Consumer Law & Policy Blog

Fed staff reads behavioral economics literature

For you law (or economics) professors out there writing about behavioral economics, take heart. Sometimes people who write regulations are listening (and reading.) The new credit card unfair practices rule proposed jointly by the Federal Reserve, OTS, and NCUA makes reference to hyperbolic discounting in discussing the practice of charging penalty rates on existing credit card balances. (See fn 47 of the proposed rule, citing among others, Angela Littwin's article.) The context: the proposed rule prohibits charging an increased, penalty APR on balances owed before the event causing the APR increase (such as a late payment.) The regulators contend that consumers cannot reasonably avoid this practice, and it is therefore unfair, in part because of hyperbolic discounting. I would argue that overconfidence bias and disregarding nonsalient terms are also behavioral tendencies that support the argument for the new rule.

Jean Sternlight on Governmental Imposition of Arbitration on Companies in Consumer Disputes

Jean R. Sternlight of UNLV, a frequent critic of binding arbitration clauses, discusses whether it would be acceptable and constitutional for the government to impose arbitration on companies in consumer disputes in "In Defense of Mandatory Arbitration (If Imposed on the Company)," 8 Nevada L. J. 82 ((2007), Here's the abstract:

Having spent much of her academic life battling companies' mandatory imposition of binding arbitration on consumers and employees, the author now switches gears. This Article contemplates whether mandatory binding arbitration is acceptable if imposed by the government on companies (governmental mandatory arbitration) rather than by companies on their employees and consumers (private mandatory arbitration). Specifically, the Article considers the possibility of statutes that would provide little guys (consumers and employees) with an opportunity to take their disputes to binding arbitration rather than litigation. If the little guys chose arbitration over litigation, post-dispute, companies would have to agree to such arbitration, and the results of the arbitration would then be binding on both little guy and company. If on the other hand the little guys preferred to litigate their disputes, they would reserve that right. After first examining the policy implications of this approach, and finding some reasons to favor the proposal, the Article next considers the constitutional arguments that would likely be raised in opposition to such statutes. Specifically, it considers the legitimacy of governmentally imposed mandatory arbitration in light of Article III, the Seventh Amendment, and the Due Process Clause. The Article finds that it may be possible to governmentally impose mandatory arbitration in some situations without violating the Constitution. Nonetheless, the Article concludes that trying to introduce such legislation is probably unwise, as a matter of realpolitik. At a minimum, however, the Article should discourage companies and their lobbyists from insisting, as they often do, that privately imposed binding arbitration is the best way to ensure little guys get access to arbitration. Instead, if such companies and lobbyists truly believe arbitration is better for little guys than litigation they should favor the governmental imposition of arbitration on companies, as discussed in this Article.

Technical Difficulties

We appear to be experiencing a problem due to Typepad's recent software upgrade, leading to the disappearance of our sidebars and headlines.  We are currently working to resolve the issue and apologize for any inconvenience. Thank you for your patience.

UPDATE - The problem appears to have been resolved.

The Dangers of "Standard" Terms

An interesting post by David Giacalone explains how used car dealers use "standard" sales contracts to avoid competition on the terms of their warranties. The use of standard terms is one reason why some things, like lawyer contingency fees, seem to be immune from the pressure of competition.

CSPI Seeks FDA Ban on 8 Food Dyes

The Center for Science in the Public Interest (CSPI) has petitioned the Food and Drug Administration to ban eight food dyes that the group claims cause behavioral problems in some children and serve to enhance the appeal of unhealthy foods. A Washington Post story on CSPI's petition is here. For much more information, read CSPI's press release. The petition itself can be found here. The petition includes a long list of popular foods containing the dyes that CSPI wants to ban: Yellow 5, Red 40, Blue 1, Blue 2, Green 3, Orange B, Red 3, and Yellow 6.

