Study explores effect of increase in minimum payments on actual payment amounts

Paolina C. Medina of Texas A&M University and Jose L. Negrin of the Banco de Mexico have written The Hidden Role of Contract Terms: Evidence from Credit Card Minimum Payments in Mexico, Management Science (2021). Here is the abstract:

This paper argues that thresholds in financial contracts act as implicit nudges in consumers’ decisions. Exploiting a regulatory change to credit card minimum payments in Mexico, we find that a one percentage point change in minimum payments, leads to a 0.87 pp change in actual payments, both expressed as a percentage of total balances. We decompose the total effect of minimum payments into a constraining effect and a reference effect. The former captures the effect of minimum payments as a binding constraint and accounts for 59% of its total effect. The later captures any remaining impact of changes in minimum payments beyond their constraining effect and represents 41% of the total. In turn, 67% of the reference effect is explained by the multiple heuristic: the tendency of consumers to pay whole-number multiples of the minimum payment.

Study suggests consumers assume product quality may be higher than it is when sellers withhold information from them

The American Economic Association has a report on the study here. The actual paper, Is No News (Perceived As) Bad News? An Experimental Investigation of Information Disclosure by Ginger Zhe Jin, Michael Luca, & Daniel Martin, is here. Here's the abstract:

This paper uses laboratory experiments to directly test a central prediction of disclosure theory: that strategic forces can lead those who possess private information to voluntarily provide it. In a simple sender-receiver game, we find that senders disclose favorable information, but withhold unfavorable information. The degree to which senders withhold information is strongly related to their stated beliefs about receiver actions, and their stated beliefs are accurate on average. Receiver actions are also strongly related to their stated beliefs, but their actions and beliefs suggest that many are insufficiently skeptical about nondisclosed information in the absence of repeated feedback.

And here's an excerpt from the paper's conclusions:

Our results also shed light on the factors that may limit voluntary disclosure in the field, and the situations in which we might expect voluntary disclosure to be an effective policy. These findings suggest that unless buyers receive fast and precise feedback about mistakes after each transaction, market forces can be insufficient to close the information gap between sellers and buyers.

A suggestion to the CFPB for a new arbitration rule

by Jeff Sovern

I have a suggestion for the CFPB relating to arbitration. Many readers will know this background, but for those who don't: in 2010, Congress enacted the Dodd-Frank Act, which in section 1028 directed the Consumer Financial Protection Bureau to study arbitration. The statute also authorized the Bureau to regulate consumer financial arbitration "if the Bureau finds that such a prohibition or imposition of conditions or limitations is in the public interest and for the protection of consumers." Any such regulation would also have to be consistent with the Bureau's arbitration study. The Bureau released a massive study of arbitration in 2015. In 2017, the CFPB issued a rule barring the use of class action waivers in arbitration clauses, but Congress and then-president Trump invoked the Congressional Review Act to block the rule from going into effect. 

Nevertheless, the CFPB still has room in which to protect consumers from arbitration abuses in the financial arena. The CRA blocks the Bureau from issuing new rules that are "substantially the same" as the regulation that Congress voted down. The Bureau has at least two sources of authority to issue a new arbitration rule. One is the original section 1028 authority, described above. The other is its authority to prohibit abusive practices. As long as any new arbitration rule is sufficiently different from the rule Congress rejected, and either blocks the use of abusive arbitration clauses or is supported by the Bureau's study, in the public interest, and protects consumers, it would be within the Bureau's power.

What might such a rule look like? How about a rule that prevents companies from blocking consumers from suing in court unless consumers specifically opted in to the arbitration clause after a Bureau-mandated disclosure that stated that the terms of the contract would otherwise be the same if the consumer declined to enter into the clause. Something like this:

If you sign below, you agree that if we violate your rights, you may not sue us in court.  The Consumer Financial Protection Bureau recommends that you NOT sign below. Signing or not signing below will not have any impact on what you pay for our services or on the services we provide. If you do NOT sign, and we violate your rights, you may still sue us in court or later agree to arbitration.

The opt-out would have to on the first-page of any contract, in big print, and require a separate signature. And it would have to be read out loud to the consumer. As for online contracts, it would have to be similarly prominent. If someone can come up with a suitable emoji, so much the better.

