Consumer Law & Policy Blog

Study finds a disclosure that helps: text alerts

by Jeff Sovern

Regular readers of the blog know that we often write about the ineffectiveness of disclosures, and plenty of others have the same complaint.  But here's a bit of good news: a study by Michael Grubb, Paul Adams, Andrea Caflisch, Darragh Kelly, and Jeroen Nieboer, and Matthew Osborne, discussed at a recent FDIC Consumer Research Symposium, found that when consumers are told about an impending overdraft in an account (it was the British equivalent of a checking account), many take action.  The slides from the talk are here  and the audio is here.  Of course, texts warning of a problem are different from a sheaf of disclosures at the outset of a transaction, but it's nice to know that notice sometimes helps. A question raised in the Q&A does raise a concern, however: will consumers overlook the texts if they become too common?

Ann Burkhart Article: How to Fix Foreclosure

Ann M. Burkhart of Minnesota has written Fixing Foreclosure, 36 Yale Law & Policy Review (2018). Here is the abstract:

Since the American Revolution, mortgage foreclosures have consisted of a public auction of the mortgaged property. Judges and state legislators at the time believed that an auction was the best way to obtain a fair price for the land. Though that belief soon proved to be mistaken, the sale method remains unchanged.

Before the real estate and mortgage markets crashed in 2007, only two significant empirical studies of foreclosure sales existed, and they involved small numbers of foreclosures. Because the crash resulted in millions of home foreclosures, it has provided a rich data source. As a result, economists, social scientists, and others have produced a wealth of empirical studies on foreclosure sales and their effects both before and after the crash. Three lines of research now clearly establish that foreclosure by public auction is seriously flawed. These studies first prove that, in this country, even a voluntary real estate auction normally produces a lower sale price than a private sale. A second line of studies shows that foreclosure usually is harmful not just for the land owner, but also for the lender, neighboring property owners, and the community. The third line of studies proves that property sells for more when, rather than foreclosing after default, a lender allows a private sale of the property. These studies make a very powerful case for foreclosure reform.

Fortunately, an established and effective method for selling foreclosed land already exists — listing it for sale with a real estate agent. Currently, the lender conducts a foreclosure, frequently purchases at the sale, and then lists the property for sale with a real estate agent. This process is time consuming, expensive, and harmful. Initially listing the property for sale with a real estate agent, rather than first auctioning it, eliminates these problems, and the success of the process has been proven. England, Ireland, Wales, and some Canadian provinces use this method very effectively, and it could readily be implemented in the United States.

Watson Paper on History of and Problems with Federal Student Loans

Camilla E. Watson of Georgia has written Federal Financing of Higher Education at a Crossroads: The Evolution of the Student Loan Debt Crisis and the Reauthorization of the Higher Education Act of 1965. Here is the abstract:

Currently, there are 44.2 million Americans holding student loan debt collectively totaling $1.5 trillion. This massive debt has a profound effect, not only on the lives of the debtors, but also on the national economy because it prevents the debtors from buying homes and cars and creating new businesses. This debt is also speculated to be a likely trigger for the next housing bubble because student loans, like the subprime mortgage loans underlying the 2008 financial crisis, are securitized and sold to investors. But many of those with student loans struggle to find jobs that will enable them to pay off their debt. In some cases, they leave school before graduating because they perceive their debt as too overwhelming. When that happens, their lack of a degree exacerbates their struggle to find decent jobs. Moreover, fear of undertaking substantial debt leads some individuals to forego higher education altogether, thereby often condemning them to a lifetime of low-paying jobs. This article traces the development of federal student loans and examines the numerous problems comprising the student loan debt crisis, among them the high cost of postsecondary education, the crisis-level amount of debt undertaken by students, the difficulties of repayment, and the fraud and abuse perpetrated by proprietary institutions and predatory lenders. It attributes these problems to Congress, which it argues has both acted, and failed to act, due to misjudgments, as well as, at least sometimes an indifference, sometimes bordering on an animus, to students in need. This article also critiques proposed legislation to reform federal funding of higher education and questions whether the mistakes of the past will soon be repeated in the pending reauthorization of the Higher Education Act of 1965.

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.

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. 

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.

Issacharoff & Marotta-Wurgler Paper on Trends Leading to Less State Court Caselaw on Electronic and Shrinkwrap Contracts

Samuel Issacharoff and Florencia Marotta-Wurgler, both of NYU, have written The Hollowed Out Common Law. Here's the abstract:

The electronic marketplace poses novel issues for contract law. Contracts created through browsewrap, clickwrap, and shrinkwrap (contracts whose embedded terms are only available after purchase) poorly fit doctrines that emerged from face-to-face offer and acceptance, the mutual execution of a common set of documents, or the rituals of mass market transactions involving physical fine print. Not surprisingly, these contracts of the new electronic marketplace require doctrinal elaboration.

Our Article asks not about the specific resolution of new doctrinal challenges, but about how the common law of contracts will be elaborated. Specifically, the Article begins with empirical observations about the domain of all electronic and shrinkwrap contract cases and makes four critical findings.

First, we document two shifts: One arises from a steady decline in the number of cases adjudicated in state court relative to federal courts, which by 2015 adjudicate the vast majority of cases. The other stems from a rise in class actions, which is intimately tied to the migration of cases to federal court. The result is that today the vast majority of cases are class actions brought in federal court. The increase in class actions is not surprising given the relatively small stakes of most transactions and the little incentive that creates for individual consumer litigation. The increased dominance of the federal forum is in part likely a reflection of the federalization of class action law under the Class Action Fairness Act (CAFA).

