Consumer Law & Policy Blog

Preston Paper on Clickwrap and Browsewrap

Cheryl B. Preston of Brigham Young has written 'Please Note: You Have Waived Everything': Can Notice Redeem Online Contracts? Forthcoming in the American University Law Review.  Here is the abstract:

Online consumers are largely unaware of the extent to which their actions are governed by legal terms in the form of clickwraps or browsewraps. These contracts are enforced without any evidence of knowing assent to the terms, but only if the consumer has some notice that a contract exists. The standards for notice are low and consumers routinely click and browse without forming a single thought relative to the legal obligations that arise with online conduct – legal obligations that frequently would not arise with procuring the same goods and services in the real world. Commentators have been hopelessly scrambling to propose various schemes for bringing home to consumers the fact that they are entering enforceable contracts.

This article debunks the idea that notice of the existence of a contract should be the measure of enforceability. The concept of notice relies on the purely fictional notion that a reasonable consumer with notice of legal provisions will stop, read them, understand the terminology, appreciate their legal significance, and decide to proceed or not. The relish for notice is irreconcilable with our knowledge that consumers do not, and cannot, read and comprehend even a fraction of the wrap contracts they encounter. Moreover, the law punishes those few who read because any hope for persuading a court to undertake an unconscionability analysis of a contract is lost to parties who admit to having read the contract. Thus, the law does not offer consumers a reasonable option for making better decisions about legal commitments online. Wrap contracts are merely the means for the powerful drafters to legislate legal results.

This Article contains a review of cases addressing clickwraps and browsewraps in the last decade, which amply illustrates that courts are enforcing them without much, if any, discussion of the length, print, density, or sophistication of the language or the parties, in part, because no one expects consumers to read them. This article then reviews the duty to read rule, and its meager exceptions, as well as the status of the unconscionability doctrine. This analysis supports little hope that courts will begin to police wrap contract excesses. This Article then reviews and evaluates various proposals for addressing the problem of wrap contracts and concludes that, while most are some improvement, none hold any significant promise for real change. Finally, this Article concludes with several examples of the kind of notice that would be required to give meaning to the theoretical concept that the market will adjust as actors make informed choices. 

Nathalie Martin Article Calls for Federal Usury Cap

Nathalie Martin of New Mexico has written Public Opinion and the Limits of State Law: The Case for a Federal Usury Cap, 34 North Illinois University Law Review (2014). Here's the abstract:

This Article calls on Congress to set a federal interest rate cap of 36%, applicable to all loans. Part II of this Article briefly describes the history of usury laws in the United States and then describes the patchwork nature of modem usury law. Part III describes various types of consumer loans, including high-cost loans like payday and title loans. Part III then reviews evidence of public opinion regarding interest rate caps for consumer loans, showing that Americans of both political parties favor caps of 36% or less by a wide margin. Given the broad and deep public support for interest rate caps, the question is not whether but how to accomplish these caps.

Part IV, the heart of the Article, describes the many ways in which state regulation of high cost lending has been inefficient and ineffective. Part IV.A describes the various forms of legislation that have attempted but failed to lower interest rates and curb other abuses in high-cost lending. It describes in detail the many work-arounds used by lenders to avoid whatever state law is enacted. These work-arounds include changing loan products to get around narrow definitions in state statutes, morphing lenders into another type of entity to get around the state statutes, or moving to lending online through Indian tribe affiliation or offshore entities. Part IV.B describes the difficulties with trying to enforce state statutes through judicial means. It discusses the unconscionability doctrine and its resulting inconsistent case law, the delays caused by lender bankruptcy, the difficulties posed by recent Supreme Court law on the enforceability of anti-class action clauses and arbitration clauses in high-cost loan contracts, and finally, the mere cost of enforcement litigation as a whole. 

