Consumer Law & Policy Blog

Michael Collins Study of High-Risk Mortgage Regulation

J Michael Collins has written Protecting Mortgage Borrowers through Risk Awareness: Evidence from Variations in State Laws, 48 J. Consumer Affairs 124 (2014).  Here is the abstract:

In the wake of historic levels of mortgage defaults, regulators have debated how to regulate certain high-risk loans because of the risks of foreclosure involved. This study examines state laws that required loan applicants to receive information about the risks of foreclosure before they could sign certain mortgage contracts. Skeptics suggest that disclosures are largely ignored by consumers, yet controlling for other factors this study shows that loan applicants in states with enhanced warnings about foreclosures were more likely to reject high-cost refinance mortgage loan offers from a lender. Enhanced disclosures with features such as risk warnings, signatures, and referrals to counseling are being implemented as part of Dodd–Frank consumer finance reforms. This study suggests these strategies may be useful to balance consumer protection and access to high-risk credit.

Fixing Consumer Protection Law So Borrowers Understand Their Payment Obligations

by Jeff Sovern

The Journal of Consumer Affairs published my paper, Fixing Consumer Protection Laws So Borrowers Understand Their Payment Obligations, 48 Journal Consumer Affairs 17 (2014). Here is the abstract:

The millions of consumers who defaulted on their mortgages in recent years should all have received disclosures mandated by the federal Truth in Lending Act (“TILA”), which requires that lenders inform borrowers of certain loan terms including monthly payments required. Yet many of those borrowers seem not to have understood what their payment obligations were. In fact, TILA, which was intended to enable consumers to borrow wisely, not only failed the subprime borrowers in that goal, but was interpreted to require lenders to provide misleading disclosures that might have persuaded borrowers that their loans were more affordable than they would turn out to be. This article attempts to substantiate the claim that the laws in place during the years in which the subprime loan buildup occurred did not provide the aid consumers needed in making borrowing decisions, and explores strategies to improve the disclosure environment.

Kirsch, Mayer, & Silber: What to Do About Payday Lending

Larry Kirsch, Roert N. Mayer and Norman I. Silber of Hofstra have authored, The CFPB and Payday Lending: New Agency/Old Problem, 48 Journal of Consumer Affairs 1 (2014). Here's the abstract:

The Dodd-Frank Act of 2010 brings nonbank payday lenders under federal regulation for the first time. The question of precisely how to regulate the payday loan industry creates a number of difficult challenges for the newly created Consumer Financial Protection Bureau (CFPB). Whereas most consumer advocates would prefer to ban or strictly limit high cost payday lending activity and address unfair/abusive lending practices, the CFPB must also be attentive to the impact of regulation on credit access for low-wage, credit-constrained payday borrowers. This article highlights the policy, legal, and institutional issues raised during the CFPB's decision-making process. The CFPB has the opportunity to dramatically shift the longstanding consumer protection paradigm in favor of real-world protection of vulnerable borrowers and, thereby, to realize the hopes of the activists who helped to bring the Bureau into existence.

Joshua Mitts Experiment on Mandatory Disclosure

Joshua Mitts of Sullivan & Cromwell has written How Effective is Mandatory Disclosure?  Here's the abstract:

Mandatory disclosure lies at the cornerstone of consumer protection law but its efficacy is unclear. I conduct one of the first online experiments on mandatory disclosure by evaluating a recent proposal to warn consumers of unexpected, unfavorable terms. To reduce sampling bias, I developed a "dynamic demographic filter" for Amazon Mechanical Turk, which is freely available to the research community. In stage one of the experiment, participants identify unfavorable terms they would not expect to appear in two types of consumer contracts. In stage two, different participants choose between highly similar providers with identical full-text contracts containing terms empirically found to be unexpected in stage one. One provider is randomly chosen to warn the consumer of a varying quantity of unexpected terms via a popup box. This provider’s products are offered at varying discount levels to identify the cost of the additional disclosure imposed by term substantiation. In a subsequent survey, participants are quizzed on the content of the unexpected terms to estimate the effect of term substantiation on consumer understanding. The results show that term substantiation had a nonlinear effect: three warnings had virtually no impact on contracting decisions but six warnings caused 20-30% fewer participants to choose the warned-of provider with larger discounts having little-to-no effect. In the post-choice quiz, term substantiation improved consumer understanding by 9-10% regardless of the number of warnings, indicating that consumers may be “tuning out” a lengthy list. These findings suggest that mandatory disclosure may be beneficial for a small number of unexpected terms but may excessively drive away consumers from firms subject to many warnings in exchange for little increase in understanding.

An Overseas Look at Binding Arbitration Clauses

Bruce Wardhaugh of the School of Law--Queen's University Belfast haas written Unveiling Fairness for the Consumer:  The Law, Economics and Justice of Expanded Arbitration, forthcoming in the Loyola Consumer Law Review. Here is the abstract:

In recent years, the US Supreme Court has rather controversially extended the ambit of the Federal Arbitration Act to extend arbitration’s reach into, inter alia, consumer matters, with the consequence that consumers are often (and unbeknownst to them) denied remedies which would otherwise be available.  Such denied remedies include recourse to class action proceedings, effective denial of punitive damages, access to discovery and the ability to resolve the matter in a convenient forum.

