EMPOWERING THE POOR: TURNING DE FACTO RIGHTS INTO COLLATERALIZED CREDIT.

Author:Schwaraz, Steven L.
 
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INTRODUCTION 2 I. EXPLAINING HOW AND WHY COMMERCIAL LAW OVERRIDES PROPERTY 7 LAW II. EXPLAINING WHY COMMERCIAL LAW SHOULD OVERRIDE PROPERTY 10 LAW TO EMPOWER THE POOR A. How Could Holders of De Facto Rights Transfer More Rights 12 than They Hold? B. Would Recognition of That Transfer Be Unfair to Holders of 14 De Jure Rights? C. How Could the De Facto Rights Be Clearly Identified? 19 D. Would Lenders Be Prepared to Extend Credit ? 22 E. Would the Poor Be Willing to Borrow? 28 III. EXPLAINING WHY OVERRIDING PROPERTY LAW TO EMPOWER THE 29 POOR WOULD BE ECONOMICALLY EFFICIENT A. Estimating Anticipated Benefits 29 B. Estimating Anticipated Costs 30 C. Balancing Costs and Benefits 33 IV. IMPLEMENTATION 33 CONCLUSION 34 ANNEX: MODEL LAW TO RECOGNIZE DE FACTO PROPERTY RIGHTS 35 INTRODUCTION

The shrinking middle class and the widening gap between the rich and the poor threaten social and financial stability. (1) The World Economic Forum, (2) the United Nations, (3) and recent surveys (4) have identified this wealth inequality as one of the greatest risks to the global community. The noted economist Hernando de Soto explains how the inability of the poor to obtain credit increases this inequality. (5)

The poor hold their resources in defective form, de Solo argues. (6) They live in houses built on land that, de facto, is theirs but not legally recorded as their property. (7) As a result, they often cannot use their homes as collateral to borrow and create wealth--mortgage lending being the primary source of capital used to start small businesses. (8) Others more recently have confirmed that without the ability to borrow by using their homes as collateral, the poor are "unable to leverage their resources to create wealth, and their assets become 'dead capital' which cannot be used to generate income or growth." (9)

This is both a U.S. and a worldwide problem. Members of rural African American communities, for example, commonly lack registered title to their land. (10) They therefore "cannot use the land as collateral for home mortgages or farming loans." (11) Recent efforts in Puerto Rico to obtain U.S. government assistance in the aftermath of Hurricane Maria revealed that over half of that island's residents "lack title" to their houses. (12)

More broadly, the World Bank estimates that, largely due to poverty, seventy percent of the world's population lacks registered title to their land. (13) As the U.S. experience shows, this is a problem even for developed countries. (14) In Canada, for example, the indigenous First Nations people hold interests in their land that "may not be immediately registerable under" land tide statutes, making those interests unmarketable and unable to be used as collateral. (15)

The inability of the poor to use their homes as collateral to borrow and create wealth poses an important challenge: Should the law recognize de facto rights--that is, rights that are recognized or respected in practice but not formally under (official) law (16)--to enable the poor and other economically disadvantaged people (collectively, the "economically disadvantaged") to use their homes and other commonly held assets as collateral, to obtain credit? Ending poverty requires bridging this "credit gap." (17) Credit is essential to economic growth and upward mobility:

Suppose you live in a medieval town that suffers from annual outbreaks of dysentery. You resolve to find a cure. You need funding to set up a workshop, buy medicinal herbs and exotic chemicals, pay assistants and travel to consult with famous doctors. You also need money to feed yourself and your family while you are busy with your research.... ... But how can you get the money when... all your time is taken up with research? Reluctantly, you go back to tilling your field, dysentery keeps tormenting the townsfolk, [and] nobody tries to develop new remedies.... That's how the economy languished and science stood still. The cycle was eventually broken in the modern age thanks to people's growing trust in the future, and the resulting miracle of credit. (18) The efforts to date to meet this challenge have failed because they focus on trying to transform de facto rights into de jure title under property law. (19)

