Consumer Law & Policy Blog

Marc Roark Paper on Payment Systems

Marc Lane Roark of Missouri has written Payment Systems, Consumer Tragedy, and Ineffective Remedies, forthcoming in 86 St. John's Law Review (2013).  Here's the abstract:

Payment methods like the Starbucks Rewards Card, while imitating liquidity, are challenged by confidence-detracting barriers of too little consumer knowledge and a lack of appropriate remedies. Starbucks operates as a non-banking firm performing an essential banking function – the storage of money for consumers to later use. Consumers are rarely well informed of the nature of this transaction and the relief that may be available when contracting for a future sale. Recent congressional action (CAFA) limiting class action lawsuits to Federal Court significantly limits traditional consumer relief while the bankruptcy code provides little relief should the merchant find itself insolvent. All the while, consumers continue to entrust more than $1 billion each year for merchants to hold with no guarantee that the credits will be honored, few enforcement mechanisms to force merchants to do so, and little relief if the company files bankruptcy. Using the metaphor of consumption gentrification, this Article re-conceptualizes the stored value cards problem as a confluence between fair dealing and risk allocation. In doing so, the Article suggests several avenues of relief, but proposes comprehensive reform that incorporates commercial policy, regulatory oversight, and social consumer awareness.

 

 

Two Conceptions of Concepcion

Arpan Sura and Robert A. DeRise, both of Arnold & Porter, have written Conceptualizing Concepcion: The Continuing Viability of Arbitration Regulations.  Here's the abstract:

Section 2 of the Federal Arbitration Act (“FAA”) provides that arbitration agreements “shall be valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.” In AT&T Mobility Limited, LLC v. Concepcion, a sharply-divided Supreme Court held that the FAA preempted a California unconscionability rule that effectively guaranteed plaintiffs the right to class action arbitrations. A wildly controversial decision, Concepcion has left courts and litigants uncertain about whether longstanding state and federal regulations on the arbitration process remain viable. To take but a few examples, may the draftor of an adhesive contract select the arbitrators unilaterally or eliminate all of a plaintiff's rights to discovery? State and federal courts have traditionally not permitted such behavior. But to date there has been no systematic analysis of the impact of the Concepcion Court’s expansive reasoning on such regulations.

This article — the first of its kind to do so — fills that void. We argue that Concepcion has entrenched, and in many ways rewritten, the fundamental principles of arbitration jurisprudence. What made Concepcion a bellwether was not its narrow holding on class actions, but rather its unprecedented analysis of when and how the FAA trumps other laws. In earlier opinions, the Court had suggested that the FAA would trump rules that were not “generally applicable” but instead were applied to discriminate against arbitration. But in Concepcion, the Court devised a new test that held that the California rule was preempted because it conflicted with the “fundamental attributes of arbitration” — informality, efficiency, reduced costs, and speed.

We argue that the Court’s newly-minted preemption analysis, in combination with its free-floating abstractions about arbitration’s “fundamental attributes,” threaten to jeopardize a bevy of facially neutral contract laws merely because they are applied to arbitration agreements. In formalizing what arbitration is and why it is important, Concepcion has unwittingly upended decades of statutory and common law that hinder arbitration’s “fundamental attributes.” This article describes how the Court arrived upon this precipice, shows how going over — taking Concepcion’s reasoning to its logical conclusion — disrupts a longstanding body of law, and suggests a lodestar to guide courts and litigants safely back from the post-Concepcion cliff.  

Meanwhile, Lisa Tripp of Atlanta's John Marshall and Evan R. Hanson have written AT&T v. Concepcion: With Only Four Votes for the Deciding Rational [sic], Is it Precedent?. Here's their abstract:

The Supreme Court’s 2011 decision in AT&T v. Concepcion is considered by many to be a landmark decision which has the potential for greatly expanding the already impressive preemptive power of the Federal Arbitration Act (FAA). It is a well-known case exploring the interplay between state law unconscionability doctrine and the vast preemptive power of the FAA. In spite of its significance as an FAA case, Concepcion’s real importance may lie elsewhere.

AT&T v. Concepcion is ostensibly a 5-4 majority decision with a concurring opinion. However, the differences in the majority and concurring opinions present a unique conundrum for lower courts. Although the Court is not divided in form, there being 5 Justices who joined the majority opinion, it is indisputably divided in substance.

