Consumer Law & Policy Blog

NCLC Report: Misaligned Incentives: Why High-Rate Installment Lenders Want Borrowerrs Who Will Default

Here.  Here's the beginning of the Executive Summary:

Lenders normally want borrowers who will pay back their loans in full. This seems obvious—otherwise, won’t the lender lose money?

Yet in the high-rate installment loan market, the normal incentive to make affordable loans does not work. When loans have high interest rates, lenders may seek out and can profit from borrowers who will default in significant numbers. The gap between lender and borrower success can encourage business models that harm numerous consumers.

This report analyzes the inherently dysfunctional and harmful dynamics of high-rate installment loans. In a responsible loan market, the lenders’ profits are closely aligned to the successful repayment of the credit. Borrowers and lenders have parallel incentives and share the same goals of successful repayment. But high-rate lending can lead to asymmetrical incentives:

As long as the borrower pays long enough before defaulting, a high-rate installment loan will be profitable. If the borrower makes even half the payments on a longer-term highrate installment loan, the lender may receive sufficient cash flow to recover the amount loaned and another 50% or more, likely more than enough to turn a profit.

* * *

While the lender may have a successful experience, default causes a cascade of devastating consequences that are likely to plague the consumer for a lifetime.

 

 

 

Can Mathematical Modeling Help Create Payday Lending Regulations?

Daria Roithmayr of USC, Justin Chin, a USC law student, and Bruce Levin, an Emory biology professor, have written Cat and Mouse: A Dynamic Analysis of Predatory Payday Lending.  Here's the abstract:

Legal actors and the regulators who pursue them often engage in a co-evolutionary game of cat and mouse, as each innovates to out-compete the other. Predatory payday lenders are a prime example of this co-evolutionary arms race. Lenders have discovered increasingly creative ways to escape state regulation, like partnering with Indian tribes to claim immunity from state jurisdiction. In turn, regulators continually adapt their regulation to retarget the latest innovation. A regulator trying to keep pace with legal actors faces a tradeoff: adapting more frequently reduces the prohibited behavior, but increases wasteful innovation for both regulator and lenders, as each innovates in response to the other. In this paper, we draw from dynamic mathematical models of drug resistance to map this process and to advise regulators on how to optimize their regulatory approach. We construct a simple mathematical model using coupled differential equations to describe the arms race of innovation between regulatory strategy and the strategy of the regulated, in the context of payday lending. We conduct numerical approximations, to analyze the evolutionary pathways of regulator and lender strategy over time, and to map the tradeoff between the benefit from reducing predatory lending and the harm from having to return again and again to the drawing board to generate new regulation. We show that, contrary to intuition, a regulator should delay responding to an innovative payday lender strategy: we calculate an optimal response time that balances the need to respond slowly in order to minimize triggering repeated innovation, and the need to respond quickly to minimize the number of predatory payday lenders. We also show that a regulator that is unable to adapt quickly should weaken the strength of its innovation, in order to minimize further innovation by predatory lenders.

Spector & Baddour Study of Texas Debt Collection

Mary Spector of SMU and Ann Baddour of Texas Appleseed, Fair Financial Services Project, have written Collection Texas-Style: An Analysis of Consumer Collection Practices in and Out of the Courts, 67 Hastings Law Journal (2016).  Here's the abstract:

As many as forty-four percent of Texans with credit files have non-mortgage debt in collection; this is more than ten percent above the national average. The Authors provide a snapshot of collection practices employed in Texas over a two-year period following the enactment of new court rules governing the litigation of most collection cases. Using a combination of quantitative and qualitative methods, they consider data in three general categories:

(1) consumer complaints to the state and federal agencies;

(2) court outcomes over a two-year period along with related demographic data; and

(3) court observations conducted in five counties with a review of the websites for each of the courts within those counties.

The Authors find that for many Texans, consumer debt collection means threats and intimidation that disrupt their family and work lives. While they also found that the default judgment rate in consumer collection cases was slightly lower than reported in a previous study, they found that it appears to be growing, signaling that more work remains to be done. The Authors recommend a number of reform efforts that include steps to increase the quantity and quality of information provided to consumers at all stages of the collection process and to increase enforcement of existing protections. To the extent that court proceedings remain an integral part of that process, the Authors also recommend further standardization of court procedures to ensure only valid claims are raised. They also encourage courts to actively participate in efforts to ensure that the protection of consumer rights does not stop at the courthouse door.
 

