Consumer Law & Policy Blog

Stephen E. Friedman Argument that the Federal Arbitration Act Doesn't Apply to Internet Transactions

Stephen E. Friedman of Widener has written Protecting Consumers from Arbitration Provisions in Cyberspace, the Federal Arbitration Act and E-SIGN Notwithstanding, 57 Catholic University Law Review (2008). Here's the abstract:

Arbitration provisions are among the most significant of boilerplate contract terms. Yet the Federal Arbitration Act, which applies to written arbitration agreements, is generally understood as leaving little room for state regulation of these provisions. This article takes the position that arbitration provisions displayed on web-sites in consumer transactions are not written for purposes of the FAA. The FAA is therefore inapplicable to such arbitration provisions and states should be free to regulate them as they see fit.

When Congress enacted the FAA in 1925, Congress excluded oral and other non-written arbitration agreements from the FAA's coverage. In the current commercial environment, arbitration provisions on consumer web-sites are the closest equivalent to what oral and other unwritten arbitration provisions were in 1925 - a form of contracting notable for its casual nature and its failure in most instances to register meaningful choice or to impart seriousness. Arbitration provisions in consumer Internet transactions are thus properly excluded from the FAA.

This interpretation of the term written in the FAA must also be reconciled with E-SIGN. E-SIGN generally ensures that electronic documents be given the same effect as written documents. E-SIGN could thus be seen as requiring that all arbitration provisions in electronic form be treated the same as those in written form. While I acknowledge and discuss that argument, I take a contrary position and argue that E-SIGN does not dictate that text on an Internet web-site must always be considered written for purposes of the FAA.

Interpreting written to exclude at least some electronically displayed text from the scope of the FAA recalibrates the balance between state and federal arbitration law in an appropriate way and in an appropriate context

Carillo on the Needs of Consumers in Multilingual Housing Markets

Jo J. Carrillo of Hastings has written In Translation for the Latino Market Today: Acknowledging the Rights of Consumers in a Multilingual Housing Market, 11 Harvard Latino Law Review 1 (2008).  Here's the abstract:

The Federal Truth in Lending Act (TILA) requires lenders to disclose the full cost of credit to borrowers. In the case of linguistic minorities, California law goes one step further. Under California Civil Code section 1632, lenders are required to provide unexecuted translations of loan documents to consumers whose language of proficiency is Spanish, Chinese, Tagalog, Vietnamese, or Korean. This Article considers the needs of consumers in a multilingual housing market and then offers a sketch of California Civil Code section 1632, which represents an important step toward affirming the economic, legal, and civil rights of consumers who, by reason of their language proficiencies, are vulnerable in credit markets.

Oren Bar-Gill and Elizabeth Warren Co-author Making Credit Safer

Oren Bar-Gill of NYU and Elizabeth Warren of Harvard have joined forces to write Making Credit Safer, 157 U. Penn. L. Rev. (2008).  Here's the abstract: 

Physical products, from toasters and lawnmowers to infant car seats and toys to meat and drugs, are routinely inspected and regulated for safety. Credit products, like mortgage loans and credit cards, on the other hand, are left largely unregulated, even though they can also be unsafe. Because financial products are analyzed through a contract paradigm rather than a products paradigm, consumers have been left with unsafe credit products. These dangerous products can lead to financial distress, bankruptcy and foreclosure, and, as evidenced by the recent subprime crisis, they can have devastating effects on communities and on the economy. In this Article, we use the physical products analogy to build a case, supported by both theory and data, for comprehensive safety regulation of consumer credit. We then examine the current state of consumer credit regulation, explaining why the current regulatory regime has systematically failed to provide meaningful safety regulations. We propose a fundamental restructuring of this regime, urging the creation of a new federal regulator that will have both the authority and the incentives to police the safety of consumer credit products.

Housing Counselors Report – Needless Foreclosures Continue Apace

The most recent housing counselor survey by the California Reinvestment Coalition reveals the continuing frustration homeowners face as they try to actualize the promises of the mortgage servicing industry.  Counselors report, consistent with my research, that servicers are not willing to reduce principal, and tend to favor workouts that increase the borrower’s monthly payment rather than reducing it.  Response times are nowhere near the 45-day guideline adopted by HOPE NOW.  Foreclosures are proceeding while frustrated borrowers and counselors make vain efforts to communicate with loss mitigation staff to craft reasonable long-term solutions.  Servicers still prefer temporary adjustments to payments and interest rates than permanent loan modifications. 

