Consumer Law & Policy Blog

What Would Senators McCain, Clinton and Obama Do?

In a speech delivered today in Orange County California (ground zero for many subprime lenders as well as foreclosed homes) Senator McCain offered some details of his plan to deal with the foreclosure crisis. Rather than spin the speech, I commend the original text to the reader's attention. One proposal that struck me was his call to increase the down payment requirements for FHA mortgages. I understand the sentiment, but in the absence of a national savings policy, it is hard to see how that would increase homeownership. It would also run contrary to current FHA efforts to offer refinancing loans to homeowners now facing foreclosures, who have little or no equity. He does not rule out government aid to mortgage defaulters, although he wants to be selective about any such program. Senator Clinton's speech on the housing crisis yesterday in Philadelphia is available here. Senator Obama has not given a speech on the housing crisis recently. His last speech on the economy on his web site is here but it is short on specifics. His issue paper offers tax subsidies for homeowners, better disclosure, a rescue fund of unspecified amount for foreclosure victims and support for the bankruptcy legislation to permit limited loan term modifications.

Paper on Enforcement of Consumer Law in the US and EU

Fabrizio Cafaggi and Hans-W Micklitz, both of the European University Institute - Department of Law, have written Administrative and Judicial Collective Enforcement of Consumer Law in the US and the European Community, available at http://ssrn.com/abstract=1024103. Here's the abstract:

In the consumer society, as it stands today in Western-type democracies, consumers have a far larger choice of products and services originating from all over the world than they did decades ago. Risks associated with products and services have also increased, as have mass problems and mass damages, often in a transborder dimension. The US and the European Community, though battling against common problems, maintain different standard setting and enforcement regimes. This paper focuses on enforcement regimes, thereby distinguishing between administrative enforcement via agencies and judicial collective enforcement via European collective actions and US class actions. The existing theoretical framework depicting administrative and judicial enforcement as alternative strategies is contrasted against modern developments in the US and the EC. In the field of consumer protection administrative control and judicial collective enforcement are being understood more as functional complements than alternatives. Enforcement covers negotiation, settlement, adjudication and arbitration. The analysis of the institutional variables determining the choice between administrative and judicial control - ex ante vs. ex post control, injunctive relief versus damages, personal injuries and economic losses, sector specificity vs. general instruments to protect consumers, public agencies vs. private organisations - provide the ground for preliminary thoughts on a revised theoretical approach.

Law Firm Incentives to Avoid Foreclosure

In an interesting story today, the Philadelphia Inquirer reports on an initiative by Fannie Mae & Freddie Mac to provide foreclosure firms with financial incentives to negotiate repayment plans and loan modifications, instead of foreclosing. Fannie Mae reportedly is willing to write down principal as well as interest to save homes. Unfortunately, servicers in the subprime market cannot turn to an investor like Fannie or Freddie to obtain these sorts of incentives. The rights and duties (and compensation) of subprime servicers are usually fixed in pooling and servicing agreements that cannot be modified without the unanimous consent of investors, an unlikely eventuality.

Borrowing Upswing May Extend to Payday Loans

Last week I blogged on Federal Reserve Board numbers showing a large upturn in credit card borrowing last January. This morning Reuters is reporting annecdotal evidence of equally troubling growth in payday lending. Here's the Reuters lead:

"As hundreds of thousands of American home owners fall behind on their mortgage payments, more people are turning to short-term loans with sky-high interest rates just to get by.

"While hard figures are hard to come by, evidence from nonprofit credit and mortgage counselors suggests that the number of people using these so-called "pay day loans" is growing as the U.S. housing crisis deepens, a negative sign for economic recovery."

Something Special for Anyone Teaching or Interested in Teaching Consumer Law.

If you are currently teaching or want to teach consumer law, full-time or as an adjunct, the Center for Consumer Law at the University of Houston Law Center has a Conference just for you. On May 23 and 24th, more than 30 experts from around the world  (including many who post on the blog) will discuss issues of importance to any consumer law professor. “Teaching Consumer Law—The Who, What, Where, Why, When and How,” will look at issues such as: what materials should be used; alternative methods of teaching; new developments in consumer law; innovative ways to look at traditional consumer problems; global approaches to consumer regulation; and how consumers can collect attorneys’ fees. On Saturday, a special session will be held exclusively for those who are interested in getting that first teaching position, either full-time or as an adjunct. The Houston Astros will also be in town and all Conference participants are invited to see them play the Philadelphia Phillies. For more information and a registration form, visit  the Center's Website. or give me a call at          713-743-2165       .

