Consumer Law & Policy Blog

Mortgage Crisis in a Nutshell Video

John E. Campbell of Denver has created a video on the mortgage crisis. Here's the abstract (yes, there's an abstract):

Before becoming a law professor, much of my work was as a litigator and appellate attorney. I became increasingly passionate about the problems that exist in the mortgage industry. I also became increasingly aware that most people, even very educated people, including lawyers, do not have a working knowledge of the big picture with regards to the mortgage crisis. Although people have often heard of “subprime loans,” or “robo-signing” or “securitization,” they are often unaware of how these buzz words fit into the full scheme.

As a result, with the help of a colleague named Erich Vieth, we put together a 52 minute video that covers the mortgage crisis in a nutshell. It is complete with some simple graphics and plain-spoken explanation. I chose to put my scholarship in a video so that 1) it could reach a wider audience, and 2) because the topic lends itself to clear, oral explanation.

I am providing the link to the video, which is publicly available. I have received comments from legislators, the media and other interested parties relating to the video. The video also appears on the National Consumer Law Center’s website. Although it is meant to simplify the mortgage crisis, it represents thousands of hours of reading and learning.

Shauhin Talesh Study on How Dispute Resolution Structures Affect Implementation of Consumer Law

Shauhin A. Talesh of Irvine has written How Dispute Resolution System Design Matters: An Organizational Analysis of Dispute Resolution Structures and Consumer Lemon Laws, 46 Law & Society Review (2012).  Here's the abstract:

This study demonstrates how the structure of dispute resolution shapes the extent to which managerial and business values influence the meaning and implementation of consumer protection law, and consequently, the extent to which repeat players are advantaged. My analysis draws from, links, and contributes to two literatures that examine the relationship between organizational governance structures and law: neo-institutional studies of law and organizations and socio-legal studies of repeat players’ advantages in disputing. Specifically, I compare an instance where powerful state consumer protection laws are resolved in private dispute resolution forums funded by automobile manufacturers but operated by independent third-party organizations (California) with one where consumer disputes are resolved in public alternative dispute resolution processes run and administered by the state (Vermont). Through in-depth interviews and participant observation in the training programs that dispute resolution arbitrators undergo in each state, I show how different dispute resolution structures operating in California and Vermont give different meanings to substantially similar lemon laws. Although my data do not allow me to establish a causal relationship, they strongly suggest that the form of the dispute resolution structure, and how business and state actors construct the meaning of lemon laws through these structures, have critical implications for the effectiveness of consumer protection laws for consumers.

Another Concepcion Paper, This Time From Harvard

David Korn and David Rosenberg of Harvard have written Concepcion's Pro-Defendant Biasing of the Arbitration Process: The Class Counsel Solution.  Here's the abstract:

By mandating that numerous plaintiffs litigate their common question claims separately in individual arbitrations rather than jointly in class action arbitrations, the Supreme Court in AT&T Mobility LLC v. Concepcion created a potent structural and systemic bias in favor of defendants. The bias arises from the parties’ divergent stakes in the outcome of the common question litigation in individual arbitrations: each plaintiff will only invest to maximize the value of his or her own claim, but the defendant has an incentive to protect its entire exposure, and thus will have a classwide incentive to invest more in contesting common questions. This investment advantage enables the defendant to wield superior litigation power against each plaintiff, skewing the outcome of individual arbitrations in its favor and frequently rendering claims not worth filing in the first place. Concepcion perpetuates the bias by precluding the use of a class arbitration solution. We propose that courts neutralize the Concepcion bias by appointing class counsel to represent each plaintiff in individual arbitrations. Without offending Concepcion’s prescriptions for maintaining the efficiency of arbitral procedures, in particular the general bar against class arbitration without express contractual authorization, the class counsel solution equalizes the parties’ investment incentives to transform individual arbitrations into a socially useful legal system for promoting the deterrence, compensation, and other public policy objectives of federal and state substantive law.

