Consumer Law & Policy Blog

Paper on data Breaches and Litigation

Sasha Romanosky

 of Carnegie Mellon University - Heinz College of Information Systems and Public Policy,

David A. Hoffman

of Temple and the Cultural Cognition Project at Yale Law School, and

Alessandro Acquisti

 of Carnegie Mellon University - H. John Heinz III School of Public Policy and Management have written Empirical Analysis of Data Breach Litigation.  Here's the abstract:

Legal privacy scholarship typically emphasizes the various ways that plaintiffs fail when bringing legal actions against entities when their personal information is lost or stolen. However this scholarship often considers only a small set of published judicial opinions from large-scale data breaches. And so, little is actually known about the characteristics and disposition of a representative set of data breach lawsuits. Using a unique sample of anually-collected data from Westlaw and PACER, we analyze the court dockets of over 200 federal data breach lawsuits from 1998 to 2011, making this, to our knowledge, the first empirical examination of data breach litigation. We use discrete outcome regression models to estimate the probability that a data breach will result in a lawsuit, and the probability that, once filed, the case will reach settlement. We find that breaches resulting from the unauthorized disclosure or disposal of personal information are 6.9% more likely to result in lawsuit, relative to breaches caused by lost or stolen hardware, whereas breaches caused by cyber-attack are only 2.9% more likely to result in lawsuit. These results suggest that plaintiffs respond more to the careless or negligent handling by a firm of their personal information, than to the firm’s inability to withstand a cyber-attack or misfortune of losing a laptop. However, while these properties may explain the probability of lawsuit, we find that breach characteristics (size, cause and types of information lost) do not significantly predict the outcome of a data breach lawsuit. Instead, the probability of settlement appears to be driven by the presence of actual financial loss, and class certification.

 

Oren Bar-Gill and Ryan Bubb on Credit Card Pricing and the Credit CARD Act

Oren Bar-Gill

 and Ryan Bubb, both of NYU, have written Credit Card Pricing: The CARD Act and Beyond.  Here's the abstract:

We take a fresh look at the concerns about credit card pricing and empirically investigate whether the Credit CARD Act of 2009 has been successful in addressing those concerns. The rational choice theory of credit card pricing, which posits that issuers use back-end fees to adjust the price of credit to reflect new information about borrowers’ credit risk, predicts that issuers will respond to the Act by using alternative ways to price risk. In contrast, the behavioral economics theory, which posits that issuers use back-end fees because they are not salient to consumers, predicts that issuers will respond by increasing unregulated non-salient prices. If the market is competitive, we argue that the CARD Act should also result in increases in some salient, up-front prices. But we show that if issuers have market power, reductions in non-salient fees may not result in concomitant increases in salient charges. We test these predictions using two datasets on credit card contract terms before and after the CARD Act rules went into effect. We find that the rules have substantially reduced the back-end fees directly regulated by the Act, including late fees and over-the-limit fees. However, unregulated contract terms, such as annual fees and purchase interest rates, have changed little. Post-CARD Act, consumers continue to face high long-term prices and low short-term prices, and imperfectly rational consumers still find it difficult to understand the cost of credit card borrowing. We thus consider potential improvements to the regulatory framework. We argue that improved disclosures that present to consumers the aggregate cost of credit under the contract, based on information about the borrower’s likely use of credit, would improve consumer outcomes. Furthermore, we suggest that regulators, rather than focusing on prices that are 'too high,' should consider limiting the ability of issuers to charge introductory teaser interest rates that are in a sense 'too low.'

 

Another Paper on Discrimination in Mortgage Markets

R. Glenn Hubbard

 of Columbia Business School and the National Bureau of Economic Research (NBER), Darius Palia of Rutgers Business School, and

Wei Yu

 of California State Polytechnic University, Pomona have written Analysis of Discrimination in Prime and Subprime Mortgage Markets.  Here's the abstract:

This paper examines evidence of lending discrimination in prime and subprime mortgage markets in New Jersey. Existing single-equation studies of race-based discrimination in mortgage lending assume race is uncorrelated with the disturbance term in the loan denial regression. At the individual loan-level, we show that race is correlated with both observable and unobservable risk variables, leading to biased coefficient estimates. To mitigate this problem, we specify a system of equations and use a full information maximum likelihood (FIML) method that does not need to identify instrumental variables for system identification. We find that minorities are less likely to be rejected than whites in the subprime market. The individual loan-level FIML results are robust to using two-stage least squares when we examine discrimination at the neighborhood-level. We also find that the reduction in rejection rates to minority neighborhoods from 1996 to 2008 cannot be fully justified by risk, suggesting a relaxation of lending standards to minority neighborhoods. Using the methodology of Mian and Sufi [2009], we also find evidence for strong credit supply effects.