Minnesota Foreclosure Freeze Vetoed

Minnesota governor Tim Pawlenty vetoed a bill that would have delayed residential foreclosures on subprime and negative amortization loans. The bill would have allowed owner-occupants to delay foreclosure by up to one year, by paying at least 65% of their current monthly payment. This was the first state legislative attempt to enact a moratorium in the current crisis. It will be interesting to see whether Senator Obama, speaking in Minnesota tonight, has any comment. Pawlenty has apparently been mentioned as a possible running mate for Senator McCain.

Attack on Behavioral Law and Economics

I just finished listening to the audio version of economist Tim Harford's book The Logic of Life during my commutes.  The thesis of the book is that people are rational and so respond to incentives.  This clashes to some extent with the arguments of behavioral law and economics ("BLE") consumer law scholars, in which group I number myself, who claim that people sometimes act irrationally in systematic ways and that businesses take advantage of consumer irrationalities. Those of us who take this position generally argue for rules that provide consumers greater protection than current law supplies.  BLE scholars rely on laboratory experiments, in the main, to prove their point. One of the chapters in Harford's book, by contrast, focuses on a number of experiments that seem to rebut the existence of the endowment effect; that is, the idea that once consumers have possessed something for even a brief period, it seems more valuable to them and they are reluctant to give it up for something that they would have valued equally before they possessed the item (hence the eagerness of some sellers to get consumers to try goods under a money-back guarantee that few consumers will take advantage of).  The difference is that the experiments he discusses took place outside of the lab and in more realistic transactions; they demonstrate that while neophytes are subject to the endowment effect, more experienced traders tend to be immune to it.  I'm afraid I can't yet cite to the papers on which the experiments are based; it's hard to take notes while you're driving and I haven't yet obtained a copy of the print version.  Though I still very much believe that BLE has valuable lessons for consumer protection, the chapter raises questions about some of the work on which we depend and is worth a read (or a listen) if you use BLE.  Harford, I should note, does not take on most of the systematic irrationalities on which much BLE work is based.  I found the remaining chapters quite interesting as well, even the ones that range far beyond consumer protection.

Tokyo Drift

By Alan White

From 1992 to 1998, Japan’s economy drifted in what became known as the Heisei depression, as banks and regulators stubbornly refused to recognize losses on overvalued loan and real estate assets. The prolonged crisis in Japan had been preceded by a bubble in real estate and stock prices, leading to a huge debt overhang based on inflated values. Sound familiar?

HOPE NOW April numbers and spin

By Alan White

On Friday HOPE NOW, the mortgage servicer coalition, released its April numbers for foreclosures and loan workouts. Unlike its prior reports, the April tally does not include new foreclosures started in April. Instead of showing both the number of new foreclosure starts and completed foreclosure sales, they only report the completed sales. New starts have been running at about three times the number of foreclosure sales, and perhaps the number was just getting too big. The press release touts April's increase in repayment plans and loan modifications, not surprisingly. While these increases are good news, they are not very meaningful without knowing if they are keeping pace with the rise in delinquencies and new foreclosures. In the last report (for the quarter ending in March) workouts were not keeping up with the rise in foreclosure filings.

I think HousingWire's analysis is correct: loan modifications are just not keeping pace with the growth in foreclosure sales. It's hard to know without the number of new starts, but I suspect that the pace of workouts is also continuing to fall behind the rising foreclosure inventory. Although HOPE NOW's headline says "Workouts Reach Record Level", they could just as well have said "Home Losses Reach Record Level", or "Foreclosure Starts outpacing Workouts."

The other continuing difficulty with the HOPE NOW reports is the inclusion of the undefined Repayment Plans in the category of workouts. We know from the MBA report that nearly 30% of foreclosure sales involve failed payment plans. Repayment plans can include something as limited as obtaining a promise from the homeowner to bring their loan current within the next 90 days. In my view, the main thing that the Repayment Plan category tells us is how many delinquent homeowners have recently been in contact with their servicer; it is not very good evidence of much else.