Consumer Law & Policy Blog

Study Examines Impact of Usury Limits on Auto Financing

Brian Melzer of Northwestern's Kellogg School of Management and Aaron Schroeder of the CFPB have written Loan Contracting in the Presence of Usury Limits: Evidence from Automobile Lending.  Here is the abstract:

We study the effects of interest rate ceilings on the market for automobile loans. We find that loan contracting and the organization of the loan market adjust to facilitate loans to risky borrowers. When usury restrictions bind, automobile dealers finance a greater share of their customers' purchases, which allows them to price credit risk through the mark-up on the product sale rather than the loan interest rate. Despite having little effect on who receives credit, usury limits therefore have a substantial effect on who provides credit and on the terms of credit granted. Usury limits may harm defaulting borrowers, who face greater liabilities in default than they would if loan contracts were unconstrained.

Gibson Article on Boilerplate-Free Transactions

James Gibson of Richmond has written Boilerplate's False Dichotomy, Georgetown Law Journal, Forthcoming.  Here is the abstract:

The argument against enforcing boilerplate contracts (i.e., contracts that no one reads) seems clear. Indeed, if this were a court case, we would say that the jury is in; the evidence against boilerplate is overwhelming. Yet the judge has yet to render judgment. Courts continue to enforce boilerplate terms, and even those scholars who have exposed boilerplate as an emperor with no clothes are reluctant to gaze upon its nakedness and condemn its use.

This reluctance originates in an assumption that pervades the boilerplate debate. Courts and commentators alike view boilerplate as necessary to the modern transaction. When asked to set it aside, then, they confront a dichotomy: either enforce boilerplate terms or wreak havoc on the consumer economy. When the choice is so presented, it is no choice at all. Living with boilerplate is better than living without mass-market commerce. We would rather be naked than dead.

This article shows that the dichotomy is false. First, it establishes that it is possible doctrinally to sever boilerplate from other terms of the consumer transaction, such that the transaction can proceed. Second, it demonstrates that the resulting transaction is theoretically feasible. When default rules take boilerplate’s place, the result is either no economic disruption at all, or economic disruption that shakes things up in a positive way. Finally, it shows that this approach is empirically viable; I use a case study of boilerplate contracts from a real-world consumer purchase to prove that there is a realistic third option — the boilerplate-free transaction.

Article on Agencies Seeking Admissions of Guilt in Settlements

Verity Winship and Jennifer K. Robbennolt of Illinois have written Admissions of Guilt in Civil Enforcement, Minnesota Law Review, Vol. 101 (Forthcoming). Here is the abstract:

Should agencies require admissions of guilt from the targets of civil enforcement? Administrative agencies rely heavily on settlement as a key enforcement tool. Admissions of guilt - or, more commonly, declarations that nothing is admitted - form part of these settlement agreements and the underlying negotiations. The Securities and Exchange Commission (SEC) has come under particular fire for allowing enforcement targets to settle while neither admitting nor denying allegations, and we use its policy changes as a case study. But our observations are aimed more broadly at civil enforcement across agencies and our examples come from a wide range of administrative agencies. We use the explicit debate over the SEC’s practices to draw attention to the high (and mostly unexamined) stakes of admissions for enforcement throughout the administrative system.

The article identifies possible enforcement models and provides a nuanced account of what it means to make and require admissions. Although the policy choice is often portrayed as binary - either an agency requires admissions or it does not - the reality is more varied. We break down the options, addressing how admissions of guilt interact with denials and identifying more precisely what may be admitted (facts? legal violation? intent?). Taking our lead from judges, regulators and commentators who have described agencies’ approaches to admissions with words like “truth,” “guilt,” “confession,” and “apology,” we link this discussion to empirical studies of the psychology of blame and responsibility-taking, acknowledgement, and apologies. We use these studies to shed light on the function and value of admissions and the implications for agency settlement negotiations.

Stephen Ware Article Takes On Current (Conservative) Arbitration Law

Stephen J. Ware of Kansas has written The Centrist Case Against Current (Conservative) Arbitration Law, 68 Florida Law Review  (2016). Here is the abstract:

In The Politics of Arbitration Law and Centrist Proposals for Reform, I explained how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines (progressives vs. conservatives) and proposed an intermediate (or centrist) position to resolve those issues. However, The Politics of Arbitration Law did not argue the case for my proposals. It left those arguments for this Article, which makes the case against current (conservative) arbitration law, and a third article, which will make the case against progressive proposals to reform arbitration law. In other words, this Article stands out from the many other articles critiquing current arbitration law because this Article’s critique comes from a centrist, rather than progressive, perspective. For that reason, this Article’s critique may be more likely than progressive critiques to gain traction with lawmakers.