Property law is difficult to transform, however, being tightly bound to tradition and protecting vested ownership. (20) Weak or conflicting property-law regimes can also impede transformation, as evidenced by certain failed property-titling programs. (21) Leading scholars also explain the failure by observing that, "[i]ronically, property titling programs might actually reduce banks' ability to foreclose [thus undermining their willingness to extend credit] because [such programs] unavoidably send the message that governments will side with poor borrowers in enforcing credit contracts." (22)

This Article meets the challenge by taking an innovative but balanced approach: focusing on using commercial law, rather than property law, to enable the economically disadvantaged to use their de facto rights as collateral to obtain credit. (23) That use of commercial law, this Article shows, would be consistent with modern principles of commercial law, which increasingly recognize important policy goals and commercial realities as a basis to override outmoded limitations imposed by property law. It also would be economically efficient, fair to vested owners, and easy to implement.

Enabling the economically disadvantaged to use their rights as collateral to obtain credit would also create an important new source of "sustainable finance," a term that encompasses financial innovations that benefit both the private sector and society at large. (24) Virtually all existing forms of sustainable finance depend on charitable or public sources of funding, (25) which are limited and unreliable, (28) or on mandatory regulation of finance to impose social responsibility. (27) In contrast, this Article's new vision of sustainable finance is designed to attract arm's-length commercial funding sources. (28)

This new vision is also consistent with government efforts to mobilize private-sector finance for sustainable growth. The European Union, for example, recognizes that because "the scale of the [sustainable growth] investment challenge is beyond the capacity of the public sector alone," the private "financial sector has a key role to play in reaching those goals." (29) To try to facilitate that role, the EU recently adopted an action plan on sustainable finance that included the objective of "reorient[ing] capital flows towards sustainable investment in order to achieve sustainable and inclusive growth." (30) This Article would squarely meet that objective. (31)

This Article proceeds as follows. To underpin the normative analysis, Part I explains how and why commercial law currently overrides property law. This approach follows the strong scholarly precedent for grafting a normative legal inquiry onto positive-law reality. (32) Part II then explains how and why commercial law should override property law to enable the economically disadvantaged to use their de facto rights as collateral to obtain credit. Thereafter, Part III explains why overriding property law in that way would be economically efficient, generating benefits that exceed its costs. Part IV of this Article examines how to implement this legal framework, comparing statutory and judicial approaches. Finally, the Annex to this Article proposes the text of a model law that could form the basis of a statutory approach (the "Model Law").

  1. EXPLAINING HOW AND WHY COMMERCIAL LAW OVERRIDES PROPERTY LAW

    Commercial law increasingly recognizes important policy goals and commercial realities as a basis to override certain property-law limitations. (33) Although there are many examples, (34) the dominant precedent is the Uniform Commercial Code (UCC), perhaps the world's most respected codification of commercial law. (35) The UCC is a model law that is promulgated and continuously updated by the American Law Institute and the Uniform Law Commission. The American Law Institute, with worldwide membership, is "the leading independent organization in the United States producing scholarly work to clarify, modernize, and otherwise improve the law." (36) The Uniform Law Commission provides "non-partisan, well-conceived and well-drafted legislation that brings clarity and stability to critical areas of state statutory law." (37) This Article builds on the foundation provided by the UCC, (38) among other sources. (39)

    The UCC overrides property law in order to recognize important commercial realities that clash with the "arbitrary shifting" of rights based on property. (40) For example, UCC [section] 9-202 provides, with very limited exceptions, that "the provisions of this article [9] with regard to rights and obligations apply whether title to collateral is in the secured party or the debtor." (41) This enables commercial law to recognize the reality that "[t]he retention or reservation of title by a seller of goods notwithstanding shipment or delivery to the buyer... is limited in effect to a reservation of a 'security interest.'" (42) That recognition "provides a clearer and more coherent system for dealing with... conflicts" over competing rights. (43)

    Similarly, UCC [section] 2-401 provides (again, with very limited exceptions) that each "provision of this Article [2] with regard to the rights, obligations and remedies of the seller, the buyer, purchasers or other third parties applies irrespective of title to the goods." (44) This enables commercial law to recognize the reality that the risk of losing goods in shipment should be allocated to the party who "control[s] the goods and can be expected to insure his interest in them," (45) whether or not that party owns the goods at the time of their loss. (46) Commercial law's recognition of that reality is widely touted as providing "enormous" gains "in...

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