Consumer Law & Policy Blog

Lea Krivinskas Shepard on Discrimination in Consumer Protection

Lea Krivinskas Shepard of Loyola Chicago has written Toward a Stronger Financial History Antidiscrimination Norm, 53 Boston College Law Review (2012).  Here's the abstract:

This Article examines a topic at the intersection of consumer protection and antidiscrimination law: the use by employers and licensing organizations of applicants’ credit reports and financial histories in the hiring and licensing processes. The Article begins with a broad normative assessment of the merits of the practice by examining applicable “logics of personhood,” categories of a framework of antidiscrimination analysis that assesses whether traditionally unprotected groups are entitled to formal antidiscrimination safeguards. Thus, the Article considers whether financial histories validly and reliably reflect personality traits relevant to job performance. It then examines to what extent the use of financial history in the employment and licensing settings is a necessary and helpful deterrent to debt default — long regarded as a socially undesirable practice. Next, the Article evaluates the practice’s impact on traditionally disadvantaged groups by assessing its relationship to racial equality and social mobility. Finally, in a novel application of behavioral economics to the area of credit reports and financial history, this Article suggests that, in spite of the difficult conceptual distinctions between consumer debtors and traditional Title VII categories like race, sex, and national origin, the findings of behavioral economists suggest that an adverse financial status is more immutable than neoclassical economists have been willing to concede. These observations lend critical normative support to legislative efforts to establish a stronger financial history antidiscrimination norm.

Victor Stango: Are Payday Lending Markets Competitive?

Victor Stango of UC Davis Graduate School of Management has written Are Payday Lending Markets Competitive? Regulation (Fall 2012) at 26.  Here's the abstract:

The rapid and widespread growth of the payday loan market has sparked considerable controversy, in part regarding the “high” prices charged for these loans. This article presents several new pieces of evidence addressing this issue. Specifically, it finds that credit unions — who frequently are payday lenders’ sharpest critics — do not (and apparently cannot) offer functionally identical products at lower prices. It concludes that the claim that other lenders can serve this market at lower prices does not seem justified.

Shay Lavie Paper on Class Actions

Shay Lavie of Harvard has written The Malleability of Collective Litigation, forthcoming in the Notre Dame Law Review. Here is the abstract:

In Wal-Mart v. Dukes (131 S.Ct. 2541 [2011]), Wal-Mart avoided class action because employment decisions were made by local supervisors. However, it was Wal-Mart who chose to delegate discretion; by doing so, it made class litigation less likely. Wal-Mart’s choice of business administration, then, substantially reduces its expected liability. This is but one example of a broader, overlooked phenomenon. Mass defendants can control, before the occurrence of damages, the scope of future collective litigation. Collective litigation procedures are malleable, sensitive to the defendant’s pre-damages choice of actions. The Article develops and substantiates this insight.

The Article elaborates on two manifestations of this phenomenon. First, defendants can avoid class actions by “individualizing” the prospective class, injecting individual differences that preclude class treatment. Second, defendants can selectively contract with future victims, buying out the stronger, leaving only weak victims with a claimable right, and reducing the prospective class’s capacity to litigate. Against this backdrop, the Article proposes an array of mechanisms to strengthen collective litigation procedures, including shifting the burden to defendants to justify the business action that prevented collective litigation, and taxing defendants for making the plaintiffs’ case weaker.

Paper on Whether the Treatment of Student Loans in Bankruptcy Should be Changed

Daniel A. Austin of Northeastern has written The Indentured Generation: Bankruptcy and Student Loan Debt, 53 Santa Clara Law Review (forthcoming)  Here's the abstract:

A generation of Americans has borrowed heavily for their education, and hundreds of thousands of them are deeply in debt. Some 37 million Americans owe a total of approximately $1 trillion dollars in student loans. They constitute an Indentured Generation as many of them will be paying student loan debt for much of their lives. Some will eventually pay their loans, others will obtain full or partial loan forgiveness, and many will default or die before completing payments. Members of the Indentured Generation in particularly dire circumstances will look to consumer bankruptcy for relief. But with very few exceptions, student loan debt cannot be discharged in bankruptcy. This is because the Bankruptcy Code excepts student loan debt from discharge unless the debtor can prove that repaying the debt would result in “undue hardship.” Courts have held this to be a very strict standard, one that few debtors are able to meet. Accordingly, the relief that is provided to most debts under the United States Bankruptcy Code (“Code”) is denied for student loan debt.

This article proposes that the Bankruptcy Code be amended to allow a student loan to be revalued to its actual fair market value. The fair market amount would be nondischargeable, and the remaining balance of the loan would dischargeable as general unsecured debt. This ensures that debtors who can pay their student loans will do so, but that those who are truly unable to do so will not be denied the “fresh start” that bankruptcy is intended to provide.

Oren Bar-Gill: Seduction by Contract

Oren Bar-Gill has written Seduction by Contract: Law, Economics and Psychology in Consumer Markets (Oxford University Press 2012).  The Introduction is available here. Here's the abstract:

Consumers routinely enter into contracts with providers of goods and services. These contracts are designed by sophisticated sellers to exploit the psychological biases of consumers. They provide short-term benefits, while imposing long-term costs – because consumers are myopic and optimistic. They are excessively complex – because complexity allows sellers to hide the true cost of the product or service from the imperfectly rational consumer. Using both general theory and detailed case studies, this book explains the costs – to consumers and society at large – imposed by seductive contracts, and outlines a promising legal policy solution: Disclosure mandates. Simple, aggregate disclosures can help consumers make better choice. Comprehensive disclosures can facilitate the work of intermediaries, enabling them to better advise consumers. Effective disclosure would expose the seductive nature of consumer contracts and, as a result, reduce sellers’ incentives to write inefficient contracts.

