Consumer Law & Policy Blog

Jeffrey Davis Paper Compares US and Australian Credit-Granting Law

Jeffrey Davis of Florida has written Regulating for the First Time the Decision to Grant Consumer Credit: A Look at the First Steps Taken by the United States and Australia.  Here is the abstract:

In this Article, I discuss the changes in three consumer-credit realms. First, I compare the Australian regime applicable to all forms of consumer credit granting, including mortgage lending, to the American regulation of the consumer mortgage-granting decision. Second, I compare the Australian and American approaches to the decision to authorize use of, or increase the credit limit on, individual credit cards. Third, I compare the two approaches to regulating small short-term loans, usually called payday loans. Finally, I compare the enforcement regimes of both countries — perhaps the key to it all.

And here is a paragraph from the Introduction describing some of the differences in the two countries' treatment of consumer credit:

The Australian approach to regulating the decision to grant consumer credit differs systematically from that in the United States. First, Australia requires responsible credit granting in all forms of consumer credit, whereas the United States thus far constrains the decision only in the narrow realms of home mortgage lending, credit cards, and military payday loans. Second, the American concept of responsible consumer lending requires only an assessment of the debtor’s ability to pay, whereas the Australian concept requires a determination of whether the credit is "suitable," requiring not only an assessment of the consumer’s likely ability to pay, but also an inquiry into the consumer’s requirements and objectives in borrowing. Third, Australia requires anyone engaging in consumer credit activity to obtain a credit license. While most American states require licenses to engage in certain types of consumer credit, such as becoming a mortgage broker, there is no such general requirement in any state, and the federal government makes no such requirement at all. Fourth, Australia alone provides a process that is unique in the world for External Dispute Resolution that is cost-free to the consumer.

 

Mark Budnitz on the History of the National Consumer Law Center

Mark Elliott Budnitz of Georgia State has written The National Consumer Law Center From Its Birth to 2013.  Here is the abstract:

The article describes, analyzes and evaluates the role played by the National Consumer Law Center, a public interest law firm dedicated to promoting the legal rights of low income consumers, in the development of consumer protection law. It does this by first providing a brief summary of the origins of federal funding of legal services through the Office of Economic Opportunity, an agency established by Congress to fight the “War on Poverty.” The article then describes the circumstances surrounding the initial funding of NCLC by OEO. Most of the paper consists of a detailed exposition of NCLC’s work product from 1969 to 2013. That work involved significant activities on both the federal and state levels. It included litigation, legislation and administrative agency advocacy. There were major victories as well as many setbacks. The paper highlights NCLC’s role in the development of the law under the Truth-in-Lending Act as well as NCLC’s efforts to ameliorate the disastrous effect of the Great Recession on low income home ownership. The paper provides details on NCLC’s joint projects with other consumer and civil rights organizations. The paper also notes the crucial role played by NCLC’s publications, training and conferences in establishing a national consumer lawyer bar. The article concludes with an examination of the challenges NCLC faces due to changes in the marketplace caused by technology.

In addition to relating NCLC’s substantive accomplishments, the paper discusses the significance of non-substantive developments. The article explores the political battle that resulted in the Legal Services Corporation’s termination of all future funding for NCLC and how NCLC successfully responded to that existential crisis by diversifying its funding sources. Having a satellite office in Washington, DC enabled NCLC to substantially increase its participation in the federal venue. Purchasing its own building in Boston provided it with a measure of stability.

The article is a case study of how a non-profit legal services organization can endure and significantly influence the law despite major adversity. It did this by being flexible, adapting to changed circumstances and adopting an entrepreneurial spirit while remaining faithful to its mission.

S.I Strong Chapter: Incentives for Large-Scale Arbitration

S.I. Strong of Missouri has written Incentives for Large-Scale Arbitration: How Policymakers Can Influence Party Behaviour.  Here's the abstract:

At this point, the future of large-scale arbitration (i.e., class, mass and collective procedures) can best be described as mixed. On the one hand, class arbitration has been curtailed in the United States as a result of various US Supreme Court decisions upholding waivers of large-scale suits in arbitration. On the other hand, mass and multiparty arbitration in investment proceedings appears to be on the rise. Collective arbitration seems to exist somewhere between these two extremes, since there are an increasing number of collective procedures around the world (for example, various types of collective arbitration can currently be found in Spain, Germany and the United States) but parties appear to use such mechanisms relatively infrequently.

The uneven status of large-scale arbitration raises the question of why parties and states choose to use or develop class, mass or collective procedures. To answer this question, it is necessary to analyse the legal and social environments in which these procedures exist to determine whether parties have sufficient incentives to pursue large-scale arbitration and whether states can or should do more to promote these forms of dispute resolution.

This chapter attempts to address these concerns by considering the use and availability of incentives for large-scale arbitration and in particular whether and to what extent lawmakers can or should seek to influence party behaviour through default rules and other policymaking tools. In so doing, this chapter attempts to provide parties, practitioners and policymakers with a better understanding of how class, mass and collective arbitration operate within various legal and social environments and how the choice of certain legal frameworks can optimize both public and private values.

