Consumer Law & Policy Blog

Silber & Stites Paper on Merchant Authorized Consumer Cash Subsitutes

Norman I. Silber of Hofstra and Steven Stites of Stites & Harbison PLLC have written Merchant Authorized Consumer Cash Substitutes. Here is the abstract:

Merchant Authorized Consumer Cash Substitutes (MACCS) have existed in one form or another for hundreds of years although without a generic name. At nineteenth century American railroad construction sites far from established towns, companies paid employees with “scrip.” Coca Cola, beginning in 1887 issued “coupons” which entitled bearers to a glass of soda. About the same time the Standard Oil Company — a customer — demanded “rebates” from railroads who shipped its oil. Descendants of these merchant-created substitutes are the MACCS of today-- phenomena including today’s “Penny-Saver Coupons,” “Groupons,” “Gift Cards,” “Disney Dollars,” “E-bates,” “Air Miles,” “Rewards Points,” and “cash-back offers.” There are countless tangible and virtual MACCS. The authors offer a functional definition in this initial approach to the subject. They explore the desirability for consumers and merchants of a unified and comprehensive treatment of this subject and recommend a new federal statute, or an Article of the Uniform Commercial Code which would address such matters as warranties, insolvency risks, deceptive and misleading practices, fungibility, frozen value, essential disclosures and privacy protection.

Study Finds Widespread Sexual Orientation and Intersectionality Discrimination in Mortgage Lending

Shahar Dillbary of Alabama and Griffin Sims Edwards of the University of Alabama at Birmingham - Department of Marketing, Industrial Distribution & Economics have written An Empirical Analysis of Sexual Orientation Discrimination, University of Chicago Law Review, 2018 Forthcoming. Here's the abstract:

This study is the first to empirically demonstrate widespread discrimination across the United States based on perceived sexual orientation, sex and race in the mortgage lending process. Our analysis of over five million mortgage applications reveals that any FHA loan application filed by same-sex male co-applicants is significantly less likely to be approved compared to the white heterosexual baseline (holding lending risk constant). The most likely explanation for this pattern is sexual orientation based discrimination — despite the fact that FHA loans are the only type of loan in which discrimination on the basis of sexual orientation is prohibited. 

Moreover, we find compelling evidence to support the intersectionality theory. According to this theory when sex and race unite, a new form of discrimination emerges that cannot be explained by sexism and racism alone. The data unequivocally indicates that the race and sex of same-sex applicants play a role and result in a unique and previously unobserved pattern. This discriminatory pattern plagues every region in the U.S., and it transcends party lines (i.e., it is present in red, blue and swing states). Furthermore, upending conventional wisdom, the data reveals that big banks discriminate at the same rate as small banks, and lenders in urban environments are as discriminatory as rural lenders. Prior studies failed to reveal this phenomenon due to data constraints and design flaws. These studies relied on testers posing as applicants, and none could investigate how intersectionality influences lending practices. 

Despite the grim results, a silver lining exists. We find that the pattern of discrimination diminishes or disappears in states and localities that pass anti-sexual orientation discrimination laws. These findings have important and timely implications. In 2017 a new bill offering nationwide protection from sexual orientation credit discrimination was introduced. The same year has experienced tectonic changes in Title VII jurisprudence. Our study can reinvigorate the debate and help policy makers tailor remedies that would correct the discriminatory pattern this study unravels.

Article on When Consumers Trust and Seek Advice from Sellers

Justin Sevier and Kelli Alces Williams, both of Florida State, have written Consumers, Seller-Advisors, and the Psychology of Trust, Boston College Law Review, Forthcoming.  Here is the abstract:

Every day, consumers ask sellers for advice. Because they do not or cannot know better, consumers rely on that advice in making financial decisions of varying significance. Sellers, motivated by strong and often conflicting self-interests, are well-positioned to lead consumers to make decisions that are profitable for sellers and may be harmful to the consumers themselves. Short of imposing fraud liability in extreme situations, the law neither protects the trust consumers place in “seller-advisors,” nor alerts them to the incentives motivating the advice that sellers give. 

