Consumer Law & Policy Blog

A Pair of Arbitration Articles

Thomas V. Burch of Florida State University has written Regulating Mandatory Arbitration, Utah Law Review.  Here's the abstract:

Over the last twenty-five years, the Supreme Court has relied on party autonomy and the national policy favoring arbitration to expand the Federal Arbitration Act’s scope beyond Congress’s original intent. Choosing these loaded premises has allowed the Court to reach the outcomes it desires while denying that it is making any political or moral judgments in its decisions – a type of bureaucratic formalism. One controversial outcome of the Court’s formalism, overall, has been the increased prevalence of mandatory arbitration. Although it reduces judicial caseloads and lowers companies’ dispute-resolution costs, it also restricts or eliminates individual rights and reduces public regulation of the companies that require it. The Court has supported the spread of mandatory arbitration despite these negative effects.

Because of the Court’s support, the parties being subjected to mandatory arbitration began asking lower courts for relief through the unconscionability doctrine in the early 1990s. And because the unconscionability doctrine could not provide the wide-scale relief they wanted, they also turned to Congress, convincing its members to introduce 139 anti-arbitration bills since 1995 – the majority of which proposed eliminating mandatory arbitration. A review of these efforts, including an original survey of these bills, reveals that these parties have been disregarding mandatory arbitration’s public benefits in favor of a rights-oriented, liberal approach that rejects regulation as a possible way to improve mandatory arbitration’s overall fairness.

This Article shows that both the Supreme Court’s and the reform advocates’ approaches to mandatory arbitration are flawed. It makes more sense, at least for now, to continue mandatory arbitration’s use while improving its overall fairness through legislative or agency regulation. Regulating mandatory arbitration with the goal of improving its fairness is consistent with pragmatic principles and is superior to the Supreme Court’s formalism and the reform advocates’ liberalism in the current mandatory-arbitration context. Taking this approach will allow us to study mandatory arbitration over time before deciding whether to eliminate it – a fair way to proceed given the importance of the rights at stake and the positive effects that mandatory arbitration can (possibly) have on the public good.

And Hiro N. Aragaki of Fordham Business adds Equal Opportunity for Arbitration, 58 UCLA Law Review.  The abstract follows:

Despite talk of a “federalism revival,” state law is quietly losing ground in the Supreme Court, and the arbitration area has proven to be no exception. As currently interpreted by the lower courts, the Federal Arbitration Act (FAA) is on course to preempt a vast array of state laws that serve important public interests, often with minimal intrusion on the arbitral process. Numerous petitions for certiorari have recently been filed in the wake of these developments. But except in the case of AT&T v. Concepcion (currently pending on the merits), the Supreme Court has denied all of them, leading many to call for Congressional intervention. The bitterly debated “Arbitration Fairness Act of 2009” is just the latest response to this controversy.

This Article offers a new theory for thinking about the extent to which the FAA should preempt state law. It deepens the work I began elsewhere, which is to reinterpret the Court’s FAA preemption jurisprudence as a principle of equal opportunity for arbitration. This enables me to reframe the current phenomenon of overpreemption in terms of a basic misapprehension of that principle rather than, as is traditionally supposed, in terms of the courts’ dogmatic “favoritism” toward arbitration.

I argue that a more sophisticated engagement with that logic will help courts fulfill the FAA’s mandate without inevitably displacing state law just because it happens to invalidate arbitration agreements. Considering controversial examples from the recent past, I conclude with concrete guidance for how my proposed model might be implemented in practice.

 

Norm Silber on Whether Consumer Credit Agreements Should be Required to Have Force Majeure Provisions

Norman I. Silber of Hofstra has written Debts, Disasters, and Delinquencies: The Case for a Mandatory Force Majeure Provision in Consumer Credit Agreements. 34 N.Y.U. Rev.L. & Social Change 1 (2010). Here's the abstract:

This article addresses inequities in the apportionment of losses that arise when traditional rules of consumer finance are applied to enforce payment obligations that accrue during and after catastrophes. Disasters lead inevitably to job losses, property destruction, inhibited access to homes and workplaces, and problems with debt repayment. In the wake of such devastation, fees and interest charges mount, and payment defaults increase. The author argues that hardships and social distress can be mitigated, and losses more equitably allocated, by mandating the inclusion of a force majeure provision in consumer agreements.

Study Finds Securitized Loans Less Likely to Get Modifications

Yan Zhang of the Office of the Comptroller of the Currency, Compliance Risk Analysis Division, has written Does Loan Renegotiation Differ by Securitization Status? An Empirical Study.  Here's the abstract: 

This paper investigates whether mortgage loan servicers renegotiate a distressed loan differently depending on whether the loan is held on their own books or by private investors. Using the proprietary mortgage metrics database that has servicer-provided loan renegotiation details, we conduct a comprehensive empirical evaluation of the securitization impact on loan renegotiation. We focus on loan outcome, loan renegotiation frequency, and loan renegotiation effectiveness in influencing outcomes.