Paper on Contract Law and the Subprime Crisis

Chunlin Leonhard of Loyola University New Orleans has written The Subprime Mortgage Crisis and Economic Checks and Balances, Banking & Financial Services Policy Report, June 2012, at 15.  Here's the abstract:

This article examines contract law’s role in the subprime mortgage crisis, specifically in the way that the laissez faire paradigm of traditional contract law focuses on the self-interest of the contractual parties and in the way contract law has led to a business culture dominated by a “survival of the fittest” mentality.

Paper on Forum Shopping in Debt Collection

Judith L. Fox of Notre Dame has written How Forum Determines Substance in Judicial Debt Collection, 31 Banking and Financial Services Rev. 11 (August 2012). Here's the abstract:

In an email to the Small Claims Task Force, a committee appointed by the Indiana Supreme Court to investigate allegations of abuse in the Marion County Small Claims Court, an Indiana attorney claimed that collection attorneys were forum shopping in Indiana small claims court. In its subsequent report, the task force confirmed that some forum shopping is occurring in Marion County Small claims courts. This study takes that allegation a step further and looks beyond the small claims courts of Marion County to examine the forum shopping practices of collection attorneys throughout Indiana. The evidence suggests that collection firms do forum shop between courts in individual judicial districts. This article takes a closer look at forum shopping by exploring the possible motivations for the forum shopping and its implications for consumers.

Paper on the Oldest Financial Institution

Paige Marta Skiba of Vanderbilt, Marieke Bos of Stockholm University - Swedish Institute for Social Research and Susan Carter of the United States Military Academy have written The Pawn Industry and Its Customers: The United States and Europe.  Here's the abstract:

As humankind’s oldest financial institution, pawnbroking has served the financial needs of low-income families for centuries. Recently, and especially in the last five years, an increasing number of consumers have relied on pawnbrokers to help them meet daily financial needs. Seven percent of all U.S. and four percent of all Swedish households have used pawn credit at one time or another. Despite the general public’s increased interest in the pawn industry, evidenced by the popularity of reality television shows like “Pawn Stars” and “Hard Core Pawn,” economists have paid surprisingly little attention to the pawnbroking industry and pawnshop borrowers. We start by reviewing the history of pawn credit and the sparse economic literature on pawnbroking, and then present unique U.S. transaction data and Swedish register data to, first, show aggregate trends, and, second, shed light on the social and financial background of pawnshop borrowers and their behavior within the pawnbroking industry in both countries. We find that the pawnbroking industry and pawnshop borrowers are unexpectedly similar in the United States and Sweden.

Paper on Behavioral Economic Approach to Credit Reporting Consumer Protection

Adi Osovsky, a Harvard SJD candidate, has written The Misconception of the Consumer as a Homo Economicus: A Behavioral Economic Approach to Consumer Protection in the Credit Reporting System, forthcoming in the Suffolk University Law Review.  Here's the abstract:

The significant increase in the number of consumer transactions, along with the expansion of information technology, have created massive amounts of detailed information on each individual's credit history. Consumer credit reporting agencies ("CRAs") play an important role in this financial information market.

Although the credit reporting system has significant economic benefits, CRAs have a tarnished reputation as far as consumer protection is concerned. While making their business out of gathering, compiling and analyzing consumers' information, CRAs generally do not have privity of contract with those very same consumers and thus have little or no incentive to protect consumers' privacy and ensure the accuracy of every single credit report. Such lack of incentive has resulted in numerous consumer problems, including inaccuracies in credit reports and erroneous credit scores; infringement of consumers' right to privacy; contribution to the prevalence of identity theft; and the creation of a fertile ground for consumer manipulation through targeted marketing lists.

This paper suggests that the current regulatory system has been captivated by the misconception of the consumer as Homo Economicus. Existing regulation has given consumers a significant role in facilitating the production of more accurate credit, envisioning rational, vigilant and alert consumers, who regularly monitor their credit reports, dispute errors and opt-out from marketing lists. However, studies have shown that consumers' rationality in decision making is in fact doubtful, and so too is the justification of imposing monitoring responsibilities on consumers.

The paper challenges the economic regulatory approach through the behavioral economic approach – a relatively new model that aspires to explain consumers' biases and cognitive limitations, which are absent in the standard economic framework. The paper then explores two potential consumer protection mechanisms, drawn from the behavioral economic framework: applying psychological tools, such as disclosure and framing, for a better designed system; and enhancing consumer financial literacy.

Amitai Etzioni Paper on Privacy Merchants

Amitai Etzioni has written The Privacy Merchants: What is to Be Done?  Here is the abstract:

Rights have been long understood, first and foremost, as protection of the private from the public, the individual from the State. True, we also recognize positive rights (such as socioeconomic rights) and the government’s duty to protect citizens from violations of rights by other actors besides the State. However, when violations of privacy are discussed, the first violator that typically comes to mind is “Big Brother” — that is, the State. This Article focuses on the growing threat to privacy from private actors, specifically profit-making corporations. It briefly outlines a range of options aimed at protecting individual privacy against encroachment by private actors, and it evaluates them within the prevailing normative, legal, and political context in the United States.