Consumer Law & Policy Blog

Eric Goldman on Privacy Class Actions

 

Eric Goldman

 of Santa Clara has written The Irony of Privacy Class Action Litigation, 10 Journal of Telecommunications and High Technology Law (2012).  Here is the abstract:

In the past few years, publicized privacy violations have regularly spawned class action lawsuits in the United States, even when the company made a good faith mistake and no victim suffered any quantifiable harm. Privacy advocates often cheer these lawsuits because they generally favor vigorous enforcement of privacy violations, but this essay encourages privacy advocates to reconsider their support for privacy class action litigation. By its nature, class action litigation uses tactics that privacy advocates disavow. Thus, using class action litigation to remediate privacy violations proves to be unintentionally ironic. 

William Black on Examining Lending Discrimination Practices and Foreclosure Abuses

 

William K. Black

 of University of Missouri at Kansas City has written Examining Lending Discrimination Practices and Foreclosure Abuses.  Here's the abstract:

The incidence of fraud in stated income loans is 90 percent. It is overwhelmingly the lenders and their agents that prompted these frauds. Over two million fraudulent mortgage loans were made in 2006 alone. It was overwhelmingly fraudulent loans to borrowers who lacked any ability to repay their loans out of their income that caused the housing bubble to hyper-inflate. Endemic accounting control fraud in the origination of mortgages led to creation of 'echo' fraud epidemics in other contexts, including widespread appraisal fraud, endemic fraud in the sale of mortgages and mortgage derivatives, widespread predatory lending targeting Latinos, blacks and the elderly, and endemic foreclosure fraud. Fraudulent lenders use compensation to create perverse incentives in which bad ethics drives good ethics out of the marketplace. Fraud begets fraud. The federal government, California, and dozens of financial firms have sued the largest banks for fraud, yet the Justice Department refuses to even conduct a meaningful criminal investigation of the largest banks. Absent vigorous financial regulators that understand control fraud and make reducing and sanctioning such frauds their top priority the prosecutors cannot succeed against an epidemic of accounting control fraud. Financial regulators who make the necessary criminal referrals and provide the FBI with the expertise to identify and investigate accounting control fraud mechanisms are essential if we are to prevent or prosecute an epidemic of such frauds. Effective financial 'regulatory cops on the beat' are essential to our ability to prosecute elite white-collar criminals.

Study of Clickwrap/Privacy Policy Terms

 

Jay P. Kesan

,

Carol M. Hayes

, and

Masooda Bashir

, all of Illinois, have written Consumer Privacy Choices, Informed Consent, and Baseline Protections to Facilitate Market Transactions in the Cloud.  Here's the abstract:

So many of our daily activities now take place 'in the cloud,' where we use our devices to tap into massive networks that span the globe. Virtually every time that we plug in to a new service, the service requires us to click the seemingly ubiquitous box indicating that the user has read and agrees to the provider’s Terms of Service and Privacy Policy. If a user does not click on this box, he is denied access to the service. It is generally accepted that no one reads these agreements. They click accept, because otherwise they could not use the service of their choice, and these terms are typically almost entirely disregarded as a factor when services are chosen. If a user is asked why he does not read these terms, he might offer reasons like the dense legalese, or the length of these agreements.

However, not reading these agreements can have negative effects. Some agreements contain binding arbitration provisions, limiting the agreeing party’s avenues for redress if the provider wrongs him. When a user is not informed about the terms of a privacy policy, she may be unknowingly consenting to the disclosure of her information to third parties with whom she would not want to share her information. These agreements can also affect the agreeing party’s legal rights. The Department of Justice has argued that violating a website’s Terms of Service amounts to a violation of the Computer Fraud and Abuse Act. Additionally, agreeing to overbroad privacy policy terms could reduce a party’s protections under the Stored Communications Act and the Fourth Amendment.

As part of this work, we analyzed and categorized the terms of TOS agreements and privacy policies of several major cloud services to aid in our assessment of the state of user privacy in the cloud. Our empirical analysis showed that providers take similar approaches to user privacy, and were consistently more detailed when describing the user’s obligations to the provider than when describing the provider’s obligations to the user. This asymmetry, combined with these terms’ nonnegotiable nature, led us to conclude that the current approach to user privacy in the cloud is in need of serious revision.

Privacy and autonomy, values necessary for a free society, are threatened by the asymmetric terms and unawareness of parties agreeing to such terms. Based on analysis of the law, theories of privacy developed by scholars, findings of research into human-computer interaction, and an analogy to the ethical guidelines of informed consent followed by social science researchers, we propose the following modest but realistically achievable goals to advance user privacy in the cloud.

