Consumer Law & Policy Blog

Mark Totten Paper on Credit Reform and State Attorneys General

Mark Totten of Michigan State has written Credit Reform and the States: The Vital Role of Attorneys General after Dodd-Frank. Here's the abstract:

Congress employed multiple strategies in the wake of the Great Recession to provide greater protections for consumers in the financial marketplace. One strategy aimed at agency design and resulted in creation of the Consumer Financial Protection Bureau. Another strategy created new substantive prohibitions and corresponding rulemaking powers. A third strategy channeled the forces of federalism, placing a limit on agency preemption and empowering state attorneys general to enforce federal law. Scholars have focused on the first two strategies, plus the new constraints on preemption, but so far have not given sustained attention to the role of states as co-enforcers of federal consumer financial protection law. This Article seeks to fill that void, focusing on implementation and charting a path for normative assessment.

I begin by placing this dual enforcement scheme within the context of recent history and the evolving infrastructure for consumer financial protection in the United States. I then consider several interpretive issues to account for the substantive, procedural, and remedial powers Congress placed in the hands of state attorneys general. Recognizing that the success of this concurrent enforcement regime will depend in part on early coordination, I next identify several implementation priorities necessary to create a scheme that is both effective and efficient. Finally, I identify key questions and offer preliminary observations toward a normative assessment of this scheme and its implications both for consumer finance and American federalism.

 

 

Study Finds Racial Discrimination in Google Searches

Latanya Sweeney, Professor of Government and Technology in Residence at Harvard University, has written Discrimination in Online Ad Delivery. Here's the abstract:

A Google search for a person's name, such as “Trevon Jones”, may yield a personalized ad for public records about Trevon that may be neutral, such as “Looking for Trevon Jones? …”, or may be suggestive of an arrest record, such as “Trevon Jones, Arrested?...”. This writing investigates the delivery of these kinds of ads by Google AdSense using a sample of racially associated names and finds statistically significant discrimination in ad delivery based on searches of 2184 racially associated personal names across two websites. First names, previously identified by others as being assigned at birth to more black or white babies, are found predictive of race (88% black, 96% white), and those assigned primarily to black babies, such as DeShawn, Darnell and Jermaine, generated ads suggestive of an arrest in 81 to 86 percent of name searches on one website and 92 to 95 percent on the other, while those assigned at birth primarily to whites, such as Geoffrey, Jill and Emma, generated more neutral copy: the word "arrest" appeared in 23 to 29 percent of name searches on one site and 0 to 60 percent on the other. On the more ad trafficked website, a black-identifying name was 25% more likely to get an ad suggestive of an arrest record. A few names did not follow these patterns: Dustin, a name predominantly given to white babies, generated an ad suggestive of arrest 81 and 100 percent of the time. All ads return results for actual individuals and ads appear regardless of whether the name has an arrest record in the company’s database. Notwithstanding these findings, the company maintains Google received the same ad text for groups of last names (not first names), raising questions as to whether Google's advertising technology exposes racial bias in society and how ad and search technology can develop to assure racial fairness.

Paper Finds Evidence of Mortgage Originators Steering Borrowers to Subprime Loans in 2000s

Sumit Agarwal of the National University of Singapore and Douglas D. Evanoff of the Chicago Fed have written Loan Product Steering in Mortgage Market.  Here's the abstract:

Accusations of unscrupulous lender behavior — e.g., predatory lending — abounded during the housing boom of the 2000s. Such behavior is said to have generated significant social costs as borrowers were misled into accepting loans with inferior characteristics relative to the mortgage products that they should have qualified for. However, there is little hard evidence of such behavior and few estimates of the true effect of such behavior. Much of the research to date is based on anecdotal evidence or analyzes differential loan terms for broad groups of borrowers that are thought to have been targeted for such lending behavior. We employ a more direct methodology and test whether a particular form of this behavior existed during the housing boom: credit steering toward predatory-like loan terms. With this steering, the broker or real estate professional encourages the home buyer to access credit from a particular lender that provides the credit, but at unattractive terms. We find evidence of such behavior. That is, we find evidence consistent with lenders steering higher-quality borrowers to affiliates that provide subprime-like loans. These borrowers were charged 40-60 bps higher APR, and were 2% points less likely to default compared to similar borrowers who were not steered to such loans — consistent with the steered borrowers receiving inferior loans given their qualifications. Delving deeper, we find that the loans with steered borrowers were more likely to be privately securitized and steering was not concentrated solely among the large banks. Our results are, to our knowledge, the first explicit evidence of systematic mortgage lending abuse during the run-up in the housing markets.

