Consumer Law & Policy Blog

Kathleen Engel Article: Local Governments and Risky Home Loans

Just in time for the Supreme Court's oral argument on Tuesday in Wells Fargo v. Miami, Suffolk's Kathleen Engel, an important thinker on consumer law, has written Local Governments and Risky Home Loans, 69 Southern Methodist University Law Review 609.  Here is the abstract:

Municipalities from the Central Valley in California to Upstate New York bear the legacy of reckless mortgage lending. Foreclosed homes and toxic titles have caused blight and cost communities billions of dollars. Many cities tried to halt the risky loans by calling on state and federal legislators and regulators to intervene. Some even passed ordinances aimed at curtailing the high-cost loans that were destroying their neighborhoods. Their pleas were dismissed and their ordinances overturned. Ultimately, the subprime crisis played a central role in the great financial crisis when millions of people lost their jobs and, as a consequence, lost their homes too. As a result, municipalities have born the burden of empty, dilapidated homes that pepper once vibrant neighborhoods. A handful of cities have sued financial institutions, attempting to recover their losses. The lawsuits have been complex and expensive, and limits on municipal standing have dramatically restricted the relief cities can recover.

At the same time that cities were trying to stop abusive loans, most states and the federal government did nothing to curtail the making of unaffordable loans or the growing number of foreclosures. In the worst cases, governmental entities took steps that fueled risky lending. Later, when the subprime crisis morphed into the foreclosure crisis, state and federal governments failed to adequately assist municipalities.

I analyze the legal and regulatory problems municipalities encountered when they attempted to restrict high-risk mortgage loans and when they sought to recover for foreclosure blight. I argue that these problems are the result of a broader, more systemic issue: municipalities are severely limited in their ability to act against commercial interests that cause harm to their communities. In the case of risky mortgage lending, I contend that the sensible policy is to expand localities’ power to protect against actions by financial institutions that threaten or impose costs on communities and I introduce models for local regulation of home mortgage lending.

Sebok Article: The Unwritten Federal Arbitration Act

Anthony J. Sebok of Cardozo has written The Unwritten Federal Arbitration Act, 65 DePaul Law Review (2016).  Here's the abstract:

Justice Scalia’s opinion in AT&T Mobility LLC v. Concepcion presented a new challenge to lawyers and scholars concerned with the unbridled growth of mandatory consumer arbitration. Not only did the decision continue to expand the scope of the Federal Arbitration Act’s preemption of state contract law, Scalia added insult to injury by arguing that by rendering the California contract doctrine in question void, the Court the court was promoting arbitration’s core mission of making it easier for Californians to resolve their disputes.

Unlike other articles that challenge the current Supreme Court’s understanding of the original intent of the FAA, or which challenge the validity of the preemption arguments as they relate to the degree of autonomy state contact law ought to have in the fact of arguments for FAA preemption, this article challenges the idea of preemption that Justice Scalia implicitly attributes to the FAA.

This article argues, first, that the concept of arbitration implicitly adopted by Justice Scalia is too thin to be attractive (or even coherent). That is, despite lip-service to the “core values of arbitration”, Scalia’s conception, essentially elevates the power to design an arbitral procedure over the goals of arbitration. Second, the article argues that, given that there is substantive content to arbitral procedures that cannot be waived by the parties, there is no reason why the states should not be allowed to experiment with various mechanisms designed to promote the core values of arbitration.

The article concludes by suggesting that the FAA cannot be read to preempt state law that is deigned to promote the core values of arbitration by prohibiting (for example) waivers of the right to representation, the right to have representation paid for by a collateral source, the right to assign a claim to a third party, and the right to have claims consolidated. 