First, we suggest adopting a legal regime that requires companies to provide baseline protections for personal information and also take steps to enhance the parties’ control over their own data. We view data control as consisting of two parts: 1) data mobility, where consumers are assured the ability to move course-of-business data from one provider to a competing provider at will, without encountering lock-in problems due to formatting issues; and 2) data withdrawal, where consumers have the right to serve notice and takedown orders on entities that possess and use the consumer’s personal information against the consumer’s wishes.

Second, we argue that collectors and users of personal information in the cloud should be held to ethical guidelines mandating informed consent to facilitate informed contracting. Adopting an approach that is consistent with the informed consent standards required of social science researchers, we view informed consent as consisting of five elements: 1) disclosure, 2) competence, 3) comprehension, 4) voluntariness, and 5) agreement.

Third and finally, we propose that a multi-tiered approach to privacy be mandated by regulations, requiring companies to make heightened privacy protections available to consumers. By mandating choice, we are creating a market where consumers have meaningful choices regarding the level of privacy being afforded, and the existence of these privacy choices will facilitate market transactions. Ultimately, our goal with this piece is to apply established law and privacy theories to services in the cloud, and set forth a model for the protection of information privacy that recognizes the importance of informed users.

Two Articles from the Kansas Law Review on Arbitration

Maureen Weston of

 Pepperdine has written The Death of Class Arbitration after Concepcion?  Here's the abstract:

In AT&T Mobility LLC v. Concepcion, the Supreme Court potentially allowed for the evisceration of class arbitration, and indeed most class actions, in consumer and employment settings where contracts contain a pre-dispute arbitration provision that only authorizes claims brought in an individual capacity or that expressly bans representative class actions in arbitration or court (“class action waivers”). The debate over the enforceability of class action waivers, which had been percolating for years in both state and federal courts, came to the forefront in Concepcion when the Court agreed to review application of the California Supreme Court’s ruling in Discover Bank v. Superior Court, which deemed some class action waivers in adhesion contracts unconscionable, exculpatory, and thus illegal under California law. In a 5–4 decision, the Concepcion Court stated that California’s judicial rule invalidating class action waivers as unconscionable “stands as an obstacle to the accomplishment and execution of the full purposes and objectives of Congress [in the FAA].” Therefore, according to the Court, the FAA preempted the California law.

In light of Concepcion, a number of state and federal courts have enforced class action waivers in consumer arbitration contracts over objections that the waivers effectively immunize defendants from liability or violate state law standards of unconscionability or public policy.

This Article examines the implications of Concepcion on the future of class actions, in court or arbitration, and analyzes the federalism issues at stake in the Court’s interpretation of FAA preemption of state law. First, it sets forth the regulatory framework governing arbitration under the FAA and key Supreme Court decisions involving questions of class arbitration prior to Concepcion. Then, it analyzes Concepcion and the decision’s scope and parameters. It also contemplates Concepcion’s impact, examining how federal and state courts have since interpreted Concepcion’s application to challenges to class action waivers in cases involving statutory claims at the state and federal level. This is followed by an introduction of potential legislative responses, and an argument that the Concepcion decision, based on a dated and deluded conception of arbitration, improperly guts the FAA savings clause, violates the reserved role of states under the FAA to “regulate contracts, including arbitration clauses, under general contract law principles,” and threatens the ability of parties in some cases to vindicate their statutory rights. The Article concludes by advocating for a narrow construction of the decision and the guarantee of a procedural option by which rights, which sometimes require collective action, can be meaningfully vindicated.

And David Horton of Loyola Los Angeles weighs in with Arbitration and Inalienability: A Critique of the Vindication of Rights Doctrine.  That abstract reads:

Courts and scholars have long struggled to harmonize the Federal Arbitration Act and other federal statutes. Currently, judges invalidate arbitration clauses that prevent a plaintiff from vindicating her public law rights. This principle, the vindication of rights doctrine, is an arbitration-specific application of the statutory waiver rule: the idea that parties cannot prospectively waive congressionally-created entitlements. However, because the policy basis of the statutory waiver rule has never been clear, jurisdictions disagree about how to implement the vindication of rights doctrine. In this contribution to the Kansas Law Review’s Perspectives on the Current State of Arbitration Law Symposium, I seek to understand the statutory waiver rule and the vindication of rights doctrine by situating them within a larger context: the debate over inalienability. Infants, sexual services, body parts, and basic civic duties cannot be exchanged for consideration. I consider whether common justifications for these fissures in the market — concern about information failures, externalities, and commodification — can explain why future federal statutory claims are immune from freedom of contract. I conclude that, to some degree, each rationale for inalienability also underlies the statutory waiver rule and the vindication of rights doctrine. Nevertheless, I argue that these principles are best explained as an attempt to preserve the distinctive qualities of congressional lawmaking in an era where private parties exercise legislative-like power. I claim that courts can further this goal by nullifying one-sided arbitration clauses that do not serve arbitration-related purposes and thus are blatant attempts to rewrite the public laws.