Justice Thomas joined the majority opinion and provided the fifth vote, but wrote a concurring opinion that explicitly rejected the legal reasoning of the majority opinion in its entirety. The putative majority opinion authored by Justice Scalia allows that unconscionability can be a valid defense to the enforcement of an agreement to arbitrate, but in Concepcion, allowing California to apply its unconscionability doctrine (the Discover Bank rule), would frustrate the purposes and objectives of Congress in enacting the FAA. For these reasons the Scalia opinion finds the law is preempted.

Justice Thomas, in contrast, does not believe that unconscionability can ever be a basis to invalidate an agreement to arbitrate and he reaffirmed his emphatic position articulated in Wyeth v. Levine that “[t]his Court’s entire body of purposes and objectives preemption jurisprudence is inherently flawed. The cases improperly rely on legislative history, broad atextual notions of congressional purpose, and even congressional inaction in order to pre-empt state law.” Justice Thomas’s conclusion that the law was preempted turned on the text of the statute which he interprets as not allowing unconscionability-based defenses to preemption. Justice Thomas has reaffirmed his rejection of purposes and objectives preemption in cases decided after Concepcion. This means, looking at the substance of the opinions, that there are but four votes for the ratio decidendi articulated in the Scalia opinion and there is not a single common denominator that the Scalia and Thomas opinions share, except that they agree on the result.

The Concepcion Court is, in substance, equally divided. Four members found that California’s unconscionability doctrine frustrated the purposes and objectives of the FAA, four in the dissent thought the law did not frustrate the purposes and objectives of the FAA, and one found that the purposes and objectives of Congress were immaterial to the resolution of the case.

How should lower courts react to an equally divided court in this situation? The Supreme Court provided the answer over 100 years ago in Hertz v. Woodman: "Under the precedents of this court, and, as seems justified by reason as well as by authority, an affirmance by an equally divided court is, as between the parties, a conclusive determination and adjudication of the matter adjudged; but the principles of law involved not having been agreed upon by a majority of the court sitting prevents the case from becoming an authority for the determination of other cases, either in this or in inferior courts."

Under any rational reading of the opinions, there can be no doubt that “the principles of law involved [have not] been agreed upon by a majority of the court sitting” and this should “prevent[] the case from becoming authority for the determination of other cases, either in [the Supreme Court] or in inferior courts.” Although Hertz dealt with a situation where the votes were literally split, its point that it takes a majority to create a governing rule is inescapable. In looking at the substance of the Scalia and Thomas opinions, there simply are not five votes for any aspect of the controlling rational articulated by Justice Scalia in his putative majority opinion. Because of this, Concepcion must, like two other Supreme Court cases that are similar to it, Branzburg v. Hayes and United States v. Verdugo-Urquidez, be treated as not having a majority opinion for precedential purposes.

 

 

Ginger Chouinard Paper on Lesser-Known Credit Reports

Ginger Chouinard of New Mexico has written The 'Other' Credit Report: What You Don't Know Can Hurt You.  Here's the abstract:

Nearly 90% of financial institutions use ChexSystems or similar account screening reports in their account opening process, yet they are under no duty to disclose this to consumers until an account is denied due to information contained in the report. For those consumers denied accounts, it is too late. They had no idea information was being collected on their checking account usage, much less that it could be used to deny them an account in the future, and are subsequently forced to go outside the mainstream and use expensive alternatives like check cashing services and money orders to conduct their everyday financial business. Increased consumer awareness of these reports is necessary so that consumers better understand the impact poor account management may have on their future usage of traditional banking services.

This article examines these reports, the impact on consumers when they can’t open a new account based on information contained in such reports, and how changes in overdraft practices have encouraged poor account management, which in turn may have resulted in even more negative reports. The article also examines how the Fair Credit Reporting Act (“FCRA”) applies to account screening reports and whether new overdraft practices technically result in loans, triggering additional disclosure. The article concludes with recommendations, discussing how the reporting system could be improved and how consumers could be better informed and protected.

