Consumer Law & Policy Blog

Paper on Improvident Student Lending

Joseph Sanders and Vijay Raghavan, both of the Office of the Illinois Attorney General have written Improvident Student Lending, Utah Law Review (2018). Here is the abstract:

The idea that lending without regard to ability to repay should be illegal is not particularly new, but it gained purchase in recent years with the rapid growth of high-cost mortgage loans. In the late 1990s, law enforcement and private litigants began attacking predatory mortgage lenders on the grounds they were making loans that borrowers could not afford. Both before and after the financial crisis of 2008, state and federal legislators imposed reforms on the mortgage market that provided relief to borrowers whose lenders failed to determine whether they had sufficient income to afford their monthly mortgage payments.

This Article seeks to address two gaps in the literature on ability to repay. The first is the lack of research on the application of the ability-to-repay standard to nonmortgage credit products. Second, the Article identifies a trend toward an increased focus on ex post loan performance as opposed to ex ante risk assessments to determine whether a lender considered a borrower’s ability to repay. The example of litigation against for-profit colleges’ student loan activities illustrates these points.

Fleming on the History of Truth in Lending

Anne Fleming of Georgetown has written The Long History of 'Truth in Lending', 30 Journal of Policy History (2018).  Here's the abstract:

This article offers the first comprehensive history of the development of mandatory disclosure rules for the cost of consumer credit. In contrast to prior studies, which begin with the creation of federal disclosure rules in 1968, this story starts with state-level laws that were drafted before World War I. By looking back over a longer time period, it reveals the challenges involved in defining “truth” in lending, and how the perceived purpose of a regulatory technique like mandatory disclosure may change over time. Although the modern APR disclosure metric has come to seem natural and inevitable, history shows that lenders and policymakers once hotly debated the design of disclosure rules, with each faction claiming the mantle of “truth.” Moreover, policymakers did not always view disclosure as a means to increase price competition, obviating the need for direct price controls. Disclosure was once a complement to usury laws, rather than a substitute.

Unfortunately, the article is not available for a free download from SSRN.

Paper on Advertising's Short-Term Effects

Chen He of the Tilburg Law and Economics Center and Tobias J. Klein of the Tilburg University Department of Econometrics & Operations Research, Center for Economic Research, Law and Economics Center; IZA Institute of Labor Economics; and Netspar, have written Advertising as a Reminder: Evidence from the Dutch State Lottery. Here is the abstract:

We use high frequency data on TV and radio advertising together with data on online sales for lottery tickets to measure the short run effects of advertising. We find them to be strong and to last for up to about 4 hours. They are the bigger the less time there is until the draw. We develop the argument that this finding is consistent with the idea that advertisements remind consumers to buy a ticket and that consumers value this. Then, we point out that in terms of timing the interests of the firm and the consumers are aligned: consumers wish to be reminded in a way that makes them most likely to consider buying a lottery ticket. We present direct evidence that this does not only affect the timing of purchases, but leads to market expansion. Then, we develop a tractable dynamic structural model of consumer behavior, estimate the parameters of this model and simulate the effects of a number of counterfactual dynamic advertising strategies. We find that relative to the actual schedule it would be valued by the consumers and profitable for the firm to spread advertising less over time and move it to the last days before the draw.

Van Loo Article: Regulatory Police

Rory Van Loo of BU has written Regulatory Police, forthcoming in the Columbia Law Review.  Here is the abstract:

The front line for business regulation — Environmental Protection Agency (EPA) engineers, Consumer Financial Protection Bureau (CFPB) examiners, and Nuclear Regulatory Commission (NRC) inspectors, among others — guard against toxic air, financial ruin, and deadly explosions. Like police officers patrolling the streets for crime, this federal regulatory front line decides when and how to enforce the law. Yet whereas scholars devote considerable attention to the role of police officers in law enforcement, they have paid limited attention to regulatory police. This Article is the first to chronicle their statutory rise and to situate them empirically at the core of modern administrative power. Since the Civil War, in response to various crises the largest federal regulators have steadily accrued authority to collect documents and enter private space without any suspicion of wrongdoing. Those exercising this monitoring authority within agencies, regulatory police, administer the law at least as much as the groups that are the focus of legal scholarship: enforcement lawyers and rule writers. Regulatory police wield sanctions, influence rulemaking, and create quasi-common law. Yet unlike lawsuits and legal rules, monitoring-based decisions are less observable by the public, largely unreviewable by courts, and explicitly excluded by the Administrative Procedures Act (APA). The regulatory police function can thus be more easily ramped up or deconstructed by the President, interest groups, and other actors. A better understanding of regulatory police is vital to designing democratic accountability not only during times of political transition, but as long as they remain a central pillar of the administrative state.

