Consumer Law & Policy Blog

Solove Paper on Privacy Self-Management vs. Paternalism

Daniel J. Solove of GW has written Privacy Self-Management and the Consent Paradox, 126 Harvard Law Review (2013).  Here's the abstract:

The current regulatory approach for protecting privacy involves what I refer to as the “privacy self-management model” – the law provides people with a set of rights to enable them to decide for themselves about how to weigh the costs and benefits of the collection, use, or disclosure of their information. People’s consent legitimizes nearly any form of collection, use, and disclosure of personal data.

Although the privacy self-management model is certainly a laudable and necessary component of any regulatory regime, I contend in this essay that it is being asked to do work beyond its capabilities. Privacy self-management does not provide meaningful control. Empirical and social science research has undermined key assumptions about how people make decisions regarding their data, assumptions that underpin and legitimize the privacy self-management model.

Moreover, even if individuals were well-informed and rational, they still cannot appropriately self-manage their privacy due to a series of problems. For example, the problem of scale involves the fact that there are too many companies collecting and using data for a person to be able to manage privacy with every one. The problem of aggregation involves the fact that privacy harms often consist of an aggregation of disparate pieces of data, and there is no way for people to assess whether revealing any piece of information will sometime later on, when combined with other data, reveal something sensitive or cause harm. The essay also discusses a number of other problems.

In order to advance, privacy law and policy must confront a complex and confounding paradox with consent. Consent to collection, use, and disclosure of personal data is often not meaningful, and the most apparent solution – paternalistic measures – even more directly denies people the freedom to make consensual choices about their data. No matter which direction the law takes, consent will be limited, and a way out of this dilemma remains elusive.

 

 

Alan White on the Mortgage Loan Transfer System

CL&B blogger Alan M. White of CUNY has written Losing the Paper – Mortgage Assignments, Note Transfers and Consumer Protection, 24 Loyola Consumer Law Review 468 (2012). Here's the abstract:

In this article, I survey the state of the mortgage loan transfer system, the legal rules that govern it, and the widening gap between those rules and the practices in the secondary mortgage market just prior to the 2008 crisis. The review includes some empirical assessment of the extent of errors and execution problems; the damage done by “robo-signing;” the Mortgage Electronic Registration System (MERS) and note delivery practices; and the extent to which courts will prevent or reverse foreclosure sales based on those errors and problems. I then examine why existing legal structures, for both paper-based and electronic transfers, are not working, and the extent to which they have failed, I also identify the key consumer and investor protection values and interests (finality, transparency, fraud protection, and so forth) that must be addressed by the law governing secondary market transfers of home loans. I conclude by outlining options for reforming the mortgage loan transfer system, including the use of a single document merging the note and mortgage, and a structure for the registration of a single authoritative electronic version of the mortgage/note and of all changes in parties to, and terms of, the transaction.

More From Creola Johnson on Payday Lending

Creola Johnson of Ohio State has written Congress Protected the Troops: Can the New CFPB Protect Civilians from Payday Lending? 69 Washington & Lee Law Review 649 (2012). Here's the abstract:

In 2007, Congress enacted a law, commonly referred to as the Military Lending Act (MLA), which placed a 36% interest rate cap on several consumer loans, including payday loans, and prohibits lenders from engaging in several practices considered predatory. However, the MLA grants these protections only to active-duty military members and their dependent family members.

In the wake of the mortgage foreclosure crisis, Congress passed and President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd–Frank Act), which creates a new federal agency, the Bureau of Consumer Financial Protection (CFPB), to focus on protecting consumers in the credit market place. In this Article, I assert that the newly-created CFPB should use its authority to afford to ordinary Americans protections similar to those now enjoyed exclusively by military families. To support my assertion, I describe how payday loans entrap civilian Americans in a cycle of indebtedness just like they once ensnared military families and yet both groups are equally lacking in financial sophistication. I further describe how regular payday lenders and now major banks, such as Wells Fargo, are engaged in reckless lending because when issuing a payday loan, they fail to do any assessment of a borrower’s ability to repay, charge triple-digit-interest rates, issue loans frequently in excess of the borrower’s next paycheck, and require loans to be repaid in a single balloon payment usually in fourteen days or less.