 

 

 

Calo's Against Notice Skepticism

by Jeff Sovern

I've moved on to the privacy chapter of our casebook, and in that regard I just finished reading M. Ryan Calo's (Calo is at the University of Washington and affilated with Stanford)  intriguing Against Notice Skepticism In Privacy (And Elsewhere), 87 Notre Dame Law Review 1027 (2012).  Before I add my two cents, here's the abstract:

What follows is an exploration of innovative new ways to deliver privacy notice. Unlike traditional notice that relies upon text or symbols to convey information, emerging strategies of “visceral” notice leverage a consumer’s very experience of a product or service to warn or inform. A regulation might require that a cell phone camera make a shutter sound so people know their photo is being taken. Or a law could incentivize websites to be more formal (as opposed to casual) wherever they collect personal information, as formality tends to place people on greater guard about what they disclose. The thesis of this Article is that, for a variety of reasons, experience as a form of privacy disclosure is worthy of further study before we give in to calls to abandon notice as a regulatory strategy in privacy and elsewhere.

Calo is clearly more a fan of notice than outright regulation.  At one point he paraphrases Winston Churchill and writes that “notice is the worst regulatory mechanism, except for all of the alternatives."  Regular readers of this blog know that I am less fond of notice as a way of conveying information to consumers.  Still, notice may yet have a role to play in privacy, in the form of the single letter-grade approach.  As I have blogged about before, restaurant grades have been effective to convey health department assessments to consumers, and have improved the health not only of consumers who pay attention to the grades, but also of those who don't.  Surely it would be possible for some external agency to devise criteria for privacy policies, so that companies that don't use consumer information at all would get an "A", those who use it only internally would get a "B", and so forth.  That way, consumers could continue to forego reading privacy policies, but still know what privacy choices they are making.  And just as restaurateurs strive for better health department grades, to attract the business of those who care about the grades, which helps all consumers, perhaps businesses would strive for better privacy grades.  It seems like such an obvious idea, I wonder if someone has already tried it. 

Calo calls for more research, and I agree.  We need to try different ways of providing notice to see what consumers actually use.  The CFPB is willing to do this with its notices. Perhaps the FTC will follow suit on privacy.  I would love to see one of those Innocentive contests for notices that convey privacy policies to consumers in such a way that consumers will actually use them.

Richard Frankel Paper on Arbitration Clauses

Richard Frankel of Drexel has written The Arbitration Clause as Super Contract.  Here's the abstract:

It is widely acknowledged that the purpose of the Federal Arbitration Act was to place arbitration clauses on “equal footing” with other contracts. Nonetheless,federal and state courts have placed arbitration clauses on a pedestal by creating special interpretive rules for arbitration clauses that do not apply to other contracts. In doing so, they have relied extensively on the Supreme Court’s adoption of a “federal policy favoring arbitration” in the case of Moses H. Cone Memorial Hosp., Inc. v. Mercury Constr. Corp., 463 U.S. 1 (1983).

While many scholars have focused attention on the public policy rationales for and against arbitration, few have explored how arbitration clauses should be interpreted. This article fills that gap and asserts that judicial reliance on the federal policy favoring arbitration unfairly deprives litigants of access to the courts by pushing cases into arbitration that do not belong there and in the process. By creating special rules favoring arbitration that deviate from state contract law, courts are enforcing arbitration agreements in situations where they would not enforce other agreements. This article questions the basis for the federal policy favoring arbitration and identifies several areas in which courts are relying on it to over-enforce arbitration clauses. Because the original purpose of the Federal Arbitration Act was to make arbitration clauses just like other contracts, this article proposes that courts should not rely on a poorly-conceived federal policy favoring arbitration, but instead should apply general contract principles to arbitration clauses. Doing so best ensures that litigants are not unfairly forced into arbitration in situations where they never agreed to it.

