Consumer Law & Policy Blog

Summary of Themes from Durkin, Elliehausen, Zywicki & Staten Book on Consumer Credit

Thomas A. Durkin, Gregory Elliehausen, both of the Fed, and Todd J. Zywicki of George Mason have written Consumer Credit and the American Economy: An Overview, Forthcoming in the Journal of Law, Economics and Policy, Here is the abstract:

This article provides an introduction to a law review symposium by the Journal of Law, Economics, and Policy on our book (co-authored with Michael E. Staten), Consumer Credit and the American Economy (Oxford 2014). The conference, held November 2014, collects several articles responding to and building on the research agenda laid out by our book. For those who have not read the book, this article is intended to summarize several of the main themes of the book, including discussion of economic models of consumer credit usage, trends in consumer credit usage over time, the use of high-cost credit, and behavioral economics.

Major Chicago Conference: Contracting Over Privacy

The Journal of Legal Studies is holding a conference at the University of Chicago titled "Contracting Over Privacy" on October 16 & 17.  The conference features an all-star lineup. Here's the conference blurb:

Information privacy is rapidly emerging as one of the key areas of consumer protection in our era. This conference will examine the role of contract in policing information privacy. Are private contracts an efficient regulatory tool of data privacy? Should the law incorporate mandatory protections, not waivable by consumers? Can disclosures effectively inform consumers about firms’ data practices?

More information here.  (HT: ContractsProf Blog).

Jim Hawkins Asks if Bigger Companies Are Better for Low-Income Consumers

Jim Hawkins of Houston has written Are Bigger Companies Better for Low-Income Borrowers?: Evidence from Payday and Title Loan Advertisements, Forthcoming in the Journal of Law, Economics and Policy. Here is the abstract:

Payday lending and title lending markets are dominated by a small number of large lenders.  Recent policy intervention into these markets in Colorado has increased this dominance as some smaller lenders have closed shop.  The Consumer Financial Protection Bureau is on the verge of regulating payday loans, creating the potential for larger companies to gain an even more prominent place in this market nationally.  But, before we implement regulation that could unintentionally bolster large lenders, we need to ask: Are bigger companies better for low-income borrowers?

This Article attempts to answer this question by presenting evidence from a study of the advertisements on 189 payday and title lending storefronts in Houston, Texas and on 30 lender websites. Accepting on their face the views of payday and title lending opponents about what is “good” for low-income borrowers, I find mixed results.  On some of the metrics I used, large lenders appear better for low-income borrowers, but on others, small lenders perform better.  For instance, more large lenders were in compliance with Texas law at the time of my study, but a larger percentage of big companies charged above average prices for loans.  Additionally, larger companies were also more likely to primarily have pictures of racial minorities on their websites while a smaller percentage of larger companies had websites dominated by pictures of females.

In addition to comparing large and small lenders, I present general information about payday and title lending advertising.  Overall, I found a low level of compliance with Texas disclosure laws.  Additionally, I found that despite consistent claims to the contrary in the literature, there is substantial price differentiation among lenders in Houston.  Finally, the pictures on websites are most likely to be females from a minority group, suggesting that perhaps lenders are targeting these audiences. 

Drobac: The Myth of 'Legal' Consent in a Consumer Culture

Jennifer Ann Drobac of Indiana's McKinney School has written The Myth of 'Legal' Consent in a Consumer Culture in FACETS OF CONSUMERISM IN A GLOBAL ECONOMY (Anand Pawar, ed., Twenty First Century Publications, 2015).  Here is the abstract:

This Essay challenges the legal default of unquestioned human capacity for consent. It posits that legal capacity for consent is not an “on/off” switch. It questions the notion that capacity – our rough filter for the ability to consent – flips on at some relatively arbitrary time that one might, as a matter of tradition, call “the age of consent,” and off again with early onset dementia or Alzheimer’s disease. A more nuanced view of consumer capacities rests, in part, on the understanding neuroscience and psychosocial evidence provide. This perspective suggests that we should match our rules and jurisprudential approaches to the variable capacities that we all show in different contexts and stages of life. By highlighting that most negotiating parties, in a given moment or context, may possess rather less than legally presumed capacity to consent, this Essay emphasizes the need for legal reform.