The CFPB needs to act to protect civilians because, despite attempts by several states to curb payday lending, payday lenders exploit loopholes in state laws or use scams to skirt consumer protection laws. The CFPB also needs to protect civilians because they are more vulnerable to ensnarement by payday loans than the active-duty military members. Military families enjoy a strong social safety net, which is comprised of numerous benefits, including complete health care coverage, educational assistance and subsidized housing. In contrast, average low-to-moderate-income civilian families face financial difficulties due to high unemployment rates and ever-shrinking compensation and benefits packages. If military families, who enjoy strong social safety nets, need protection from payday loans, then unquestionably civilian Americans, who are largely left to fend for themselves, deserve protection from payday loans.

Under Title X of the Dodd–Frank Act, the CFPB has the authority to issue rules as well as guidelines to prevent a covered financial institution from committing an unlawful practice in connection with any consumer financial product or service. Because the rulemaking process could take as long as ten years, I propose that the CFPB issue immediately guidelines and a policy statement to get lenders to voluntarily cease predatory lending practices. The guidelines would give notice to all lenders about which common payday lending practices the CFPB considers unfair, abusive and deceptive and, therefore, unlawful. The CFPB’s policy statement would identify responsible lending practices, such as applying reasonable criteria to assess a consumer’s ability to pay and avoiding any practice that extends the loan’s due date for the primary purpose of generating fees for the lender. While the guidelines would warn lenders that they may be subject to enforcement actions for committing unlawful practices, the policy statement would provide a safe harbor, exempting from enforcement actions lenders who follow practices that comport with responsible lending standards. In addition to using the guidelines and policy statement to decrease the supply of payday loans, the CFPB should use its educational mandate to increase the demand for safe affordable loans. To accomplish this mandate, the CFPB needs to employ a multi-faceted strategy that harnesses the power of social media and uses a national public service announcement campaign to make it easy for consumers to access safe affordable loans from lenders with a demonstrated commitment to responsible lending practices.

 

 

Paper on Defending Foreclosure Actions

Marcia Johnson of Texas Southern and Luckett Anthony Johnson have written Defending Foreclosure Actions, 49 Real Estate Law Journal 516 (2012). Here's the abstract:

With the rising incidences of residential foreclosures, many homeowners are overwhelmed by the foreclosure process and anticipated costs and often opt to vacate the premises without offering any defense. The American justice system rests on the premise that no person will be deprived of their liberty or property without due process. Procedural due process requires that a person have notice of the charges against them as well as a reasonable opportunity to defend against them. Reasonable opportunity is circumvented when the defendant is effectively without the means to defend. This is especially offensive to our notions of justice when the defendant has legitimate bases for defense but is effectively denied the opportunity to urge such defenses because of finances. This article is written to examine the defenses available to homeowners facing foreclosure and to provide a practical approach to defending against foreclosure.

Federal Reserve Paper on Industry Reaction to Data Breaches

Julia S. Cheney, Robert M. Hunt, Katy Jacob, Richard D. Porter and Bruce J. Summers, all of the  Federal Reserve, have written The Efficiency and Integrity of Payment Card Systems: Industry Views on the Risks Posed by Data Breaches.  Here is the abstract:

Consumer confidence in payment card systems has been built up over many decades. Cardholders expect to use their cards to execute payment instructions in a reliable and timely manner. Data breaches that degrade the perceived safety and reliability of payment cards may weaken consumer confidence in those systems and potentially cause cardholders to shift to other, and perhaps less efficient, forms of payment. A sizable shift away from payment cards — induced by the consequences of one or more data breaches is unlikely. Even so, the probability of such an outcome is uncertain. In other words, this could be an example of “tail risk” for payment card systems. The authors informally interviewed a number of market participants and several experts to better understand the risks presented by data breaches, the efforts to protect payment card systems against data breaches, and areas where more might be done to secure these systems. In particular, the authors investigated whether existing levels of investment,
coordination, information sharing, and management of incentives in securing payment card systems by firms and organizations in the private and public sectors are adequate to confront the threats arising from modern data breaches. The lessons learned from these conversations are described in this paper. These insights may also be helpful in considering the risks that data breaches may broadly pose to retail payments in the United States.

