Consumer Law & Policy Blog

Arbel Paper on Reputation and Markets

Yonathan A. Arbel of Alabama has written Reputation Failure: Market Discipline and Its Limits. Here is the abstract:

Free-market advocates seek to repeal broad swaths of tort, contract, and consumer law, trusting reputation to provide effective market-discipline. Their core belief is that reputation assures honest dealings because a seller reputed to sell inferior goods will lose business. Realizing that, the rational seller will behave honestly in order to maximize profits, thus obviating the need for costly, coercive, and uncertain legal interventions.

Despite their focus on rationality, these common accounts have glossed over a profound puzzle. Reputational information is a public good par-excellence, comprising myriad disparate decisions to gossip, share word-of-mouth, write online reviews, and rate products. Why, then, is it rational to produce reputational information? Who does it? To what effect?

This Article’s primary contribution is the introduction of the concept of a reputation failure, the systematic distortion of reputational information that jeopardizes the ability of reputation to discipline markets. Like the more familiar concept of market failure, reputation failure offers a new justification for legal interventions in markets. Moreover, fixing reputation failure offers a new program of regulation, one that would appeal to many free-market advocates.

Wells Fargo will not finish repaying customers until 2020

"Wells Fargo & Co will not finish paying back the estimated 600,000 customers it wrongly charged for auto insurance until at least 2020, the bank said in a letter to U.S. lawmakers. ... U.S. regulators slapped Wells Fargo with a $1 billion penalty in April when it admitted to wrongly forcing drivers into auto insurance policies. That agreement envisioned the customer payouts would finish within months."

The New York Times has the story, here.

Online student-loan refinance company settles FTC charges

Online student loan refinancer SoFi has agreed to stop misrepresenting how much money student loan borrowers have saved or will save from refinancing their loans with the company, in order to settle Federal Trade Commission charges that it deceptively advertised inflated figures for more than two years.

In a complaint against Social Finance, Inc. and subsidiary SoFi Lending Corp., the FTC alleged that since at least April 2016, they made prominent false statements about loan refinancing savings in television, print, and Internet advertisements.

The FTC alleges that the average savings SoFi touted in its ads inflated the actual average savings – sometimes even doubling it – by excluding large categories of consumers.

The FTC's press release, with links to the complaint and consent order, are here.

Sant'Ambrogio: Federal government filed only eight consumer protection cases in federal court in a recent year

by Jeff Sovern

According to Private Enforcement in Administrative Courts, 72 Vanderbilt Law Review,  (Forthcoming), by Michael Sant'Ambrogio of Michigan State, in the year ending March 31, 2017, the government filed only eight consumer protection cases in federal court, which contrasts with the 9,706 cases filed by private plaintiffs. Sometimes we see the argument that we don't need private enforcement of consumer laws because public enforcement is sufficient.  If the numbers Sant'Ambrogio reports are accurate, they make that claim harder to make; indeed, they make it ludicrous. To be sure, many government cases are resolved short of filing in federal court, some government cases are resolved in internal administrative proceedings, and state agencies--especially AG's offices--also file consumer protection cases, but those categories are unlikely to come close to solving underenforcement problems. 

CFPB issues statement regarding payday rule

The Consumer Financial Protection Bureau today issued a statement about its plans for its payday-loan regulation:

The Bureau expects to issue proposed rules in January 2019 that will reconsider the Bureau's rule regarding Payday, Vehicle Title, and Certain High-Cost Installment Loans and address the rule's compliance date. The Bureau will make final decisions regarding the scope of the proposal closer to the issuance of the proposed rules. However, the Bureau is currently planning to propose revisiting only the ability-to-repay provisions and not the payments provisions, in significant part because the ability-to-repay provisions have much greater consequences for both consumers and industry than the payment provisions. The proposals will be published as quickly as practicable consistent with the Administrative Procedure Act and other applicable law.

The statement is presumably intended to give payday lenders, some of whom have sued the CFPB to challenge the rule, see here, an indication of what's in store.

Update on NFL concussion class-action settlement

We've posted many times on the NFL concussion class-action settlement. Go here, for instance. Now there's this story in USA Today saying that some injured former players who qualify for payments under the settlement are getting little or nothing after the lawyers, health-care providers, and other (purported?) lien holders take what they say is theirs (and for other reasons).

Ideas about dealing with student-loan debt

We've posted here many times about the massive and growing student-loan debt in this country. Two new pieces might interest our readers.

First, Maine is so interested in getting educated people to move to Maine that it will refund most (and often all) student loan repayments through a state tax credit. The program applies to all Maine workers who graduated college in 2015 or later, even people who move to Maine after having gone to school outside the state. (The program originally applied only to Mainers who received their degrees from a Maine school.) This article explains the program in general terms. Maine's revenue department provides greater detail here.