The court’s extension of arbitration’s ambit is controversial.  Attempts to overturn this extension have been made in Congress, but to no avail.  In contrast to American law, European consumer law looks at pre-dispute agreements to arbitrate directed at consumers with extreme suspicion, and does so on the grounds of fairness.  In contrast, some argue that pre-dispute agreements in consumer (and employment) matters are consumer welfare enhancing:  they decrease the costs of doing business, which is then passed on to the consumer.  This Article examines these latter claims from both an economic and normative perspective.

The economic analysis of these arguments shows that their assumptions do not hold.  Rather than being productive of consumer surplus, the use of arbitration is likely to have the opposite effect.  The industries from which the recent Supreme Court cases originated not only do not exhibit the industrial structure assumed by the proponents of expanded arbitration, but are also industries which exhibit features that facilitate consumer welfare reducing collusion.

The normative analysis addresses the fairness concerns.  It is explicitly based upon John Rawls’ notion of “justice as fairness,” which can provide a lens to evaluate social institutions.  This Rawlsian analysis considers the use of extended arbitration in consumer matters in the light of the earlier economic results.  It suggests that the asymmetries present in the contractual allocation of rights serve as prima facie evidence that such arbitration-induced exclusions are prima facie unjust/unfair.  However, as asymmetry is only a prima facie test, a generalized criticism of the arbitration exclusions (of the sort found in Congress and underlying the European regime) is overbroad.

Peter Holland Study of Debt Buyer Collection Suits Finds Mass Produced Default Judgments

Peter A. Holland of Maryland has written Junk Justice: A Statistical Analysis of 4,400 Lawsuits Filed by Debt Buyers, 26 Loyola Consumer Law Reporter 179 (2014).  Here's the abstract:

Debt buyers have flooded courts nationwide with collection lawsuits against consumers. This article reports the findings from the broadest in-depth study of debt buyer litigation outcomes yet undertaken. The study demonstrates that in debt buyer cases, (1) the vast majority of consumers lose the vast majority of cases by default the vast majority of the time; (2) consumers had no lawyer in ninety-eight percent of the cases; and (3) those who filed a notice that they intended to defend themselves without an attorney fared poorly, both in court and in out of court settlements.

This study challenges the notion that there is an “adversary system” within the context of debt buyer lawsuits. The findings suggest that no such adversary system exists for most defendants in consumer debt cases. Instead, these cases exist in a “shadow system” with little judicial oversight, which results in mass produced default judgments.

The procedural and substantive due process problems which are endemic in debt buyer cases call for heightened awareness and remedial action by the bench, the bar, and the academy. As lawyers who are “public citizens, with a special responsibility for the quality of justice,” the profession can do better.  This article proposes suggestions for further study, and several common sense reforms.

Dennis Hirsch Article Proposes Sectoral Global Privacy Rules

Dennis D. Hirsch of Capital has written In Search of the Holy Grail: Achieving Global Privacy Rules Through Sector-Based Codes of Conduct, 74 Ohio St. L.J. (2013). Here is the abstract:

The movement of personal data across national borders is fundamental to the Internet economy. Yet the laws that govern such data flows remain national or, at best, regional. This mismatch weakens privacy protection, increases costs and uncertainty for business, creates tension and political strife between major trading partners such as the US and the EU, and confronts global privacy managers with difficult challenges. These problems have made the harmonization of national and regional privacy laws a very hot topic in privacy law and policy today. Several initiatives have sought to achieve such harmonization, but none has proven satisfactory.

This article proposes a relatively simple and elegant solution: internationally-approved, industry codes of conduct. The European Union and the Asia-Pacific Economic Cooperation (APEC) organization have each established privacy rules for their respective region. The proposed solution would take advantage of these existing arrangements. It would work as follows. An industry sector would draft a privacy code of conduct that fulfilled the core requirements of the EU and APEC regional privacy regimes. It would then submit the same code to the relevant authority in each system. If each approved the terms of the code, then firms that met those terms could feel quite confident that their activities complied with EU and APEC-region legal requirements. The approved code would function as a nearly global set of privacy rules.

The Article provides a fuller exposition of this proposal, situates it in regulatory theory, and explains how it fits with current legal frameworks. It shows that existing privacy law regimes already contain many of the pieces needed to support the proposed approach. It identifies the legal reforms that will be required in order to make this solution work, and so to come closer to that Holy Grail of privacy law: harmonized, global privacy rules.