We find that non-renegotiated securitized loans have a significantly higher foreclosure rate than similarly situated portfolio loans. We show that servicers actually conduct fewer loan renegotiations for securitized loans. By studying multi-stage transition probabilities, we discover that the self-cure rate and re-default rate are different between securitized loans and portfolio loans. Overall this paper reveals that loan renegotiations, in particular loan outcome, loan renegotiation frequency and effectiveness, do differ by securitization status.

Freeman Paper on Race and Credit Card Debt

Andrea Freeman of California Western has written Credit Card Ills: Reducing Racial Disparities in Debt.  Here's the abstract:

Credit card debt, particularly in conjunction with the subprime lending crisis and severe economic recession, jeopardizes the ability of many African American and Latino households to maintain financial viability. The credit card industry’s business model relies on the payment of fees and high interest rates by the poorest consumers to generate profits and subsidize credit card use by the richest. Documented racial disparities in credit card debt represent and perpetuate structural inequities that require regulatory intervention. Both increased consumer protection and structural reform are necessary to reduce credit card debt disparities arising from present and past discrimination and subordination.

The evolution of credit cards into the primary conduit of consumer debt has dramatically reshaped the relationship between banks and consumers, creating the potential for large-scale exploitation along race and class lines by major financial institutions. This Article builds on legal scholarship on racial disparities by analyzing the problem in the context of credit card debt, explains why both law and economics and behavioral economics fail to account for these disparities, and applies a critical race and class analysis to develop proposals that would alleviate in part the structural inequities that lie at the core of the problem. The Article identifies two types of credit card consumers who carry balances, ‘subsistence users,’ who rely on credit to provide for their basic needs, and ‘lifestyle users,’ who maintain a lifestyle above their income through credit. To create transparency that will facilitate regulatory intervention, it calls for full disclosure of industry practices, including targeted marketing and solicitation, and racial discrimination. It then explores two regulatory options for ameliorating the conditions and changing the practices that lead to racial debt disparities: ‘subsistence amnesty,’ in the form of the temporary elimination of fees and interest rates on the subsistence purchases of consumers living under the poverty line, and the addition of substantive requirements to the Community Reinvestment Act that would compel credit card companies to help equalize the financial status of low-income communities of color through individual savings accounts, domestic micro-lending, and community-based financial counseling. This Article seeks primarily to contribute to a dialogue about racial debt disparities, in numbers and treatment, among politicians, activists, and economics theorists that will lead to creative strategies to reduce or eliminate these disparities.

Grimmelmann Paper on Hoofnagle and Moringiello on ID Theft & Data Security

James Grimmelmann of New York Law School has written Known and Unknown, Property and Contract: Comments on Hoofnagle and Moringiello, 5 Brooklyn Journal of Corporate, Financial, and Commercial Law 85 (2011).  Here's the abstract:

In addition to gerund-noun-noun titles and a concern with the misaligned incentives of businesses that handle consumers' financial data, Chris Hoofnagle's Internalizing Identity Theft and Juliet Moringiello's Warranting Data Security share something else: hidden themes. Hoofnagle's paper is officially about an empirical study of identity theft, but behind the scenes it's also an exploration of where we draw the line between public information shared freely and secret information used to authenticate individuals. Moringiello's paper is officially a proposal for a new warranty of secure handling of payment information, but under the surface, it invites us to think about the relationship between property and contract in the payment system. Parts I and II, respectively, of this brief essay will explore these hidden themes in Hoofnagle's and Moringiello's articles. I hope the exercise will tell us something interesting about these two papers, and also about the problems of privacy and security in the payment system. A brief conclusion will add a personal note to the mix.

Viscusi Paper: Does Product Liability Make Us Safer?

W. Kip Viscusi of Vanderbilt and the National Bureau of Economic Research has written Does Product Liability Make Us Safer?  Here's the abstract:

Although a fundamental objective of tort liability is to promote safety, the performance of product liability has been more mixed. Safety levels have increased steadily over the past century for reasons wholly apart from tort liability, such as increases in societal wealth and technological progress. Low and moderate levels of liability enhance new product introductions and safety innovations, but high levels of liability have the opposite effect. Similar results are found for new product introductions, patents, and rates of R&D. There is no empirical evidence of a deterrent effect of punitive damages. Jury decision making is hindered by hindsight bias and other cognitive failures, which creates excessive aversion to novel risks associated with innovative products. Jurors’ biases against corporate risk analyses discourages systematic analysis of product risks and potentially beneficial new products.

Jim Hawkins Paper on the CFPB and Regulation of Fringe Credit Products

Jim Hawkins of Houston has written The Federal Government in the Fringe Economy, 14 Chapman Law Review (2011).  Here's the abstract:

This paper is a contribution to Chapman Law Review’s symposium, From Wall Street to Main Street: The Future of Financial Regulation. It explores the Dodd-Frank Act’s creation of the Consumer Financial Protection Bureau and specifically assesses the Bureau’s new power to regulate alternative financial services providers like payday lenders, rent-to-own companies, pawnshops, and auto title lenders.

