Consumer Law & Policy Blog

Writings on the Postal Service Offering Banking Services

by Jeff Sovern

There's been a lot of discussion recently about whether the Post Office should offer banking services.  The idea is that it could serve the unbanked, and that its many existing branches would cover the entire country (Disclosure: one of my brothers works for the Postal Service, though we haven't discussed this idea).  For example, Adam Levitin had something in the American Banker here. Other American Banking coverage of the proposal can be found here, here, here, and here (some behind paywall).   Now Mehrsa Baradaran of Georgia has written It’s Time for Postal Banking, forthcoming in the Harv. L. Rev. F.  Here's the abstract:

This essay makes the case that the USPS is in a unique position to provide much-needed financial services for the large population of unbanked or underbanked Americans. First, the post office can offer credit at lower rates than fringe lenders by taking advantage of economies of scale as well as their position in the federal bureaucracy.  Second, they already have branches in many low-income neighborhoods that have been long deserted by commercial banks.  And, third, people at every level of society, including the unbanked, have a level of familiarity and comfort with the post office that they do not have with more formal banking institutions.

This essay moves one step further by demonstrating why government support and even subsidies to enable the endeavor are appropriate and justifiable. First, banking-related subsidies are grounded in historical practice, as demonstrated by government support for credit unions, savings and loans, and student loans. Postal banking derives from these longstanding practices, but broadens the scope to include the poor and not just the middle class. Further, state support of banking throughout U.S. history has operated much like a social contract: the state supports the banking system in a variety of ways and in return, banks are to be credit intermediaries, providing the populace with access to loans and financial services. Thus subsidies for banking have been justified because they provide a benefit to all citizens. Mainstream banks have met a portion of their obligation, but a large portion of the population — the poor — have been left out. It is time, then, for the government itself to meet the demand for credit. 

Mark Budnitz Article on Georgia's Primary Consumer Protection Statute

Mark Elliott Budnitz of Georgia State has written Buyer Beware: Georgia Consumers Can't Rely on the Fair Business Practices Act, 6 John Marshall Law Journal  507 (2013).  Here is the abstract:

In Novare Group, Inc. v. Sarif, the Georgia Supreme Court rejected the plaintiffs' claim that the defendant brokers and developers violated the Georgia Fair Business Practices Act ("FBPA"), Georgia's primary consumer protection statute. The author contends that the court's approach in Novare undermines the Georgia General Assembly's purpose in enacting the FBPA to protect consumers from unfair or deceptive practices. The article criticizes the court for treating claims under the FBPA the same as common law fraud claims. It also examines the court's treatment of reliance, parol evidence, merger clauses and legislative silence. Finally, the article discusses the implications for future actions seeking redress for FBPA violations.

(I don't normally post articles on the law of a single state, but Mark Budnitz articles always merit attention.)

Economists' Paper: Regulating Automobiles: The Consequences for Consumers

Colleen E. Haight of San Jose State University and Derek Thieme of George Mason University's Mercatus Center have written Regulating Automobiles: The Consequences for Consumers.  Here is the abstract:

Automobiles are ubiquitous. Most Americans take at least one car trip every day to get to work or school or to run household errands. The automobile has also never been safer. New technology has brought car frames that crumple to reduce the impact of a crash, airbags that cushion the blow of an accident, and cameras that show drivers what is behind the vehicle. In addition, rising standards of living have allowed consumers to purchase more safety equipment and to question the environmental impact of cars. While cleaner, safer automobiles certainly have benefits, as economists, we must ask, what do all these regulations cost the consumer? Costs arise from three sources: workplace safety regulation, environmental regulation, and consumer safety regulation. In this paper, we examine each area in turn, focusing on how the cost of regulations impacts the average automobile consumer.

IMF Researchers on the Impact of Foreclosure Laws on the Supply of Credit

Jihad Dagher and Yangfan Sun, both of the International Monetary Fund, have written Borrower Protection and the Supply of Credit: Evidence from Foreclosure Laws.  Here's the abstract:

Laws governing the foreclosure process, which vary across jurisdictions, have direct consequences on creditors’ losses from borrower default, and thus, could potentially affect lending decisions. Our empirical strategy exploits a quasi-experimental setting using loan-level data to examine the impact of these laws on banks’ propensity to reject a loan application. Our analysis takes into consideration the variation in the banking landscape across state borders, present even within contiguous counties, an aspect that has been overlooked in the extant literature. We find that judicial foreclosure and the prohibition of recourse reduce the supply of credit mainly for jumbo (non-conforming) loans, i.e., loans that are ineligible to be guaranteed by the GSEs. These results are robust to a battery of robustness tests. Our findings illustrate the consequences of foreclosure laws, and more generally borrower protection laws, on credit supply. They also shed light on an indirect subsidy by the GSEs to borrower-friendly states.

Fed Staff Article on Payment Fraud Liability

Sandeep Dhameja, Katy R. Jacob and Richard D. Porter, all of the Federal Reserve Bank of Chicago, have written Clarifying Liability for Twenty-First-Century Payment Fraud, 37 Economic Perspectives (2013).  Here's the abstract:

This article examines the governance structure of retail payments in the United States, provides an overview of payment fraud, and discusses in depth the liability frameworks for fraud involving specific payment methods. It also presents a series of recommendations that describe how the public sector might work together with the private sector to reduce fraud risks by clarifying liability for fraud.