A Pair of Arbitration Papers

Richard Frankel of Drexel has written Concepcion and Mis-Concepcion: Why Unconscionability Survives the Supreme Court's Arbitration Jurisprudence, 17 Journal of Dispute Resolution. Here is the abstract:

States have long relied on the doctrines of unconscionability and public policy to protect individuals against unfair terms in mandatory arbitration provisions. The Supreme Court recently struck a blow to such efforts in AT&T Mobility LLC v. Concepcion and American Express Co. v. Italian Colors Restaurant. In those two cases, the Court established that a challenge to the enforceability of unfairly one-sided arbitration clauses is preempted if it would interfere with “fundamental attributes of arbitration.” Several commentators have argued that these decisions will dramatically alter the arbitration landscape, by wiping away virtually any contract defense to the validity of an arbitration agreement and giving corporations carte blanche to impose whatever terms they want into an arbitration clause. Many practitioners are aggressively pushing courts to take a similarly broad reading of Concepcion and Italian Colors.

This article takes a contrary view. First, this article argues that the cases will have very little impact outside of the context of class action waivers, the subject matter of both Concepcion and Italian Colors. Applying state law to strike down arbitration provisions that are so one-sided as to be unconscionable ordinarily will not interfere with “fundamental attributes of arbitration” and should not be preempted.

Second, the Court’s newfound focus on “fundamental attributes of arbitration” reveals why Concepcion should actually narrow the scope of Federal Arbitration Act (FAA) preemption rather than expand it. A careful examination of arbitration clauses shows that, if anything, the “fundamental” aspect of arbitration is choice, that is, the ability of parties to freely negotiate the terms of their arbitration agreements in an arms-length fashion. If choice is fundamental to arbitration, then what is inconsistent with arbitration is a lack of choice, namely adhesion. As a result, states have much greater power than previously thought to ensure fairness in standard-form, non-negotiable adhesion contracts, in which most arbitration agreements are contained, without violating the FAA.

And Stephen J. Ware of Kansas has authored The Politics of Arbitration Law and Centrist Proposals for Reform.  Its abstract is as follows:

Arbitration law in the United States is far more controversial when applied to individuals than to businesses. While enforcement of arbitration agreements between businesses sometimes raise legal issues that divide courts, those issues tend to interest only scholars, lawyers, and other specialists in the field of arbitration. In contrast, enforcement of arbitration agreements between a business and an individual (such as a consumer or employee) raises legal issues that interest many members of Congress and various interest groups — all of whom have taken positions on significant proposals for law reform. The Consumer Financial Protection Bureau has extensively researched and reported on consumer arbitration agreements and is expected to issue a rule regulating, or even prohibiting, such agreements.

This Article both explains how issues surrounding consumer and other adhesive arbitration agreements became divisive along predictable political lines and introduces a framework to understand and compare various positions on them. This new framework arrays on a continuum five positions on the level of consent the law should require before enforcing an arbitration agreement against an individual. Progressives generally would require higher levels of consent than arbitration law currently requires, while conservatives generally defend current arbitration law’s low standards of consent.

This Article proposes an intermediate (or centrist) position. It joins progressives in rejecting conservative-supported anomalies that enforce adhesive arbitration agreements more broadly than other adhesion contracts on the three important topics: contract-law defenses, correcting legally-erroneous decisions, and class actions. Once these anomalies are fixed though, adhesive arbitration agreements should — contrary to progressives — be as generally enforceable as other adhesion contracts. In other words, this Article joins conservatives in defending general enforcement of adhesive arbitration agreements under contract law’s standards of consent. The Article briefly concludes with the language of a rule the CFPB could adopt to enact into law the reforms advocated in this Article.

Paper Analyzes Testing of Consumer Disclosures

Talia B Gillis, a doctoral student at Harvard, has written Putting Disclosure to the Test: Toward Better Evidence-Based Policy. Here is the abstract:

Financial disclosures no longer enjoy the immunity from criticism they once had. While disclosures remain the hallmark of numerous areas of regulation, there is increasing skepticism as to whether disclosures are understood by consumers and do in fact improve consumer welfare. Debates on the virtues of disclosures overlook the process by which regulators continue to mandate disclosures. This article fills this gap by analyzing the testing of proposed disclosures, which is an increasingly popular way for regulators to establish the benefits of disclosure. If the testing methodology is misguided then the premise on which disclosures are adopted is flawed, leaving consumers unprotected. This article focuses on two recent major testing efforts: the European Union’s testing of fund disclosure and the Consumer Financial Protection Bureau’s testing of the integrated mortgage disclosures, which will go into effect on August 1, 2015.

Despite the substantial resources invested in these quantitative studies, regulation based on study results is unlikely to benefit consumers since the testing lacks both external and internal validity. The generalizability of the testing is called into question since the isolated conditions of testing overlook the reality of financial transactions. Moreover, the testing method mistakenly assumes a direct link between comprehension and improved decisions, and so erroneously uses comprehension tests. 

As disclosure becomes more central to people’s daily lives, from medical decision aids to nutritional labels, greater attention should be given to the testing policies that justify their implementation. This article proposes several ways to improve the content and design of quantitative studies as we enter the era of testing.