This Article makes several contributions to the literature. First, it identifies and defines the seller-advisor. Sellers and advisors are usually regarded separately by the law; therefore, consumers interacting with them are protected by different rules. As a result, a false dichotomy has arisen between (1) a doctrine of caveat emptor, subject to liability for fraud and applying to consumers interacting with sellers, and (2) fiduciary duties protecting consumers interacting with advisors. This Article is the first attempt to study consumer trust in the many common transactions that fall somewhere in the space between. Second, in reporting the results of an original psychology experiment, this Article offers empirical evidence of how consumers’ decision making is influenced by the trust they place in seller-advisors. Finally, it explores how consumer trust in seller-advisors arises and how it can be manipulated in an effort to understand how legal policy should respond to both the ubiquity of seller-advisors and the consequences of consumer reliance on, and vulnerability to, their advice.

Colin Marks Paper: Online Terms as In Terrorem Devices

Colin P. Marks of St. Mary's has written Online Terms as In Terrorem Devices.  Here's the abstract:

Online shopping has quickly replaced the brick-and-mortar experience for a large portion of the consuming public. The online transaction itself is rote: browse items, add them to your cart, and checkout. Somewhere along the way, the consumer is likely made aware of (or at least exposed to) the merchant’s terms and conditions, via either a link or a pop-up box. Such terms and conditions have become so ubiquitous that most consumers would be hard-pressed to find a merchant that doesn’t try to impose them somewhere on their website. Though such terms and conditions are pervasive, most consumers do not bother to read them before checking-out. Consumers might be surprised at what they would find if they did read the terms and conditions as many retailers include clauses limiting liability, disclaiming warranties as well as choice of law, forum selection, arbitration, jury waiver, and class action waiver clauses. Many of these clauses are grounded in a practical concern over limiting liability and lowering transaction costs. However, the fact that retailers do not include such clauses as part of their in-store transactions raises the question of whether the retailers are actually concerned with binding consumers to such terms. The apparent lack of importance of these terms is further highlighted by the fact that most retailers use “browsewrap” terms and conditions to bind their customers, despite browsewrap being one of the least effective methods of making consumers aware of the terms. While these terms and conditions may provide some utility to the companies attempting to impose them, the main benefit may in fact be their in terrorem effect. This is especially true in instances where companies have failed to adequately notify their consumers about the terms’ existence. This article examines the various methods that are used in online contracting to bind consumers, as well as the enforceability of the most common terms. The article concludes that the primary incentive sellers have to include such terms on their websites is their in terrorem effect. Though the use of online terms and conditions as in terrorem devices may be appealing economically, the use of browsewrap as the primary notification device ex ante presents moral and ethical issues.

Matt Bruckner Article on FinTech and Big Data

Matthew A. Bruckner of Howard has written The Promise and Perils of Algorithmic Lenders' Use of Big Data, 93 Chicago-Kent Law Review (2018). Here's the abstract:

Like many new technologies, algorithmic lenders’ use of Big Data holds great promise but may also be perilous. At the most basic level, Big Data is simply a toolkit for “creating, refining, and scaling financial solutions for consumers.” A company’s decision to use Big Data is “neither inherently good nor bad.” Instead — as with any other tool — it can be used to help or to harm consumers. The Janus-faced nature of emerging financial technology (“fintech”) firms is particularly noteworthy, and lies at the heart of this Article.

Appropriate regulation will likely be key to delivering on Big Data’s promises in the financial services sector. All financial services companies are potentially subject to a significant amount of regulation. But while regulators have paid attention to fintech’s development, regulations “have not kept pace with modern Big Data capabilities.” This presents challenges both for regulators and “for companies looking for firm legal guidelines as they build” their companies. Indeed, the Consumer Financial Protection Bureau (CFPB) noted in a recent Request for Information that it needs to better understand these technologies to “encourage their responsible use and lower unnecessary barriers, including any unnecessary regulatory burden or uncertainty that impedes such use.” Impliedly, it will also seek to prevent fintech’s irresponsible use.