 

 

Nancy Welsh Paper on Arbitration and Incentivizing Procedural Safeguards

Nancy Welsh of Penn State has written Mandatory Predispute Consumer Arbitration, Structural Bias, and Incentivizing Procedural Safeguards, 42 Southwestern University Law Review 187 (2012).  She presented the paper at the AALS annual conference.  Here's the abstract:

Within the past several decades, there has been an explosion in the creation, institutionalization and use of “alternative” dispute resolution procedures. Mandatory predispute arbitration has generated the most controversy because it appears beset with structural bias. The recent cases of AT&T Mobility LLC v. Concepcion and Compucredit Corp. v. Greenwood have raised additional concerns as the Supreme Court has announced that corporations can force consumers to arbitrate their private and statutory claims and give up their rights to pursue class relief. This Article begins by arguing that the Supreme Court’s enthusiastic embrace of mandatory predispute arbitration should be understood primarily as institutional self-help, as an opportunistic search for the funding and personnel that courts need to conduct fact-finding and decision-making in cases that the courts perceive as routine. By permitting corporations to impose class waivers on consumers, the Supreme Court is incentivizing the corporations to provide and fund a national private small claims court.

If the Court is incentivizing in this way, however, this Article urges that it should demand more in return for class waiver. Specifically, it should demand evidence that the arbitration procedure is sufficiently attractive to consumers so that they will pursue their claims, as well as evidence that the procedure is sufficiently fair. One difficulty in making these demands, however, is that courts are obligated to use very limited grounds and a deferential standard of review for arbitral awards.

Second, therefore, this Article urges courts to mine past experience in other legal contexts that involve privatized judicial functions, a deferential standard of judicial review, and the incentivizing of procedural safeguards. For guidance, this Article examines MetLife v. Glenn and the evolution of the deferential standards of review that courts apply to ERISA plan benefit denials by private claims administrators, particularly when such administrators operate in a conflicted decision-making context. In this context, the Supreme Court has managed to acknowledge the existence of structural bias and make it a relevant and important factor to be considered as part of deferential judicial review. Further, the Supreme Court has provided guidance to lower courts regarding the weight to be given to structural bias and has provided examples of the information required to assess such weight. Structural bias has been given the stature of tiebreaker in close cases. Finally and most important for the purposes of this Article, the Supreme Court has also incentivized the provision of structural and procedural safeguards (as well as discovery into the existence and operation of such safeguards) in order to reduce the potency of the structural incentives that encourage biased decision-making. In other words, the Supreme Court has incentivized the provision of safeguards that will enhance the likelihood of accurate decision-making — all while maintaining a deferential standard of review.


Glenn and its progeny thus offer procedural safeguards that the Supreme Court could -- and should -- import into its arbitration jurisprudence. These, at the very least, are the sorts of safeguards that the valuable bargaining chip of class waiver should be able to buy.

 

 

Ray Brescia Paper Calls for Strengthening the CRA

Raymond H. Brescia of Albany has written The Community Reinvestment Act: Guilty, but Not as Charged.  Here's the abstract:

Since its passage in 1977, the Community Reinvestment Act (CRA) has charged federal bank regulators with "encourag[ing]" certain financial institutions "to help meet the credit needs of the local communities in which they are chartered consistent with [] safe and sound” banking practices. Even before the CRA became law — and ever since — it has become a flashpoint. Depending on your perspective, this simple and somewhat soft directive has led some to charge that it imposes unfair burdens on financial institutions and helped to fuel the subprime mortgage crisis of 2007 and the financial crisis that followed. According to this argument, the CRA forced banks to make risky loans to less-than creditworthy borrowers. Others defend the CRA, arguing that it had little to do with the riskiest subprime lending at the heart of the crisis.

Research into the relationship between the mortgage crisis and the CRA generally vindicates those in the camp that believe the CRA had little to do with the risky lending that fueled these crises. At the same time, recent research by the National Bureau of Economic Research attempts to show that the CRA led to riskier lending, particularly in the period 2004-2006, when the mortgage market was overheated.

This paper reviews this and other existing research on the subject of the impact of the CRA on subprime lending to assess the role the CRA played in the mortgage crisis of 2007 and the financial crisis that followed. This paper also takes the analysis a step further, and asks what role the CRA played in failing to prevent these crises, particularly their impact on low- and moderate-income communities: i.e., the very communities the law was designed to protect. Based on a review of the best existing evidence, the initial verdict of not guilty — that the CRA did not cause the financial crisis, as some argue — still holds up on appeal. At the same time, as more fully described in this piece, an appreciation for the weaknesses inherent in the law’s structure, when combined with an understanding of the manner in which it was enforced by regulators, lead one to a different conclusion; although the CRA did not cause the crisis, it failed to prevent the very harms it was designed to prevent from befalling the very communities it is supposed to protect.