Article on Law and Non-Verbal Market Manipulation

Shmuel I. Becher of the College of Management (Israel) - School of Law and Yuval Feldman of Bar-Ilan University have written Non-Verbal Market Manipulation. Here is the abstract:

Consumers make purchasing decisions in various markets every day.  Contrary to common belief, such decision-making is often not the result of deliberate analysis of information and data and of rational thinking.  Rather, it is frequently based on feelings, sensations and intuition.  Purchasing decisions are not made in a vacuum and are regularly influenced by sellers’ manipulation and selling tactics.

It is well documented that people receive a substantial part of the information they possess via non-verbal communication.  One of the most alarming aspects of this reality is that consumers are mostly unaware of non-verbal cues and the ways it can influence them.  Therefore, consumers cannot correct their mistakes.  This stands in sharp contrast to the intentional efforts invested by marketers in employing non-verbal marketing methods. 

Current consumer protection law neglects to address the encoding and decoding of wordless cues exchanged between consumers and businesses.  This opens a challenging gap between the law’s intention to protect consumers from deceptive practices and its ability to do so effectively, which contributes to a false consumers’ consciousness of proper protection.  It provides consumers with an artificial sense of effective legal protection while leaving them exposed to far more sophisticated manipulations of which they are not always aware.

Non-verbal manipulations are a robust phenomenon, extensively employed by sellers who are well versed in marketing research.  Yet legal scholars, judges and legislatures lack a systematic understanding of how non-verbal cues influence consumers, let alone how the law should respond.  This Article, while focusing on the psychology of non-verbal manipulations, aims to narrow this gap both descriptively and normatively.

Jim Hawkins Paper: Using Advertisements to Diagnose Behavioral Market Failure

Jim Hawkins of Houston has written Using Advertisements to Diagnose Behavioral Market Failure.  Here is the abstract:

In imperfect markets where consumers have malleable preferences and bounded rationality, advertising has the potential to increase demand for products through persuasion and through information that exploits systematic mistakes that consumers make.  Scholarship on advertising has criticized it on these grounds, but the legal and economic literature has missed advertising’s enormous potential to reveal consumers’ behavioral biases in specific markets.  This Article argues that researchers and policymakers should use advertising to detect and diagnose behavioral market failure.  

As a case study of my strategy, I offer the first comprehensive empirical study of advertisements for payday and title loans.  These are short-term, small-dollar, high-cost loans, and the majority of consumers using them are lower-income Americans.  I report on research I conducted that coded information on advertisements at 189 payday and title lending storefronts and 27 websites.  Using the advertisements to diagnose behavioral market failure, I find evidence that firms use advertising to exploit the ways in which payday and title lending customers deviate from the rational actor model.  Finally, I offer policy suggestions aimed at fixing this market failure.

George Mason Study of Self-Regulation of Privacy

Siona Robin Listokin of George Mason's  School of Policy, Government, and International Affairs has written Industry Self Regulation of Data Privacy and Security.  Here is the abstract:

Industry self-regulation of consumer data privacy and security has been proposed as a flexible alternative and compliment to traditional government regulation. This study analyzes whether different types of existing industry-led standards improve online privacy and security. The paper examines which types of firms join voluntary standards and whether there is a difference in outcomes between trade association memberships (like the Digital Advertising Alliance) and certification programs (like TRUSTe). Results suggest that more trafficked websites are more likely to adopt standards, and that trade association membership does not have an effect on privacy and security performance. There is some evidence that paid certification can hurt subsequent privacy and security. This study also compares website privacy measures and highlights the need for a valid privacy metric.

Horton & Chandrasekher Reply to Kaplinsky & Levin on Empirical Study of Arbitration

Guest Post by Professors David Horton & Andrea Cann Chandrasekher:      

We recently posted our draft article, After the Revolution: An Empirical Study of Consumer Arbitration, 104 Geo. L.J. -- (forthcoming 2015) on the Social Science Research Network.  On June 22, well-known corporate defense lawyers Alan S. Kaplinsky and Mark J. Levin published a critique of the piece on their CFPB Monitor Blog.  Although we appreciate Kaplinsky and Levin taking the time to engage our work, they don’t do it justice.   

For starters, Kaplinsky and Levin misunderstand After the Revolution’s goals.  The paper analyzes 4,839 cases filed by consumers with the American Arbitration Association (AAA) between July 2009 and December 2013.  In part, it tries to accomplish the ultra-benign task of improving our understanding of what happens inside the arbitral forum.  How many consumers file claims?  What percentage reach the award stage?  Who wins, and how much?  How long do cases usually take?  As one might imagine, the answers to these questions are often nuanced and can’t be reduced to talking points.  Bizarrely, though, Kaplinsky and Levin insist on casting After the Revolution as an anti-arbitration polemic.  They call our encouraging discoveries “admissions” and contend that our gloomier data betray our lack of objectivity. But the article fails as a saw-toothed indictment of alternative dispute resolution for a simple reason—it’s not supposed to be one.