Paper Comparing US and European E-Commerce Protections

Michael L. Rustad of Suffolk has an article titled Circles of E-Consumer Trust: Old E-America v. New E-Europe in the Michigan State University College of Law Journal of International Law, available at http://ssrn.com/abstract=1023659.  Here's the abstract:

Robert Kagan's article in The Economist entitled, Old America v. New Europe, obliterates the American assumption that Europe is a clapped-out old continent while America is the young teenager. For example, Kagan notes how America's political system is old in comparison to the upstart European Community. The transnational divide in consumer rights in electronic commerce is yet another example of Old America and New Europe. The American free market approach to consumer e-commerce relies largely upon private ordering generally taking the form of one-sided clickwrap license agreements that disclaim all warranties, meaningful remedies, and require consumers to litigate in the functional equivalent of Siberia. U.S. courts have been inclined to enforce mass-market license agreements so long as consumers have a right to manifest assent after reviewing the terms. European courts will not enforce these adhesive contracts because of mandatory consumer protection rules such as the Unfair Contract Terms Directive and the Distance Selling Directive. As a result, there is a chasm between U.S. and European consumer protection rules in cyberspace. The U.S. is from Mars and Europe from Venus when it comes to mandatory consumer protection rules in e-commerce transactions.

Part I of this Article introduces New Europe's substantive consumer rules governing e-commerce (as well as the bricks and mortar world). Part II explores, compares and contrasts U.S. style cyberspace jurisdiction with the mandatory consumer rules of the Brussels Regulation. Part III compares U.S. conflict of law to the mandatory private international law of Europe. In each of these areas, the twenty-seven countries of the European Community have promulgated minimum adequate consumer remedies. In contrast, U.S. consumers have, in effect, anti-warranties and remedies in e-commerce transactions. The Old America and New Europe must harmonize their radically different approaches to build circles of consumer trust in cyberspace.

Journal of Consumer Affairs Call for Papers on Privacy

The Journal of Consumer Affairs plans a special issue on Privacy Literacy -- How Consumers Understand and Protect Their Privacy.  Here is the Call for Papers:

Special Issue Guest Editors
Jeff Langenderfer                   Anthony Miyazaki
Meredith College                   Florida International University
 
Consumers increasingly confront a wide array of privacy-related information and are called upon to make decisions impacting their privacy in a growing number of arenas and contexts.  Existing research suggests that many consumers do not understand the decisions they are forced to make nor the impact of those decisions.  For this special issue of the Journal of Consumer Affairs, manuscripts are being solicited devoted to the effects of privacy literacy on consumer welfare.  The goal of this special issue is to extend our theoretical and practical knowledge of how consumers obtain, process, and use information and mechanisms that relate to their privacy.  We seek contributions from multiple disciplines including communications, consumer education, economics, finance, law, public policy, psychology and marketing.  Authors may submit empirical studies or conceptual work.  Papers that are theoretically grounded and also contain significant implications for consumer welfare are especially appropriate.
 
Topics that would be appropriate for this special issue include, but are not limited to:

• Consumer understanding of privacy and privacy-related information
• The interplay between privacy knowledge and consumer behavior
• Cost assessments for the surrender of personal information
• Tradeoffs between the surrender of private information and online access
• Deceptive or covert practices in information exchange
• Measurement and assessment of privacy literacy
• Legal and regulatory issues in privacy
• How consumers respond to solicitations for private information
• Consumer understanding of privacy certifications, trustmarks, and seals of approval
• Methods to improve privacy literacy
• The privacy literacy of vulnerable consumers (e.g., children, low-income, etc.)
• Relationships between desire-for-privacy, privacy concern, trust, and privacy knowledge
• Disclosure versus practice regarding privacy-related behaviors
• Consumer awareness regarding seller use of private information
• Consumer understanding of medical and financial privacy practices and disclosures

Submission Information
Manuscripts are due by June 1, 2008. Please follow the submission guidelines for The Journal of Consumer Affairs as detailed under "JCA Author Guidelines" on the Blackwell Publishing web site (http://www.blackwellpublishing.com/submit.asp?ref=0022-0078&site=1).  Authors wishing to submit a manuscript should send two (2) electronic copies of their manuscript (one with the full title page and one copy cleaned of all information that identifies the authors) to the special issue co-editor:

It's Time for Another National Commission on Consumer Finance

Back in 1968, Congress created a bipartisan National Commission on Consumer Finance.  See Pub. L. No. 90-321. The Commission reported and went out of business.  It's probably fair to say that the Consumer Credit Protection Act would be a very different statute had the Commission not existed, though of course it's impossible to know. 