When Is a Threat to Litigate Not a Threat to Litigate? Sometimes in a Debt Collection Letter

by Jeff Sovern

Last week, I posted the abstract for our article, Are Validation Notices Valid? An Empirical Evaluation of Consumer Understanding of Debt Collection Validation Notices. In this post, I wanted to write about something that didn’t appear in the abstract: the extent to which respondents thought a collection letter said the collector would sue when the letter actually said the company had not yet decided whether to sue.

Collectors may not want to threaten litigation for fear of violating 15 U.S.C. § 1692e(5), which prohibits collectors from threatening to “take any action that cannot legally be taken or that is not intended to be taken.” On the other hand, collectors may want consumers to think that a failure to pay will result in litigation, because if consumers believe that, consumers may be quicker to pay the debt in question. In other words, collectors who don’t want to sue or can’t sue may want the benefits of threatening litigation without incurring the legal penalties for doing so. Would the letter that we tested, which the Seventh Circuit found did not violate the FDCPA in Zemeckis v. Global Credit & Collection Corp., 679 F.3d 632 (7th Cir.), cert. denied, 133 S.Ct. 584 (2012), enable collectors to have their cake and eat it too? The Zemeckis letter made three references of one sort or another to litigation. Thus, the collector alluded to a lawsuit (“XYZ Credit Card Company has not yet made a decision to file a lawsuit”) legal action (“If we cannot get this matter resolved soon and your account charges off, XYZ Credit Card Company may be forced to take legal action.”), and their outcome, a judgment (“This could result in a judgment against you”).

We asked our respondents this question:

What, if anything, did the letter say about XYZ’s intention to sue if you don’t pay the debt?       (If you wish to see the letter again, please click here for the first page and here for the second. If the letter is too small for comfortable reading, please use your browser control to zoom in. You also have the option of hitting the back button to review the earlier presentation of the letter.)     

The letter did not say anything about either XYZ suing. [Unfortunately, the word “either” was left over from an earlier version of the question and should have been omitted]

The letter said XYZ would sue if I don’t pay the debt.

The letter said XYZ has not yet made a decision to sue.

The letter said XYZ would not sue.

I don’t know.

Nearly a third of the respondents who saw the letter the Seventh Circuit approved (we called that Condition A) thought the letter said the company would sue. That seems like a lot of people who might feel pressure that Congress didn’t want them to feel, especially for a statute that courts, depending on the circuit, interpret as intended to protect the least sophisticated or unsophisticated consumer. When we showed the letter without the validation notice to another group of consumers (that was Condition C), half of them thought the letter said the company would sue. When we showed a third group of consumers a version of the letter with the validation notice but without the sentences about litigation quoted above (Condition D), only 11% of the respondents thought that the letter said the company would sue. The differences between A and D were not large enough to be statistically significant at the .05 level, but the differences between C and D were. Put another way, we can’t be certain that the references to litigation made a difference in a letter which included a validation notice, but we can be certain they did as to a letter that didn’t have a validation notice. Perhaps the key takeaway is that many respondents thought the letter said the company would sue even when it said the company hadn’t made a decision. Collectors who want to have the benefits of consumers thinking they will get sued if they don’t pay, but who don’t want to be liable under the FDCPA, will probably call that a victory.

 

Hnylka Article on Rule 68 and Mooting Class Actions

Joseph M Hnylka of Nova Southeastern has written Continuing to Litigate after You Have Won: Courts Defy Article III to Avoid Mooting TCPA Class Actions, Despite Defendants’ Rule 68 Offers of Complete Relief, 64 Drake Law Review (2016).  Here's the abstract:

Every day, thousands of ordinary Americans receive unwelcome faxes, text messages, and prerecorded telephone calls (frequently referred to as “robocalls”). The proliferation of these unwelcome messages has increased at an astronomical rate. In 2015, the Federal Trade Commission (FTC) reported that it received approximately 150,000 complaints each month. This dramatic increase occurred despite Congress’s enactment of the Telephone Consumer Protection Act (TCPA) in 1991, which was meant to restrict dramatically such unwelcome calls, texts, and faxes, and to protect the privacy interests of consumers. Because the recovery under the TCPA is limited to $500 per violation, many consumer suits under the TCPA are filed as class actions under Federal Rule of Civil Procedure 23. The Rule 23 class action mechanism appears to be tailored to such small regulatory actions. However, defense counsel, confronted by the increasing number of class actions filed against their clients, searched for an effective response to fend off these class actions aggressively and advocate for their clients. Defense counsels’ “weapon of choice” appears to be Federal Rule of Civil Procedure 68. Rule 68 permits defense counsel to serve an offer of judgment on the opposing party. The rule is a procedural one, intended to encourage settlement and avoid litigation. The rule achieves these goals by shifting costs: “If the judgment that the offeree finally obtains is not more favorable than the unaccepted offer, the offeree must pay costs incurred after the offer was made.” One thing not addressed by the language of Rule 68 is the effect, if any, of an unaccepted offer on the justiciability of the plaintiff’s claim under the Constitution’s Case or Controversy Clause. In TCPA class actions, one strategy used by defense counsel to fend off suits has been to make a Rule 68 offer of judgment to the named class representative for the statutory maximum that a plaintiff could recover on his individual claim, prior to plaintiff’s filing of a motion for class certification, in order to moot the named representative’s individual claim and the entire class action. In other words, defense counsels’ position is that when the named plaintiff is offered all that he could possibly receive from suit and has not yet moved to certify a class, there is no longer a case or controversy under Article III, and the case is moot. In Gomez v. Campbell-Ewald Co., the Supreme Court attempted to resolve a Circuit Court split as to whether a Rule 68 offer of judgment, made before a plaintiff moves to certify the class, moots the named plaintiff’s claim and the entire class action. However, rather than resolving the split, the Court’s opinion only provided a temporary solution, and the Court postponed a definitive resolution of the matter for another day. The Gomez majority noted: “[w]e need not, and do not, now decide whether the result would be different if a defendant deposits the full amount of the plaintiff’s individual claim in an account payable to the plaintiff, and the court then enters judgment for the plaintiff in that amount.” This Article takes the position that both Article III and the Supreme Court’s precedent compel the conclusion that a defendant’s Rule 68 offer of complete relief, when made before the plaintiff moves for class certification, moots not only the plaintiff’s individual claim, but also the entire action. The article maintains a contrary conclusion would run afoul of Article III and undermine the “personal stake” requirement set forth in the Supreme Court’s Article III jurisprudence. Because this Article was in final production at the time the Supreme Court issued its recent decision in Gomez, the Court’s decision is addressed in the Author’s Addendum, provided at the end of the Article. 

Are Validation Notices Valid? An Empirical Evaluation of Consumer Understanding of Debt Collection Validation Notices

by Jeff Sovern

My co-author, Kate Walton, and I have posted a draft of our new article, Are Validation Notices Valid? An Empirical Evaluation of Consumer Understanding of Debt Collection Validation Notices to SSRN.  We would love comments on this version.  Here's the abstract:

A principal protection against the collection of consumer debts that are not actually owed is the Fair Debt Collection Practices Act’s validation notice, which obliges debt collectors demanding payment to notify consumers of their rights to dispute debts and request verification, among other things. No one has ever studied whether consumers understand the notices or what they take away from them. Consequently, for nearly four decades, courts have decided whether validation notices satisfied the FDCPA without ever knowing when or if consumers understand the notices. This Article reports on the first study of that question.

Collectors who prefer that consumers focus on the request for payment rather than a statement of consumer rights will find our results heartening. When we surveyed consumers by showing them a collection letter the Seventh Circuit had upheld against challenge, on most questions respondents did not show significantly better understanding of the validation notice in that letter than on an otherwise identical letter without any validation notice at all. Nearly half the respondents who saw the court-approved letter did not realize it said they could dispute the debt. More than half the court-approved letter respondents seemed confused by the notice’s phrasing about when the collector would assume the debt to be valid. About a quarter did not realize they could request verification of the debt, and nearly all who realized they could seek verification also thought that an oral request was sufficient even though both the statute and notice specify that a writing is required. More than a fifth of respondents thought that if they did not meet the thirty-day deadline specified in the validation notice for disputing the debt, they would have to pay the debt or could not defend against a suit to collect it even if they did not owe the debt. Under the standard the FTC uses for determining deception in surveys, the notice would be found deceptive.

Our results raise troubling questions about the effectiveness of current forms of validation notices, and therefore whether consumers being pursued by collectors for debts they do not owe are appropriately protected. The willingness of courts to approve validation notices that do not serve Congress’s goals creates the illusion of consumer protection without the reality.

Students Agree to Give Up First Born Child to Join Social Network

by Jeff Sovern

If I had known about this study a few days ago, I would have added it to my list for John Oliver. The study is Jonathan A. Obar & Anne Oeldorf-Hirsch, The Biggest Lie on the Internet: Ignoring the Privacy Policies and Terms of Service Policies of Social Networking Services (2016). The authors administered an experiment to 543 undergrads in a communications class.  The students were offered a chance to sign up for a new social network and were given the opportunity to read the Terms of Service and privacy policy. The following appeared in the TOS:

[A]ll users of this site agree to immediately assign their first-born child to [the social network].  If the user does not yet have children, this agreement will be enforceable until the year 2050.  All individuals assigned to [the social network] automatically become the property of [the social network].  No exceptions.