Wilson on Prepaid Cards

Catherine Lee Wilson of Nebraska has written Making Prepaid Safe for Consumers:  A Framework for Providing Deposit Insurance and Regulation E Protections, Forthcoming in the University of Pennsylvania Journal of Business Law.  Here's the abstract:

General purpose reloadable prepaid cards are part of a larger trend toward a cashless society.  This market offers significant benefits to both traditional depository institutions and new non-bank entrants in the payments industry.  Electronic transfers significantly reduce the costs associated with paper-based payment systems.  To balance the benefits received by payment providers, consumer protections must be established to prevent consumers from becoming the sole bearers of the risks inherent in any payment system.  Simple protections, those traditionally afforded to mainstream banking clients using checking accounts and debit cards, must be adopted for the GPR prepaid product to ensure long-term product safety for consumers.  GPR prepaid cards are a new product, so deposit insurance should simply be extended to maintain the historical principles underlying deposit insurance.  Likewise, the extension of Regulation E protections to GPR prepaid cards would simply complete work initiated by the Federal Reserve eighteen years ago.  Both the EFTA and Dodd-Frank give the CFPB the authority to extend these consumer protections.  Part I of this paper will provide a brief overview of the prepaid card industry and consumer use of the GPR prepaid product.  In Part II, the paper outlines the gaps in the regulatory scheme for prepaid cards and highlights the initial steps federal regulators have taken to close the gaps. Part III outlines reasons for extending consumer protections to GPR prepaid cards by illustrating that consumers are unable to protect against risks inherent in GPR prepaid card programs.  Finally, Part IV outlines the existing statutory provisions giving the CFPB broad authority to regulate GPR prepaid cards and includes an analysis of recent proposed legislation that would provide additional support to the CFPB’s work to ensure the safety and transparency of the general purpose reloadable card for consumers.  This section highlights the CFPB’s broad power under Dodd-Frank to regulate consumer financial products to insure the consistent application of federal consumer protection laws. Ultimately, consumer safety and transparency goals will be supported by the CFPB’s comprehensive regulation of GPR prepaid cards.

Zywicki & Durkin: Why Everything Elizabeth Warren Told You About Consumer Credit Is Wrong

by Jeff Sovern

The op-ed is here, at Forbes.com.  Except that if you want to find out why everything Warren said is wrong, maybe the op-ed wouldn't be the place to look.  Here's the lead:

Why do people borrow? To hear law professor turned Senator Elizabeth Warren, it is because they are seduced by rapacious lenders and a consumerist culture into living beyond their means, buying big-screen televisions, new cars, and expensive vacations. And before you know it, you are under the thumb of the big banks—or, even worse, of the street corner payday lender.

And here's how Zywicki & Durkin respond to that claim:

* * * Although there are exceptions to any rule, for most [consumers, the reason they borrow] bears little resemblance to Senator Warren’s picture of hapless victims goaded into debt by rapacious credit card issuers. Instead, consumers borrow for essentially the same reasons that businesses borrow: for capital investments and to smooth disruptions in income and expenses. * * *

So "everything" Warren said is wrong, but as for Zywicki's & Durkin's explanation, there are "exceptions" and the explanation applies only to most consumers anyway.  I don't know but I suspect that Warren would agree that most consumers borrow for the reasons Zywicki & Durkin state, but she would also say that some are lured into unwise borrowing (remember the Great Recession, which was triggered by unwise lending?) and that Zywicki & Durkin would agree, judging by their "exceptions," that sometimes that happens.

Here's another paragraph commenting on Warren:

But aren’t people today different—more prone to living beyond their means? As then-Professor Warren herself put it in a 2004 interview with PBS, “The [credit card] industry has no evidence that people were being turned down for loans in the early 1980s. What they have is evidence that people more often in the early 1980s preferred to pay cash than to pay on credit.” Yet hand-wringing about how other people use consumer debt is as old as debt itself. For example, the New York Times warned in the 70s that American consumers were “borrowing trouble”—the 1870s, that is.

I don't see that that particular quote demonstrates either hand-wringing about how people use consumer credit or that people are living beyond their means.  Nor do I see anything wrong with saying that a problem that existed in the 1870s is still with us, even assuming that Warren said that.  But on top of that, given the role of unwise consumer lending in creating the Great Recession, which we are still recovering from, isn't a little hand-wringing about that appropriate?

