Consumer Law & Policy Blog

More Americans Giving Up on Banking

That's what this report issued by the FDIC shows. A Washington Post story on the report says that

In the aftermath of one of the worst recessions in history, more Americans have limited or no interaction with banks, instead relying on check cashers and payday lenders to manage their finances, according to a new federal report. Not only are these Americans more vulnerable to high fees and interest rates, but they are also cut off from credit to buy a car or a home or pay for college... . 821,000 households opted out of the banking system from 2009 to 2011 and ... the so-called unbanked population grew to 8.2 percent of U.S. households.

Lauren Willis Paper: When Nudges Fail

Lauren E. Willis 

of Loyola Los Angeles, always a thoughtful writer, has authored When Nudges Fail: Slippery Defaults.  Here's the abstract:

Inspired by the success of “automatic enrollment” in increasing participation in defined contribution retirement savings plans, policymakers have put similar policy defaults in place in a variety of other contexts, from checking account overdraft coverage to home mortgage escrows. Internet privacy appears poised to be the next arena. But how broadly applicable are the results obtained in the retirement savings context? Evidence from other contexts indicates two problems with this approach: the defaults put in place by the law are not particularly sticky, and the people who opt out can be those who would benefit the most from the default. Examining the new default for consumer checking account overdraft coverage reveals that firms can systematically undermine each of the mechanisms that might otherwise operate to make defaults sticky. Comparing the retirement savings default to the overdraft default, four boundary conditions on the use of defaults as a policy tool are apparent: policy defaults will not be sticky when (1) motivated firms oppose them, (2) these firms have access to the consumer, (3) consumers find the decision environment confusing, and (4) consumer preferences are uncertain. Due to Constitutional and institutional constraints, government regulation of the libertarian paternalism variety is unlikely to be capable of overcoming these bounds. Therefore, policy defaults intended to protect individuals when firms have the motivation and means to move consumers out of the default are unlikely to be effective unless accompanied by substantive regulation. Moreover, the same is likely to be true of “nudges” more generally, when motivated firms oppose them.

Wealth Inequality

In 1962, the net worth of the wealthiest 1% of Americans had 125 times the net worth of the median household. That number is now 288, according to a study by the Economic Policy Institute. That study is discussed in this CNNMoney article. EPI's full report provides many more details. Note the chart below, which shows the considerable drop in median household wealth between 1983 and the present.

Second Liens and Mortgage Modifications

Vicki Been of NYU, Howell E. Jackson of Harvard, and Mark A. Willis of NYU have written Essay: Sticky Seconds - The Problems Second Liens Pose to the Resolution of Distressed Mortgages.  Here's the abstract: 

Almost five years into the foreclosure crisis, policymakers, the mortgage industry, consumers and taxpayers all express disappointment over the slow pace of modifications, refinancings, and other resolutions of borrowers’ distress short of foreclosure auctions. Many analysts point to the prevalence of second liens on the properties as a significant impediment to efficient resolutions of borrowers’ distress and therefore to the stabilization of the housing market. In addition, many observers argue that a significant number of second liens are at serious risk of default, and therefore may imperil the financial solvency of the financial institutions holding the liens. To better understand whether and how second liens might prevent efficient resolutions of borrower distress and to assess how second lien holders could be encouraged to cooperate with efficient resolutions without undermining the financial interests of the banks, we reviewed existing data and research, as well as debates among both academics and industry experts about the role second liens might be playing in slowing the recovery of the housing market. We then convened a small group of experts from across the country on April 10th, 2012, gathering around one table servicers, investors, title insurers, consultants, bank regulators, government officials, mortgage counselors, economists, lawyers, accountants and academics to explore the full range of issues that second liens pose to efforts to stabilize the housing market.

This article reports the results of our research and the roundtable discussion. It first explores what we know about the prevalence and delinquency rates of different types of second liens, the extent to which banks are exposed to losses on the liens, and the extent to which the banks already have accounted for those expected losses. It then reviews the various reasons that second liens have interfered with the efficient resolution of distressed mortgages, and documents advances that recently have been made in addressing those problems. Finally, the article examines the most promising proposals for reducing the transaction costs and frictions that are behind many of the current problems second liens are posing, as well as proposals to prevent similar problems from arising in the future. We focus our analysis of solutions on programs to remove barriers to greater coordination between first and second lien holders, rather than on the incentive approaches that have already been attempted.

 

Microsoft Adds Class-Action Ban to Service Agreements

Another company reacts to AT&T v. Concepcion. A Forbes article yesterday notes that Microsoft is now including forced arbitration and class-action bans in its customer agreements. The article explains:

Recently, [Microsoft] made changes to the Services Agreement governing Hotmail, SkyDrive, Bing, Windows Live Messenger and other online services.

The key provision in the Agreement requires users of Microsoft’s products to agree to “binding arbitration,” in which they give “up the right to litigate (or participate in as a party or class member) all disputes in court before a judge or jury.”

Just in case that wasn’t restrictive enough, the next section – entitled “Class Action Waiver” – also forbids the software giant’s consumers from joining “a class action or in any other proceeding in which either party acts or proposes to act in a representative capacity.”

The article is surprisingly--surprisingly, because Forbes generally offers a business-side perspective--understanding of the important role that class actions can serve:

Despite the[ir] flaws, class actions are ideally situated to pursue wrongdoers who have harmed many people in small amounts.  Conceptually, at least, they serve a worthy purpose in our legal system yet have been under threat for many years.

