Consumer Law & Policy Blog

Crespi Paper: Why Are 99% of the Applications for Debt Discharge under the Public Service Loan Forgiveness Program Being Denied, and Will This Change?

Gregory S. Crespi of Southern Methodist Universit has written Why Are 99% of the Applications for Debt Discharge under the Public Service Loan Forgiveness Program Being Denied, and Will This Change? Here is the abstract:

During the first 18 months after October 1, 2017 that student loan borrowers were able to apply for tax-free debt forgiveness under the Public Service Loan Forgiveness program a striking 99% of the 76,002 applications that have been fully processed have been denied. The more recently adopted Temporary Expanded Public Service Loan Forgiveness program also has a 97% to 99% application denial rate, depending on how it is calculated. This short article discusses the various factors that may be contributing to such a bizarrely high denial rate, and why the number of applications filed and the proportion of applications filed that are approved are both likely to increase significantly over time, particularly after 2024, and to a greater extent if the Department of Education improves its currently inadequate borrower outreach and loan servicer oversight activities.

Hunt Paper: Promoting the Purposes of Student Loans by Tempering Bankruptcy Nondischargeability

John P. Hunt of California, Davis has written Promoting the Purposes of Student Loans by Tempering Bankruptcy Nondischargeability. Here's the abstract:

Student loans, unlike other debts, are not dischargeable in bankruptcy unless the debtor starts a special proceeding and proves that repayment would cause “undue hardship.” This requirement probably accounts for the fact that only a tiny fraction of bankrupt debtors succeed in discharging their student loans. This Article is the first to make the case that student-loan nondischargeability interferes with achieving the programs’ goals and to propose solutions that courts and the Department of Education (“Department”) can employ under current law.

The Article draws on the legislative history of the student-loan programs to establish that they serve at least four distinct purposes: providing equality of access to higher education, educating the population for the benefit of the country, enabling students’ free choice of career, and providing a benefit to students.

The Article then looks to the empirical literature and to fundamental precepts of bankruptcy law to show that nondischargeability can thwart the purposes of the student-loan programs through four different effects: deterring students from starting or completing higher education, distorting career choice, discouraging borrowers from economic and social participation, and rendering student loans harmful to borrowers.

The Article offers suggestions for tempering each of these effects. To avoid deterrence of education, the fact that bankruptcy relief often is available if requested should be made more salient. To combat distortion of career choice, bankruptcy courts should stop ruling that debtors should abandon jobs for which their education has prepared and find others that pay more. To remedy borrower discouragement, courts and the Department should take account of the likelihood that borrowers will be discouraged in deciding whether to grant or consent to discharge. The debt-income ratio is a promising proxy for likelihood of discouragement. Finally, courts and the Department should consider whether student loans harmed the borrower. 

A Terrific Conference and a Terrific Talk

by Jeff Sovern

I've spent the last few days at a terrific International Association of Consumer Law conference at the of Indiana University's Robert H. McKinney Law School (my second great conference in five months, the other being Ted Mermin's Berkeley Consumer Law Scholars Conference). Indiana's James Nehf clearly had worked very hard to put on the conference.  The IACL brings together consumer law scholars from all over the world every other year so this was an opportunity to hear how other countries solve the same kinds of problems we have while at the same time getting helpful comments on our own work.  One lesson from the conference is that other countries are also struggling with the challenges of how to regulate electronic commerce.

I will probably have more to say about the conference in future posts but I wanted to say something in this post about the talk Shmuel ("Samuel") I. Becher of Victoria University of Wellington in New Zeeland gave about a paper he co-authored with Uri Benoliel of Ramat Gan Law School, The Duty to Read the Unreadable, 60 Boston College Law Review (Forthcoming).