 

Mary Spector Study of Debt Collection Litigation

Mary Spector of SMU has written Debts, Defaults and Details: Exploring the Impact of Debt Collection Litigation on Consumers and Courts, 6 Virginia law and Business Review 257 (2011).  Here's the abstract:

This Article explores consumer collection litigation through original research from more than five hundred cases filed in the Dallas County courts. It analyzes the data within the context of the modern debt collection industry, paying special attention to the role of debt buyers and to the peculiar legal issues their involvement raises. After explaining the methodology and mechanics used to gather and analyze the data, the Article discusses the data collected, identifying and analyzing the most significant findings and placing them within a larger legal landscape. While the research confirms anecdotal reports of litigation abuse in consumer collection cases, it also reveals some surprising patterns. For example, the research indicates that consumer default was not the most common outcome and that minimal effort by consumers often considerably helped to protect their rights and favorably to conclude the litigation. The Article concludes by discussing some of the implications for the judicial system and by suggesting additional areas of research that would increase understanding of the challenges the litigation presents for parties, their lawyers, and the courts.

Oren Bar-Gill on Consumer Protection and Behavioral Economics

Oren Bar-Gill of NYU has written Competition and Consumer Protection: A Behavioral Economics Account, forthcoming in SWEDISH COMPETITION AUTHORITY, THE PROS AND CONS OF CONSUMER PROTECTION. Here's the abstract:

 

 Do the benefits of competition extend to a world with imperfectly rational consumers? I argue that sellers, operating in a competitive market, will design their products, contracts and pricing schemes in response to consumer misconception, resulting in both efficiency losses and harm to consumers. Under certain conditions, competition provides incentives for sellers to educate consumers and reduce misconception, but these mistake-correction forces are limited. The existence of biased demand, generated by imperfectly rational consumers, creates a market failure – a behavioral market failure. Mandated disclosure, deliberately designed for imperfectly rational consumers, or for sophisticated intermediaries that advise imperfectly rational consumers, can help.

 

 

Chris Peterson on How to Regulate High-Cost Small Loans

Christopher Lewis Peterson of Utah (and a CL&P blogger) has written 'Warning: Predatory Lender' -- A Proposal for Candid Predatory Small Loan Ordinances, 69 Washington and Lee Law Review (2012).  Here's the abstract:

Over a hundred different local governments around the country have adopted ordinances restricting high cost, small loans. This trend reflects the solid majority of the American public that opposes the legality of triple-digit interest rate loans and the long historical tradition of treating “payday” and car-title lending as a serious civil offense or even a crime. Nevertheless, perhaps owing to limits on municipal power, local payday lending law has generated relatively little scholarship or commentary. This paper describes the existing local law governing small, high-cost consumer loans and proposes a more emphatic ordinance that better reflects the policy judgment of many local leaders and a solid majority of the America public. In particular, this paper (1) introduces the historical background of regulation of usurious lending; (2) analyzes the recent growth in local ordinances attempting to control small, high-cost loans; (3) discusses the evidence of market failure in the small high-cost loan market; (4) proposes a model ordinance requiring that lenders who offer loans in excess of 45% per annum display a cautionary message that reads: “Warning: Predatory Lender,” on their street, storefront, and other on-premises signs; and, (5) argues that the well-established municipal authority over signage provides a solid statutory and constitutional basis for such a law. An appendix with a model ordinance suitable for adoption by most local governments follows.

Andrew Schwartz on the Infancy Rule in the Credit CARD Act

Andrew A. Schwartz

 of Colorado has written Old Enough to Fight, Old Enough to Swipe: A Critique of the Infancy Rule in the Federal Credit Card Act, 2 Utah Law Revies 407 (2011).  Here's the abstract:

In the 1960s and 1970s, American society came to the considered conclusion that if eighteen-year-olds can be drafted to fight and possibly die for their country, they should be treated as adults under the law. Thus, in 1971, the Twenty-Sixth Amendment to the United States Constitution, which lowered the voting age to eighteen from twenty one, was proposed and ratified in just three months, making it the fastest amendment in American history. The minimum age for federal and state jury service was also lowered to eighteen from twenty one. And, with regard to contract law, every state passed legislation reducing the age of contractual capacity to eighteen. These changes overrode the centuries-old common law rule that one becomes an adult, in the eyes of the law, at age twenty-one, this being premised on the then-relevant custom that Englishmen became eligible for knighthood at that age. Despite the fact that all of these reforms remain in place, the federal “Credit CARD Act of 2009” established twenty-one as the minimum age to contract for a credit card.