Second, the consequence of the dominance of the federal forum is that the common law is being elaborated in federal court in suits arising under diversity jurisdiction. In turn, those federal courts are largely bereft of any state law moorings as they develop the common law of the electronic marketplace. Erie Railroad v. Tompkins notwithstanding, the common law is driven by federal court decisions, building incrementally on each other rather than state law.

Third, the development of common law in federal court means that there is no apex court that can define conclusively the law of any jurisdiction. Diversity jurisdiction allows federal courts to predict how they believe state common law would develop, but binds no state courts in the affected jurisdiction, and does not even bind federal courts in the same Circuit putatively applying the law of another state. Rather than the law resolving hierarchically, we identify a “tournament effect” in which the law settles on one or a few influential decisions, regardless of the state law that the case may have arisen under. Finally, we conjecture that the use of contractual clauses compelling arbitration and forbidding claim aggregation may have affected the number of cases being adjudicated in court and, consequently, depressed the development of publicly-available law in this area.

Todd Zywicki article attacks Behavioral Law & Economics as applied to consumer finance

Todd J. Zywicki of George Mason has written The Behavioral Economics of Behavioral Law & Economics, Journal of Behavioral Economics (2019, Forthcoming). Here is the abstract:

Behavioral Law & Economics (BLE) has loudly proclaimed its victory over traditional law & economics methodologies. Nowhere has this proclamation been so loud or self-certain as with respect to claims about consumer financial decision-making. Drawing on a set of casual observations styled as empirical proof, BLE scholars have called for a variety of regulatory interventions that are claimed to be necessary to protect consumers. But examining two detailed case studies here, one involving credit card usage by consumers and the other involving claims about consumer behavior in response to cash discounts and credit card surcharges, it is shown that these claims are simply incredible, in the sense that it is literally difficult to believe that unbiased scholars would find those studies to be even slightly persuasive. Possible explanations for this disconnect between the weakness of the underlying science and the widespread social acceptance of the theories by BLE scholars are discussed.

Dee Pridgen Seeks Co-Author for Consumer Law Treatises

Dee Pridgen is seeking a coauthor/collaborator for her two treatises published by Thomson Reuters, Consumer Protection and the Law and Consumer Credit and the Law.  These books have been updated yearly for 30 years and are available both in print and on Westlaw.  Her current coauthor, Richard Alderman, Professor Emeritus of the University of Houston Law Center, will no longer be available after the current update.  Note that these treatises are updated yearly, with a due date typically in early August.  Compensation would be through shared royalties or as agreed.  

She would prefer someone who is currently a law school academic professor with a good publication record, preferably in consumer law or related subjects.   However, she would consider anyone with excellent research and writing skills, relevant legal/academic experience, and a willingness to consider a long term commitment to this project.  

Please contact her at pridgen@uwyo.edu if you are interested in being considered.

Chandrasekher & Horton Article Proposes Solution to Arbitration Problem: Arbitration Multiplier

Andrea Chandrasekher and David Horton, both of California, Davis, have written Arbitration Nation: Data from Four Providers, 109 California Law Review. Here's the abstract:

Forced arbitration has long been controversial. In the 1980s, the Supreme Court expanded the Federal Arbitration Act (FAA), sparking debate about whether private dispute resolution is an elegant alternative to litigation or a rigged system that favors repeat-playing corporations. Recently, these issues have resurfaced, as the Court has decided a rash of cases mandating that lower courts enforce class arbitration waivers in almost all circumstances. Critics argue that abolishing the class action insulates companies from wrongdoing, but businesses have predicted that pro se plaintiffs will flood the arbitral forum with their own low-value claims. The Obama administration responded to the Court’s FAA jurisprudence by regulating arbitration clauses in the employment, financial services, and healthcare fields. However, after the balance of power shifted in 2017, Republicans have repealed many of these rules. 

Despite this policymaking frenzy, we know little about what happens inside the confidential world of arbitration. This Article sharpens our understanding of this pervasive and polarizing institution by reporting the results of an empirical study of 40,775 cases filed in four major arbitration providers between 2010 and 2016. It highlights three main points. First, a wave of reforms has made arbitration surprisingly affordable for consumers, employees, and medical patients. Indeed, in leading arbitration providers such as the American Arbitration Association, JAMS, and the Kaiser Office of the Independent Administrator, a majority of plaintiffs pay no arbitration fees. Second, enterprising plaintiffs’ lawyers — not pro se litigants — have taken advantage of arbitration’s open doors. In fact, some attorneys have filed class action-style cases, bringing dozens or even hundreds of related arbitrations against the same company. Third, although arbitration does indeed favor repeat playing businesses, that is just half of the repeat player story. Repeat playing plaintiff’s law firms also fare well. In fact, in a variety of settings, no variable affects win rates as dramatically as whether a plaintiff hires attorneys with arbitration experience. 

The Article then uses these findings to propose reform. For decades, state lawmakers have tried to protect substantive rights by exempting claims from arbitration. Yet because the FAA prohibits state law from discriminating against arbitration, these efforts have failed. Accordingly, this Article urges policymakers to reverse course and create incentives for plaintiffs’ lawyers to arbitrate. Specifically, jurisdictions should create an “arbitration multiplier”: a bounty for winning a case in arbitration. By encouraging skilled plaintiffs’ lawyers to capitalize on arbitration’s accessibility, this approach would counteract the corporate repeat player advantage. In addition, because the multiplier actually encourages arbitration, it would not be preempted.