Jill Gross on AT&T Mobility

Jill Gross

 of Pace has written At&T Mobility and FAA Preemption, forthcoming in the Penn State Dickinson School of Law Yearbook on Arbitration and Mediation.  Here's the abstract:

The Supreme Court's recent arbitration law decisions reflect the Court's strong support for arbitration agreements, but also severely limit the states’ powers to police the fairness of arbitration. In particular, the Court’s decision in AT&T Mobility v. Concepcion, LLC expands the FAA preemption doctrine beyond its prior boundaries, signaling how far the Court is willing to go to support arbitration clauses at the expense of states’ rights and the values of federalism. This article explores the impact of AT&T Mobility on the preemption of state arbitration law, and the concomitant impact on the balance between state and federal power in the arbitration arena. This article argues that AT&T Mobility results in FAA over-preemption, as it unduly shifts arbitration law-making power away from the states, in violation of the FAA’s savings clause.

Paper Finds Evidence of Redlining and Race-Based Discrimination in Subprime Loan Pricing

Andra C. Ghent

 of Arizona State University (ASU) - Finance Department and

Ruben Hernandez-

Ruben Hernandez-

Murillo and

Michael Owyang

, both of the Federal Reserve Bank of St. Louis have written Race, Redlining, and Subprime Loan Pricing.  Here's the abstract:

We investigate whether race and ethnicity influenced subprime loan pricing during 2005, the peak of the subprime mortgage expansion. We combine loan-level data on the performance of non-prime securitized mortgages with individual- and neighborhood-level data on racial and ethnic characteristics for metropolitan areas in California and Florida. Using a model of rate determination that accounts for predicted loan performance, we evaluate the presence of statistical and taste-based discrimination, as well as disparate impact and disparate treatment discrimination, in mortgage rates. We find evidence of redlining as well as adverse pricing for blacks and Hispanics.

Simkovic Paper: Risk Based Student Loans

Michael Simkovic

 of Seton Hall has written Risk Based Student Loans. Here is the abstract:

Credit markets serve a vital function in capitalist economies: evaluating the riskiness of a range of possible investments and channeling resources toward those investments that investors believe are most likely to prove successful. This process is known as the “risk-based pricing” of credit. Ideally, risk-based pricing should lead to lower cost of capital for lower risk investment choices, and therefore more investment in such promising activities. Conversely, risk-based pricing should lead to higher costs of capital, and therefore less investment, in high-risk activities. If creditors are well informed and analytic, and borrowers respond to financial incentives, then risk-based pricing — compared to uniform credit pricing — leads to a more efficient allocation of society’s limited resources.

Although risk-based pricing is standard in business loan markets, and is increasingly common in consumer credit markets such as mortgages and credit cards, risk-based pricing is rare in the market for student loans. The reasons for the rarity of risk-based pricing in the student loan market include limitations of the available data, bankruptcy and collections laws that shift default risk from student loan lenders to borrowers, and moral and philosophical beliefs about the primacy of individual choice and the role of education as an engine of equal opportunity.

This article argues that the lack of risk-based pricing in student loans may ultimately undermine many of the interests and values that uniform student loan pricing ostensibly seeks to promote. Without risk-based pricing of student loans, there may be no reliable price signal about the long-term financial risks inherent in different courses of study. This lack of price signals undermines students’ ability to make informed decisions about the course of study that will best balance their innate abilities and individual preferences with postgraduate economic opportunities. Similarly, the lack of price signals may undermine post-secondary educational institutions’ ability to adjust their programs to improve their students’ postgraduate prospects. Misallocation of educational resources is not only harmful to individual students and their families — it could threaten to undermine the productivity and competitiveness of the U.S. labor force and the U.S.’s ability to continue to invest in education and research.

Transparent, risk-based student loan pricing could greatly benefit students and educational institutions, particularly if it were data-driven and sensitive to the values of equal opportunity and independent research that are central to the academic enterprise. This article discusses legal and policy reforms that could facilitate risk-based student loan pricing, potential hazards from a shift toward risk-based pricing, and safeguards that could help protect students and educators from abuse.