One of the useful things about conferences is that they allow you to hear a brief talk about a paper the significance of which you might have overlooked. I had previously posted the article's abstract to the blog (I'll paste it in again below), but I hadn't read it, a mistake I will now correct.  The article surveys many online wrap contracts and finds that they are beyond the reading level of many consumers.  This doesn't seem unusual; according to the CFPB, the average credit card contract requires a reading level well into eleventh grade while credit card arbitration clauses are on average at a reading level of someone who has nearly completed college. Yet, the paper points out, courts hold consumers to a duty to read these contracts--even though many consumers can't.  That hardly seems either fair or consistent.  The paper argues that policy-makers should oblige consumer contract drafters to write contracts that consumers should be able to understand. Indeed, if policy-makers do not impose such a duty, contract drafters have an incentive to make the contracts unreadable so they can impose their terms on consumers but consumers can't read them and so won't shop elsewhere (though perhaps that incentive is reduced slightly by the unlikely possibility of an unconscionabilty defense). If only courts would say that unreadable contracts are likewise unenforceable.

There were other excellent talks but many were about papers that have not yet been published or posted on the web, and I won't discuss those until they are.

Anyway, here's the abstract:

The duty to read doctrine is a well-recognized building block of U.S. contract law. Under this doctrine, contracting parties are held responsible for the written terms of their contract, whether or not they actually read them. The application of the duty to read is especially interesting in the context of consumer contracts, which consumers generally do not read. 

Under U.S. law, courts routinely impose this doctrine on consumers. However, the application of this doctrine to consumer contracts is unilateral. While consumers are expected and presumed to read their contracts, suppliers are generally not required to offer readable contracts. This asymmetry creates a serious public policy challenge. Put simply, consumers might be expected to read contracts that are, in fact, rather unreadable. This, in turn, undermines market efficiency and raises fairness concerns. 

Many scholars have suggested that consumer contracts are indeed written in a way that dissuades consumers from reading them. This Article aims to empirically test whether this concern is justified. The Article focuses on the readability of an important and prevalent type of consumer agreement: the sign-in-wrap contract. Such contracts, which have already been the focal point of many legal battles, are routinely accepted by consumers when signing up for popular websites such as Facebook, Amazon, Uber, and Airbnb. 

The Article applies well-established linguistic readability tests to the 500 most popular websites in the U.S. that use sign-in-wrap agreements. The results of this Article indicate, inter alia, that the average readability level of these agreements is comparable to the usual score of articles in academic journals, which typically do not target the general public. These disturbing empirical findings hence have significant implications on the design of consumer contract law.

Study shows businesses benefit from using unenforceable contract terms

Meirav Furth-Matzkin and Roseanna Sommers, both of Chicago, have written Consumer Psychology and the Problem of Fine Print Fraud, 72 STANFORD LAW REVIEW___ (Forthcoming). Here's the abstract:

This Article investigates how laypeople respond to consumer contracts that are formed as a result of fraud. Across four studies, we show that contrary to the prevailing wisdom in contract law scholarship, fine print is not simply white noise. Rather, it has a significant and detrimental effect on lay consumers. We demonstrate that clauses that consumers neglect to read ex ante, at the time of signing, have a significant psychological effect ex post, when consumers discover that they were deceived about the terms of the transaction. Consumers who would otherwise complain about being cheated are demoralized by contractual fine print, and consequently decline to seek redress. This is because they erroneously assume that all contracts—even contracts induced by fraud—are binding. Our studies presented participants with cases in which a seller induces a consumer to buy a product or service by making a false representation. The false representation is directly contradicted by the written terms of the contract, which the consumer signs without reading. Our findings reveal that laypeople, unlike legally trained individuals, mistakenly believe that such agreements are consented to, and will be enforced as written, despite the seller’s material deception. Importantly, the presence of fine print discourages consumers from wanting to take legal action, initiate a complaint, or damage the firm’s reputation by telling others what happened, even when the contract contradicts what they were told. At the same time, the fact that the seller lied makes little difference to laypeople’s intuitions about whether the contract will be, or should be, enforced as written. Finally, we show that informing consumers about Anti-Deception Consumer Protection Laws alters their perceptions about the legal and moral status of contracts induced by fraud, although such information does not completely counteract their formalistic intuition that whatever the contract says is the final word. The implications of our study, we argue, are that prevailing methods for addressing deceptive business practices are inadequate because they fail to take account of consumer psychology.