Engel & Mccoy on Preemption After Dodd-Frank

Kathleen C. Engel of Suffolk Patricia A. McCoy of Connecticut have written Federal Preemption and Consumer Financial Protection: Past and Future, 3 Banking & Financial Services Policy Report 25 (2012).  Here is the abstract:

Many states and cities filled the void by passing anti-predatory lending laws of their own. Lenders, worried about potential liability, quickly organized a full-scale attack on the state and local initiatives. Their most potent strategy lay in challenging the laws and ordinances under federal preemption rules for national banks and federal savings associations that precluded states from enforcing their anti-predatory lending laws.

The Dodd-Frank Act curtailed the preemption rules by establishing that state consumer financial
laws can only be preempted if they discriminate against state-chartered depository institutions relative to, or prevent or significantly interfere with the powers of, national banks or federal savings associations.

Dodd-Frank's preemption standards became effective on July 21, 2011, at which point the U.S. Office of the Comptroller of the Currency (OCC) should have conformed its preemption rulings to the new law. Instead, on that date, the OCC issued a new rule that preempted broad swaths of existing state laws using its old preemption precedents, bypassing the Dodd-Frank procedures along the way. We contend that the OCC's actions are not consistent with Congress's intent and predict that there will be legal challenges to the substance of the OCC's new preemption rule and to the process the OCC employed when adopting the rule.

Disclosure vs. Regulation

by Jeff Sovern

Last week I had a very interesting conversation with a Ph.D candidate from the University of Amsterdam, Frederik J. Zuiderveen Borgesius, who is researching privacy regulation and behavioral targeting. He asked me if I could refer him to a book that explores when disclosure is an appropriate response to consumer protection problems as opposed to regulation of conduct, such as a prohibition on troublesome behavior.  I realized that I don't know of such a book, or even an article on the issue--something I had never realized before.  Does anyone out there know of such a work?

What makes this particularly embarrassing for me is that it connects to one of the themes of our casebook. The first two chapters focus on information remedies, including disclosure, while the remaining chapters look at conduct regulation.  We ask students to consider why the law takes one approach for some problems and the other in different contexts.  It seems like a natural thing for consumer protection folks to write about, and yet if any of us have, I don't know about it.

My own view is that since the sixties or so, the law has tried to use disclosure in consumer markets and conduct regulation in non-market matters. For example, Truth in Lending tries to make lending markets work better while Magnuson-Moss tries to fix warranty markets.  But when there is no relevant market--such as when consumers try to get credit reports fixed or debt collectors to back off, Congress relies on regulation, in the form of the Fair Credit Reporting Act and the Fair Debt Collection Practices Act, respectively.  But as behavioral economics has made clearer that consumers do not always act rationally, Congress is moving toward regulation even where markets operate.  That latter point is made by my co-author, Dee Pridgen, in her recent paper. 

And another thought: Mr. Borgesius's primary interest was in disclosure vs. regulation in the privacy context.  It appears that disclosure has not worked very well in privacy, in that consumers seem not to read privacy disclosures.  On the other hand, regulation seems paternalistic and risks regulate something consumers don't want.  What to do?  I wondered whether a middle-ground might work, in which government provides that if businesses want to collect, use, and disclose information about consumers, they should be obliged to give consumers something in return: money, discounts, or something else. Government could establish a floor for what that something could be, and companies and consumers would be free to contract for more than the floor if they wanted.  That way, consumers could continue paying little attention to their privacy, but would still receive something for yielding it. It's just a half-baked idea, and may not taste so good upon more reflection, but maybe it is worth contemplating. 

All of this is another lesson, for me at least, that you can think about something for a quarter-century and still miss the basics. I think we will be hearing more from Mr. Borgesius.