Judging by the statistics reported in the article, it appears likely that few of the students read the clause.  But some clearly did, because nine students (1.7%) expressed concerns about the clause. Nevertheless, every single one of the students signed up, including the nine who had reservations about the term. Evidently college students really like their social networks.

Here's the authors' abstract:

This paper addresses ‘the biggest lie on the internet’ with an empirical investigation of privacy policy (PP) and terms of service (TOS) policy reading behavior. An experimental survey (N=543) assessed the extent to which individuals ignore PP and TOS when joining a fictitious social networking site, NameDrop. Results reveal 74% skipped PP, selecting ‘quick join.’ For readers, average PP reading time was 73 seconds, and average TOS reading time was 51 seconds. Based on average adult reading speed (250-280 words per minute), PP should have taken 30 minutes to read, TOS 16 minutes. A regression analysis revealed information overload as a significant negative predictor of reading TOS upon signup, when TOS changes, and when PP changes. Qualitative findings further suggest that participants view policies as nuisance, ignoring them to pursue the ends of digital production, without being inhibited by the means. Implications were revealed as 98% missed NameDrop TOS ‘gotcha clauses’ about data sharing with the NSA and employers, and about providing a first-born child as payment for SNS access.

Schwartz Article on Scalia's Jiggery-Pokery in Arbitration

David S. Schwartz of Wisconsin has written Justice Scalia's Jiggery-Pokery in Federal Arbitration Law, Minnesota Law Review, Vol. 101, Headnotes 75 (2016). Here's the abstract:

"Jiggery-pokery," a phrase introduced into the U.S. Reports by the late Justice Scalia, is emblematic of Justice Scalia's style -- both his lively writing style and his penchant for criticizing his colleagues for judicial practices in which he frequently indulged himself. Though less well-known than his opinions in constitutional or administrative law, Justice Scalia's contribution to federal arbitration law is a prime example of his own jiggery-pokery in statutory interpretation. Federal arbitration law comprises the largely judge-made doctrine under the aegis of interpreting and applying the 1925 Federal Arbitration Act ("FAA"). Justice Scalia's impact in this area boils down to three recent and significant 5"4 majority opinions issued between 2010 and 2013. The purpose and effect of these decisions has been to winkle unconscionability doctrine out of the law of arbitration contracts, and to establish, at least for now, a legal regime in which arbitration clauses can be used by corporate defendants to immunize themselves from class actions. These decisions display reasoning that casts aside both doctrinal fidelity and logic to reach a desired result.

Paper on the Use of Unenforceable Terms in Consumer Contracts

Harvard Law S.J.D. candidate and John M. Olin Fellow Meirav Furth-Matzkin has written On the Surprising Use of Unenforceable Contract Terms: Evidence from the Residential Rental Market.  Here is the abstract:

This paper explores the prevalence of unenforceable terms in consumer contracts. Taking the residential rental market in the Greater Boston Area as a test case, the study analyzes a sample of 70 leases in terms of Massachusetts Landlord and Tenant Law. The paper’s findings reveal that landlords frequently use legally dubious — as well as clearly invalid — provisions in their contracts. Building on psychological insights and on a survey-based study of 279 tenants, the paper suggests that such clauses may significantly affect tenants’ decisions and behavior. In particular, when a problem or a dispute with the landlord arises, tenants are likely to perceive the terms in the lease contract as enforceable and forgo valid legal rights and claims. In light of this evidence, the paper discusses preliminary policy prescriptions.

My recollection, which may not be accurate, is that ethical issues can arise if a lawyer knowingly advises a client to insert an unenforceable provision in a contract.

Waldman Article: Manipulating Trust on Facebook

Ari Ezra Waldman of New York Law has written Manipulating Trust on Facebook, 29 Loyola Consumer Law Review.  Here is the abstract:

Facebook is built on gathering massive amounts of information from its users. To maximize the data it collects, Facebook relies on the trust we have in our friends to encourage us to share even more, and it designs its platform to reflect and leverage trust. But this strategy also manipulate us into sharing personal information with websites, advertisers, and third party partners we’ve never met or heard of. When it does this, Facebook crosses a line from social space to manipulative force.