 

Linda Fisher & Judith Fox Book: The Foreclosure Echo: How the Hardest Hit Have Been Left Out of the Economic Recovery

It's to be published next month by Cambridge and sounds like an important contribution. Here's a description:

The Foreclosure Echo tells the story of the ordinary people whose quest for the American dream was crushed in the foreclosure crisis when they were threatened with losing their homes. The authors, Linda E. Fisher and Judith Fox - each with decades of experience defending low-to-moderate-income people from foreclosure and predatory lending practices - have employed a range of legal, economic, and social-science research to document these stories, showing not only how people experienced the crisis, but also how lenders and public institutions failed to protect them. The book also describes the ongoing effects of the crisis - including vacant land and abandoned buildings - and how these conditions have exacerbated the economic plight of millions of people who lost their homes and have increased inequality across the country. This book should be read by anyone who wants to understand the fallout of the last financial crisis and learn what we can do now to avoid another one.

• Provides specific examples, through stories, of how the law affects real people
• Illustrates the implications of law and policy to help readers see and feel the implications
• Makes concrete policy and legal recommendations, based on evidence, legal experience and clients' situations

More information here.

How often do elite law reviews publish consumer law articles: evidence from six journals

by Jeff Sovern

I wanted to know if the law reviews in elite schools that teach consumer law have published more consumer law articles in the last five years than law reviews in elite schools that don’t offer the course.  Consequently, I asked a research assistant, Sara Krastins, to look at the articles published in law reviews of three schools that offered a consumer law course in both the 2014 and 2019 surveys—Harvard, Virginia, and Berkeley--and the law reviews of three schools that didn’t-- Stanford, Yale, and Columbia. First I will report what Sara found, and then some methodological limits. But here’s the short version: if you want to publish in one of these six journals, subject to the methodological limits described below, you had better be at one of the schools that publish the journals, be a superstar professor at Yale or Michigan, or co-author an article with one. Oh, and whether the school offers a course in consumer law doesn’t seem to make a difference. But just as with our look at what schools offer consumer law, this is just a first cut at the matter and we welcome corrections. More on that below.

As for schools that don’t offer consumer law, Sara found two consumer law articles in Stanford, both written or co-authored by Yale superstar professors (Ian Ayres and Alan Schwartz), and none in Yale or Columbia. She counted 225 articles in the three law reviews during the relevant period, meaning that less than 1% of the law review articles they published were on consumer law.  If you ignore articles authored by Yale superstars, you end up with zero.

What about at the schools that teach a consumer law course? Harvard published one, co-authored by Robin Bradley Kar of Illinois and Margaret Jane Radin of Michigan—another superstar professor (and Kar is pretty impressive too). Virginia also published one, but it was by one of their own professors. Berkeley also had one, by Ted Mermin, who as regular readers of the blog know, is the Interim Executive Director of Berkeley’s Center for Consumer Law and Economic Justice. So we have three articles out of a collective 275 or (drumroll) 1%.  And the three articles were all written or co-authored by a superstar professor or a person already at the school that published it.

And here are the totals from all six journals: five consumer law articles of 500 or 1%.  Consumer law articles not written or co-authored by a superstar professor or someone at the school publishing it: zero.

Now the methodological limits: Sara based her conclusions on reading article titles and abstracts. If she couldn’t tell from those that an article dealt with consumer law, she excluded it, so articles that dealt with consumer in their text but not in the abstract or title would not have been included.  In addition, Sara, as a 2L, probably has an incomplete understanding of what consumer law deals with (just as 2L law review editors probably don’t have a complete understanding of the value of consumer law articles), so she may have excluded articles because she didn’t realize they addressed consumer law. We also excluded pieces that appeared solely online, and pieces not described as articles, meaning that essays, reviews, and reflections were not included.  The survey considered only articles that Sara could find before April 11, 2019. If you know of an article on consumer law that appeared in one of these law reviews from 2014-2019, please let me know so we can add it.

UPDATE: David Noll of Rutgers has reminded me of his arbitration article in the California Law Review--so that makes six.