I advance two claims. First, I argue that the Consumer Financial Protection Act gives broad, novel powers to the Bureau to regulate fringe credit. Part I describes the scope of the Bureau’s power under the Act, demonstrating how the Act covers the vast majority of fringe credit transactions. Part II surveys the substance of the Act to reveal the surprising emphasis the Act places on the Bureau governing fringe banking transactions. The scope of the Bureau’s authority coupled with its substantive mandate to confront problems in fringe credit markets signal the new power and interest the federal government has taken in the fringe economy.

Second, I argue that most of the justifications that have been offered for the Bureau regulating fringe credit are flawed. To understand why people have contended the Bureau should govern the fringe economy, I surveyed the two most important academic articles arguing in favor of the Bureau, and I conducted an empirical study to measure the frequency of the rationales for the Bureau regulating fringe credit in media, government press releases, and testimony to Congress. Part III reports the results of the study, and it assesses the different rationales for the Bureau intervening in fringe credit markets.

Stipanowich Paper on the Struggle to Shape American Arbitration

Thomas Stipanowich of Pepperdine has written Revelation and Reaction: The Struggle to Shape American Arbitration in CONTEMPORARY ISSUES INTERNATIONAL ARBITRATION AND MEDIATION: THE FORDHAM PAPERS 2010, Martin Nijhoff, 2011.  Here's the abstract: 

In this article, Professor Stipanowich explores recent decisions by the U.S. Supreme Court and the implications for the respective domains of courts of law and arbitration tribunals regarding so-called “gateway” determinations surrounding the enforcement of arbitration agreements and the contracts of which they are a part. The decisions address the complex interplay between federal substantive law focusing on questions of arbitrability, a body of law defined and expanded by the Court under the Federal Arbitration Act (FAA), and the law of the states and bring into play competing judicial philosophies of contractual assent and contrasting views about the balance between policies promoting the autonomy of contracting parties and judicial policing of overreaching in the context of contracts of adhesion.

According to Prof. Stipanowich, the Court’s current jurisprudence, which may be seen as establishing and expanding a “second tier” of the “revealed” substantive law of arbitrability under the FAA first given shape and substance in the 1980s, is a flashpoint for special concerns associated with standardized contracts directing consumers and employees to arbitrate. Prof. Stipanowich believes that this will inevitably add momentum to current efforts to enact national legislation outlawing pre-dispute arbitration agreements in consumer, employment and other classes of contracts, with possible negative consequences for business-to-business arbitration.

In part I of his article, Prof. Stipanowich offers a short history of the evolution of Supreme Court decisions concerning the “revelation” and expansion of federal substantive law under the Federal Arbitration Act (FAA). Parts II and III then discuss recent Supreme Court cases reflecting the Court’s continuing reliance on the wellspring of divined federal law as a basis for promoting party autonomy in arbitration while limiting lower courts’ ability to police such agreements. Part IV briefly explores the dynamic political response to the extreme, non-nuanced pro-arbitration position developed in modern Court jurisprudence. Finally, Prof. Stipanowich concludes the article by calling for carefully crafted legislation or administrative regulations limiting the use of arbitration agreements in adhesion contracts or establishing due process standards for such agreements.

Harkness Paper on the Credit CARD Act and Seniors

Donna S. Harkness of Memphis has written The Credit Card Act of 2009: Welcome Relief or Too Little, Too Late for Vulnerable Seniors? 29 Banking and Financial Services Policy Report, No. 9, at 12. Here's the abstract:

As a group, the elderly have found themselves increasingly strapped for cash during the current economic downturn. While credit card debt grew 53% across all demographic groups during the 1990s, for senior citizens, aged 65 to 69, the growth was truly astronomical, representing a 200% increase. The Credit Card Accountability, Responsibility and Disclosure (CARD) Act of 2009, which amended the federal Truth in Lending Act, has been described as a “sweeping law” that is “designed to permanently alter the relationship between consumers and their credit cards.” While the CARD Act did add a number of specific consumer protection provisions providing for enhanced consumer disclosures, creating specific protections for young consumers, addressing gift cards and other miscellaneous issues, none of the statute’s provisions are directly aimed at the elderly. This article examines the statute’s consumer protection and enhanced disclosure provisions that are relevant for purposes of protecting vulnerable senior citizens, and considers the extent to which the law will help older consumers to recognize and avoid credit use behaviors that are not in their best interests. In the final analysis, this article argues that while the CARD Act is a harbinger of a more consumer oriented direction for the credit card industry, its protections may come too late, and provide too little protection for the many senior citizens that have already fallen victim to excessive credit card fees and finance charges.

Paper on the Relationship Between Payday Loan Size and Default Probability

Will Dobbie of Harvard and Paige Marta Skiba of Vanderbilt have written Information Asymmetries in Consumer Lending: Evidence from Two Payday Lending Firms.  Here's the abstract:

This paper tests for incentive and selection effects in a subprime consumer credit market using sharp discontinuities in loan eligibility rules. We find evidence of advantageous incentives and adverse selection. For a given borrower, we estimate that a $100 increase in loan size decreases the probability of default by 3.7 to 4.2 percentage points, a 20 to 23 percent decrease from the mean default rate. Borrowers who choose $100 larger loans are 6.9 to 8.0 percentage points more likely to default than borrowers who choose smaller loans.