Defaulted Student Loans Are Lucrative Business for Debt Collectors

Of course, debt collectors always make money because people's loans are in default. But student loan debt appears to be especially attractive for debt collectors, as explained in this article by Andrew Martin. Why? Among other reasons, the government helps debt collectors track down many of the debtors, and it is very hard to discharge student loan debt in bankruptcy. Here's an excerpt from the beginning of Martin's extensive piece:

At a protest last year at New York University, students called attention to their mounting debt by wearing T-shirts with the amount they owed scribbled across the front — $90,000, $75,000, $20,000. On the sidelines was a business consultant for the debt collection industry with a different take. “I couldn’t believe the accumulated wealth they represent — for our industry,” the consultant, Jerry Ashton, wrote in a column for a trade publication, InsideARM.com. “It was lip-smacking.” Though Mr. Ashton says his column was meant to be ironic, it nonetheless highlighted undeniable truths: many borrowers are struggling to pay off their student loans, and the debt collection industry is cashing in. As the number of people taking out government-backed student loans has exploded, so has the number who have fallen at least 12 months behind in making payments — about 5.9 million people nationwide, up about a third in the last five years. ...In an attempt to recover money on the defaulted loans, the Education Department paid more than $1.4 billion last fiscal year to collection agencies and other groups to hunt down defaulters. Hiding from the government is not easy.

 

Why is Elizabeth Warren Against Part of the Affordable Care Act?

Here's an explanation:

U.S. Senate candidate Elizabeth Warren is a superstar within the Democratic Party and a lightning rod for Republican outrage over the issue of tax fairness. But there is one tax that Warren doesn't like and it's part of Obamacare. The 2.3 percent excise tax on medical devices is a little-known provision in the law that is estimated to raise $20 billion in revenue over 10 years, according to the Joint Committee on Taxation. But some Democrats, including Warren, a Democratic National Convention speaker, represent states that employ medical device workers and are concerned that the tax with hamper job growth in industry valued at over $100 billion in 2010, according to the Department of Commerce.

Perhaps it is not a good idea to impose excise taxes on particular industries. But this reminds me a bit of the late Senator Paul Wellstone's support for aspects of "tort reform" legislation that benefitted the medical device industry. Wellstone was probably as far to the left as anyone in the Senate. So, why? Perhaps because  he was a Senator from the home state of Medtronic.

Comparing President Obama and former Governor Romney on the Law

This article by Todd Ruger compares the views of President Obama and former Governor Romeny on legal issues, including judicial nominations.

State Highway Safety Officials Want to Ban Hand-Held Cell by Drivers

This Washington Post article from last Friday explains that a coalition of the top state highway safety officers want to ban hand-held cell phone use by drivers. But their ultimate goal is probably a ban on all cell-phone use by drivers -- hand-held or hands-free -- because, as we've explained earlier, studies show that hands-free cell phone use while driving is as dangerous (or nearly as dangerous) as hand-held use. Here's an excerpt from the Post article:

A national coalition of state highway safety officials ... called for outlawing all hand-held use of cellphones while behind the wheel. The recommendation by the Governors Highway Safety Association carries particular weight because its members are the chief highway safety officers in each state. Regulation of mobile device use by drivers falls in the purview of state legislatures, where lawmakers in many states have been hesitant to tackle the cellphone issue and endure the public backlash. ... A ban on hand-held use could be the first step toward what some experts argue is the real solution: a ban on any cellphone use in moving vehicles. Several studies have shown that requiring drivers to use hands-free devices to talk on their cellphones does little to minimize the distraction caused by a conversation. The National Transportation Safety Board last year recommended a total ban on using mobile devices to hold conversations or send text messages while driving.

The Limits on "Agreements" to Arbitrate

One of things that bothers opponents of binding pre-dispute mandatory agreements in consumer contracts is that often they don't seem like agreements at all. In most cases, the arbitration clauses are buried in take-or-leave-it contracts that the consumer doesn't read (and sometimes has little opportunity to read). Arbitration opponents sometimes say that contracts of adhesion are efficient and thus good. Or perhaps some consumers know that they will be bound to whatever the hell is in the contract (even if they don't know what's in it). But it's hard to say that these contracts are consensual in the ordinary sense of that term. And, yet, in the arbitration context, the courts' opinions upholding ariitration contracts are full of language about the parties' "consent" and "agreement"--because the Federal Arbitration Act is supposedly built on those concepts--even when the underlying contract is of the take-it-or-leave it variety.

But last Friday the Second Circuit in Schnabel v. Trilegiant Corp. put on the brakes, at least a little bit, in the context of on-line consumer contracting. The opinion is worth reading in full, but here's a summary of the holding that gives you a flavor:

The question presented to us on this appeal is whether the plaintiffs are bound to arbitrate their dispute with the defendants as a consequence of an arbitration provision that the defendants assert was part of a contract between the parties.Neither of the plaintiffs acknowledge being aware of the existence of the arbitration provision when their contractual relationships with the defendants were formed. But, according to the defendants, the provision was made available to the plaintiffs through a hyperlink appearing on the page the plaintiffs would have seen before enrolling in a service offered by the defendants and an email sent to the plaintiffs after their enrollment. We conclude that despite some limited availability of the arbitration provision to the plaintiffs, they are not bound to arbitrate this dispute. As regards the email, under the contract law of Connecticut or California –- either of which may apply to this dispute –- the email did not provide sufficient notice to the plaintiffs of the arbitration provision, and the plaintiffs therefore could not have assented to it solely as a result of their failure to cancel their enrollment in the defendants' service. As regards the hyperlink, we conclude that the defendants forfeited the argument that the plaintiffs were on notice of the arbitration provision through the hyperlink by failing to raise it in the district court. [Read the opinion, and decide for yourself whether the hyperlink created an agreement to arbitrate.]