Haim & Mann Article on Stored Value Cards

Liran Haim and Ronald J. Mann of Columbia have written Putting Stored-Value Cards in Their Place, 18 Lewis & Clark Law Review 989 (2014). Here is the abstract:

This Essay explores the effects of stored-value cards on social welfare. We argue that stored-value cards, in general, are socially beneficial payment devices. Their burgeoning use benefits society in three main plains. First, by replacing paper-based instruments in market segments previously inaccessible to card-based payments, stored-value cards lower the private and public costs of payment transactions. Second, by extending the use of card-based payment systems towards lower- and middle-income households, stored-value cards foster inclusion of those households in the financial mainstream of our society. Third, by operating without an extension of credit, stored-value cards help to limit the uniquely American reutilization of credit transactions associated with the widespread use of credit-card borrowing.

We further identify several risks associated with the use of stored-value cards. First, as in many cases their issuers are not federal banks, stored value cards expose consumers to the possibility of losing funds in the case of issuer's insolvency. Second, as their mechanism is vulnerable to data breaches, they expose consumers to unauthorized uses of their funds — as opposed to other payment cards where consumers enjoy regulatory protection on this matter. Third, they raise the issue of the unused funds remaining on the card after most of it has been depleted.

We recommend policies that will foster the use of stored-value cards, while adopting several rules that will confine their associated risks. We therefore call for adequate supervision that will assure the availability of deposits insurance to most stored-value cards; an extension of the current unauthorized use rules to stored-value cards; and a mechanism that will allow cash out of small unused funds associated with those cards. We also emphasize the need to exempt from regulation small stored-value cards programs in order to foster their beneficial use in contexts where the risks of harm are slight. 

Hosea Harvey Article on Disclosure Laws

Hosea H. Harvey of Temple has written Opening Schumer’s Box: The Empirical Foundations of Modern Consumer Finance Disclosure Law, 48 University of Michigan Journal of Law Reform (2014). Here's the abstract:

This Article explores the fundamental failure of Congress’ twenty-five-year quest to utilize disclosure as the primary tool to both regulate credit card issuers and educate consumers. From inception until present, reforms to this disclosure regime, even when premised on judgment and decision-making behavioralism, were nomothetic in orientation and ignored clear differences in population behavior and the heterogeneity of consumers. Current law prohibits credit card issuers from acquiring consumer socio-demographic data and prevents issuers and regulators from using market and policy experimentation to enhance disclosure’s efficacy. To explain why this regime was structured this way and why it must change, this Article contains four key sections: (1) a comprehensive review of the creation of our modern consumer credit card regulatory scheme; (2) a survey of the empirical evidence used to update and expand that disclosure-centered regime over twenty-five years; (3) an account of why the existing scheme’s disclosure function substantially fails, not- withstanding recent reforms; and (4) an argument that to achieve optimal credit card disclosure efficacy, the law must permit issuers to acquire and utilize customer socio-demographic information, including race, gender, and other characteristics.

Klonoff Predicts the Future for Class Actions

Robert H. Klonoff of Lewis & Clark has written Class Actions in the Year 2025: A Prognosis, Forthcoming in the Emory Law Journal. Here is the abstract:

In this Article, I reflect on what the federal judiciary has done in recent years, and I attempt to predict what the class action landscape will look like a decade from now. My predictions fall into several categories:

First, I discuss whether the basic class action framework — Federal Rule of Civil Procedure 23 — is likely to be revamped in the next decade. I predict that there is little chance that the basic structure of Rule 23 will change.  Calls by some scholars to rewrite Rule 23 will not make headway.  The only caveat to this prediction is that either Congress or the Supreme Court could repudiate so-called no injury classes — i.e., classes in which some unnamed class members suffered no harm — a result that would not change the text of Rule 23 but would adversely impact certain kinds of class actions, such as consumer cases.

Second, I examine the likely state of class action jurisprudence in the year 2025.  In that regard, I make several predictions: Securities class actions will continue to flourish, but consumer, employment, and personal injury class actions will continue to decline. The Supreme Court will curtail the ability of plaintiffs to establish liability or damages through expert statistical sampling (referred to frequently as “trial by formula”). The “ascertainability” requirement imposed by the Third Circuit will be repudiated by the Supreme Court or by the Third Circuit itself. The Supreme Court will conclude, as have numerous circuits, that an unaccepted offer of judgment to a class representative pursuant to Federal Rule of Civil Procedure 68 is a legal nullity and does not moot the individual’s claim or the putative class action. Defendants will advance several arguments against class certification that, until now, have had only limited success.  These will include expansive applications of Rule 23’s typicality, predominance, and superiority requirements. Although defendants will not be fully successful with these arguments, they will succeed in erecting some additional barriers to class certification. During the next decade, courts addressing class certification and the fairness of settlements will give greater weight to allegations of unethical behavior by class counsel and by counsel representing objectors to settlements. The future of class actions will ultimately lie in the hands of a small number of appellate court judges who have a special interest and expertise in aggregate litigation.

Third, I focus on the administration and resolution of class actions and offer two predictions: (1) by 2025, a significantly larger number of class action cases will go to trial than at any time since 1966; and (2) technological changes will fundamentally alter the mechanics of class action practice, offering more sophisticated tools for notice, participation by class members, and distribution of settlement proceeds.