This Article proceeds as follows. Part I provides a (very brief) overview of Big Data, machine learning/predicative analytics, and their use in making credit determinations. Part II discusses the promising and perilous nature of “algorithmic lending 2.0.” Its major promise is to bring the so-called “credit invisibles” into the credit markets by using non-traditional credit measures. Its primary threat is the possibility that it will exacerbate financial services discrimination. Part III discusses several major pieces of the current regulatory regime, where it fails to adequately address the worst threats, and how we might improve oversight of algorithmic lenders.

Empirical Study of Third Party Consumer Litigation Funding

Ronen Avraham of Tel Aviv University - Tel Aviv University, Buchmann Faculty of Law and Texas and Anthony J. Sebok of Cardozo have written An Empirical Investigation of Third Party Consumer Litigation Funding, 104 Cornell Law Review __ (2018).  Here is the abstract:

This is the first large-scale empirical study of consumer third-party litigation funding in the United States. Despite being part of the American legal system for more than two decades there has not been a single real data-driven empirical study to date. We analyzed funding requests from American consumers in over 100,000 cases over a twelve year period. This proprietary data set was provided to us by one of the largest consumer litigation funder in the United States. 

Our results are striking and important. We find that the funder plays an important role in the American legal system by screening cases. Our funder rejected about half the applications, as well as was cautious about investing too much in a single case, thus preserving the incentives of the client and her lawyer to exert optimal effort. We find that the funder suffered losses in 12% of the cases primarily because of complete defaults. Even in the cases the funder made profit we find a surprising gap between the markup that the funder was supposed to receive from consumers based on the contract between them and the markup the funder actually received. This gap stems both from clients’ defaults as well as from haircuts that the funder gave to the clients. 

On the troubling side we find that the funder used controversial techniques to calculate the amount due from the clients. Specifically, the funder used various types of interest compounding, minimum interest periods, interest buckets and fees to add costs to the contract. Accounting for defaults, haircuts, fees, etc., we find that the funder makes about 44% a year on each case. We are also the first to shed light on the role lawyers play in this industry. We find that some law firms are better than others in getting better treatment of their clients both before and after they received funding. 

This study provides important concrete and specific data to policymakers and legal scholars interested in litigation finance. While we cannot assess whether the overall welfare effects from funding is positive or negative, we suggest that consumers should be better protected by reducing the opacity and complexity of the funding contracts as well as by requiring lawyers to do more to protect their clients who seek third party funding.

Dari-Mattiacci & Marotta-Wurgler Paper on How Authors of Standard Form Contracts Learn and Revise Contracts

Giuseppe Dari‐Mattiacci of Amsterdam Law School; Amsterdam Business School; and the Tinbergen Institute and Florencia Marotta-Wurgler of NYU have written Learning in Standard Form Contracts: Theory and Evidence.  Here is the abstract:

We explore learning and change in standard form contracts. We hypothesize that drafters (sellers) are more likely to revise the terms they offer when they have an opportunity to learn about their value. These opportunities arise only for those types of terms that allow drafters to experience the relative costs and benefits of offering them. Consider a warranty. Sellers offering a warranty in an initial period will be exposed to claims about malfunction by purchasers and will learn whether it is desirable to offer it going forward. When drafters are unable to learn, either because they fail to offer such learning-enabling terms initially, or because the term in question is one where there is no increased opportunity to learn, we expect that such terms will be revised less frequently. Indeed, a reduced opportunity to learn might create contractual “black holes,” where terms that are less likely to be revised might lose their meaning over time or appear less related to the rest of the contract. Our results support this hypothesis. Using a large sample of changes in consumer standard form contracts over a period of seven years, we find that sellers are more likely to revise terms that offer an opportunity to learn than those that do not. The results suggest that standard form contract terms evolve over time as sellers learn about their benefits, costs, and risks. Our results have normative implications for the design of default rules.