Odinet article on student debt, fintech, and discrimination

Christopher K. Odinet of Oklahoma has written The New Data of Student Debt, 92 Southern California Law Review (Forthcoming). Here is the abstract:

Silicon Valley is increasingly setting its sights on student lending. Financial technology (fintech) firms such as SoFi, CommonBond, and Upstart are ever-expanding their online lending activities to help students finance or refinance educational expenses. These online companies are using a wide array of alternative, education-based data points — ranging from applicants’ chosen majors, assessment scores, the college or university they attend, job history, and cohort default rates — to determine creditworthiness. Fintech firms argue that through their low overhead and innovative approaches to lending they are able to widen access to credit for underserved Americans. Indeed, there is much to recommend when it comes to using different kinds of information about young consumers in order assess their financial ability. Student borrowers are notoriously disadvantaged by the extant scoring system that heavily favors having a prior credit history. Yet, there are also downsides to the use of education-based data by private lenders. This Article critiques the use of this kind of borrower information, arguing that while it can have a positive effect in promoting social mobility, it could also have significant downsides. Chief among these are reifying existing credit barriers along income and class lines and further contributing to discriminatory lending practices that harm women, black and Latino Americans, and minority groups. The discrimination issue is particularly difficult because of the novel and opaque underwriting algorithms that facilitate these online loans. This Article concludes by proposing three-pillared regulatory guidelines for fintech credit firms to use in designing, implementing, and monitoring their education-based data underwriting systems.

Prince & Schwarcz article on how AI is a game-changer for proxy discrimination

Anya Prince of Iowa and Daniel Schwarcz of Minnesota have written Proxy Discrimination in the Age of Artificial Intelligence and Big Data, Iowa Law Review, Forthcoming. Here's the abstract:

Big data and Artificial Intelligence (“AI”) are revolutionizing the ways in which firms, governments, and employers classify individuals. Surprisingly, however, one of the most important threats to antidiscrimination regimes posed by this revolution is largely unexplored or misunderstood in the extant literature. This is the risk that modern algorithms will result in “proxy discrimination.” Proxy discrimination is a particularly pernicious subset of disparate impact. Like all forms of disparate impact, it involves a facially-neutral practice that disproportionately harms members of a protected class. But a practice producing a disparate impact only amounts to proxy discrimination when the usefulness to the discriminator of the facially-neutral practice derives, at least in part, from the very fact that it produces a disparate impact. Historically, this occurred when a firm intentionally sought to discriminate against members of a protected class by relying on a proxy for class membership, such as zip code. However, proxy discrimination need not be intentional when membership in a protected class is predictive of a discriminator’s facially-neutral goal, making discrimination “rational.” In these cases, firms may unwittingly proxy discriminate, knowing only that a facially-neutral practice produces desirable outcomes. This Article argues that AI and big data are game changers when it comes to this risk of unintentional, but “rational,” proxy discrimination. AIs armed with big data are inherently structured to engage in proxy discrimination whenever they are deprived of information about membership in a legally-suspect class that is genuinely predictive of a legitimate objective. Simply denying AIs access to the most intuitive proxies for predictive but suspect characteristics does little to thwart this process; instead it simply causes AIs to locate less intuitive proxies. For these reasons, as AIs become even smarter and big data becomes even bigger, proxy discrimination will represent an increasingly fundamental challenge to anti-discrimination regimes that seek to limit “rational discrimination.” This Article offers a menu of potential strategies for combatting this risk of proxy discrimination by AI, including prohibiting the use of non-approved types of discrimination, mandating the collection and disclosure of data about impacted individuals’ membership in legally protected classes, and requiring firms to employ statistical models that isolate only the predictive power of non-suspect variables.

Bruckner et al. article on when the DOE should not contest the discharge of student loans

Matthew A. Bruckner of Howard, Brook Gotberg of Missouri, Dalié Jiménez of Irvine and Harvard's Center on the Legal Profession, and Chrystin D. Ondersma of Rutgers have written No-Contest Discharge for Uncollectable Student Loans, forthcoming in the University of Colorado Law Review (2020). Here is the abstract:

Over 44 million Americans owe more than 1.4 trillion dollars in student loan debt. This debt is uniquely difficult to shed in bankruptcy; even attempting to do so usually requires costly and contentious litigation with the Department of Education, and initial success may be followed by years of appeals by the Department of Education. As a result, very few student loan borrowers even attempt to discharge their student loan debt in bankruptcy.