The defects in the CRA that emerge from this review, in total, suggest not that the CRA was too strong, but, rather, too weak. They also point to important reforms that should be put in place to strengthen and fine-tune the CRA to ensure that it can meet its important goal: ensuring that financial institutions meet the needs of low- and moderate-income communities, communities for which access to capital and banking services on fair terms is a necessary condition for economic development, let alone economic survival.

 

 

Jim Hawkins, et al. Paper on Title Lending

Vanderbilt Ph.D. student Kathryn Fritzdixon, Jim Hawkins of Houston, & Paige Marta Skiba of Vanderbilt have writtetn Dude, Where's My Car Title?: The Law, Behavior, and Economics of Title Lending Markets. Here's the abstract:

Millions of credit-constrained borrowers turn to title loans to meet their liquidity needs. Legislatures and regulators have debated how to best regulate these transactions, but surprisingly, we still know very little about the customers who use title loans. This Article reports findings from the first large-scale academic study of title lending customers. We surveyed over 400 title lending customers across three states and obtained information about customers’ demographic and behavioral characteristics.

Based on the results of our survey and guided by insights from behavioral economics, this Article seeks to reframe the title lending debate. Instead of focusing on the risks and consequences of borrowers’ cars being repossessed, as the vast bulk of the literature does, we argue that the primary problem that most borrowers face is underestimating the true cost of taking out a title loan. Borrowers’ survey responses demonstrate that many borrowers are overly optimistic and experience self-control problems that affect their ability to make timely loan payments. We argue that these deviations from the assumptions of classical economics do not warrant an outright ban of title lending, but they do provide room for policy interventions. Policymakers can improve efficiency in title lending markets by requiring lenders to disclose to consumers the likely experiences they will have with their title loans rather than merely requiring lenders to communicate pricing information.

Debt Collection Study of Offer of Representation and Counseling

Dalie Jimenez of Connecticut, James Greiner of Harvard, Lois R. Lupica of Maine, & Rebecca L. Sandefur of the American Bar Foundationand Illinois have written Using a Randomized Control Trial to Accomplish Multiple Goals: An RCT Evaluating What Works for Individuals in Financial Distress, Investigating the Debt Collection System, Exploring Ways to Increase Access to Justice, and Bridging Clinical and Doctrinal Instruction, forthcoming in the Georgetown Journal on Poverty Law Policy.  Here's the abstract:

This article describes a proposed randomized control trial (RCT) involving individuals in financial distress, specifically, individuals sued on a credit card debt collection case by a debt buyer or creditor. The aim of the RCT is to evaluate the effectiveness of two interventions often proposed to help individuals in financial distress improve their financial health. We intend to test, inter alia, whether (1) an offer of legal representation in the debt collection case, (2) an incentive to undergo the same financial counseling required in bankruptcy, or (3) a combination of both treatments have an effect on the financial health of financially distressed consumers. Our primary outcome measure will be credit scores and reports, although we also aim to survey study participants about other outcomes such as changes in health, assets, and general well-being.

We describe in detail not just the methodology of the study, but also the mechanics of how we have gone about executing this complex field experiment so far. The objective in doing so is to demystify the process for scholars, legal aid lawyers, and clinical professors who have not had direct experience with empirical methods, and to encourage them to think about conducting RCT evaluations of their own programs. The article also describes three other goals we seek to advance through the project. The first is a deeper understanding of debt collection in the courts. Allegations of abuse abound about the industry generally and legal collections specifically, but to date, the evidence is largely anecdotal. We will be uniquely positioned to learn about whether the allegations are more than anecdotes. The second is increasing access to justice for unrepresented defendants in collection cases. Along with a team of dedicated law students, the study team is developing an attorney litigation manual and pro se materials, including court forms and scripts, for debt collection litigation. Before making the pro se materials available, they will be field tested with individuals in similar situations to those facing study participants. The third goal is developing an innovative pedagogical approach to legal instruction that combines doctrine and practice. A majority of the law students participating in the project are doing so in the context of a seminar which incorporates both doctrinal instruction about the consumer credit system and clinical experience.

We hope that this article provides our readers both with ideas for future research projects and with ideas about how to incorporate diverse goals in a single study design.  