Durkin, Zywicki, Gregory Elliehausen, and Michael Staten have written a new book, Consumer Credit and the American Economy, and are trying to sell it. That's perfectly appropriate.  I hope to find time to read the book soon myself.  I want to see if it's going to change my thinking on consumer credit issues, for one thing. But if this op-ed is any example, it won't.  Here's more. After mentioning proposals to outlaw payday lending, they write:

And if you take away legal, high-cost options? Well, history shows the unintended consequences of that policy too: When New York’s legendary Genovese crime boss Anthony “Fat Tony” Salerno was indicted in 1973 on 11 counts of loan-sharking (and one count of criminal solicitation to have a victim’s leg broken) it was estimated that his operation had some $80 million a day outstanding—that’s $429 million in today’s dollars, in just his territory alone. Nor was Fat Tony alone: according to a 1968 U.S. Senate Report, loan-sharking was the second-largest revenue source of the mafia at the time.

I worry about what consumers who use payday lending appropriately--and apparently there are some, though they are out-numbered by consumers for whom payday lending turns out to be more of a problem than a solution--would do if payday lending was barred.  But if the best evidence that barring payday lending is a bad idea is that more than forty years ago there were loan-sharks, I'm going to be less worried.  Plenty of states bar payday lending already. If prohibitions on payday lending lead to loan-sharking, wouldn't we be seeing  a lot more loan sharking in those states?  I hope there's more about this in the book, because the op-ed doesn't convince me.

 

Critics of Behavioral Law & Econ Strike Back on Credit Cards

Thomas A. Durkin and Gregory Elliehausen, both of the Fed, and Todd J. Zywicki of George Mason have written An Assessment of Behavioral Law and Economics Contentions and What We Know Empirically About Credit Card Use by Consumers.  Here is an abstract:

“Behavioral Law and Economics” (BLE) is a specialized component of the legal literature that purports to base its conclusions on a branch of economic analysis known as behavioral economics. The central claim of BLE is that by applying findings of behavioral economics to the real world it can provide more accurate assumptions about individual behavior and decision making than neoclassical economics and thus better and more effective policy prescriptions where needed. To date, however, BLE’s claims have been almost entirely a priori, taking certain suggested biases identified in the laboratory experiments by behavioral economists and claiming that they extend significantly to actual consumer behavior and the need for regulation. Yet it is well-accepted that the proper test of the scientific validity of an economic theory is the accuracy of its predictions relative to empirically testable hypotheses, not a priori reasoning or hypothetical extensions. This paper focuses on an area where BLE has been particularly active and even influential — the analysis of consumer use of credit cards. Comparison of the claims of BLE against hypotheses of the traditional neoclassical model of consumer credit use developed over the past century finds that available empirical evidence uniformly rejects BLE’s hypotheses for consumer credit. In short, while behavioral considerations are an important component of economic analysis, its BLE extension to policy in the consumer credit area has not yet proven to be useful.

For more on Zywicki, see here.

Philadelphia Fed Authors on What Consumers Learn From Identity Thefts

Julia S. Cheney, Robert M. Hunt, Vyacheslav Mikhed, and Dubravka Ritter all of the Philadelphia Fed, have written Identity Theft as a Teachable Moment.  Here is the abstract:

This paper examines how instances of identity theft that are sufficiently severe to induce consumers to place an extended fraud alert in their credit reports affect their risk scores, delinquencies, and other credit bureau variables on impact and thereafter. We show that for many consumers these effects are relatively small and transitory. However, for a significant number of consumers, especially those with lower risk scores prior to the event, there are more persistent and generally positive effects on credit bureau variables, including risk scores. We argue that these positive changes for subprime consumers are consistent with the effect of increased salience of credit file information to the consumer at the time of the identity theft.