In the absence of clearer and stronger leadership from FHFA, Treasury and FDIC, servicers are still in denial, acting as if the downturn is a problem of a few months’ duration, and that the mortgages made in 2005 and 2006 can be repaid eventually, if we just keep kicking the can down the road.  Here are some counselor comments from the report:

•    “Right now with our current pipeline of foreclosure clients, we are waiting for responses from servicers, which are now at the 4th or 5th month, even with constant follow-up.”

•    “Repayment plans most often do not work because they typically increase the monthly payment; they seem to be done hastily, just so the servicer can report that they have ‘done x # of modifications.’ Foreclosure is the most common outcome, followed by modifications that lower the interest rate. We have only seen one principal reduction on a first mortgage and that just happened at the end of September ‘08.”

•    “LOL! God only knows what these servicers/investors are waiting for! The greater depression of 2008? They are still digging their heels in, but the recent movement by the FDIC-owned IndyMac, Countrywide and FHA H4H is a huge step in the right direction. Let's see if other lenders will follow suit and how many H4H actually get originated...”

•    “Writing down the principal would help all clients stay in the home and would slow down the amount of foreclosures currently taking place. This would be a good step towards halting the high number of foreclosures occurring everyday. It is a much-needed remedy. These homes’ prices should have never reached these levels and because of greed, and deregulation, it created an environment in which we find ourselves today.”

•    “We have noticed write-downs only when a lawsuit is filed.”

•    “Most of our clients have some income and can sustain a mortgage if they reduce principal.”

To hear from frustrated California homeowners themselves, you can watch this video.

Interesting Explanation for the Lesser Depression

Here's an interesting explanation for the current plight of our economy--which I've come to think of as the Lesser Depression--gleaned from the MP3 version of the ALI/ABA program The Subprime Mortgage Crisis: From A to Z.  One of the speakers in the panel titled "Class Actions and Shareholder Derivative Lawsuits Brought by Investors," after first suggesting that some lenders were overinsured for losses through credit default swaps, analogized to the situation in which the owner of a million dollar home insures it for five million.  The speaker then observed that it's not surprising when a fire breaks out at the home. The theory does explain why so many decisions that have since appeared to be self-destructive were made.  I suspect that it will ultimately not stand up to scrutiny, but that scrutiny may be coming in the form of litigation. 

Tranche Warfare Declared

HousingWire reports that investors are suing Countrywide [complaint here] in its role as mortgage servicer, objecting to Countrywide's settlement with state regulators whereby it will modify home mortgages to reduce interest and principal.  While the modifications can be justified in many cases on the basis of net present value calculations and the best interest of investors (foreclosures being a losing proposition in the current market), the investors claim is that Countrywide is foisting the losses attributable to Countrywide's misdeeds in making the loans onto them.  While investors, originators and servicers battle over who has to bear the inevitable losses, other servicers will see this as another reason not to modify mortgages.

It is undoubtedly true that many mortgages are subject to fraud, deceptive practice and other claims and defenses, in addition to having lost value due to home price declines.  Parsing out losses is always a problem in a debt crisis, and Congress may need to act to allocate losses wholesale, rather than waiting for the case-by-case allocation of losses for every mortgage through a series of similar lawsuits.   

The Economic Team and the Foreclosure Crisis

By Alan White  

So far President-Elect Obama's economic team, while perhaps full of bright people, reflects very little diversity in viewpoint, coming mostly from the mainstream, centrist, a-little-Keynsianism-is-OK-but-not-too-much school of thought.  Notably missing are any economists one might regard as leftist, or even genuinely liberal in the American sense.  None of the announced advisers to date concern themselves primarily, or even very much at all, with issues of poverty, labor, housing, or the unequal distribution of wealth and income.  None could be characterized as a fan of regulation of markets, as a matter of principle.  

A brief search for their writings on the the foreclosure crisis produces very little.

Larry Summers wrote a a reasonable column for Financial Times earlier this year, in which he advocated bankruptcy reform to allow homeowners to reduce mortgage debt to property values, and to swap debt for equity.  Austan Goolsbee, on the other hand, wrote a wretched piece in March 2007 warning against regulation of subprime mortgages, based on the erroneous factual assumption that subprime mortgages expanded homeownership for minorities (who are in fact losing billions in home wealth as a result of subprime foreclosures, which are approaching 50% of subprime loans.)  Thankfully the Federal Reserve and other regulators have not heeded this advice.  If anyone knows of anything Christina Romer, Paul Volcker, or Tim Geithner have written on the subject, let me know.

While some of these economists may be pragmatists, their deeply held biases favor the unregulated market that has brought the present catastrophe.  Thus far, I don't hold much hope for a transformative administration, on the foreclosure crisis front, or for that matter on the new regulatory architecture for financial services generally.