Wright Paper on Behavioral Law and Economics and Consumer Contracts

Joshua D. Wright of George Mason has an article in 2 NYU Journal of Law & Liberty, Behavioral Law and Economics, Paternalism, and Consumer  Contracts: An Empirical Perspective, available at http://ssrn.com/abstract=1015899.  Here's the abstract:

Modern legal scholars frequently and increasingly base their analyses on the assumption, grounded largely in the extensive experimental literature, that individuals are subject to a number of systematic behavioral biases. Within the legal literature, behavioral economic analysis has been relied upon to generate a significant number of proposals for paternalistic regulation. These proposals are frequently accompanied by claims that neoclassical economics is insufficiently flexible to deal with these empirical observations, and that behavioral law and economics is as a superior guide for policy analysis. These claims must ultimately be resolved empirically and turn on whether incorporating insights from behavioral economics improves our ability to explain the law, understand the behavior of economic agents, or predict the consequences of legal change. This paper focuses on the shared interest of both neoclassical and behavioral economists in empiricism and explanatory power. It asks whether behavioral economic analysis of law has increased our knowledge in an area of “consumer contracts.” Specifically, the paper surveys the available empirical evidence to assess claims from the behavioral law and economics literature involving exploitation of consumer biases with credit cards, standard form contracts, and shelf space contracts. I find that the empirical studies of firm and consumer behavior in these examples do not support the claims that behavioral law and economics generates greater predictive power than conventional price theory.

Matt Edwards Paper on the FTC's Use of Behavioral Law and Economics

Matt Edwards's article, The FTC and the New Paternalism, can be found at http://ssrn.com/abstract=1014652.  Here's the abstract

During the past decade, we have witnessed a renaissance of paternalism in legal scholarship fueled by the rise of behavioral law and economics ("BLE"). This paper addresses the potential impact of BLE and the "new paternalism" on the Federal Trade Commission's consumer protection mission. After providing a survey of some of the basic teachings of BLE, the paper reviews the fascinating political and legal history of the FTC's unfairness authority to show how a major political battle helped to transform the legal concept of unfairness from a market morality norm into a law and economics concept grounded in the concept of consumer sovereignty.

The latter parts of the paper use three examples - mail-in consumer rebates, inducement of supermarket impulse purchases, and payday lending - to explore the challenges that the FTC faces if it decides to press unfairness claims based on alleged behavioral exploitation. These tasks include weighing uncertain costs and benefits of business practices, determining what harms are "reasonably avoidable" in cases of purported consumer irrationality, and elaborating a principle to mediate disputes between consumers' multiple selves. Given these empirical and normative challenges, and the FTC's unfairness history, one might expect the Commission to be cautious in its use of BLE and resistant to more radical strains of the new paternalism.

Intellectual Property Bullies -- This Time It Is the Grinch

Dr. Seuss –- or, at least, the lawyers for his estate -- are at it again.  The victim this time is  Teamsters for a Democratic Union, which put articles on its web site and in its newspaper that portrayed Teamster President James Hoffa as the Grinch.   TDU used an illustration of the Grinch, and used the distinctive font used in the Seuss classic to decry “Hoffa’s Holiday Give-away to Employers.”

Barbara Orr, a lawyer with DLA Piper who represents the Seuss estate, apparently thought that Teamster dissidents who patronize TDU’s web site and read its newspaper might not be bright enough to understand that TDU was satirizing Hoffa by reference to a common cultural icon, the Grinch.  She sent a  cease and desist letter claiming that truck drivers and others might think that the Seuss estate was endorsing TDU (or, might they think that Dr. Seuss was responsible for giving away workers’ contract rights?).  So, she claimed trademark and copyright infringement, and threatened to sue for damages unless TDU promptly signed a letter “agreeing to [the] terms” set forth in her demand letter.