Odinet & White Paper on the CFPB's Proposed Debt Collection Rules

Christopher K. Odinet and Roederick C. White Sr., both of the Southern University Law Center, have written Regulating Debt Collection, Review of Banking and Financial Law, 2017 (Forthcoming).  Here is the abstract:

Debt collection. It often starts as a late night call carrying threats of being thrown in prison, ruin at the workplace, and trouble for the family unless you pay up. While the law actually prohibits some of these tactics, most consumers do not know their legal rights, which leave much to be desired, or fail to exercise them when faced with the harassing practices of some debt collectors. Moreover, the debt collection industry as a whole — both massive and sophisticated — lacks the incentives to self-police or internally punish bad actors. In July 2016 the Consumer Financial Protection Bureau released a proposal aimed at overhauling the entire debt collection industry — both as to how collectors interact with consumers and how debts are bought and sold. Consumer protection groups have lauded the new rules as a win for average Americans, while consumer credit firms caution that some of the provisions go too far and risk crippling the collection industry, which would have an adverse effect on the ability of people to obtain the type of everyday credit that makes the wheels of the economy turn. This Article explores the proposed rules and critiques the places where they fall short or go too far, as well as considers future developments and issues that will arise from their enactment. 

Richard Marcus Article: Optimism about Class Actions in the 21st Century

Richard Marcus of Hastings has written Bending in the Breeze: American Class Actions in the Twenty-First Century, 65 DePaul Law Review (2016). Here's the abstract::

It is always better to have the breeze at your back, but that surely has not recently been the case for class action proponents. At the risk of overstating, there is a certain fin de siecle flavor to current procedural discussions, at least among academics; it seems that several foundational principles of late twentieth century procedural ordering have come under attack in the twenty-first century. Although not alone among those principles, class actions have a prominent role. Dean Robert Klonoff has recently written of "The Decline of Class Actions," and Professor Linda Mullenix has written of "Ending Class Actions as We Know Them." Professor Arthur Miller-who was present at the creation of the modern class action-has suggested that we face "the death of aggregate litigation by a thousand paper cuts." But he, at least, sees some "rays of light that indicate it will survive." It is likely an overstatement to claim that any of these prominent academics foresees the imminent demise of American class actions. But as we shall see, lawyers sometimes view things in more apocalyptic terms. At the same time, most or all would probably agree with Judge Boyle about the increasing headwinds that plaintiffs face.

Without questioning in the least the idea that proponents of the class action have suffered some reverses recently, I intend to argue that Professor Miller's optimism about American aggregate litigation is justified. Like Confucius' green reed, the class action is likely to bend in the breeze and survive the current, cold climate. In significant part, this attitude stems from an appreciation of the exceptional character of American class actions in particular and the American bench and bar in general. As Professor Christopher Hodges of Oxford began his study of European techniques for affording relief in court to groups, lawmakers in Europe sought to avoid "a US-style court-based mechanism." And Canadian Professor Janet Walker introduced an international panel on group litigation in Moscow by noting that "everyone, at least outside the United States, seems also to agree that they do not want to adopt U.S.-style class actions in their legal systems."

Against this background, it does not seem that American aggregate litigation in general, and class actions in particular, are in danger of extinction. Indeed, one book published in 2014 on European group litigation worries in its title whether they-compared to American aggregate litigation-are "squeaking mice," and Dean Klonoff has recently explained why most nations do not have U.S.-style class actions."

Jim Hawkins Article: Exploiting Advertising

Jim Hawkins of Houston has written Exploiting Advertising, Law and Contemporary Problems, Forthcoming.  Here's the abstract:

Advertising’s goal, we all know, is to cause people to spend more money. Often, it exploits bad decision-making to accomplish it. This Article hopes to turn the tables and offer a way for policymakers to exploit the information presented in advertisements to produce better regulations.

It makes the novel suggestion that legal researchers and policymakers should use advertising to diagnose behavioral market failures. I argue that advertisements reflect companies’ beliefs about how consumers make purchasing decisions. If advertising supplies information that a rational actor would value, then there is good evidence that the market is not experiencing a behavioral market failure. If, on the other hand, advertising only serves to exploit the systematic mistakes that consumers make persists in the market, then it is likely that the market is not functioning efficiently.