 

 

Study Finds Default Counseling Helpful

J. Michael Collins of the University of Wisconsin - Madison - Center for Financial Security, Maximilian D. Schmeiser of the Federal Reserve Board, and Carly Urban of the University of Wisconsin - Madison - Department of Economics have written Protecting Homeowners: Foreclosure Counseling Policies and Modifications of Mortgage Terms. Here's the abstract:

Millions of homeowners are at risk of losing their homes as a result of being delinquent on their mortgage payments and/or owing more than their home is worth. One consumer-oriented policy response to this crisis is financial counseling for mortgage borrowers. This study examines which borrowers seek default counseling, and the relationship between counseling and the modification of mortgage terms. The results suggest that borrowers most exposed to financial distress are more likely to take-up counseling. They further show that counseled borrowers are more likely to obtain modifications with better loan terms than uncounseled homeowners. These results support the current emphasis by policy makers on default counseling as a means of mitigating the housing crisis and promoting consumer financial well-being.

Creola Johnson on the CFPB and Payday Lending

Creola Johnson of Ohio State has written America's First Consumer Financial Watchdog Is on a Leash: Can the CFPB Use Its Authority to Declare Payday-Loan Practices Unfair, Abusive, and Deceptive? 61 Catholic University Law Review (2012). Here's the abstract:

To stop payday lenders from skirting state laws, this Article asserts that the CFPB should exercise its rulemaking authority to declare many payday loan practices as unfair, deceptive, abusive, and, consequently, unlawful.

The CFPB's imposition of restrictions on payday loans will not end short-term, small-dollar loans in America, but will cause an increased prevalence of responsible lending practices. The results of a recent pilot program implemented by the Federal Deposit Insurance Corporation (FDIC) demonstrate that lenders can issue small-dollar loans subject to the types of restrictions proposed above and still achieve long-term profitability. Therefore, the CFPB's regulatory intervention will correct the continuing market failure by promoting profitable, yet fair loans by responsible lenders.

Marotta-Wurgler & Taylor on Changes in Consumer Standard Form Contracts

Florencia Marotta-Wurgler of NYU and Robert Brendan Taylor of Kirkland & Ellis have written Set in Stone? Change and Innovation in Consumer Standard Form Contracts for the Seventh Annual Conference on Empirical Studies.  Here's the abstract:

This article studies the rate, direction, and determinants of change in consumer standard form contracting. We examine what changed between 2003 and 2010 in the terms of 264 mass-market consumer software license agreements. Thirty-nine percent of contracts materially changed at least one term, and some changed as many as fourteen terms. The average contract became more pro-seller as well as several hundred words longer. The increase in length is not due to the use of simpler language: contract readability has been constant: the average contract is as readable as an article in a scientific journal. Younger, larger, growing firms, and firms with in-house counsel were more likely to change existing terms and to introduce new terms to take advantage of technological and market developments. Contracts appeared to respond to litigation outcomes: Terms that were increasingly enforced by courts were more frequently used in contracts, and vice-versa. The results indicate that software license agreements are relatively dynamic and shaped by multiple factors over time. We discuss potential consumer protection implications as a result of the increased length and complexity of contracts over time.

David Horton Paper on the Federal Arbitration Act Preemption

David Horton of UC Davis has written Federal Arbitration Act Preemption, Purposivism, and State Public Policy, 101 Georgetown law Journal (2013).  Here's the abstract:

The relationship between the Federal Arbitration Act (“FAA”) and state public policy has long been unsettled. According to some judges, scholars, and litigants, the FAA precludes courts from invalidating arbitration clauses under the contract defense of violation of public policy. However, in a practice that is impossible to square with that understanding of FAA preemption, courts have traditionally nullified arbitration clauses when necessary to preserve substantive rights or remedies under state law. Nevertheless, in its recent decision in AT&T Mobility LLC v. Concepcion, the U.S. Supreme Court held that the FAA eclipses a rule that deemed class arbitration waivers to be unconscionable when they prevented plaintiffs from pursuing numerous, low-value state law claims. Both Justice Scalia’s majority opinion and Justice Thomas’s decisive concurrence strongly implied that state public policy is not a permissible basis for striking down an arbitration clause. As a result, lower courts are now compelling arbitration — often through gritted teeth — of lawsuits that are destined to fail.