In this Article, we call on the Department of Education to develop a set of nine easily calculable and verifiable circumstances in which it will not contest a debtor’s attempt to discharge her student loan debt. Nearly every category of “no-contest” discharge represents a circumstance where the debtor would clearly suffer an undue hardship if forced to continue to attempt repayment, such that the Department of Education should conserve taxpayer dollars by consenting to discharge. Specifically, we urge the Department of Education to allow a “no-contest” discharge when the debtor’s income is less than 150% of the federal poverty level and:
(1) household income has been at or below the federal poverty level for the last four years;
(2) the debtor receives disability benefits under the Social Security Act;
(3) the debtor receives disability benefits because of military service;
(4) the debtor’s income is derived solely from retirement benefits;
(5) the debtor is a caregiver of an adult or child as defined in the Lifetime Respite Care Act;
(6) the debtor is a family caregiver of an eligible veteran;
(7) the debtor did not receive a degree from the institution or the institution closed;
(8) the debtor owes less than $5,000; or
(9) the debtor has been repaying their student loans for more than 25 years. 

Our proposal will not solve every problem, but it would go a long way towards resolving many of the grosser inequities currently associated with student loans and their treatment in bankruptcy. 

 

Reidenberg et al. Article on Trustworthy Privacy Indicators

Joel R. Reidenberg of Fordham, together with four co-authors, has written Trustworthy Privacy Indicators: Grades, Labels, Certifications and Dashboards, 96 Washington University Law Review  (2019).  Here's the abstract:

Despite numerous groups’ efforts to score, grade, label, and rate the privacy of websites, apps, and network-connected devices, these attempts at privacy indicators have, thus far, not been widely adopted. Privacy policies, however, remain long, complex, and impractical for consumers. Communicating in some short-hand form, synthesized privacy content is now crucial to empower internet users and provide them more meaningful notice, as well as nudge consumers and data processors toward more meaningful privacy. Indeed, on the basis of these needs, the National Institute of Standards and Technology and the Federal Trade Commission in the United States, as well as lawmakers and policymakers in the European Union, have advocated for the development of privacy indicator systems.

Efforts to develop privacy grades, scores, labels, icons, certifications, seals, and dashboards have wrestled with various deficiencies and obstacles for the wide-scale deployment as meaningful and trustworthy privacy indicators. This paper seeks to identify and explain these deficiencies and obstacles that have hampered past and current attempts. With these lessons, the article then offers criteria that will need to be established in law and policy for trustworthy indicators to be successfully deployed and adopted through technological tools. The lack of standardization prevents user-recognizability and dependability in the online marketplace, diminishes the ability to create automated tools for privacy, and reduces incentives for consumers and industry to invest in a privacy indicators. Flawed methods in selection and weighting of privacy evaluation criteria and issues interpreting language that is often ambiguous and vague jeopardize success and reliability when baked into an indicator of privacy protectiveness or invasiveness. Likewise, indicators fall short when those organizations rating or certifying the privacy practices are not objective, trustworthy, and sustainable.

Nonetheless, trustworthy privacy rating systems that are meaningful, accurate, and adoptable can be developed to assure effective and enduring empowerment of consumers. This paper proposes a framework using examples from prior and current attempts to create privacy indicator systems in order to provide a valuable resource for present-day, real world policymaking.

First, privacy rating systems need an objective and quantifiable basis that is fair and accountable to the public. Unlike previous efforts through industry self-regulation, if lawmakers and regulators establish standardized evaluation criteria for privacy practices and provide standards for how these criteria should be weighted in scoring techniques, the rating system will have public accountability with an objective, quantifiable basis. If automated rating mechanisms convey to users accepted descriptions of data practices or generate scores from privacy statements based on recognized criteria and weightings rather than from deductive conclusions, then this reduces interpretive issues with any privacy technology tool. Second, rating indicators should align with legal principles of contract interpretation and the existing legal defaults for the interpretation of silence in privacy policy language. Third, a standardized system of icons, along with guidelines as to where these should be located, will reduce the education and learning curve now necessary to understand and benefit from many different, inconsistent privacy indicator labeling systems. And lastly, privacy rating evaluators must be impartial, honest, autonomous, and financially and operationally durable in order to be successful.