 

Stark et al. on Mortgage Disclosures

Debra Pogrund Stark of John Marshall,Jessica M. Choplin of DePaul University, Mark A. LeBoeuf of DePaul and Andrew G. Pizor of the National Consumer Law Center have written Dodd-Frank 2.0: Creating Interactive Home-Loan Disclosures to Enable Shrewd Consumer Decision-Making, forthcoming in the Loyola Consumer Law Review. Here's the abstract:

Congress and the Consumer Financial Protection Bureau (the “Bureau”) have taken major steps under the Dodd-Frank Wall Street Reform and Consumer Protection Act to begin to meaningfully address the predatory practices that led to the mortgage loan crisis. However, most of the legal reforms enacted to help consumers are more in the nature of a “nudge” than outright prohibition of predatory practices. Consequently, home loan disclosure forms and disclosure rules remain the primary method under federal law to enable borrowers to avoid entering into predatory loans. And while the new home loan disclosure forms created by the Bureau are a vast improvement over the forms used prior to 2010, we argue that the Bureau’s new Loan Estimate form is doomed to fail many consumers due in large part to: (i) pernicious practices that mortgage brokers and lenders commonly engage in when presenting the forms to the borrower (including saying “sign here” rather than “please carefully review this form” causing many consumers not to carefully read or to only skim over the form), (ii) the complicated nature of the home loan decision making process and the high level of financial illiteracy of many consumers (as evidenced in the results from a financial literacy test that we gave experiment participants), and (iii) certain cognitive phenomena we describe that impede rational decision making in this context. We hypothesize that revising the Loan Estimate form to make it “interactive” in the manner we propose will better address the afore-described barriers to consumers’ effective use of the disclosure forms. In addition, we report on two experiments we ran that demonstrate that one major change the Bureau made to the Loan Estimate form (to greatly de-emphasize the “APR”) was a major step backward.  Experiment participants using the Bureau’s new Loan Estimate form were able to identify the lower of two offered home loans at only chance level (44%) compared with 74% who were able to do so with our proposed enhanced APR disclosure. Consequently, we urge the Bureau to revise the Loan Estimate Form before it becomes effective in August 2015 to reflect the enhanced APR disclosure we designed together with certain interactive features we propose.

Hart on Kim's Wrap Contracts

Danielle Kie Hart of Southwestern has written Form & Substance in Nancy Kim's Wrap Contracts, 44 Southwestern University Law Review (2014 Forthcoming).  Here's the abstract:

Nancy Kim’s book, Wrap Contracts, is ambitious and well worth reading. Kim coins the term “wrap contracts” to expose, explain and demystify the world of mostly online contracting. By revealing the ubiquity (and audacity) of wrap contracts, Kim also skillfully demonstrates that just about everything we do or want to do now involves a contract and, as a result, non-drafting parties like consumers have no choice but to accept the terms imposed by wrap contracts if they want to participate in modern society. In demonstrating so persuasively that drafters of wrap contracts consistently make more aggressive use of even more one-sided terms in their contracts than their offline counterparts, Kim has effectively made the case that wrap contracts pose significant problems for non-drafting parties in particular and society in general. That said, the crux of the problem posed by wrap contracts is the (mis)use of bargaining power within a contract law system that permits the (mis)use of unequal bargaining power to go unchecked and unimpeded. Kim’s solutions — the duty to draft reasonably and specific assent — do not effectively address this fundamental problem built into modern contract law. Consequently, it is unclear how Kim’s solutions end up assisting non-drafting parties in any meaningful way. On the contrary, her solutions appear to elevate form over substance in ways that will produce two adverse outcomes for non-drafting parties both of which will make it harder for non-drafting parties to get out of problematic wrap contracts. This is clearly not Kim’s intent. But I fear it will be the result.

Brescia & Martin on Local Government Responses to Underwater Mortgages

Raymond H. Brescia and Nicholas M. Martin, both of Albany have written The Price of Crisis: Eminent Domain, Local Governments, and the Value of Underwater Mortgages, forthcoming in 24 Temple Political & Civil Rights Law Review (2014).  Here's the abstract:

 

