Consumer Law & Policy Blog

David Reiss on Eminent Domain and Underwater Loans

David J. Reiss of Brooklyn has written Comment on the Use of Eminent Domain to Restructure Performing Loans.  Here is the abstract:

There has been a lot of fear-mongering by financial industry trade groups over the widespread use of eminent domain to restructure residential mortgages. While there may be legitimate business reasons to oppose its use, its inconsistency with Takings jurisprudence should not be one of them. To date, the federal government’s responses to the current crisis in the housing markets have been at cross purposes, half-hearted and self-defeating. So it is not surprising that local governments are attempting to fashion solutions to the problem with the tools at their disposal. Courts should, and likely will, give these democratically-implemented and constitutionally-sound solutions a wide berth as the ship of state tries to right itself after being swamped by a tidal wave of mortgage defaults.

Martin & Longa Study of Whether Payday and Title Loans Serve the Middle Class

Nathalie Martin and Ernesto A. Longa, both of New Mexico have written High-Interest Loans and Class: Do Payday and Title Loans Really Serve the Middle Class?, 24 Loyola Consumer Law Reporter 524 (2012). Here's the abstract:

This symposium article addresses the question of whether payday and title lenders serve primarily the working poor, as some critics claim, or the middle class, as the payday and title loan industries claim.

This article starts by discussing how and why lenders claim to serve the middle class. It then describes how scholars define the middle class and the typical indicia of middle class America. The paper then summarizes the demographic data gathered to date on payday and title loan customers, focusing on income and home ownership rates, and concluding that these data refute the middle class myth. The article also briefly discusses how geographic studies bear on the questions of class and payday and title loans. Next, this article describes the methodology and results of our own study of payday demographics, which analyzes data from the Bankruptcy Court for the District of New Mexico from 2007-2011. This article ends with the results of this modest study, which conclude that bankruptcy debtors who list payday loans are far less likely to own their own homes and overall, have lower incomes than bankruptcy debtors who do not list payday loans. It also concludes that the bankruptcy debtors in the sample who also own homes did not turn to payday loans in higher numbers after the 2008 crisis.

Paper on Behavioral Advertising

Chris Jay Hoofnagle of Berkeley, Ashkan Soltani of Berkeley's School of Information, Nathan Good of Good Research, Dietrich James Wambach, a student at Wyoming, and Mika Ayenson of the Worcester Polytechnic Institute have written Behavioral Advertising: The Offer You Cannot Refuse, 6 Harvard Law & Policy Review 273 (2012).  Here's the abstract:

At UC Berkeley, we are informing political debates surrounding online privacy through empirical study of website behaviors. In 2009 and 2011, we surveyed top websites to determine how they were tracking consumers. We found that advertisers were using persistent tracking technologies that were relatively unknown to consumers. Two years later, we found that the number of tracking cookies expanded dramatically and that advertisers had developed new, previously unobserved tracking mechanisms that users cannot avoid even with the strongest privacy settings.

These empirical observations are valuable for the political debate surrounding online privacy because they inform the framing and assumptions surrounding the merits of privacy law.

Our work demonstrates that advertisers use new, relatively unknown technologies to track people, specifically because consumers have not heard of these techniques. Furthermore, these technologies obviate choice mechanisms that consumers exercise. We argue that the combination of disguised tracking technologies, choice-invalidating techniques, and models to trick the consumers into revealing data suggests that advertisers do not see individuals as autonomous beings. Once conceived of as objects, preferences no longer matter and can be routed around with tricks and technology.

In the political debate, “paternalism” is a frequently invoked objection to privacy rules. Our work inverts the assumption that privacy interventions are paternalistic while market approaches promote freedom. We empirically demonstrate that advertisers are making it impossible to avoid online tracking. Advertisers are so invested in the idea of a personalized web that they do not think consumers are competent to decide to reject it. We argue that policymakers should fully appreciate the idea that consumer privacy interventions can enable choice, while the alternative, pure marketplace approaches can deny consumers opportunities to exercise autonomy.

Lauren Willis Paper: When Nudges Fail

Lauren E. Willis 

of Loyola Los Angeles, always a thoughtful writer, has authored When Nudges Fail: Slippery Defaults.  Here's the abstract:

Inspired by the success of “automatic enrollment” in increasing participation in defined contribution retirement savings plans, policymakers have put similar policy defaults in place in a variety of other contexts, from checking account overdraft coverage to home mortgage escrows. Internet privacy appears poised to be the next arena. But how broadly applicable are the results obtained in the retirement savings context? Evidence from other contexts indicates two problems with this approach: the defaults put in place by the law are not particularly sticky, and the people who opt out can be those who would benefit the most from the default. Examining the new default for consumer checking account overdraft coverage reveals that firms can systematically undermine each of the mechanisms that might otherwise operate to make defaults sticky. Comparing the retirement savings default to the overdraft default, four boundary conditions on the use of defaults as a policy tool are apparent: policy defaults will not be sticky when (1) motivated firms oppose them, (2) these firms have access to the consumer, (3) consumers find the decision environment confusing, and (4) consumer preferences are uncertain. Due to Constitutional and institutional constraints, government regulation of the libertarian paternalism variety is unlikely to be capable of overcoming these bounds. Therefore, policy defaults intended to protect individuals when firms have the motivation and means to move consumers out of the default are unlikely to be effective unless accompanied by substantive regulation. Moreover, the same is likely to be true of “nudges” more generally, when motivated firms oppose them.