Study Finds Judicial Foreclosure Reduces Subprime Lending

Brian Feinstein of Penn's Wharton School has written Judging Judicial Foreclosure, 15 Journal of Empirical Legal Studies, 406 (2018).  Here is the abstract:

For the third time in the last several decades, policymakers are contemplating an overhaul of mortgage‐finance regulations. Despite the considerable attention paid to how ex ante regulations affect the availability of credit and the appropriateness of the mortgage products that lenders offer, however, our understanding of how the legal framework governing foreclosures—a form of ex post borrower protection—affects mortgage lending is incomplete. Leveraging data on loan applicants that are geographically proximate and subject to the same federal mortgage‐finance regulations and nearly identical state foreclosure regimes—but for the presence or absence of a judicial foreclosure requirement—this analysis enables the identification of the independent effects of judicial‐foreclosure requirements on loan approval decisions and the share of approved applicants who are offered subprime loans. I find that lenders adopt a more conservative posture in evaluating loan applications in jurisdictions where they must haul delinquent borrowers into court. All else equal, loan applications are less likely to be approved and approved borrowers are less likely to be offered subprime loans in judicial‐foreclosure states. Further, some models indicate that these results may be amplified for borrowers with lower socioeconomic status, suggesting that judicial supervision of foreclosures may have tempered one of the more flagrant practices of the subprime era: providing high‐rate mortgages with a greater likelihood of default to lower‐income and minority borrowers. These results suggest that, in contemplating changes to the regulation of mortgage lenders, policymakers should consider state foreclosure law to be among the tools in their regulatory toolkit.

Noll Article: Public Litigation, Private Arbitration

David L. Noll of Rutgers has written Public Litigation, Private Arbitration? 18 Nev. L.J. 477 (2018).  Here is the abstract:

How should legal disputes be allocated between litigation and arbitration? Given strong incentives for many actors to arbitrate everything, the question turns fundamentally on the scope of arbitration under the applicable law. In "Re-Inventing Arbitration: How Expanding the Scope of Arbitration Is Re-Shaping Its Form and Blurring the Line Between Private and Public Adjudication," Professor Deborah Hensler and Damira Khatam posit that the "public" or "private" nature of a dispute provides the key to whether it belongs in arbitration. While arbitration of private disputes is ok, disputes with "public policy dimensions" belong in the courts. Hensler and Khatam therefore suggest that Congress override Supreme Court decisions mandating arbitration of employment and consumer disputes, which, they contend, would restore domestic arbitration to its proper sphere.

But can disputes really be divided into public and private categories that provide the key to whether they belong in arbitration? This Response suggests that on close examination it is exceedingly difficult to identify a reliable proxy for the public or private nature of a dispute. The absence of such a proxy suggests there is an inescapably political dimension to how disputes are allocated between litigation and arbitration. Whether a category of disputes should be heard in a public court because the disputes impact the public interest turns out to depend on contested judgments about where the public interest lies. This, in turn, suggests a more fundamental reason for Congress to revisit the scope of arbitration under the Federal Arbitration Act. If the allocation of disputes between litigation and arbitration is an inescapably political question, it should ideally be addressed by an institution accountable to democratic politics.

Pound Civil Justice Institute Announces $10,000 Award for Civil Justice Scholarship

We have received the following announcement:

The Pound Civil Justice Institute will make a Civil Justice Scholarship Award, bi-annually as possible, to recognize current scholarly legal research and writing focused on topics in civil justice, including access to justice and the benefits of the U.S. civil justice system, as well as the right to trial by jury in civil cases.  Nomination deadline is September 17, 2018. More information here.