Todd Zywicki on Network Branded Prepaid Cards

Todd J. Zywicki of George Mason has written The Economics and Regulation of Network Branded Prepaid Cards. Here is the abstract:

General-purpose reloadable prepaid cards have been one of the fastest-growing sectors of the consumer payments marketplace in recent years. Their importance has accelerated as a consequence of new regulations enacted in the wake of the 2008 financial crisis. This increased use of prepaid cards has also increased angst among regulators, especially regarding the number and size of fees on prepaid cards. State and federal regulators as well as Congress are interested in imposing new regulations on prepaid cards. These calls for regulation, however, have proceeded in a largely fact-free environment. This paper describes the current economic and regulatory landscape for prepaid cards. The market appears to be robustly competitive, as recent years have seen declining costs and increasing functionality as well as entry of major players such as American Express and several large banks. Nor is there any evidence that consumers systematically err in the cards that they choose. Absent a demonstrable competitive market failure or systematic consumer abuse, prescriptive regulation of the terms and substance of prepaid cards would likely have unintended consequences that would exceed the benefits to consumers. On the other hand, there are some regulations that might be enacted that could promote competition and consumer welfare in this rapidly evolving market.

Paper on Add-ons to Consumer Products and Services and Behavioral Economics

Tom Baker of Penn and Peter Siegelman of Connecticut have written Protecting Consumers from Add-On Insurance Products: New Lessons for Insurance Regulation from Behavioral Economics. Here's the abstract:

Persistently high profits on “insurance” for small value losses sold as an add-on to other products or services (such as extended warranties sold with consumer electronics, loss damage waivers sold with a car rental, and credit life insurance sold with a loan) pose a twofold challenge to the standard economic analysis of insurance. First, expected utility theory teaches that people should not buy insurance for small value losses. Second, the market should not in the long run permit sellers to charge prices that greatly exceed the cost of providing the insurance. Combining the insights of the Gabaix and Laibson shrouded pricing model with the behavioral economics of insurance, this article explains why high profits for add-on insurance persist and describes the negative distributional and welfare consequences of an unregulated market for such insurance. The article explores four potential regulatory responses: enhanced disclosure, a ban on the point of sale offer of add-on insurance, price regulation, and the creation of a new, on-line market. Drawing on theoretical, empirical, and comparative law sources, the article explains why enhanced disclosure will not work, the circumstances under which a point of sale ban is desirable, and why a new, on-line market is preferable to price regulation in circumstances in which a point of sale ban is undesirable.

 

 

Paper on the Foreclosure Crisis in Appalachia

Jenna Rosie Tighe of Appalachian State has written Responding to the Foreclosure Crisis in Appalachia: A Policy Review and Survey of Housing Counselors, 23 Housing Policy Debate No. 1 (2013). Here's the abstract:

Existing research on the foreclosure crisis tends to focus on national trends or on metropolitan areas. Few studies focus on rural areas, and none look at Appalachia in particular. Existing research on rural housing challenges suggests that rural communities face unique challenges in the wake of the foreclosure crisis due to capacity constraints, lack of qualified counselors in rural areas, and lack of funding availability. This study investigates the impact of existing policies upon Appalachian communities and households – analyzing whether communities suffering from widespread foreclosures lack the governmental and non-profit resources necessary to adequately utilize funding and other resources to respond to the crisis. We present findings from a survey of housing counselors serving the Appalachian region, which suggests that lack of federal funding is placing enormous strain on counseling agencies. These challenges often prevent them from getting distressed homeowners aid in a timely manner or help them to make modifications to their mortgages. Finally, we make policy and planning recommendations to target assistance to these and other rural and distressed communities suffering from foreclosures.

Paper on Payment Card Security Measures

Edward A. Morse of Creighton and Vasant Raval of Creighton Business have written Private Ordering in Light of the Law: Acheiving Consumer Protection through Payment Card Security Measures, 10 DePaul Business & Commercial Law Journal 213 (2012).  Here's the abstract:

A private ordering regime has developed within the payment card industry to define appropriate security practices and to monitor compliance by network participants. Market demands for trustworthy systems upon which consumers and merchants could rely provide incentives for security, which the card brands supplement by privately designed fines and sanctions imposed through contract. Although private ordering has functioned sufficiently well to make payment cards a trusted payment method, the system is not completely secure, as data security breaches continue to occur. This is not surprising, as complete security is not a feasible goal. Nevertheless, some have questioned whether additional government regulation is necessary to protect consumers. This article explores the effects of legal intervention, including disclosure laws, on this private ordering system. It questions whether additional government intervention would enhance consumer welfare, particularly when consumers will likely bear the ultimate costs of such regulation. It recommends modifications in breach disclosure laws to eliminate individual notice requirements in favor of public notices, which may reduce costs and enhance consumer welfare. It challenges “bounty” enforcement regimes, such as FACTA, which offer little marginal benefit to consumers while substantially raising costs. It identifies practical and political problems presented by the different capacities of large and small firms to bear security costs, which are not easily solved under either private ordering or legislative approaches. Finally, it offers a set of policy issues as a possible agenda for consideration by policy makers and researchers in this domain.