Second Liens and Mortgage Modifications

Vicki Been of NYU, Howell E. Jackson of Harvard, and Mark A. Willis of NYU have written Essay: Sticky Seconds - The Problems Second Liens Pose to the Resolution of Distressed Mortgages.  Here's the abstract: 

Almost five years into the foreclosure crisis, policymakers, the mortgage industry, consumers and taxpayers all express disappointment over the slow pace of modifications, refinancings, and other resolutions of borrowers’ distress short of foreclosure auctions. Many analysts point to the prevalence of second liens on the properties as a significant impediment to efficient resolutions of borrowers’ distress and therefore to the stabilization of the housing market. In addition, many observers argue that a significant number of second liens are at serious risk of default, and therefore may imperil the financial solvency of the financial institutions holding the liens. To better understand whether and how second liens might prevent efficient resolutions of borrower distress and to assess how second lien holders could be encouraged to cooperate with efficient resolutions without undermining the financial interests of the banks, we reviewed existing data and research, as well as debates among both academics and industry experts about the role second liens might be playing in slowing the recovery of the housing market. We then convened a small group of experts from across the country on April 10th, 2012, gathering around one table servicers, investors, title insurers, consultants, bank regulators, government officials, mortgage counselors, economists, lawyers, accountants and academics to explore the full range of issues that second liens pose to efforts to stabilize the housing market.

This article reports the results of our research and the roundtable discussion. It first explores what we know about the prevalence and delinquency rates of different types of second liens, the extent to which banks are exposed to losses on the liens, and the extent to which the banks already have accounted for those expected losses. It then reviews the various reasons that second liens have interfered with the efficient resolution of distressed mortgages, and documents advances that recently have been made in addressing those problems. Finally, the article examines the most promising proposals for reducing the transaction costs and frictions that are behind many of the current problems second liens are posing, as well as proposals to prevent similar problems from arising in the future. We focus our analysis of solutions on programs to remove barriers to greater coordination between first and second lien holders, rather than on the incentive approaches that have already been attempted.

 

Myriam Gilles on Arbitration Clauses After Concepcion

Myriam E. Gilles of Cardozo has written Killing Them with Kindness: 'Consumer-Friendly' Arbitration Clauses after AT&T Mobility v. Concepcion, forthcoming in Notre Dame Law Review.  Herer's the abstract: 

In AT&T v. Concepcion, the Supreme Court struck California’s so-called “Discover Bank rule” – a judge-made rule providing that arbitration agreements attended by class action waivers are unenforceable, if those agreements are contained in standard form consumer contracts. But, arguably, Concepcion leaves open and unresolved the viability of a state law challenge to a bilateral arbitration clause which is shown, in a particular case, to impose a forfeiture of the claimant’s ability to vindicate his state law rights. Meanwhile, in the context of federal claims, the Second Circuit in American Express III reaffirmed in light of Concepcion its earlier holdings that a class action waiver contained in an arbitration agreement is unenforceable if it is proven in the individual case that the arbitration clause at issue would force the claimant to shoulder such costs as would prevent the claimant from effectively vindicating its federal statutory rights. On both the state and federal levels, then, cost-based vindication of rights challenges remain a significant concern to corporate defendants looking to exculpate themselves from exposure to aggregate litigation.

All of this begs a question this paper seeks to answer: will the robust recognition of cost-based, evidence-backed vindication of rights challenges swallow up the basic ruling of Concepcion, rendering unenforceable arbitration agreements and class action waivers that the Supreme Court has held are otherwise to be enforced?

Daniel Schwarcz on the Lack of Transparency in Insurance Consumer Protection

Daniel Schwarcz of Minnesota has written Transparently Opaque: Understanding the Lack of Transparency in Insurance Consumer Protection.  Here's the abstract:

Consumer protection in most domains of financial regulation centers on transparency. Broadly construed, transparency involves making relevant information available to consumers as well as others who might act on their behalf, such as academics, journalists, newspapers, consumer organizations or other market watchdogs. By contrast, command and control regulation that affirmatively limits financial firms’ products or pricing is relatively uncommon in financial regulation. This article describes a remarkable inversion of this pattern: while state insurance regulation frequently employs aggressive command and control consumer protection regulation, it typically does little or nothing to promote transparent markets. Rather, state lawmakers routinely either completely ignore transparency-oriented reforms or implement them in a self-evidently flawed manner. This pattern represents a deep and unappreciated flaw in state insurance regulation. Although substantive rules may be necessary in many insurance markets, such regulation must be coupled with strong transparency-oriented strategies in order to promote consumer choice, harness market discipline, and ensure regulatory accountability.