Reifa & Markou: Advertisers Know You are a Dog on the Internet!

Christine Riefa of Brunel and Christiana Markou of the European University Cyprus have written Online Marketing: Advertisers Know You are a Dog on the Internet!, in Savin, Trzaskowski (Eds) Research Handbook on EU Internet Law (Edward Elgar 2014) 383-410.  Here's the abstract:

This piece explores the regulation of online marketing. The Internet has enabled advertisers to get to know their customer base and harness technology to a point where the once anonymous Internet is now a space where advertisers know you are dog. There is much progress however for the law to make in order to catch up with technology and the marketing practices it enables. The many dangers allied with those advertising techniques should force the legislator to rethink and tighten controls in a bid to protect consumers.

Michael Barr Article on Arbitration

Michael S. Barr of Michigan has written Mandatory Arbitration in Consumer Finance and Investor Contracts, 11 New York University Journal of Law and Business (2015). Here is the abstract:

Mandatory pre-dispute arbitration clauses are pervasive in consumer financial and investor contracts — for credit cards, bank accounts, auto loans, broker-dealer services, and many others. These clauses often ill serve households. Consumers are typically presented with contracts on a “take it or leave it” basis, with no ability to negotiate over terms. Arbitration provisions are often not clearly disclosed, and in any event are not salient for consumers, who do not focus on the importance of the provision in the event that a dispute over the contract later arises, and who may misforecast the likelihood of being in such a dispute. The lack of salience means that there is no meaningful competition over arbitration provisions or likely any price effect. Some arbitration proceedings lack procedural protections, and unbiased arbitrator selection essential for fair outcomes. In addition, many arbitration provisions contain “gag” rules barring disclosure of reasoning, evidence, or outcomes. Moreover, arbitration clauses typically preclude consumers from banding together in aggregated actions, which diminishes redress and weakens deterrence. In the wake of the financial crisis, Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, which authorizes the new Consumer Financial Protection Bureau and the U.S. Securities and Exchange Commission to prohibit or condition the use of arbitration clauses in consumer finance and investment contracts, respectively. It is well past time for these agencies to use this authority.

Braucher & Orbach Article on Scamming: The Misunderstood Confidence Man

The late great Jean Braucher and Barak Orbach, both of Arizona, have written Scamming:  The Misunderstood Confidence Man, 27 Yale Journal of Law and the Humanities, (2015, Forthcoming).  Here's the abstract:

Samuel Thompson, the swindler who gave name to confidence men (“con men”) was “a man of genteel appearance,” “ladies’ man,” and gifted with “persuasive powers.” He approached his victims — “perfect strangers” — on the street, engaged them in a short conversation, and then asked them express confidence in him by lending him money or a watch. A few men placed confidence in Thompson and gave him gold watches and money. Thompson became known as the “Confidence Man” for his method and primarily for his signature question:  “Have you the confidence in me to trust with me your watch until tomorrow?” His modus operandi was used to reframe swindling as exploitation of trust and define swindling as “confidence game.”

“Scamming,” also known as the “confidence game,” “diddling,” and “swindling,” is the exploitation of predictable imperfect decisions for profit facilitated by persuasion tricks. The practice is as old as the human race, yet still confuses lawmakers, courts, and scholars. We use the story of the Confidence Man to explain some of the core elements of scamming. Specifically, we explain why the abuse of trust in the pursuit of profit is conceptually confusing.

Our study consists of two parts. First, we examine the origins of the terms “confidence game” and “confidence man.” Numerous studies describe Thompson as a genius operator. We argue that this attribution of sophistication illustrates broad misunderstanding of scamming. The record shows that Thompson was a clumsy thief and unsophisticated scammer and that his limitations were useful for illustrative purposes. We identify the reporter who coined of the term and explain the historical context in which the term was introduced. Second, we utilize insights from the story of the Confidence Man and its conceptualization to explain some of the confusing elements of scamming. Specifically, we emphasize (1) the common abuse of trust for profit; (2) the folly of attributing rationality to consumers and scammers; (3) scammers’ use of time to trap people in situations where they are likely to make mistakes; (4) challenges created by institutional scammers; (5) the role of intent and knowledge in scams; and (6) the possibility of using industry standards for scams.

 

MarketWatch: Dodd-Frank is not killing mortgage access for home buyers

The story, based on a Fed study, is here. Excerpt:

New rules designed to make sure borrowers can repay their mortgages haven’t curtailed the ability to buy a home, a Federal Reserve study says.

* * *

The Fed study didn’t find any evidence of credit restriction as a result of the rules.

For instance, black and Hispanic borrowers, who tend to have fewer assets and lower credit scores, actually saw their share of mortgages rise in 2014 after several years of decline. There also wasn’t much of a change in the frequency in which debt-to-income was cited by lenders as a reason for denial (it rose slightly for purchase applications and fell slightly for refinancing).

The Fed suggests the new rules had little effect because lenders had already tightened standards after the 2008 financial crisis. Lenders may also have adjusted to the new rules prior to implementation.