We need such a commission now.  The truth is there's a lot we don't understand about the subprime meltdown specifically and the consumer credit system generally.  We need to know more about what caused borrowers to take out these loans, and what caused lenders to make them.  We need to know more about whether disclosures can prevent this type of crisis, and if so, what kind of disclosures, and if not, what alternatives we have.  Plenty of solutions to the problem have been suggested, and we might solve the problem by happenstance, but then again, we might not.  A long careful look at the problem would be more likely to prevent recurrences than a rush to action in the heat of the moment.

It's clear that the marketplace, existing laws, and existing regulatory structures were not up to preventing the crisis.  In that light, it seems unwise to depend solely on the marketplace or existing regulatory structure to prevent the crisis from happening again. 

Of course appointing a commission is sometimes a substitute for taking action.  I'm not suggesting a commission should be used to create the illusion of action: the members of the commission should be chosen to represent all the various constituencies and should be committed to working hard on the business of the commission.  The commission should also have subpoena power and enough financing to conduct a serious investigation.  We need a body that can cut across jurisdictional lines while giving us an overview of what happened and what to do.

Such a commission should not confine its acts to investigating the subprime crisis.  It should also take a long look at other ills affecting the consumer credit system.  Can more be done about identity theft?  What about predatory credit cards?  Is our structure for regulating consumer credit transactions the best we can do?  I'm sure readers of this blog can come up with plenty of other things for the commission to explore.

We face probably the worst consumer credit crisis in decades. It's been forty years since we stepped back to see how we could do better.  Now it's time to do it again.

Costs and Benefits of Subprime Lending

By Alan White

The new paper by Todd Zywicki and Joseph Adamson reasserts the received wisdom that subprime mortgage lending had significant consumer welfare benefits, specifically that it increased homeownership and provided access to credit to previously excluded groups. I was disappointed to find that the sources cited do not provide any more empirical support for this folk wisdom than has been previously offered elsewhere. I have argued that subprime mortgage lending did no such thing, i.e. was in no way responsible for the slight increase in homeownership in the 1995 to 2005 period (homeownership is now going down, thanks to subprime foreclosures), in a paper I posted a while back. In my view, subprime mortgage lending had the net impact of reducing homeownership, and displacing cheaper and better home financing, especially for low-income and minority groups. I tried to survey the available research and empirical data and to look at other variables that have affected homeownership and the volume of consumer credit in the relevant period, including data from the Survey of Consumer Finances, the Census Housing Survey and other available sources. If it were true that subprime mortgages had produced significant welfare benefits, then I would agree with the conclusion that regulation needs to proceed carefully. I don't believe the evidence is there, if the question is examined carefully, although I am very interested in seeing empirical evidence to support the hypothesis that subprime mortgages improved aggregate welfare. A note on the specific sources in the continuation.

The Law and Economics of Subprime Lending

Todd Zywicki and Joseph Adamson of George Mason have a new article at SSRN offering a conservative law-and-economics take on the subprime mortgage lending crisis. After a lot of back and forth, the paper's basic point is that policymakers shouldn't do anything in response to the current crisis until we know much more about how to "balance the cost and benefits" of subprime lending. Here's their abstract:

The collapse of the subprime mortgage market has led to calls for greater regulation to protect homeowners from unwittingly trapping themselves in high-cost loans that lead to foreclosure, bankruptcy, or other financial problems. Weighed against this catastrophe are the benefits that have accrued to millions of American families who have been able to become homeowners who otherwise would not have access to mortgage credit. Although the bust of the subprime mortgage market has resulted in high levels of foreclosures and even problems on Wall Street, the boom generated unprecedented levels of homeownership, especially among young, low-income, and minority borrowers, putting them on a road to economic comfort and stability. Sensible regulation of subprime lending should seek to curb abusive practices while preserving these benefits.

This article reviews the theories and evidence regarding the causes of the turmoil in the subprime market. It then turns to the question of the rising foreclosures in that market in order to understand the causes of rising foreclosures. In particular, we examine the competing models of home foreclosures that have been developed in the economics literature - the "distress" model and the "option" model. Establishing a correct model of the causes of foreclosure in the subprime market is necessary for sensible and effective policy responses to the problem. Finally, we review some of the policy initiatives that have been suggested in response to the crisis in the subprime market. Because new regulatory interventions will have costs as well as benefits, until the causes of the market‘s problems are better understood it may be that the best policy in the short-term is to do little until well-tailored regulatory approaches are available.