Two More Arbitration Articles

Rhonda Wassermanof Pittsburgh has written Legal Process in a Box, or What Class Action Waivers Teach Us About Law-Making, forthcoming in 44 Loyola University Chicago Law Journal, (2012).  Here's the abstract:

The Supreme Court’s decision in AT&T Mobility v. Concepcion advanced an agenda found in neither the text nor the legislative history of the Federal Arbitration Act. Concepcion provoked a maelstrom of reactions not only from the press and the academy, but also from Congress, federal agencies and lower courts, as they struggled to interpret, apply, reverse, or cabin the Court’s blockbuster decision. These reactions raise a host of provocative questions about the relationships among the branches of government and between the Supreme Court and the lower courts. Among other questions, Concepcion and its aftermath force us to grapple with the relationship between law and politics, the role of legislative history in statutory interpretation, the meaning of legislative primacy, the influence of federal agencies on the development of the law, and competing conceptions of the relationship between the Supreme Court and the lower courts.

And Roger Perlstadt of Florida adds Article III Judicial Power and the Federal Arbitration Act, forthcoming in 62 American University Law Review.  Here's his abstract:

Arbitrators determine facts and apply law to those facts to bindingly resolve disputes between two or more parties, a task normally reserved for judges. The Federal Arbitration Act (FAA) makes agreements to arbitrate disputes enforceable, including disputes that would normally be heard by an Article III judge, such as those arising under federal law or between parties of diverse citizenship. Accordingly, disputes subject to an arbitration agreement brought before a federal court for adjudication must instead, pursuant to the FAA, be resolved by an arbitrator. Yet, while Article III mandates that such disputes be decided by life-tenured and salary-protected judges, arbitrators — selected and compensated by one or more of the parties — enjoy neither protection. A literal reading of Article III thus suggests that sending federal disputes to non-Article III arbitrators under the FAA is unconstitutional. Although courts and scholars have roundly rejected Article III literalism and have adopted various theories justifying non-Article III adjudication of Article III disputes, whether the FAA is consistent with Article III has received little analysis. This article addresses that gap by applying the leading judicial and scholarly theories of non-Article III adjudication to the FAA, ultimately determining that none of them justify arbitration. While a legislative change could remedy the tension between Article III and the FAA, this article suggests that the better approach is simply to acknowledge the fundamental inconsistency of the FAA with Article III while recognizing that parties may waive their constitutional right to an Article III forum. Given that arbitration is a waiver of Article III rights, however, this article concludes that consent to arbitration must be determined under the standards used to determine waiver of constitutional rights generally, a fundamental shift from current FAA jurisprudence.

Jean Sternlight Paper on Arbitration of Procedurally Difficult Claims

Jean R. Sternlight of University of Nevada, Las Vegas has written Mandatory Binding Arbitration Clauses Prevent Consumers from Presenting Procedurally Difficult Claims, forthcoming in the Southwestern University Law Review. Here's the abstract: 

The longstanding debate over the benefits and detriments of mandatory arbitration in the consumer context has often focused on the wrong issue. Although we have now argued for almost twenty years over whether it is appropriate to require consumers to arbitrate rather than litigate claims against providers of products and services, too often commentators have asked whether consumers win or lose when they bring claims in arbitration, rather than whether consumers’ claims are suppressed or eliminated altogether as a result of companies’ use of mandatory arbitration clauses. The United States Supreme Court’s recent decision in AT&T Mobility v. Concepcion brings this claim suppression issue to the forefront by allowing companies to use arbitration clauses to insulate themselves from exposure to plaintiffs’ class actions.

While some urge that the elimination of consumer class actions is no big deal, in that consumer arbitration offers a more effective way for consumers to resolve their claims than do class actions, this Article suggests this analysis is deeply flawed. Although some 'procedurally easy' claims may effectively be resolved through individual arbitration (in actuality they are far more frequently resolved through complaints to customer service or through credit card chargebacks), 'procedurally difficult' claims cannot typically be resolved on an individual basis. 'Procedurally difficult' claims are those in which the consumer does not realize she has potentially been injured; the consumer does not realize that an injury she has suffered may be legally cognizable; the consumer’s claim is difficult and expensive to present, relative to the anticipated recovery; or the consumer seeks injunctive or other group relief. Claims for discrimination or fraud or regarding tainted food may often be procedurally difficult. While recognizing that, in theory, government agencies could protect consumers with procedurally difficult claims, the Article finds that in the United States such agencies are not sufficiently well-funded to protect many consumers. Thus, the Article concludes that Congress and/or administrative agencies such as the Consumer Finance Protection Board need to step in to protect consumers with procedurally difficult claims and assure they receive the legal protection they have been promised by our substantive laws.

Call for Papers for AALS on Response to Debt Crisis Extended

We previously posted about a Call for Papers on the Response to the Debt Crisis for an AALS program at the Conference in January.  The deadline for submissions has been extended to August 31.  The full Call for Papers appears below the fold.