Governments at all levels in the U.S. have deployed a range of tactics to address some of the most pernicious effects of the Financial Crisis of 2008: namely, a loss of trillions in homeowner equity as well as the growth of the prevalence of underwater mortgages, where the outstanding principals on the mortgages exceed the value of the underlying properties.  Among other tactics for addressing such impacts, local governments have begun to explore whether it is wise and legal to use the power of eminent domain to seize distressed home mortgages.  This Article attempts to situate this approach to such mortgages within the larger economic, legal and policy context to determine whether this approach has a sound basis in law and policy.  To do this, we deploy the tools of Comparative Institutional Analysis to assess the potential viability of using eminent domain to seize underwater mortgages.  In doing so, we review the wide-ranging efforts of governments at all levels in the United States to deal with the economic effects of the Financial Crisis of 2008.  We look at the relative success of these different tactics used by these governmental entities — from ex ante regulatory approaches to ex post law enforcement and civil litigation strategies — to assess the most effective tools available to remedy the economic and social problems posed by distressed mortgages.  We then determine whether the use of eminent domain by localities is consistent with those governmental responses to the fallout of the Financial Crisis that have proven effective in responding to some of its worst impacts: here, the loss of homeowners’ equity in their homes and the prevalence of underwater mortgages.

In carrying out this analysis we ask, and attempt to answer, five key questions.  First, are local governments appropriate actors to address the lingering problem of underwater mortgages?  Second, what has been the relative success of the range of tactics that governments at all levels have used to address underwater mortgages, including law enforcement strategies and legislative and regulatory measures?  Third, assuming local governments are appropriate actors to address this problem, how should localities and, if necessary, courts, value underwater mortgages in the context of condemnation proceedings: i.e., what is the appropriate amount of compensation that localities should pay mortgagees and other lienholders when seizing underwater mortgages?  Fourth, what are some strategies local governments can use to find the resources necessary to finance a program that would seize underwater mortgages and, in effect, purchase them from mortgage holders?  Finally, what are some potential down-side risks to local governments taking these actions?  This review concludes not only that local governments are appropriate actors to address underwater mortgages, but also that ex post legal tools — such as eminent domain — are appropriate and effective techniques to use to address the fallout from the Financial Crisis of 2008, particularly its impact on homeowners.  It also finds that the just compensation due holders of distressed, underwater mortgages, should governments seek to seize them by eminent domain, should be roughly sixty percent of the unpaid principal balance on those mortgages.

Lauren Willis Paper: Performance-Based Consumer Law

Lauren E. Willis of Loyola Los Angeles has written Performance-Based Consumer Law.  Here is the abstract:

When firm and consumer interests are not well-aligned, the resulting transactions are often lousy, whether one uses consumer autonomy or consumer welfare as the metric.  With modern experimental and data analysis techniques, firms can run circles around the law’s current disclosure and design rules, yet regulators today are tied to slow, circumscribed responses.  What should be added is a regulatory instrument that does three things.  First, it should unite the interests of firms with the goals of regulators through performance standards for consumer comprehension and/or suitable consumer product use, thereby redirecting the creative potential of the private sector much as emissions standards do for pollution reduction.  Second, the instrument should ground the law on actual consumer knowledge and behavior, rather than hypothesized conceptions of the “reasonable” consumer.  Third, it should institutionalize a monitoring system that provides feedback used to improve both the marketplace and regulation in a virtuous cycle.  

This Article suggests a fresh approach to consumer law, one that has been tried piecemeal in consumer regulation, but until now without a fulsome intellectual foundation.  Its aims are both modest – to bring consumer transactions in line with consumer expectations – and ambitious – to make the law as agile as firms.  Performance-based consumer law has the potential to incentivize firms to educate rather than obfuscate, develop product designs that align with rather than defy consumer expectations, and channel consumers to products that are suitable for the consumers’ circumstances.  Moreover, even if performance-based regulation does not directly lead to dramatic gains in consumer comprehension or marked declines in unsuitable uses of consumer products, the process of establishing and implementing such regulation promises dividends for improving traditional forms of regulation.  

The article is particularly timely in at least three respects.  First, it answers the question implicitly asked by recent critiques of mandated disclosure: what should we do instead?  Second, it plots a course for the young Consumer Financial Protection Bureau that has great potential to improve the consumer marketplace and is plainly authorized by the Dodd-Frank Act.  Third, the policy structure it proposes would be helpful in a host of areas where policymakers are currently at a loss for what to do, including personal data privacy, payday lending, overdraft, and consumer drug marketing.  Performance-based consumer law is more than a technocratic exercise.  It is based on and in operation would re-inscribe a normative vision of consumer law that places consumers at the center.