Study: Color and Credit: Race, Regulation, and the Quality of Financial Services

Taylor A. Begley of Olin Business School, Washington University in St. Louis and Amiyatosh Purnanandam of Ross School of Business, University of Michigan have written Color and Credit: Race, Regulation, and the Quality of Financial Services. Here is the abstract:

The incidence of mis-selling, fraud, and poor customer service by retail banks is significantly higher in markets with lower income and educational attainment. Further, areas with a higher share of minority population experience significantly worse outcomes even after controlling for factors such as income, education, and house price changes. Regulations aimed at improving access to credit to such areas are partly responsible for these findings. Specifically, low-to-moderate-income (LMI) areas targeted by the Community Reinvestment Act have significantly worse outcomes, and this effect is larger for LMI areas with a high-minority population share. The results highlight an unintended adverse consequence of such quantity-focused regulations on the quality of credit to poor and minority customers.

Horton Empirical Study of How Arbitrators and Judges Decide Differently on Whether to Allow Class Actions

David Horton of California, Davis has written Clause Construction: A Glimpse into Judicial and Arbitral Decision-Making, Duke Law Journal, Vol. 68, Forthcoming. Here is the abstract:

For decades, the U.S. Supreme Court has insisted that forcing a plaintiff to arbitrate — rather than allowing her to litigate — does not affect the outcome of a dispute. Recently, the Court has invoked this “parity principle” to expand arbitral jurisdiction. Reasoning that it does not matter whether an arbitrator or a judge resolves a particular issue, the Justices have allowed arbitrators to decide important questions about the arbitral proceeding itself.

The parity principle has proven impossible to test. First, cases that are arbitrated differ from those that end up in the judicial system, complicating efforts to compare outcomes from each sphere. Second, arbitral awards are rarely published, and thus remain shrouded in mystery.

However, one important topic defies these limitations. Jurisdictions are divided over whether courts or arbitrators should perform a task known as “clause construction”: determining whether an arbitration clause that does not mention class actions permits such procedures. As a result, both judges and arbitrators have been weighing in on the same question. Moreover, because class members are entitled to notice of rulings that impact their rights, the American Arbitration Association requires arbitral clause construction awards to be available to the public. For once, then, it is possible to assess how the two decision-makers resolve the identical issue.

The Article capitalizes on this opportunity by analyzing a dataset of 134 recent judicial and arbitral clause construction decisions. Its logit regression analysis concludes that the odds of class actions being allowed increase nearly 27 times when an arbitrator, rather than a judge, resolves the issue. The Article then uses its findings to propose a solution to the circuit split over clause construction and inform the broader debate over the boundaries between judicial and arbitral power.

Hyman & Kovacic Article on Who Should Do What on Privacy

David A. Hyman of Georgetown and William E. Kovacic of GW and , King's College London – The Dickson Poon School of Law have written Implementing Privacy Policy: Who Should Do What?. Here's the abstract:

Academic scholarship on privacy has focused on the substantive rules and policies governing the protection of personal data. An extensive literature has debated alternative approaches for defining how private and public institutions can collect and use information about individuals. But, the attention given to the what of U.S. privacy regulation has overshadowed consideration of how and by whom privacy policy should be formulated and implemented. 

U.S. privacy policy is an amalgam of activity by a myriad of federal, state, and local government agencies. But, the quality of substantive privacy law depends greatly on which agency or agencies are running the show. Unfortunately, such implementation-related matters have been discounted or ignored -- with the clear implication that they only need to be addressed after the "real" work of developing substantive privacy rules is completed.

As things stand, the development and implementation of U.S. privacy policy is compromised by the murky allocation of responsibilities and authority among federal, state, and local governmental entities -- compounded by the inevitable tensions associated with the large number of entities that are active in this regulatory space. These deficiencies have had major adverse consequences, both domestically and internationally. Without substantial upgrades of institutions and infrastructure, privacy law and policy will continue to fall short of what it could (and should) achieve.