Chris Peterson Joins the CFPB

My good friend Chris Peterson is joining the CFPB, and therefore leaving the list of contributors to this blog. He's taking a leave of absence from his position as the John J. Flynn Endowed Professor of Law at the Univeristy of Utah, and has stepped down as academic dean of the law school. Chris and I are sort of switching places; he's joined the agency as Senior Counsel for Enforcement Strategy, the same title that I most recently held -- though, unlike me, Chris will focus his efforts on the western United States.

I wish Chris the best of luck in his new role. Those who know him and his scholarship in the field of consumer finance know that this hire is a major coup for the CFPB. His work -- on the mortgage market, MERS, securitization, preemption, payday lending, and other big topics in predatory lending -- blends the empirical with the doctrinal, and consistently has an impact not only in the world of scholarship but in the real world as well. To name just one example, Chris's eye-opening study on the law and geography of payday loans, demonstrating that payday lenders target servicemembers, led to a Defense Department investigation and, in turn, to the enactment of the Military Lending Act of 2007. Not bad for a law review article. It's only appropriate that an agency that owes its existence to a scholarly article by a law professor should have the good sense to draw on Chris's considerable talents.

Update: Alan Kaplinsky posts on the appointment at the CFPB Monitor blog. (Last year, Alan said my appointment "certainly raise[d] ... concerns."  In fact, as far as I can tell, Alan's blog takes the view that pretty much everything the CFPB does is a cause for concern.)

Littwin Paper on Repairing Credit Reports Damaged by Domestic Violence

Angela K. Littwin

 of Texas has written Escaping Battered Credit: A Proposal for Repairing Credit Reports Damaged by Domestic Violence, forthcoming in the University of Pennsylsvania Law Review.  Here's the abstract:

Debt and domestic violence are connected in ways not previously imagined. A new type of debt – which I have labeled “coerced debt” – is emerging from abusive relationships. Coerced debt occurs when the abuser in a violent relationship obtains credit in the victim’s name via fraud or coercion. It ranges from secretly taking out credit cards in victims’ names to coercing victims into signing loan documents to tricking victims into relinquishing their rights to the family home. As wide-ranging as these tactics can be, one consequence consistently emerges: ruined credit ratings.

Coerced debt wreaks havoc on credit scores, which is particularly problematic because the use of credit reports is no longer confined to traditional lenders. Employers, landlords, and utility companies all make extensive use of credit scores in screening. Thus, a credit score that has been damaged by coerced debt can make it prohibitively difficult for victims to obtain employment, housing, or basic utilities, all of which are requirements for establishing an independent household.

In this Article, I propose amending the Fair Credit Reporting Act to enable victims of coerced debt to repair their credit reports. My proposal would enable family courts to rule on whether alleged coerced debt is, in fact, coerced. The victim could then submit the court’s certification to the credit reporting agencies, which would block the coerced debt from her credit report to the extent that the block did not unduly harm her creditors. My proposal would build a bridge between the decision-makers already making determinations about issues related to coerced debt and the credit reports victims need reformed in order to move beyond the abuse.

Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements

Michael L. Rustad,

Richard Buckingham,

Diane D'Angelo, and

Katherine Durlacher, all of Suffolk, have written An Empirical Study of Predispute Mandatory Arbitration Clauses in Social Media Terms of Service Agreements, forthcoming in the University of Arkansas at Little Rock Law Review.  Here's the abstract:

With predispute mandatory arbitration clauses, a large and growing number of social networking sites (SNSs) are depriving users of their consumer rights. SNS users across the globe are required to agree to predispute mandatory arbitration as a condition of accessing content. Consumers that enter into clickwrap or browsewrap agreements waive their right to a jury trial, discovery, and appeal, likely without being aware that they are losing these important rights. The U.S. Supreme Court’s arbitration jurisprudence has made it difficult to challenge these troublesome contractual clauses and practices. The Roberts Court’s recent decisions, including AT & T Mobility, LLC v. Concepcion (2011) and CompuCredit Corp. v. Greenwood (2012), make it clear that the Court favors a broad enforcement of consumer arbitration agreements stripping the state of the ability to police these documents. These decisions are, in effect, a federal takeover of arbitration, preventing state efforts to protect consumers against one-sided and oppressive consumer arbitration clauses. This Article is the first empirical study of the use of predispute mandatory arbitration clauses by SNSs and sheds light on whether SNSs have used arbitration clauses strategically in order to achieve a “liability-free” zone in cyberspace. Our empirical findings reveal that SNS arbitration clauses contravene many of the principles deemed necessary for a fundamentally fair process for consumers to resolve disputes.