Article Examines How Government Agencies Enforce UDAP Laws

Prentiss Cox of Minnesota, Amy Widman of Northern Illinois, and Mark Totten of Michigan State have written Strategies of Public UDAP Enforcement, Harvard Journal on Legislation, Forthcoming.  Here's the abstract:

Laws protecting consumers from unfair and deceptive acts and practices – commonly called “UDAP” laws – have played a stunning role in recent years. As one example, state and federal enforcers plied these laws more than any other to hold individuals and companies accountable for the Great Recession, while chalking-up record payouts. And with the shift in national power, the spotlight shows no signs of dimming.

Given the outsized role these statutes play, critics have directed their sights on both the laws and the enforcers who wield them. Missing from this debate, however, is an account of the actual conduct of UDAP enforcement in America. How do public UDAP enforcers exercise their considerable discretion? This article examines every UDAP matter resolved by state and federal enforcers in 2014 and presents the initial results of the first comprehensive empirical study of public UDAP enforcement.

Across a range of attributes, public UDAP enforcement varies while also revealing clear patterns. We organize the data to show how enforcers employ distinct strategies. The two main federal enforcers adopt sharply different approaches, especially regarding targets and relief. The state enforcers divide into seven distinct strategies, distinguished not only by case variables, but also by case quantity and leadership in multi-enforcer actions. The picture that emerges should shape the policy and scholarly debate on public UDAP enforcement and help optimize the work of public enforcers.

Horton Article: Arbitration About Arbitration

David Horton of California, Davis has written Arbitration About Arbitration Stanford Law Review, Vol. 70, (2017 Forthcoming).  Here is the abstract:

Recently, the U.S. Supreme Court’s interpretation of the Federal Arbitration Act (“FAA”) has nearly eliminated consumer and employment class actions, sparking vigorous debate. Yet another important development in federal arbitration law has received less attention. Traditionally, judges granted motions to compel arbitration only after confirming that the parties formed a valid agreement to arbitrate that applies to the underlying lawsuit. But now, through the use of “delegation clauses,” businesses are giving arbitrators the exclusive power to decide these matters. Increasingly, critical questions about the arbitration—including whether the process is fair—are being resolved in arbitration.

This Article demonstrates that judges are struggling with every major issue related to arbitration about arbitration. Indeed, they have splintered over how to determine whether a contract contains a delegation clause, how to gauge the validity of these provisions, and whether arbitrators can decide whether the FAA even applies to a lawsuit. The Article then contends that this doctrinal chaos stems from a single faulty premise.

The Court has opined that delegation provisions are their own freestanding miniature arbitration clauses:

(1) agreements to arbitrate disputes,

(2) over the broader agreement to arbitrate the underlying complaint.

Seen this way, delegation clauses are entitled to the same extraordinary deference enjoyed by conventional arbitration clauses. However, drawing on the FAA’s text, legislative record, and forgotten strands of federal common law, the Article contends that arbitration about arbitration is manifestly different from arbitration about the merits of a case. Finally, the Article explains how acknowledging the ways in which delegation clauses are unique can resolve the many of the questions that are currently dividing courts.

 

 

Book Published on the CFPB From Birth to 2015

The book is Meltdown: The Financial Crisis, Consumer Protection, and the Road Forward (Praeger 2017), by research economist Larry Kirsch and sociologist Greg Squires (George Washington University Sociology Department). Here's an abstract:

Meltdown is the first book length account of the CFPB from its inception through 2015. With a foreword based on an interview with Elizabeth Warren and an afterword contributed by Michael Barr, Meltdown could hardly be a more timely read for all the doers and viewers immersed in the current political/legal threats to the Bureau. The book is written for both subject matter specialists (academics and practitioners) and general public affairs readers; its brisk narrative style plus detailed endnotes make it accessible and very useful for scholarship.

Meltdown is based on extensive in-depth interviews with more than 50 current CFPB staffers (at various levels and places throughout the agency, including Director Cordray); Bureau alumni including some of the pioneers; and a host of key stakeholders from industry, the consumer and fair-lending advocacy communities, the press, academia, and the Hill.