Piché Paper on the Effectiveness of Class Action e-Notices

Catherine Piché of the University of Montreal has written The Coming Revolution in Class Action Notices: Reaching the Universe of Claimants Through Technologies. Here's the abstract:

This paper will address whether a correlation may be drawn between the types and modalities of notices sent to class action members and the rate of compensation of these members, based on data collected in 854 class action court files in Quebec superior court over a twenty year period (1997-2017). Notices are essential to fair procedure in all class action regimes, but it is difficult to know whether these notices have reached their intended addressee in such a way as to make them aware of the case and its potential distributions, and eventually allow for this distribution to be completed. If a collective approach to compensation is favored, class notices should aim to compensate at least 50% of the members. My hypothesis is that technologies will help doing just that. In this paper, I ask whether this hypothesis is supported by the data, and which forms of technological notices are actually most effective at reaching and compensating members. I argue that we have come to a revolution in class action noticing, a digital revolution. In traditional forms of notice, reduced cost has almost always meant reduced probability of achieving actual notice. By contrast, properly designed e-notices are potentially transformative because they serve to lower the cost of notice while increasing reach rates in time and space. With the support of empirical data, I demonstrate that cases making use of technological noticing serve to compensate members more efficaciously than those who rely upon traditional noticing (mail, newspaper notices), with a distribution (or take-up) rate of 69%.

Alexandrov & Jiménez Article Finds 2005 Bankruptcy Reforms "Failed Miserably" to Help Students

Alexei Alexandrov, formerly of the CFPB, and Dalié Jiménez of Irvine, Connecticut, and Harvard have written Lessons from Bankruptcy Reform in the Private Student Loan Market, 11 Harvard Law & Policy Review (2017).  Here's the abstract:

This article explores the effects of the 2005 bankruptcy amendments in the private student loan market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students. 

Using a novel loan-level administrative dataset from the Consumer Financial Protection Bureau (CFPB) and econometric techniques, we quantify the (a) effect of consumers receiving lower prices as a result of the law and (b) the demand-expansion effect of lower prices leading new consumers to enter the market. Overall, our findings suggest that bankruptcy reform failed miserably at helping students. 

First, we show that BAPCPA did not have a significant effect on the price of loans for the lowest credit score individuals relative to individuals with higher credit scores. In other words, students became effectively unable to discharge their loans in bankruptcy, but did not experience a compensating decrease in price. Second, we do see an increase in loan volumes, but since we do not observe a change in prices and we find that the price elasticity of demand for student loans is not significantly different from zero, we do not attribute this change in originations to a price effect. It is thus easy to argue that BAPCPA was not very helpful to students: they lost the ability to discharge their private student loans, but received no discount in return.

Given these findings, we offer some recommendations to reform how student loans are treated in bankruptcy and to regulate private student loans. First, we join with many others in calling for an amendment to the Bankruptcy Code to treat PSLs in the same way as credit cards or other types of unsecured debt are treated. That is: PSLs should be automatically dischargeable in bankruptcy unless the bankruptcy judge finds that the bankruptcy petition has been filed in bad faith. This is, we think, the simplest and best solution to the problems we identify.

Nonetheless, we recognize that rolling back the protection PSL lenders obtained in 2005 may be a hard sell politically. A number of bills have been proposed attempting to do just that and none have gained much traction. Consequently, we propose an alternative. Given students’ inelastic demand and the fact that PSL lenders are in a better position to know the true likelihood of loan repayment, the CFPB should implement an ability-to-repay rule similar to the one they have implemented in the mortgage markets. In other words, private student loan lenders would incur liability to borrowers if they originated loans without verifying a borrower’s ability to repay that loan. Because this verification is a complex endeavor, we outline some of the features of PSLs that could be packaged as a “qualified PSL,” a safe harbor to the ability-to-repay rule.

Dalié Jiménez Article Argues for "Automatic Bankruptcy" of Longstanding Consumer Debts

Dalié Jiménez of Irvine, Connecticut and Harvard has written Ending Perpetual Debts, 55 Houston Law Review (2018). Here is the abstract:

Consumer debts in the United States can effectively live (and grow) forever: most statutes of limitations do not extinguish them; they can morph into relatives’ obligations after the debtor’s death; and they sometimes rise from the grave even after they have been paid. All the while, interest and fees accrue. There is one sure way to extinguish most debts, however, and that is by filing bankruptcy. This Article explores the practical, philosophical, and economic effects of the current system. It proposes a form of “automatic bankruptcy” for consumer debts: a federal discharge that, by operation of law, would extinguish debts (roughly) seven years after a default, or seven years after a judgment. The Article explores additional features of this proposal including ones designed to ensure it is self-executing, and others that mirror features of the Fair Credit Reporting Act and the discharge provisions of the Bankruptcy Code.