Counter-intuitively, I argue that Concepcion holds the seeds of an approach to FAA preemption that gives judges greater freedom to strike down arbitration provisions to further state interests. FAA preemption stems from its centerpiece, section 2, which makes agreements to arbitrate specifically enforceable “save upon such grounds as exist at law or in equity for the revocation of any contract.” Under the leading account of FAA preemption, the plain language of this “savings clause” immunizes arbitration clauses from state public policy: few state regulations apply across-the-board to “any contract.” Yet the courts and commentators who embrace this view have not explained why its rigid textualism is appropriate in the context of the FAA, which displaces state law through the purposivist mechanism of obstacle preemption. And indeed, Concepcion relied not on section 2’s text, but on Congress’ “purposes and objectives” when it enacted the FAA. I show that the purposivism that animates Concepcion is superior to the textualism that dominates FAA preemption cases. The incoherence of the literalistic “any contract” test and the centrality of context and legislative history to “purposes and objectives” preemption suggest that purposivism should be the primary technique for mapping the FAA’s dominion over state law. However, this path leads to a starkly different end-point than the one Concepcion reached. A faithful, full-bore examination of Congress’ intent reveals that section 2 allows courts to strike down arbitration clauses under any traditional contract doctrine, including some strands of the venerable defense of violation of public policy. I conclude by proposing a test for when the FAA preempts state public policy and applying it to controversial issues now pending in courts, including class arbitration, the unconscionability doctrine, and judicial or legislative rules that prohibit that arbitration of particular claims.

Papers on Privacy

Ira Rubinstein of NYU's Information Law Institut has written Big Data: The End of Privacy or a New Beginning?  Here's the abstract:

“Big data” refers to novel ways in which organizations, including government and businesses, combine diverse digital data sets and then use statistics and other data mining techniques to extract from them both hidden information and surprising correlations. While big data promises significant economic and social benefits, it also raises serious privacy concerns. In particular, big data challenges the Fair Information Practices (FIPs) as embodied in various privacy laws including the EU Data Protection Directive. This past January, the European Commission released a proposal to reform and replace the Directive by adopting a new Regulation. In this paper, I argue that this Regulation relies too heavily on the discredited informed choice model, and therefore fails to fully engage with the coming big data tsunami. My contention is that when this advancing wave arrives, it will so overwhelm the core privacy principles of informed choice and data minimization on which the Directive rests that reform efforts alone will prove inadequate. Rather, an adequate response must combine legal reform with encouragement of new business models premised on consumer empowerment and supported by a personal data ecosystem. This new business model is important for two reasons: first, existing business models have proven time and again that privacy regulation is no match for them. Businesses inevitably collect and use more and more personal data, and while consumers realize many benefits in exchange, there is little doubt that businesses, not consumers, control the market in personal data with their own interests in mind. Second, a new business model, which I describe in this paper, promises to stand processing of personal data on its head by shifting control over both the collection and use of data from firms to individuals. This “control shift” — and this alone — stands a chance of making the FIPs efficacious by giving individuals the capacity to benefit from big data and hence the motivation to learn about and control how their data is collected and used, while also enabling businesses to profit from a new breed of services that are both data-intensive and imbued with privacy values.

Meanwhile, Chris Jay Hoofnagle and of Jennifer M. Urban, both of  Berkeley, and Su Li of Berkely's Center for the Study of Law and Society have produced Privacy and Modern Advertising: Most US Internet Users Want 'Do Not Track' to Stop Collection of Data about their Online Activities for the 2012 Amsterdam Privacy Conference. Here's the abstract:

Most Americans have not heard of 'Do Not Track,' a proposal to allow Internet users to exercise more control over online advertising. However, when probed, most prefer that Do Not Track block advertisers from collecting data about their online activities. This is a much more privacy-protective approach for Do Not Track than what has been proposed by the advertising industry.

In previous studies, we have found that Americans think they are protected by strong online privacy laws. Here, we probed beliefs about tracking on medical websites and 'free' websites, with most not able to answer true/false questions correctly about tracking. This result brings into question notice-and-choice models that depend on consumer understanding of the terms for their legitimacy.

We also probed Internet users' attitudes towards advertising. Most Internet users say that they do not find utility in online advertising, with half claiming that they never click on ads.

Advertisers and consumers are at an impasse on privacy. Advertisers seem to be seeking a kind of total information awareness for behavioral advertising, and have proposed self-regulatory guidelines with little bite. At the same time, both our survey evidence and media reports show consumer opposition to tracking.

Do Not Track has emerged from the current skirmish between consumers and advertisers, but it is a relatively modest intervention that does little to shift the underlying incentives that have driven increasing tracking and aggregation of information about consumers. It is foreseeable that regardless of the form Do Not Track takes, websites will simply require consumers to disable it in order to access content. A fundamental change in incentives may be necessary to relieve this impasse and find an approach for advertising that is not so dependent upon third-party tracking and aggregation of information, both online and off.