As usually happens in these situations, the intimidation tactic was effective, even though TDU's plainly non-commercial use for the purpose of commentary would have afforded a strong defense in any lawsuit.  TDU apparently calculated that it didn’t have enough interest in fighting with Dr. Seuss to spend its meagre staff time and resources on a lawsuit, and it has removed the image from its web site.   But society will be the poorer if citizens engaged in criticism of companies (or, in this case, companies and the leaders of their union bargaining partner) can’t refer to such common cultural icons as the Grinch as an embodiment of the sort of evil they seek to criticize. 

This is not the first time that Dr. Seuss has abused intellectual property claims to suppress free speech.  For example, a year ago the blogosphere was buzzing over a threat by the Seuss estate against a musician who recorded “Green Eggs and Ham” in a voice resembling Bob Dylan (the musician could not afford to fight and backed down, of course), or its  successful lawsuit against the publisher or a satirical book, The Cat NOT in a Hat, which used a Dr. Seuss theme to make fun of O.J Simpson trial for the murder of Nicole Brown Simpson and Ronald Goldman.

Bullies need to be put in their place.  Barbara Orr is invited to respond.

Subprime: the Lawsuits

By Alan White
Borrower class actions comprised 43% of subprime mortgage litigation filed in federal courts in 2007 according to a new report from Navigant Consulting, based on a survey of 278 cases. Other categories included securities investor claims (22%), commercial contract claims, mostly efforts to force originators to repurchase bad mortgages (22%), employment class actions (9%) and bankruptcy and miscellaneous (4%).

Among the consumer class actions, 36 alleged disclosure violations, 31 claimed improper charges (e.g. RESPA kickbacks), and 26 asserted discrimination claims under the Equal Credit Opportunity Act, Fair Housing Act or similar laws. A majority of the disclosure cases seem to have been brought by one firm challenging disclosures for "option-ARM" (i.e. negative amortization teaser rate) mortgages. The survey did not include any state court lawsuits, nor did it include lawsuits filed by lenders, which of course include hundreds of thousands of foreclosures filed in judicial foreclosure states, some of which are contested. As a result, the conclusions about the scope of litigation so far are necessarily understated. Pending cases filed before 2007, like the Ameriquest MDL class actions in Illinois federal court, are also not covered. HT to Kathleen Keest at the Center for Responsible Lending for spotting this.

Angela Littwin Paper on How Low-Income Borrowers Respond to Restraints on Credit Card Use

Angela K. Littwin of Harvard has written a  paper, Testing the Substitution Hypothesis: Would Credit Card Regulation Force Low-Income Borrowers Into Less Desirable Lending Alternatives?, available at http://ssrn.com/abstract=1014460.  Here's the abstract:

One of the strongest arguments against regulating credit cards is the substitution hypothesis, which states that if a restriction on one form of credit decreases access, borrowers will respond by using other, less desirable forms of credit. For low-income consumers, the argument is more powerful still, because their other options are high-cost lenders such as pawn shops and rent-to-own stores. But the substitution hypothesis has been more frequently assumed than investigated, and the empirical research that has taken place does not support the theory as strongly as has been supposed. The theory is based on a naïve presumption about the constancy of demand for consumer credit and a failure to account for a more nuanced view of the role of credit supply. This Article presents original data from a study of low-income women. The findings suggest that lenders such as pawn shops and rent-to-own stores may function as complements more than substitutes. In addition, the research uncovered another form of credit that low-income families routinely use and participants evaluated favorably, but that has never been discussed in the academic literature. These findings suggest a more nuanced formulation of the hypothesis that better predicts the consequences of credit card regulation.

Engel & McCoy Paper on Improving Sustainability of Minority Homeownership

Two leading writers on predatory lending, Kathleen C. Engel and Patricia McCoy have written a paper titled From Credit Denial to Predatory Lending: The Challenge of Sustaining Minority Homeownership, available at http://ssrn.com/abstract=1011489  Here's the abstract:

Years of discriminatory behavior against minority households have damaged their ability to build wealth. One of the most financially destructive practices endured by minority households is the excessive overpayment to finance a home purchase or access accumulated equity in a home. The market conditions that position blacks, and to a lesser extent, Latino households, to be the principal targets of predatory mortgage lending have their roots in decades of legally sanctioned housing market discrimination. Some minority households lack the financial knowledge or awareness to protect themselves. In other cases, years of discriminatory financial practices have contributed to rendering them ineligible to access low-cost financing. And, finally, vestiges of discrimination continue today with minority consumers convenient targets of unscrupulous lending behavior.