This regulation would be supported by the CFPB study because that study made clear that consumers didn't understand that arbitration clauses prevent consumers from suing in court. A study my co-authors and I conducted also found that consumers didn't realize that. I am not aware of any study that shows that consumers do, in fact, understand arbitration clauses. Consequently, just as with countless other consumer protections, a disclosure would be an appropriate response. 

Such a regulation would also be within the Bureau's abusiveness power because section 5531 of the Dodd-Frank Act defines abusive as including a practice which "takes unreasonable advantage of-- (A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service" and as already noted, consumers are bewildered by these clauses. Because these clauses elude consumer comprehension, and consumers who enter into them are waiving their constitutional rights, such a regulation would protect consumers and be in the public interest. After all, how can it be in the public interest for consumers to waive a constitutional right unknowingly?

No doubt the industry will object to an opt-in provision. But many in the industry use something similar. Many businesses include in their arbitration clauses a provision allowing consumers to opt-out of arbitration, provided they notify the company soon after signing the contract. Sauce for the goose, sauce for the gander. And doesn't it make more sense for the default dispute resolution process to be the one prescribed by the founding fathers in the constitution?

One advantage of opt-in provisions over opt-out provisions is that opt-in provisions give the industry an incentive to explain to consumers why an arbitration clause is preferable while opt-out provisions give the industry an incentive not to say anything about the matter. See Jeff Sovern, Opting In, Opting Out, or No Options at All:  The Fight for Control of Personal Information, 74 Washington Law Review 1033 (1999). Watch any congressional arbitration hearing, and you will hear industry witnesses argue that arbitration is better for consumers. An opt-in provision gives them an incentive to make that argument to consumers themselves, and gives consumers an opportunity to decide. In other words, it allows the free-market to operate. The industry may also claim that a contract is itself a form of opt-in, and consequently no other opt-in is necessary. The problem with that argument is, again, that consumers don't realize they are surrendering a constitutional right by, say, getting a credit card. Constitutional rights deserve more protection than a fine-print statement that no one reads and even fewer understand.

This rule would also preserve consumer freedom by allowing consumers to opt in to arbitration, perhaps because they don't trust the government. And those of us who do trust the government could simply decline to sign. As long as enough consumers didn't opt in so that class actions would make economic sense, companies would be deterred from misconduct. They would lose their ability to cheat consumers out of small amounts with no consequences. 

It's time for the CFPB to get back to arbitration clauses, either with this or some other way to protect consumers.

 

 

Complex litigation and best practices for managing it

Many of our readers are consumer lawyers. Many of them handle complex, aggregated litigation, so they may be interested in Collected Wisdom on Selecting Leaders and Managing MDLs by law professor Elizabeth Burch and U.S. district judge Stephen Bough. Here is the abstract:

Today, nearly one out of every two new suits filed in federal civil court is part of a multidistrict litigation (MDL). Initially designed to organize antitrust cases against electrical equipment manufacturers, MDL’s adaptability and minimal requirements made it the preferred approach for coordinating pretrial process for all manner of cases, from securities, employment, intellectual property, and antitrust to sales practices, common disasters, and products liability. Yet, the simplicity of MDL’s technical requirements—that cases are pending in different districts and share a common factual question—belie the complexity of the proceedings themselves. Governed principally by insiders’ unwritten but longstanding norms, both newly-appointed MDL judges and lawyers with cases suddenly swept up in MDL may find themselves in unfamiliar waters.

For those both old and new to this burgeoning world, we have collected case-management wisdom from judges handling the thorniest of MDLs: products-liability proceedings with over 500 cases. Consider this article an insider’s guide on how to navigate the critical first step—appointing lead attorneys. We also offer best-practice tips on permitting dissent and objections, heading off meritless cases, developing future stars, keeping lawyers fiscally responsible, progressing cases, maintaining transparency, and seeking help from magistrate judges versus special masters.