 

Porat & Strahilevitz Paper: Personalizing Default Rules and Disclosure with Big Data

Ariel Porat of Tel Aviv University and Chicago and Lior Strahilevitz of Chicago have written Personalizing Default Rules and Disclosure with Big Data.  Here's the abstract:

This paper provides the first comprehensive account of personalized default rules and personalized disclosure in the law. Under a personalized approach to default rules, individuals are assigned default terms in contracts or wills that are tailored to their own personalities, characteristics, and past behaviors. Similarly, disclosures by firms or the state can be tailored so that only information likely to be relevant to an individual is disclosed, and information likely to be irrelevant to her is omitted. The paper explains how the rise of Big Data makes the effective personalization of default rules and disclosure far easier than it would have been during earlier eras. The paper then shows how personalization might improve existing approaches to the law of consumer contracts, medical malpratice, inheritance, landlord-tenant relations, and labor law.

The paper makes several contributions to the literature. First, it shows how data mining can be used to identify particular personality traits in individuals, and these traits may in turn predict preferences for particular packages of legal rights. Second, it proposes a regime whereby a subset of the population (“guinea pigs”) is given a lot of information about various contractual terms and plenty of time to evaluate their desirability, with the choices of particular guinea pigs becoming the default choices for those members of the general public who have similar personalities, demographic characterics, and patterns of observed behavior. Third, we assess a lengthy list of drawbacks to the personalization of default rules and disclosure, including cross-susidization, strategic behavior, uncertainty, stereotyping, privacy, and institutional competence concerns. Finally, we explain that the most trenchant critiques of the disclosure strategy for addressing social ills are really criticisms of impersonal disclosure. Personalized disclosure not only offers the potential to cure the ills associated with impersonal disclosure strategies, but it can also ameliorate many of the problems associated with the use of personalized default rules.

 

 

 

Carolyn Dessin Paper: Arbitrability and Vulnerability

Carolyn Dessin of Akron has written Arbitrability and Vulnerability, 21 Temple Political & Civil Rights Law Review, 349 (2012).  Here's the abstract:

Arbitration is cool. Everybody's doing it. In the eighty-five years since the passage of the Federal Arbitration Act, that seems to be the prevailing sentiment. Recent decades have seen the meteoric rise of arbitration as a form of alternative dispute resolution. Arbitration is widely regarded as a less expensive, more expeditious alternative to litigation.

Courts frequently note that federal policy clearly favors arbitration. No judicial enthusiasm for arbitration seems more complete than that evidenced in the jurisprudence of the United States Supreme Court.

Along with the rise of arbitration, however, there has also been a rise in the amount of criticism of arbitration. Some suggest that nothing short of a complete overhaul of the Federal Arbitration Act will correct problems that have arisen in the arbitration context.

One of the main focuses of the criticism has been against mandatory binding pre-dispute arbitration in the consumer context. The United States has condoned this species of arbitration in an unparalled fashion, and some suggest that our country has gone too far. One of the major concerns in this area is that it is unlikely that a consumer can knowingly agree to arbitrate claims that have not yet arisen.

This Article focuses on mandatory pre-dispute arbitration agreements in the context of a situation involving a vulnerable party. As the
discussion will illustrate, there is no precise definition of vulnerability. Although most of the cases discussed herein involve older vulnerable adults, the concerns in this area frequently arise in other contexts as well. Thus, the author suggests that the discomfort exhibited by courts in dealing with these cases may suggest a broader discomfort with mandatory pre-dispute arbitration agreements in the consumer context.

 

 

Derek Bambauer Paper on Privacy vs. Security

Derek E. Bambauer of Arizona has written Privacy Versus Security, forthcoming in the Journal of Criminal Law and Criminology.  Here is the abstract:

Legal scholarship tends to conflate privacy and security. However, security and privacy can, and should, be treated as distinct concerns. Privacy discourse involves difficult normative decisions about competing claims to legitimate access to, use of, and alteration of information. It is about selecting among different philosophies, and choosing how various rights and entitlements ought to be ordered. Security implements those choices – it intermediates between information and privacy selections. This Article argues separating privacy from security has important practical consequences. Security failings should be penalized more readily, and more heavily, than privacy ones, because there are no competing moral claims to resolve, and because security flaws make all parties worse off. Currently, security flaws are penalized too rarely, and privacy ones too readily. The Article closes with a set of policy questions highlighted by the privacy versus security distinction that deserve further research.