Second, regarding law-school debt in particular, take a look at Curing the Cost Disease: Legal Education, Legal Services, and the Role of Income-Contingent Loans by law prof John Brooks. Here is the abstract:

The costs of both legal education and legal services have been rising steadily for decades. This is because they share a common root: the constant above-inflation growth in the cost of labor-intensive goods and services known as the “cost disease.” The cost disease story roots cost growth not in market failure or bureaucratic waste, but in natural, even healthy, economic forces—productivity and wage growth. Because the source of this cost growth is productivity growth, the nature of the cost disease is such that an economy as a whole can afford these rising costs. But in a world of deep income inequality, the costs must be socialized, to be shared collectively. In this article for a symposium on financing legal education, I argue that the Income-Driven Repayment program for student loans is a mechanism for partially socializing the costs of both legal education and legal services, while still maintaining the vital independence of both law schools and the bar. I also take a critical look at the Public Service Loan Forgiveness program, counter-intuitively arguing that it has serious flaws in its goal of serving the broader public interest.

DiLorenzo FinTech Article

by Jeff Sovern

My colleague, Vincent DiLorenzo, has written Fintech Lending: A Study of Expectations Versus Market Outcomes, Forthcoming in Review of Banking & Financial Law. Here is the abstract:

This paper documents the expectations for the fintech lending industry, which has emerged in this decade, and compares such expectations to market outcomes. It presents an evidence based analysis for policy making decisions. Part one of the paper explores expectations - possible benefits and risks of fintech lending - through large-scale surveys and interviews of industry, consumer and government stakeholders. Part two of the paper examines market outcomes – benefits and risks that have been realized or failed to materialize, as documented by studies of substantial data sets of various types of fintech loans. This includes examination of expanded access to credit, lower costs, predatory terms, fair lending risks, and lack of transparency. After comparing expectations and outcomes, the paper explores policy implications, particularly the implications for chartering of special purpose national banks by the U.S. Comptroller of the Currency.

Did Glass-Steagall's repeal matter?

That's the topic of as Glass-Steagall's Demise Inevitable and Unimportant? by law prof Arthur Wilmarth. Here's the abstract:

The demise of the Glass-Steagall Act was the result of affirmative policy decisions by federal regulators and Congress, and it was not the inevitable byproduct of market forces. Economic disruptions and financial innovations posed serious challenges to the viability of Glass-Steagall, beginning in the 1970s. However, federal regulators and Congress could have defended Glass-Steagall and made necessary adjustments to preserve its effectiveness. Instead, they supported efforts by large financial institutions to break down Glass-Steagall’s structural barriers, which separated commercial banks from securities firms and insurance companies.

Federal agencies opened a number of loopholes in Glass-Steagall’s barriers during the 1980s and 1990s. However, those loopholes were subject to many restrictions and did not allow banks to establish full-scale affiliations with securities firms and insurance companies. The largest banks needed two major pieces of legislation to achieve their longstanding goal of becoming full-service universal banks. First, big banks and their trade associations persuaded Congress to pass the Gramm-Leach-Bliley Act of 1999 (GLBA). GLBA authorized the creation of financial holding companies that could own banking, securities, and insurance subsidiaries. Second, the financial industry convinced Congress to adopt the Commodity Futures Modernization Act of 2000 (CFMA). CFMA insulated over-the-counter (OTC) derivatives from substantive regulation under both federal and state laws.

The campaigns that led to the enactment of GLBA and CFMA lasted two decades and cost hundreds of millions of dollars. The largest financial institutions and their trade associations would not have pursued those campaigns unless they believed that both statutes would have great importance.

GLBA and CFMA proved to be highly consequential laws. They enabled banking organizations to become much larger and more complex and to offer a far broader range of financial products. They transformed the U.S. financial system from a decentralized system of independent financial sectors into a highly consolidated industry dominated by a small group of giant financial conglomerates. GLBA and CFMA promoted explosive growth in shadow banking, securitization, and OTC derivatives between 2000 and 2007. All three of those markets played key roles in fueling the toxic credit boom and unstable financial conditions that led to the financial crisis of 2007-09.

CFPB expected to cut payday repayment tests in revised rule

Bloomberg reports: 

Payday lenders could escape tighter regulation as the Trump-led Consumer Financial Protection bureau considers eliminating a requirement that they first assess borrowers’ ability to repay loans.

The CFPB is expected to either propose eliminating the rule’s strict ability to repay standards or delaying their effective date so that they can undergo further review, according to multiple sources with knowledge of the rulemaking process.

The full article is here.