Suffolk Law Review Symposium on Credit Scoring and Reporting Now Available Online

Here. Here's a list of the articles:

Credit Reports and Employment: Findings from the 2012 National Survey on Credit Card Debt of Low- and Middle-Income Households

 by Amy Traub ·

Medical Debt and Its Relevance When Assessing Creditworthiness

by Mark Rukavina 

Discriminatory Effects of Credit Scoring on Communities of Color

by Lisa Rice and Deidre Swesnik

The Misconception of the Consumer as a Homo Economicus: A Behavioral-Economic Approach to Consumer Protection in the Credit-Reporting System

by Adi Osovsky 

Selling Consumers Not Lists: The New World of Digital Decision-Making and the Role of the Fair Credit Reporting Act

 by Ed Mierzwinski and Jeff Chester 

Adapting Credit Scores to Evolving Consumer Behavior and Data

by Frederic Huynh 

The Legal Framework of Consumer Credit Bureaus and Credit Scoring in the European Union: Pitfalls and Challenges—Overindebtedness, Responsible Lending, Market Integration, and Fundamental Rights

Federico Ferretti 

Foreword: Symposium On Credit Scoring and Credit Reporting

by Terry Clemans

Compromising the Safety Net: How Limiting Tax Deductions for High-Income Donors Could Undermine Charitable Organizations

by Patrick E. Tolan, Jr.

Making Law with Lawsuits: Understanding Judicial Review in Campaign Finance Policy

 by Rebecca Curry 

Paper on the Ethics of Payment Mechanisms

James Angel of Georgetown's Finance Department and Douglas M. McCabe of Georgetown's Management Department have written The Ethics of Payments: Paper, Plastic, or Bitcoin?  Here is the abstract:

Individuals and businesses make billions of payments every day in various forms. Payers have choices about what forms of payment they will make, and payees also have some flexibility on what they will accept. Different forms of payment involve different costs and benefits for both the payer and the payee.  Can it be unethical to use a particular form of payment? Can a payment system like bitcoin be “evil,” as charged by Krugman (2013)?  Or does it provide a means for a more trustworthy means of payment? What are the ethical implications of paying workers with one form of payment, such as a fee-laden payroll card, over another? What are the ethical implications of choosing a payment tool, such as a rewards credit card, that imposes higher costs on the merchant?  The differential nature of bargaining power between the users and operators of the dominant payment networks also raise ethical questions regarding the fairness of charges in such asymmetric power situations.  A payment system, like any tool, is not “evil” by itself; it is the use that matters.

Should substantive due process stop courts from enforcing excessive penalties in consumer contracts?

For years now, some have argued that if substantive due process prohibits disproportionately large punitive damages awards against major corporations, it also should stop courts from enforcing excessive contract damages against consumers. See Seana Valentine Shiffrin, Are Credit Card Late Fees Unconstitutional?, 15 Wm. & Mary Bill Rts. J. 457, 460 (2006).

Two Ninth Circuit judges -- Nelson and Reinhardt -- just endorsed that view. See In re Late Fee and Over-Limit Fee Litigation, 2014 WL 211729.

Paper Explores How the Amount of Privacy Affects Industry Profits, Consumer Welfare, and Total Welfare

Oz Shy of the Federal Reserve Bank of Boston and Rune Stenbacka of the Swedish School of Economics and Business Administration have written Customer Privacy and Competition.  Here is the abstract:

We analyze how different degrees of privacy protection affect industry profits, consumer welfare and total  welfare. Firms earn higher profits under weak privacy protection compared with strong or no privacy protection. Therefore, the relationship between the degree of privacy protection and equilibrium profits is not monotonic. Consumers monotonically benefit from an increase in the degree of privacy protection. Finally, total welfare  monotonically increases with the degree of privacy protection.

Paper on Formal and Informal Sanctions in Consumer Protection

Scott Baker of Washington University in Saint Louis and Albert H. Choi of Virginia have written Crowding In: How Formal Sanctions Can Facilitate Informal Sanctions. Here's the abstract:

This paper examines the interaction between legal and reputational sanctions in the design of an optimal deterrence regime, particularly in a setting where two parties have a long term relationship.  The paper makes three claims.  First, both legal and reputational sanctions are costly: legal sanctions require spending resources on litigation while reputational sanctions can lead to inefficient failures to trade.  An optimal deterrence regime must make a trade-off between these two types of costs.  Second, in achieving optimal deterrence, the two sanctions function as both substitutes and complements.  As substitutes, relying more on one type of sanction requires less of the other in reaching any desired level of deterrence.  As complements, legal sanctions, through generation of relevant information, can facilitate reputational sanctions.  Especially when fault-based standards (such as “best efforts,” “commercially reasonable efforts,” or “good faith”) are used, if the court’s decision produces information that correlates with the underlying behavior, that information can be used to better tailor reputational sanctions.  Third, the paper argues that the most effective deterrence regime will often combine formal and informal sanctions.  By keeping the formal sanctions low, the optimal regime keeps the litigation costs in check.  Reputational sanctions, then, can make up for any shortfall in deterrence.  Allowing some litigation also enables the parties to take advantage of the informational benefits of litigation.  After establishing these points theoretically, the paper pivots to examine various empirical findings consistent with the theory.