 

 

Omri Ben-Shahar Paper Looks at Which Consumers Are Hurt Most by Arbitration Clauses

Omri Ben-Shahar of Chicago has written Arbitration and Access to Justice: Economic Analysis. Here is the abstract:

Mandatory arbitration clauses in consumer contracts are widely regarded as problematic because they limit consumer’s access to judicial forums, to fair procedures, and potentially to any kind of remedy. But rather than looking at consumers as a group, I examine which sub groups of consumers are affected by this limitation more than others. I argue that in most circumstances, access to courts benefits the elite, not the weak. It is a species of open-access policy that has an unintended regressive effect. Paradoxically, rules that limit the use of pre-dispute arbitrations clauses hurt, rather than protect, weaker consumers, as they mandate a regressive reallocation. I also consider the role of class actions, and whether weak consumers are potentially the indirect beneficiaries of class action litigation. This argument has theoretical merit, but it, too, is limited in ways that are often unappreciated.

Paper Proposes Solution to Class Arbitration Problem

Emanwel J. Turnbull has written Opting Out of the Procedural Morass: A Solution to the Class Arbitration Problem, forthcoming in the Widener L. Rev. Here's the abstract:

American class actions are internationally regarded as a procedural form to avoid and widely criticized in the United States. They have been narrowed and restricted by U.S. statutes and case law. Plaintiffs' lawyers in consumer class actions are  portrayed as greedy and fraudulent, while businesses are increasingly acting to avoid class actions through mandatory pre-dispute arbitration clauses. Even class arbitration is criticized as leading to a “procedural morass.”

This Article proposes that parties and arbitral fora opt out of the American procedural morass (and the attendant long-running disputes about American class actions) by adopting an English procedural rule for aggregation. This Article performs the necessary investigation into the legal contexts of England and America and adjusts the transplant rule to best fit its new home.


The proposed arbitral rule is simpler and more flexible, and therefore more suitable, than the existing arbitral rules adapted from Federal Rule of Civil Procedure. Perhaps more importantly, this new rule does not carry the cultural baggage of the American class action. Where consumers and businesses are vehemently opposed, this new approach to aggregation can bring compromise and co-operation. If adopted, this rule can relieve the consumer-business tensions and breathe new life into the arbitral forum as a setting in which many consumers can obtain a fair hearing of a dispute, even if they need to do so together.

 

 

James Nehf on the Failed Promise of Information Privacy

James P. Nehf of Indiana University has written Open Book: The Failed Promise of Information Privacy in America.  Here's the abstract:

With financial and other personal information about us in countless databases, and with companies such as Facebook and Google collecting data about their users to drive profits and satisfy expectations of shareholders, there is a pervasive concern that we have little control over access to potentially harmful uses of that information. Moreover, many consumers believe that little can be done to address the problem except to give out as little information as possible and try our best to monitor our credit reports and financial accounts in an effort to detect unexpected activity if it occurs. By not enacting strong information privacy laws in the non-governmental sector, the U.S. Congress and the fifty states have effectively defaulted to a market-based model of privacy protection that relies heavily on individual self-policing and market incentives as the primary means of information control. A self-policing privacy protection model could be effective if a market for information privacy were possible — if well informed individuals could shop their privacy preferences effectively. This book-length paper examines the reasons why this is highly unlikely and why privacy laws in the United States (or the lack thereof) will not protect legitimate consumer interests in the years to come. Part 1 shows why information privacy is a social or societal value and not just an individual concern. Part 2 examines in more detail why individualist, market approaches to privacy protection are destined to fail. Part 3 continues this theme and examines research in behavioral sciences about how consumers make decisions in market transactions. Part 4 concludes by critiquing the “new” privacy framework released by the Federal Trade Commission. While the framework contains hopeful rhetoric calling for greater emphasis on societal solutions to privacy concerns, most of the framework continues to rely heavily on individual notice and choice in transactions that involve exchanges of personal information.