Want to know how forced arbitration affects ordinary folks? A website has videos of them telling their stories

by Jeff Sovern

Here. [Disclosure: the website is put up by AAJ, which gave St. John's a grant to fund some of my research back in 2015]

Former CFPB staffer Eric Blankenstein, who left under a cloud, calls CFPB "criminal syndicate"

by Jeff Sovern

Blankenstein's essay appears in the National Review. Bureau-watchers may recall that Blankenstein served as an associate director at the Bureau during the Trump administration but left after a rebellion over blog posts he had written a decade earlier questioning whether use of the n-word is racist, among other things. Here's the opening of the National Review piece:

On April 1, the Consumer Financial Protection Bureau (CFPB) issued a “compliance bulletin” that warned mortgage servicers that “unprepared is unacceptable.” The agency, largely a brainchild of then-professor Elizabeth Warren, intimated that the proverbial hammer would fall on any mortgage servicer that does not allocate sufficient resources and staff to handling an anticipated wave of distressed borrowers. Left unstated is what the CFPB would consider to be sufficient resources, and where it gets the legal authority to make such a demand. What was clearly stated is that the agency wants to dictate how companies act beyond what the law requires, and is willing to use the strong arm of the government to get its way. This is the government equivalent of a visit from the mob: Nice business you got there. It would be shame if anything happened to it.

Unfortunately, this was not the first time the criminal syndicate masquerading as a government agency ignored the law and issued vaguely worded threats to regulated entities without regard to niceties like what the law actually requires. * * *

The Bureau's description of the Bulletin in question appears here, and that page links to the actual Bulletin. I'm not sure why Blankenstein claims the Bureau left unstated where it gets the legal authority; the Bulletin states "The Bureau is committed to using its authorities, including its authority under Regulation X mortgage servicing requirements and under the Consumer Financial Protection Act (CFPA), to ensure that homeowners facing the ongoing economic impact of the Coronavirus Disease (COVID-19) national emergency receive the benefits of critical legal protections and that avoidable foreclosures are avoided." The CFPB includes the Bureau's UDAAP authority. The Bulletin also cites the Equal Credit Opportunity Act and provides additional guidance abut what the Bureau sees as problematic behavior. I would have thought that an industry that criticized the Bureau for regulation by enforcement would have appreciated the advance warning of how the Bureau plans to use its enforcement powers. 

"Biden, unlike Trump, thinks businesses shouldn’t be free to abuse consumers"

That's the title of this article by LA Times consumer reporter David Lazarus, who explains that "Rohit Chopra is expected to receive the U.S. Senate’s blessing any day now to become the new head of the Consumer Financial Protection Bureau. His job will be to restore credibility to a watchdog agency that was largely sidelined during the Trump administration."

Landlord Sues Activists for Emotional Distress Damages For Telling Tenants about Eviction Moratoria

by Paul Alan Levy

When Keep Pushing, a St. Louis community organization devoted to protecting the unhoused, went door-to-door to speak to tenants facing eviction orders and hand out a flyer about their rights under the CDC eviction moratorium, one of the landlords whose tenants were visited, Norwood 2020, was desperate to suppress this potential threat to its bottom line. Its tactic, however – a nine-count count complaint  seeking damages an injunctive relief, followed by a demand for expedited discovery – is a textbook SLAPP suit.

As lawyers for Legal Services of Eastern Missouri explain in a motion to dismiss filed yesterday, not a single one of the state law claims can succeed on its own merit, indeed some of them are borderline frivolous, even apart from the fact that imposing damages or injunctive relief would be violate the First Amendment. Moreover, most of the claims rest on the theory that, in talking to a tenant who had presumably moved into an apartment after Norwood 2020 obtained the eviction order (and how did Norwood 2020 manage to empty the apartment without violating the local eviction moratorium)?  Keep Pushing had spoken in error because that tenant was not facing eviction.  So the landlord claims include infliction of emotional distress, invasion of privacy, and deceptive merchandising (the free leaflet being the merchandise, apparently). Norwood 2020 has yet to explain how a corporate landlord can suffer emotional distress or invasion of privacy, or why it has standing to pursue such tort claims on behalf of its tenants. Its counsel has not responded to a request for comment.

Visual Capitalist Infographic: The state of household debt in America:

Here. This really brings home how mortgage debt compares to other consumer debts.

Dep't of Education continues defense of Trump-era student-loan rules

The Washington Post reports:

The Biden administration continues to defend lawsuits against the Education Department over Trump-era policies on student loans and career training regulation.

Biden’s Education Secretary Miguel Cardona has begun dismantling his predecessor’s policies. The department this week lifted a ban on colleges providing emergency grants to undocumented and international students. It has also extended student debt relief to disabled borrowers and some defrauded students.

But advocacy groups are baffled as Justice Department attorneys representing the federal agency hold the line on legal positions that are out of step with Biden’s agenda.

The full article is here.