I use the reverse mortgage market as a case study to apply my approach. Drawing on recent empirical studies of reverse mortgage advertising, I show how rational choice theory cannot explain some features of the advertising. By exploiting the advertisements for reverse mortgages, policymakers can detect places reverse mortgage customers are likely making systematically poor decisions

Study Explores Consumer Confusion About Native Advertising

David A. Hyman of Illinois, David J. Franklyn of San Francisco, Calla E. Yee, and Mohammad Hossein Rahmati of Sharif University of Technology have written Going Native: Can Consumers Recognize Native Advertising? Does it Matter?  Here's the abstract:

Native advertising, which matches the look and feel of unpaid news and editorials, has exploded online. The Federal Trade Commission has long required advertising to be clearly and conspicuously labeled, and it recently reiterated that these requirements apply to native advertising. We explore whether respondents can distinguish native advertising and “regular” ads from unpaid content, using 16 native ads, 5 “regular” ads, and 8 examples of news/editorial content, drawn from multiple sources and platforms. Overall, only 37% of respondents thought that the tested examples of native advertising were paid content, compared to 81% for “regular” advertising, with substantial variation by platform, advertiser, and labeling. Modest labeling changes materially increased the number of respondents that correctly recognized that native ads are paid content – but even these improved results fell well short of those for “regular” advertising. We also explored labeling preferences and self-reported concern about native advertising. Our findings indicate that native advertising involves a significant risk of deception which self-regulation has not addressed.

Newman Paper: Free Things Aren't

John M. Newman of Memphis has written The Myth of Free.  Here's the abstract:

Myths matter. This Article is the first to squarely confront a powerful myth that pervades modern economic, technological, and legal discourse: the Myth of Free. The prevailing view is that consumers capture massive welfare surplus from an ever-rising flood of innovative new products that are offered free of charge. This windfall was made possible, we are told, by the convergence of digitization and networking, which eliminated the marginal costs of such products. Free was born, heralding the end of scarcity and an age of abundance.

But that orthodox origin story is fatally flawed. This Article first formalizes, then critiques, the Myth of Free. It addresses four questions raised by the Myth’s premises: (1) have the marginal costs of digital goods fallen to zero? (2) if not, is “close to zero” close enough for firms to round down the difference? (3) do suppliers of Free products employ marginalist pricing strategies? (4) are Free markets perfectly competitive?

Unsurprisingly, given its faulty premises, the Myth’s conclusion is incorrect: there is still “no such thing as a free lunch.” Free signals neither the end of capitalism nor the demise of standard economic theory. In place of the Myth, this Article provides a revisionist history of Free, explaining its origins and forecasting its future.

Moreover, the Myth of Free is not benign. It has led to an undeserved protected status for certain suppliers, who receive immunity or favorable treatment in close cases involving contract, antitrust, privacy, and consumer-protection laws. It has motivated policy proposals that would eliminate market interventions or (paradoxically) competitive markets themselves, without adequate justification in either case. Worse yet, policies designed for a post-scarcity world necessarily overlook the persistent problems attendant to scarcity. This Article seeks to dispel the Myth of Free before it can wreak further harm.

Adam Levitin Paper: Digital Wallets and Honor All Wallets Rules

Adam J. Levitin of Georgetown has written Pandora's Digital Box: Digital Wallets and the Honor All Wallets Rules.  Here's the abstract:

Digital wallets are poised to transform the world of retailing. These digital wallets, such as ApplePay and Android Pay, are “smart” payment devices that can integrate payments with two-way, real-time communications of any type of data. Integration of payments with real-time communications holds out tremendous promise for retailers: the combination in a single platform of search, advertising, payment, shipping, customer service, and loyalty programs. Such an integrated retail platform offers brick-and-mortar retailers a potentially superior ability to identify, attract, and retain customers, bringing eCommerce-type platforms into the brick-and-mortar environment.