 

Dee Pridgen Paper on the CFPB and Recent Consumer Protection Statutes

Dee Pridgen of Wyoming has written Sea Changes in Consumer Financial Protection: Stronger Agency and Stronger Laws.  I read this one before it was posted and found it particularly useful in pulling together some recent themes in consumer law and explaining how the Dodd-Frank Act's anti-predatory lending rules are based on behavioral economics, as opposed to earlier statutes which partake more of traditional rational-person economics. Here is the abstract:

After the financial crisis of 2008, Congress responded by enacting new laws that changed the direction and theoretical underpinning of consumer protection in the financial sector. The Consumer Financial Protection Agency, formed by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, is a new and stronger agency for consumers. Two pieces of legislation, the Mortgage Reform and Anti-Predatory Lending Act (Title XIV of Dodd-Frank), and the Credit Card Accountability, Responsibility and Disclosure Act (Credit CARD Act) of 2009, are stronger laws ensuring the safety of consumer financial products. These new legislative and regulatory developments mark a shift from the rational consumer theory that underlay the great disclosure statutes of the late 1960’s and early 1970’s, such as the Truth in Lending Act, and toward the rising influence of behavioral economics as a guiding force in consumer protection. This article examines the new agency and the new laws, explains how they differ from the prior governmental structure and precepts, compares and contrasts rational consumer theory and behavioral economics theory, demonstrates how the new developments are a reflection of the modern theory, and then analyzes the advantages and disadvantages of this new approach.

 

 

More From Robert Hockett on Using Eminent Domain to Solve the Underwater Mortgage Debt Problem

Robert C. Hockett of Cornell has written Paying Paul and Robbing No One: An Eminent Domain Solution for Underwater Mortgage Debt that Can Benefit Literally Everyone. Here's the abstract:

This essay provides updated argumentation for and abbreviated specification of the municipal eminent domain plan for underwater mortgage loans that the author lays out in his earlier piece titled It Takes a Village. The nation's ungoing foreclosure crisis and economy-stifling mortgage debt deflation will not be arrested and reversed, the paper argues, until mortgage debt principal is written-down to post-bust home equity levels. Once that is done, however, literally everyone can benefit - from homeowners and bondholders to neighbors, communities, and local and regional economies.

Unfortunately, a host of classic collective action problems presently stand in the way of the 'win-win' solution here. Such problems require collective agents for their resolution, which is what private label securitization (PLS) trustees and even loan servicers are. But the pooling and servicing agreements (PSAs) pursuant to which many PLS trusts are formed, hurriedly drafted as they were during the bubble years when many pushed product and few apparently anticipated system-wide housing price crash, prohibit or effectively prevent even value-raising modifications or sales of sufficient numbers of underwater mortgage loans. This means that government alone - the sole entity able to sidestep dysfunctional contract rigidities, by use of the eminent domain authority - can serve as the requisite collective agent.

In theory, the essay continues, our federal government, through any number of instrumentalities, could play the appointed role. But political paralysis in Congress shows that it now faces collective action hurdles of its own. All that is left, then, is state and local government. But the latter, it happens, is happily best situated in any event to exercise the eminent domain authority to take underwater loans at fair value and modify them to benefit homeowners, bondholders, and third parties alike. For the nation's underwater mortgage loan problem is heavily localized in character, and municipalities in any event face the brunt of foreclosure-induced homelessness, tax base decline, and consequent blight wrought by ongoing defaults wrought by negative home equity - the makings of 'public use,' per our constitutional limits on eminent domain use, par excellence.

Mark Budnitz on Mobile Financial Services

Mark Elliott Budnitz of Georgia State has written Mobile Financial Services: The Need for a
Comprehensive Consumer Protection Law, 27 Banking & Finance Law Review (2012).  Here's the abstract:

The article first describes mobile financial services for consumers and the types of companies participating in the provision of those services. Anticipated consumer problems are explored, including: security, privacy, unauthorized transfers, error resolution, viruses, system breakdown, consumer mistake, and the need for documentation and a history of transactions. Public policy and government
regulatory issues are examined. Applicable U.S. state and federal laws are reviewed; their gaps and inadequacies are identified. The article concludes with a description of a proposed Model Law that provides satisfactory consumer protection.