In addition, After the Revolution examines the impact of the U.S. Supreme Court’s April 2011 decision in AT&T Mobility LLC v. Concepcion.  As most readers know, Concepcion effectively required plaintiffs to arbitrate low-value complaints on an individual basis, rather than as part of a class action.  So do consumers abandon these small-dollar grievances or pursue them in bilateral arbitration?  We find that filing levels moderately increased after Concepcion, largely because some plaintiffs’ lawyers have initiated numerous individual arbitrations against the same company.  In turn, these class action-style claims have transformed some companies into “extreme” repeat players, who arbitrate dozens or even hundreds of times.  Using several regression analyses, we prove that extreme repeat players win more often and pay less in damages than other defendants.    

It’s this last finding—the extreme repeat player advantage—that draws most of Kaplinsky’s and Levin’s ire.  Notably, they don’t engage it on its own terms.  Indeed, they couldn’t—our conclusions are statistically significant and robust to various model specifications.  Instead, they attempt to impugn it by saying that we “purport[] to find a ‘repeat player’ effect favoring companies that previous researchers, including the Consumer Financial Protection Bureau (CFPB) itself, have not discerned.” 

This assertion is flawed to the core.  Where to begin?  For starters, nearly every “previous researcher[]” has uncovered a repeat player effect in arbitration.  See, e.g., Lisa B. Bingham, Employment Arbitration: The Repeat Player Effect, 1 Emp. Rts. & Emp. Pol’y J. 189 (1997); Lisa B. Bingham, On Repeat Players, Adhesive Contracts, and the Use of Statistics in Judicial Review of Employment Arbitration Awards, 29 McGeorge L. Rev. 223 (1998); Alexander J. S. Colvin, An Empirical Study of Employment Arbitration: Case Outcomes and Processes, 8 J. Empirical Legal Stud. 1 (2011); cf. Searle Civil Justice Inst., Consumer Arbitration: Before the American Arbitration Association 76-82 (2009) (finding a repeat player advantage in consumer arbitration under one definition of “repeat player” but not another).  Likewise, section 5.6.12 of the CFPB’s recent Arbitration Study does discover that repeat-playing companies win more often than one-shot firms—although, to be fair, the Bureau doesn’t highlight this effect, perhaps because their sample sizes are small. 

Moreover, Kaplinsky and Levin play ostrich with the fact that After the Revolution takes the repeat player debate to the next level.  Prior commentators define “repeat player” as a firm that arbitrates more than once.  Rather than employ this crude rubric, we create tiers of repeat players based on how often a company appears in our data.  In addition, with the exception of Colvin, existing studies do not use multivariate regression analysis to tease out the effect of repeat player status on win rates and damage amounts, which has the advantage of being able to hold other confounding factors constant.  This means that they can’t rule out the possibility that an apparent repeat player advantage stems from a source other than the company’s repeat player status.  Conversely, our regressions allow us to control for a wide array of variables.  Here’s just one example:  near the end of their contribution, Kaplinsky and Levin gesture toward the fact that the CFPB found that any repeat player boon “was counter-balanced by the fact that counsel for the consumers were also usually repeat players in arbitration.”  But (even ignoring the fact that this arguably distorts the CFPB’s conclusions), the Bureau simply tallies up results in cases along the binary dimensions of whether or not a company or a consumer’s lawyer are repeat players.  After the Revolution, on the other hand, compares arbitration outcomes across different levels of consumer lawyer experience—all the while controlling for other factors (claim amount, documents only submission, telephonic hearing, and case length) that could confound the consumer lawyer effect.  In this more detailed investigation, we are able to uncover the result that having a highly seasoned plaintiffs’ attorney isn’t the panacea that Kaplinsky and Levin claim it is.  In fact, we show that it often hurts consumers. 

Ultimately, the glowing question isn’t whether extreme repeat playing companies thrive in the extrajudicial forum; it’s why they do so.  One hypothesis that has been kicking around for years is that arbitrators follow their wallets, and thus rule in favor of big companies in the hopes of being selected again in the future.  As we explain in the paper, we’re skeptical of that theory.  Not surprisingly, Kaplinsky and Levin heavily emphasize our discussion of this topic.  But they misleadingly frame it as though it’s somehow a “contradiction[]” or hiccup in our agenda, rather than just straight-up empirical and legal analysis.  That’s emblematic of their response—it accuses us of missing a mark we never set out to hit.