At the same time, however, digital wallets present materially different risks for merchants than traditional plastic card payments precisely because of their “smart” nature. Digital wallets can reallocate flows of consumer data from merchants to financial institutions, depriving merchants of valuable customer information used for anti-fraud, advertising, loyalty, and customer service purposes. Digital wallets can also facilitate poaching of customers by competitors, impair merchants’ customer relationship management, deprive merchants of influence over tender choice and payment routing, increase fraud risk, subject merchants to patent infringement liability, and ultimately increase the costs of accepting payments.

Noll Article on Regulating Arbitration, including the CFPB's Proposed Regulation

David L. Noll of Rutgers has written Regulating Arbitration,  California Law Review, Forthcoming.  Here's the abstract: 

Arbitration is everywhere, as are calls to regulate its use in consumer and employment contracts. But when should Congress and federal administrative agencies do so? That is, what is the policy rationale for regulating arbitration through federal legislation and agency action? This Article reveals an overlooked set of consequences caused by the growing use of arbitration -- its impact on the implementation of federal statutory policy -- and argues that these effects should be a focus of policymakers' efforts to regulate arbitration through legislation and agency action. In hundreds of statutes, Congress has created financial incentives for private litigants to enforce the law through civil litigation. The enactment of such incentives allows litigants to assert claims that would be too expensive to prosecute under ordinary procedural rules, and, more importantly, allows Congress to calibrate enforcement of federal law. By mandating specific forms of dispute resolution procedure, arbitration can dramatically alter the returns from enforcement of statutes with incentives for private, civil litigation, and, in so doing, subvert or completely undermine congressional efforts to mobilize and calibrate private statutory enforcement. These "enforcement effects" threaten Congress's ability to accomplish substantive regulatory objectives through private, civil litigation but have received little attention. To illustrate how greater attention to them would affect efforts to regulate arbitration, the Article analyzes the Consumer Financial Protection Bureau’s proposed arbitration regulation under section 1028 of the Dodd-Frank Act and explains how it falls short of ensuring that consumer financial protection laws are enforced in the manner contemplated by Congress.

Fed's Call for Papers: Financial Innovation: Online Lending to Households and Small Businesses

We received the following call for papers:

The Board of Governors of the Federal Reserve System is hosting a research and policy conference on Financial Innovation: Online Lending to Households and Small Businesses, to be held in Washington, DC on December 2, 2016.

The purpose of the conference is to bring together academics, industry participants, and policymakers to discuss current academic research related to innovations in online lending and its implications for borrowers, traditional lenders, the macroeconomy, financial stability, and regulatory policy.

PAPER SUBMISSION TOPICS: We invite the submission of high quality research papers in all areas related to online lending. Topics of particular interest include, but are not limited to:

- The characteristics of online borrowers and lenders

- The effects of online lending on the availability of credit to households and small businesses

- Similarities and differences between online lenders and traditional lenders in areas such as underwriting and risk standards, production processes, technology, cost structure, and profitability

- Competition and cooperation between online lenders and traditional lenders

- The substitutability/complementarity of online lending and traditional lending

- The implications of online lending for financial stability

- New regulatory challenges posed by the emergence of online lending

- Consumer protection and online lending

PAPER SUBMISSIONS AND CONFERENCE INVITATIONS: We welcome the submission of theoretical, empirical, and policy-oriented papers.  Authors should email completed papers to: <mailto:RS-OnlineLending-Conference@frb.gov>

RS-OnlineLending-Conference@frb.gov by September 16, 2016.

Papers will be reviewed and selected for presentation by the organizing committee. Authors whose papers have been accepted to the conference will be notified by October 14, 2016.

Please note that attendance at the conference is by invitation only, and capacity is limited.

Please direct all questions and correspondence, including paper submissions, to: <mailto:RS-OnlineLending-Conference@frb.gov>

RS-OnlineLending-Conference@frb.gov

ORGANIZING COMMITTEE:

Tim Dore, Board of Governors of the Federal Reserve System Geng Li, Board of Governors of the Federal Reserve System Traci Mach, Board of Governors of the Federal Reserve System Adair Morse, Haas School of Business, University of California Berkeley Robin Prager, Board of Governors of the Federal Reserve System Stephen Zeldes, Graduate School of Business, Columbia University