probate lending. It starts by urging the California legislature to revise its probate lending statute by making judicial review of probate loans mandatory, rather than permissive. (29) In addition, it doubles down on one of Probate Lending's most provocative claims: that probate lending falls within the ambit of usury laws and the TILA. (30) Admittedly, these venerable consumer protection measures are subject to an important limit: they only govern advances of money that are certain to be repaid. (31) On their face, probate loans do not seem to meet this benchmark. Because they are structured as nonrecourse assignments of inheritance rights, lenders recover nothing if the estate becomes insolvent. (32) Yet my data shows that this hazard is illusory. Companies recovered the full amount of the principal and interest on 97.5 percent of their probate loans. (33) Finally, to fill gaps in states that have abolished or weakened their usury laws, the Article proposes that courts review probate loans under the contract defense of unconscionability.

The Article contains three Parts. Part I lays the groundwork by surveying three well-known fringe products--tax refund anticipation loans, payday loans, and pension loans--and comparing them to probate loans. Part II describes my research methodology and presents my results. Part III uses this data to offer guidance to courts and policymakers as they confront the budding practice of borrowing against rights in a decedent's estate.

1. BORROWING ON THE FRINGES

   This Part describes how probate lending fits within the larger universe of fringe finance. It first describes how fringe products have sparked heated debate and attracted interest from Congress, agencies, state legislatures, and judges. It then pivots to probate loans. It demonstrates that we know little about probate lending, and that the practice is subject to very few legal constraints.

   1. The Rise of Fringe Finance

      Until the end of the twentieth century, consumer credit was one of the most regulated industries in America. For starters, usury statutes kept predatory lenders at bay. Although these laws are riddled with exceptions, (34) they generally cap the amount of annual interest on a loan for "personal, family, or household purposes" at between 8 and 12 percent. (35) Likewise, in 1968, Congress passed the TILA. (36) The TILA requires lenders to disclose information to prospective clients in a regimented format (37) and imposes strict liability for violating these mandates. (38)

      However, near the dawn of the new millennium, the landscape changed. First, the Supreme Court dealt usury statutes a body blow with its decision in Marquette National Bank of Minneapolis v. First of Omaha Service Corp. (39) The National Bank Act (NBA) allows national banks to charge "interest at the rate allowed by the laws of the State... where the bank is located." (40) The Justices interpreted this provision to permit national banks to charge all of their customers whatever interest rate was allowed in the jurisdiction where they are headquartered. (41) In turn, this prompted national banks to set up shop within states that have no usury limits--such as Delaware, South Dakota, and Utah--and "export" this laissez-faire regime throughout the country. (42)

      Second, credit became a hot commodity. Consumer debt soared from about $650 bilhon in the late 1970s to $5.6 trillion in 1998. (43) This massive increase was driven largely by the prime market, which includes home mortgages and credit cards. (44) But as Americans began to borrow in record numbers, entrepreneurs saw opportunities in the shadowy subprime sector. (45) As the next Subsections describe, these entrepreneurs designed a range of financial arrangements that try to evade consumer protection laws.

      1. Tax Refund Anticipation Loans

         In the 1980s, tax preparers and banks teamed up to provide what they called "instant tax refunds," and later become known as refund anticipation loans (RALs). (46) This service involves three steps. First, a tax preparer calculates a consumer's expected refund. (47) Second, the tax preparer performs due diligence by checking the IRS's "debt indicator," which reveals whether the consumer's check will be offset by...