Among its major contributions, Meltdown profiles some of the key early players inside and out of the Bureau (including Director Cordray, Raj Date, Michael Barr, and Mike Calhoun) and offers diverse perspectives relating to the origins and early days of the CFPB from the stand-up (2010) through 2015. It features detailed case studies of the CFPB’s auto lending and mortgage origination initiatives as vehicles for probing and making preliminary observations about some of the fundamental conflicts the Bureau was called on to balance and resolve. Among them were striking the right balance between consumer protection and the risk of reduced credit access, finding ways of adapting to changing market conditions, bringing about maximum voluntary compliance among regulated lenders without sacrificing the agency’s firm objectives, making subtle judgments about how hard to push while standing right on the nebulous border of regulatory overreach, and finding ways to get industry to invest in structural changes in their consumer lending practices (to promote safety and fairness) when the benefits—from the industry perspective—seem tenuous though the costs are in plain sight.

 

Nehf Article on Arbitration's Impact on the Common Law's Regulation of Standard Terms in Consumer Contracts

James P. Nehf of Indiana has written The Impact of Mandatory Arbitration on the Common Law Regulation of Standard Terms in Consumer Contracts, 85 Geo. Wash. Law Review (2017). Here is the abstract:

The focus of this paper is the regulation of standard terms in consumer contracts at common law, i.e., judges deciding cases in published opinions. In particular, I focus on the two most important common law doctrines in this area — unconscionability and good faith — and to a lesser extent on court decisions that interpret consumer statutes. They have all played a central role in regulating standard terms in consumer contracts over the years, yet their continuing role is being threatened by the proliferation of mandatory arbitration provisions in consumer contracts. If this trend continues, the ability of courts to further develop contract doctrine in consumer transactions may be severely limited. I begin with a discussion of the role that common law plays in regulating consumer transactions. I then discuss how the unconscionability and good faith doctrines have evolved as limitations on standard terms in consumer contracts. Next I discuss the increasing use of mandatory arbitration clauses in consumer contracts and the likely effects of this trend on consumer contract litigation. Toward the end of the paper, I explore what this might mean going forward if the common law of unconscionability and good faith in consumer contracts are essentially frozen in time, and if mandatory arbitration results in fewer published decisions interpreting and applying consumer statutes.

Eric Goldman Article on the Consumer Review Fairness Act

Eric Goldman of Santa Clara has written Understanding the Consumer Review Fairness Act of 2016, Michigan Telecommunications and Technology Law Review, Forthcoming. Here's the abstract

Consumer reviews are vitally important to our modern economy. Markets become stronger and more efficient when consumers share their marketplace experiences and guide other consumers toward the best vendors and away from poor ones.

Businesses recognize the importance of consumer reviews, and many businesses take numerous steps to manage how consumer reviews affect their public image. Unfortunately, in a misguided effort to control consumer reviews, some businesses have deployed contract provisions that ban or inhibit their consumers from reviewing them. I call those provisions “anti-review clauses.”

Anti-review clauses distort the marketplace benefits society gets from consumer reviews by suppressing peer feedback from prospective consumers, which in turn helps poor vendors stay in business and diminishes the returns that good vendors get from investments in quality (thus degrading their willingness to make those investments).

Recognizing the threats posed by anti-review clauses, Congress banned them in the Consumer Review Fairness Act of 2016 (the CRFA). As the House Report explains, the law seeks “to preserve the credibility and value of online consumer reviews by prohibiting non-disparagement clauses restricting negative, yet truthful, reviews of products and services by consumers.” By doing so, the CRFA helps advance the effective functioning of marketplaces.

This essay helps readers understand the CRFA. Part I provides some background about anti-review clauses. Part II describes the new law and how it relates to existing law. Part III considers if the law goes far enough to protect consumer reviews. The article then has a short conclusion.

Colin Marks Study of the Prevalence of Disclaimers in Online Sales

Colin P. Marks of St. Mary's has written Online and As Is.  Here is the abstract:

Online retail is a multi-billion-dollar industry in the United States. Consumers enjoy the ease with which they can browse, click, and order goods from the comfort of their own homes. Though it may come as no surprise to most lawyers, retailers are taking advantage of online transactions by attaching additional terms and conditions that one would not normally find in-store. Some of these conditions are logical limitations on the use of the retailers’ websites, but others go much further, limiting consumers’ rights in a way that would surprise many shoppers. In particular, many online retailers are using these terms to limit implied warranties, selling the goods “as is,” and limiting remedies, as well as adding a host of other limitations. This article does not discuss the effects of online terms and conditions, but rather starts with exploring a very basic question: How prevalent are certain terms and conditions? While these terms and conditions may seem to be ever-present in online transactions, there have been few attempts thus far to empirically record the frequency of their use in retail transactions involving goods. This article remedies the situation by exploring the mode by which consumers assent, the prevalence of warranty and liability limitation clauses, and the prevalence of other common clauses used by the largest retailers in the United States.