This Article criticizes this “infancy rule” of the CARD Act, found in section 301, in two ways. First, in the late twentieth century, we decided that eighteen-year-olds really are adults that deserve to be treated with dignity by the law, and this view has not changed. This basic principle was the driving force behind the Twenty-Sixth Amendment to the United States Constitution, which in 1971 lowered the minimum age to vote to eighteen, as well as state and federal statutes that lowered the age to serve on a jury to eighteen, not to mention the state statutes lowering the age of contractual capacity to eighteen. In declaring all those under twenty one to be infants, section 301 runs badly afoul of this broad societal consensus, rolls back the clock to medieval times, and undermines the dignity of eighteen-year-olds.

Second, separate and apart from the harm section 301 directly inflicts on young people, the CARD Act’s infancy rule hurts society at large. This is because the state statutory reforms of the 1970s that endowed eighteen-year-olds with the capacity to enter into binding contracts ushered in the new and hugely beneficial phenomenon of youthful entrepreneurship. Young people, aged eighteen to twenty, were now able to obtain credit and found start-up companies, such as Bill Gates, who founded Microsoft at age nineteen, and Mark Zuckerberg, who founded Facebook at the same age. These and other youthful start-ups employ hundreds of thousands of people, and their products and services improve our lives. Under section 301 of the CARD Act, however, they likely never would have been launched. In short, by hampering youthful entrepreneurship, section 301 harms not only the youths themselves, but society as a whole.

DiLorenzo Paper Contrasts US and UK Approaches to Mortgage Crisis

My colleague, Vincent DiLorenzo of St. John's has written Barriers to Market Discipline: A Comparative Study of Mortgage Market Reforms. Here's the abstract:

This paper explores mortgage market reforms in the U.S. and U.K. in response to the recent mortgage market crisis. Two issues are examined. First, the paper explores the extent to which regulatory bodies have recognized behavioral barriers to market discipline on the part of not only consumers but also industry actors. Second the paper examines the varied response in the U.S. and U.K. to both market limitations and behavioral limitations to self-protection and self-discipline that led to unsafe lending practices in the period 2003 through 2007. The greater emphasis on rules-based regulation in the U.S. after 2008 is compared with the continued reliance primarily on principles-based regulation in the U.K. This difference, however, is not what will determine future outcomes. Rather, the main finding is that future compliance with safety and soundness requirements will depend on a regulatory policy and enforcement record that will alter the industry’s past conclusion that evasion, or even noncompliance, with legal requirements is a reasonable business decision based on cost-benefit evaluations. In light of that finding, the U.K.’s new enforcement policy and record is far more likely to lead to compliance than the light-touch enforcement policy and record that has continued in the U.S.

Fed Researchers Find Subprime Loan Discrimination and Redlining

Ruben Hernandez-Murillo

 of the Federal Reserve Bank of St. Louis,

Andra C. Ghent

 of Baruch College (CUNY) - Zicklin School of Business, and

Michael Owyang

 also of the St. Louis Federal Reserve have written Race, Redlining, and Subprime Loan Pricing.  Here is 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.

Elizabeth Renuart Article on Ibanez

Elizabeth Renuart

of Albany has written Property Title Trouble in Non-Judicial Foreclosure States: The Ibanez Time Bomb? Here's the abstract:

The economic crisis gripping the United States began when large numbers of homeowners defaulted on poorly underwritten subprime mortgage loans. Demand from Wall Street seduced mortgage lenders, brokers, and other players to churn out mortgage loans in extraordinary numbers. Securitization, the process of utilizing mortgage loans to back investment instruments, not only fanned the fire; the parties to these deals often handled and transferred the legally important documents that secure the resulting investments — the loan notes and mortgages — in a careless manner.

The consequences of this behavior are now becoming evident. All over the country, courts are scrutinizing whether the parties initiating foreclosures against homeowners legally possess the authority to repossess those homes. When the authority is absent, foreclosure sales may be reversed. The concern about authority to foreclose is most acute in the majority of states where foreclosures occur with little or no judicial oversight before the sale, such as Massachusetts. Due to the decision in U.S. Bank N.A. v. Ibanez, in which the Supreme Judicial Court voided two foreclosure sales where the foreclosing parties did not hold the mortgage, Massachusetts is the focal jurisdiction where an important conflict is unfolding.

This article explores the extent to which the Ibanez ruling may have traction in other nonjudicial foreclosure states and the likelihood that clear title to foreclosed properties is jeopardized by shoddy handling of notes and mortgages. I focused on Arizona, California, Georgia, and Nevada because they permit nonjudicial foreclosures and they are experiencing high seriously delinquent foreclosure rates. After comparing the law in these states to that of Massachusetts, I conclude that Ibanez should be persuasive authority in the four nonjudicial foreclosure states highlighted herein. However, property title trouble resulting from defective foreclosures may be more limited in Arizona and Nevada. The article also provides a roadmap for others to assess the extent to which title to properties purchased at foreclosure sales or from lenders’ REO inventories might be defective in other states. Finally, the article addresses the potential consequences of reversing foreclosure sales and responds to the securitization industry’s worry about homeowners getting free houses.