Starting in the early 1990s, federal antipoverty policies placed new emphasis on asset creation for low- and moderate-income people, especially the working poor. While federal policy embraced wealth creation as the new antidote to poverty, it failed to anticipate threats to preserving home equity once it has been created, including rising consumer debt and predatory lending. To date, the federal government has failed to combat predatory lending consistently and effectively. The failure to curb predatory lending has spawned high levels of home loan foreclosures across the U.S. and threatens the largest asset of many minority households, i.e., their homes. This paper proposes policies to improve the sustainability of minority homeownership.

David Adam Friedman Article on Free Offers

David Adam Friedman's article, Free Offers: A New Look, to appear in the New Mexico Law Review, is available at http://ssrn.com/abstract=1010238.  Here's the abstract:

Free offers - the practice wherein firms market goods and services by claiming that they are free - have been overlooked for too long from a structural regulatory perspective. These offers have become so ingrained into our consumer culture that they often go unnoticed, viewed as part of the natural commercial landscape. The courts and the FTC have effectively left free offer regulation untouched since the 1950s. Even legal scholarship has largely ignored free offers. I argue that advances in the study of human behavior require a new look and a new approach to the half-century-old free offer regulatory regime.

A truly free offer would be a gift. In contrast, a free offer attached to another definite commercial commitment is not free under our common understanding of the word. Under the legal standard, however, the use of the word free is lawful, provided there is adequate disclosure of the attached commercial commitment.

Free offers can be perceived as merely harmless exaggerations or simple puffery. In fact, why wouldn't consumers want free goods and services? Rational consumers should want truly free goods and services. However, free offers subvert rationality. Cognitive psychology and reciprocity theory demonstrate that the power of a free offer induces consumers to behave differently, making them more likely to engage in certain transactions. The powerful expressive function of the word free tactically puts consumers at a disadvantage even in the situations where the conditions of our laws and regulations are satisfied.

I argue that current law and regulations require wholesale reevaluation, especially given the date of their original formation and the advances in our understanding of human behavior. This ubiquitous practice should be reexamined. Moreover, policymakers should go even as far as banning the practice of the free offer in certain contexts and seeking other appropriate means to even the playing field.

Senate Passes Consumer Product Safety Bill

This Washington Post article reports that S. 2663, The CPSC Reform Act, was passed by the U.S. Senate  by an overwhelming 79 to 13 margin. The beginning of the Post article provides a synopsis:

The Senate yesterday approved the most far-reaching changes to the nation's product safety system in a generation, responding to recalls of millions of lead-laced toys that rattled consumers last year.

Lawmakers still have to resolve key differences between the Senate bill and a similar measure that passed the House in December. While the Senate version is considered by consumer advocates to be tougher, both contain provisions that would require retailers and manufacturers to be more vigilant about product safety.

Our most recent post on the legislation -- here -- contains links to lots of relevant information.

Fed Credit Card Rule update

At today's Consumer Advisory Council meeting, Federal Reserve Board staff provided a bit more information on the news that the Fed will regulate abusive credit card practices. A proposed rulemaking will be published in the Federal Register, perhaps in April or May, and may include rules on prompt posting of payments, double-cycle billing, retroactive application of rate increases, and other practices. The Fed is working separately on a credit card disclosure rule, and plans to combine the pending rule and the new proposal into a final credit card regulation by the end of the year.

Mortgage standards improving?

Has the mortgage market self-corrected by tightening up underwriting? Not according to blownmortgage.com. In this post, the author describes lender junk mail aimed at brokers, touting aggressive undewriting, no-doc loans and other questionable practices.