Levitin & Ratcliffe Chapter on the Duty to Serve in Housing Finance

Adam J. Levitin of Georgetown and Janneke Ratcliffe the University of North Carolina at Chapel Hill's Center for Community Capital have written Rethinking Duties to Serve in Housing Finance, in Homeownership Built to Last:  Lessons from the Housing Crisis on Sustaining Homeownership for Low-Income and Minority Families (Brookings 2014).  Here is the abstract:

In this chapter, we consider the role of duties-to-serve in the housing finance market -- the patchwork of obligations on lending institutions to reach out to traditionally underserved communities and borrowers. We review the current regulatory framework and history of various duties-to-serve, including the Community Reinvestment Act, GSE Affordable Housing Goals, and FIRREA requirements for Federal Home Loan Banks, and identifies several problems within the framework. Going forward, we argue, a fair and inclusive housing finance market needs to involve a reconceptualized set of duties-to-serve that recognize the public purposes of financial services.  Accordingly, we recommend four changes to the duties-to-serve regulatory framework:  

(1) duties-to-serve should apply universally to the entire primary market, regardless of institution type; 

(2) duties-to-serve should apply equally to all secondary market entities; 

(3) duties-to-serve must be supported by a more robust set of evaluative tools, metrics, and incentives; and 

(4) duties-to-serve must have a credible enforcement mechanism. 

To effectuate these changes, we suggest the creation of an independent duty-to-serve commission that would advocate for greater financial inclusion and serve as a check on financial institutions' compliance with regulatory requirements outside of prudential bank regulators. An unconflicted institutional actor with a single duty of advocating for duties-to-serve would reduce the regulatory arbitrage incentives that plague the current duties-to-serve regime.

CRL Chapter on Car-Title Lending

Susanna  Montezemolo of the Center for Responsible Lending haas written Car-Title Lending.  Here is the abstract:

Provides an overview of car-title lending and its impact on U.S. households. Car-title lending — making expensive loans secured by the title of a vehicle a borrower owns outright — has become a multi-billion dollar industry in the U.S. over the last decade. CRL estimates that car-title lenders generate nearly $2 billion in loans annually, with borrowers paying more than $4 billion in fees — twice the amount loaned — in the process. While borrowers in most states are protected from these high-cost loans, 21 states permit these products that trap borrowers in debt and put one of their most significant assets on the line.

This chapter discusses key abuses in car-title lending, including a lack of underwriting, balloon payments, high APRs, loan churning and the threat of repossession. This chapter also updates recent estimates on the size of the car-title lending market and policy recommendations for state legislatures and federal regulators.

Elizabeth Renuart Updates Foreclosure Paper

In August we posted a link to a paper Albany's Elizabeth Renuart had written, Uneasy Intersections: The Right to Foreclose and the U.C.C., 48 Wake Forest L. Rev. 1205 (2013),    The paper has already drawn more than 500 downloads.  An updated version is now available.  Here is the revised abstract:

Historically, the practice of real property and foreclosure law was routine and noncontroversial. This legal landscape significantly altered during the spectacular growth of securitization deals involving trillions of dollars of residential mortgage loans. The National Conference of Commissioners on Uniform State Laws (NCCUSL) was a driving force behind one of these changes. It adopted amendments to Article 9 of the Uniform Commercial Code in 1998, at least in part, to facilitate securitization. These modifications included extending coverage to the sale of (not merely to a security interest in) promissory notes, declaring that the sale of the note also constitutes a sale of the mortgage without the need for a written assignment of the mortgage, and providing for automatic perfection of interests in both the note and the accompanying mortgage without the need to file.

Meanwhile, the behavior of a number of mortgage lending and securitization participants or their agents generated additional legal complications.  Examples include the mishandling of loan notes and mortgages, the forging of indorsements or the submitting of fraudulent affidavits to courts in support of their purported right to foreclose, and the pressing of foreclosures without the necessary documentation. 

Confusion about the roles of and intersections among Articles 3 and 9 of the UCC and the right to foreclose under state real property law followed in the wake of these changes. These misunderstandings spawned volumes of judicial rulings, many of which appear to be at odds with each other. In an effort to reduce the ensuing legal confusion about the intersections between the right to foreclose and the UCC, this Article provides a roadmap of the relevant rules in Articles 3 and 9 and the right to foreclose in state real property law. Further, it explores the tension developing over the last decade among Articles 3, 9, and the right-to-foreclose concept in state real property law.

This Article advances the literature concerned with the right to foreclose by categorizing recent state appellate court decisions that address this right by the type of analysis applied by those courts. The rulings from Arizona, California, and Georgia fall into one category and are the subject of special scrutiny because they dismiss the role of the UCC outright. Moreover, these three states have experienced some of the worst foreclosure rates in the nation and permit foreclosures to proceed nonjudicially. Hence, these decisions will affect a broad swath of homeowners in danger of losing their homes. The Article then applies statutory construction principles to determine whether those courts ruled out the UCC unnecessarily, proffering that foreclosure laws in those states could be harmonized with the UCC.

Finally, the Article concludes that where inconsistencies arise between the UCC and state real property law, applying statutory construction principles likely will result in creating a more uniform legal landscape throughout the nation, in protecting homeowners from unjustified foreclosures, and in reducing litigation costs and judicial resources in a distraught foreclosure system.