Consumer Law & Policy Blog

Another Academic Attack On Disclosure

Omri Ben-Shahar of University of Chicago and Carl E. Schneider of Michigan have written The Failure of Mandated Disclosure.  Here's the abstract:

This article explores the spectacular prevalence, and failure, of the single most common technique for protecting personal autonomy in modern society: mandated disclosure. The article has four sections:

(1) A comprehensive summary of the recurring use of mandated disclosures, in many forms and circumstances, in the areas of consumer and borrower protection, patient informed consent, contract formation, and constitutional rights;

(2) A survey of the empirical literature documenting the failure of the mandated disclosure regime in informing people and in improving their decisions;

(3) An account of the multitude of reasons mandated disclosures fail, focusing on the political dynamics underlying the enactments of these mandates, the incentives of disclosers to carry them out, and, most importantly, on the ability of disclosees to use them;

(4) An argument that mandated disclosure not only fails to achieve its stated goal but also leads to unintended consequences that often harm the very people it intends to serve.

Hoofnagle Paper on Identity Theft

Chris Jay Hoofnagle University of California, Berkeley has written Internalizing Identity Theft, UCLA Journal of Law and Technology (2010). Here's the abstract:

Why has identity theft remained so prevalent, in light of the development of ever more sophisticated fraud detection tools? Identity theft remains at 2003 levels – 9.9 million Americans fell victim to the crime in 2009.

One faction explains the identity theft as a problem of a lack of control over personal information. Another argues conversely that identity theft may be caused by a lack of access to personal information by credit grantors. This article presents data from a small sample of identity theft victims to explore a different dimension of the crime, one that suggests alternative interventions.

Drawing upon victim and impostor data now accessible because of updates to the Fair Credit Reporting Act, the data show that identity theft impostors supply obviously erroneous information on applications that is accepted as valid by credit grantors. Thus, the problem does not necessarily lie in control nor in more availability of personal information, but rather in the risk tolerances of credit grantors. An analysis of incentives in credit granting elucidates the problem: identity theft remains so prevalent because it is less costly to tolerate fraud. Adopting more aggressive and expensive anti-fraud measures is extremely costly and jeopardizes customer acquisition efforts.

These business decisions leave individuals and merchants with some of the externalities of identity theft. Victims sometimes spend their own money, and more often, valuable personal time dealing with identity theft externalities. This article concludes by reviewing several approaches to internalizing these costs. Popular approaches specify prescriptive rules to address particularly problematic practices in credit granting, such as using the Social Security number as a password for authentication. These approaches may lead to compliance-oriented approaches and reification. Several commentators have suggested negligence actions as a cure to identity theft, but uncertainty surrounding the duty of care would probably leave many consumers unremunerated. A strict liability regime is suggested because credit grantors are the least cost avoiders in the identity theft context, and because consumers cannot control the credit granting process nor insure against identity theft losses efficiently.

David Adam Friedman Article on Advertising

David Adam Friedman of Willamette has written Debiasing Advertising: Balancing Risk, Hope and Social Welfare, 19 Journal of Law & Policy (2011) (forthcoming).  Here's the abstract:

This article explores the nuances of “debiasing through law,” a regulatory approach proposed by Christine Jolls and Cass Sunstein. Proponents have described advertising regulation as a form of debiasing through law. Debiasing approaches regulation through less paternalistic means using strategies that improve consumer decision making. Proponents believe that the improved decision making will gracefully lead to better choices. These debiasing strategies find some of their roots in addressing human cognitive biases and bounded rationality.

Although debiasing through law purports to offer an attractive alternative to pure paternalism, this Article demonstrates that the net social welfare effects of this approach can prove difficult to anticipate. An examination of the recent tightening of the regulation of consumer endorsements in advertising illuminates the challenges and nuances of the debiasing approach.

This Article attempts to answer a myriad of questions. Does removing the consumer endorsement tool from the marketing arsenal ensure that consumers will make better decisions? The truthful consumer endorsement can offer other consumers legitimate hope. When netted out, does taking hope off the market advance consumer welfare? Can regulators remove true information from the marketplace and expect to foster an improvement in social welfare? Can regulators preserve real choice while simultaneously improving decisions? Are regulators truly capable of harnessing cognitive and social science to engage in this sort of precision welfare engineering? Consumer endorsement regulation presents a live proxy for the analytical dissection of debiasing through law.

Some scholars have expressed a keen skepticism toward this approach to regulation and toward the whole of behavioral law and economics. This Article presents a cautionary tale about the unpredictability of the net outcomes from deploying debiasing through law.

Daniel Schwarcz on Insurance Policy Transparency

Daniel Schwarcz of Minnesota has written The Need for Insurance Policy Transparency.  Here's the abstract:

This Article empirically debunks the common claim that homeowners insurance policies do not vary across different insurance carriers. It demonstrates that different carriers' homeowners policies differ radically with respect to numerous important coverage provisions. It also reports that a substantial majority of these deviations produce decreases in the amount of coverage, though some deviations increase coverage. Additionally, the Article reviews the shocking absence of any mechanisms by which even informed and vigilant consumers could comparison shop among carriers on the basis of differences in coverage. It closes by noting that state insurance regulators must act aggressively to remedy this lack of transparency in homeowners insurance markets and to study more broadly whether this problem extends to other personal lines of coverage.

Larry Kirsch on the Fremont Case

Larry Kirsch of IMRHE, LLC has written The State Attorney General as Consumer Advocate: A Recent Effort to Tame Unfair Subprime Lending.  Here's the abstract:

In 2008, the Massachusetts Attorney General’s Office obtained a preliminary injunction in state court against Fremont Investment and Loan, a major state-chartered lender active in the subprime mortgage market. The injunction claimed that Fremont’s Adjustable Rate Mortgage loan products and underwriting practices were inherently unfair to borrowers. This article describes the unique and innovative role played by the Attorney General’s Office in enforcing the unfairness arm of a state’s Unfair and Deceptive Acts and Practices statute against abusive financial products and practices. And it suggests that the heretofore underused state UDAP unfairness litigation strategy is available to other states.<

What Happens When You Tell Consumers You're Trying to Collect a Time-Barred Debt?

Nathalie Martin of New Mexico and Timothy E. Goldsmith of New Mexico's Psychology Department report the answer in Testing Materiality Under the Unfair Practices Acts: What Information Matters When Collecting Time-Barred Debts? Forthcoming in the Consumer Finance Law Quarterly Report.  Here's the abstract:

Should creditors and debt collectors be required to disclose the fact that a debt is time-barred when attempting to collect from a consumer? This article describes an empirical study that compares how consumers react to two different collection letters, one in which the recipients are told explicitly that the debt being collected is time-barred, and one in which they are not given this information. The study measures whether consumers are equally willing to pay the debt, when they are told that the debt is time-barred. Appended to the article are the survey questions asked of the study participants.

Spoiler alert: telling them the debt is time-barred makes a difference to their willingness to pay it.

Zahr Said Stauffer Paper on Embedded Advertising

Zahr Said Stauffer of Virginia has written Embedded Advertising and the Venture Consumer, North Carolina Law Review (forthcoming).  Here's the abstract:

Embedded advertising - marketing that promotes brands from within entertainment content - is a thriving, rapidly changing practice. Analysts estimate that embedded advertising expenditures could exceed $10 billion in 2010. The market continues to grow even as traditional advertising revenues contract. The relatively few legal scholars who have studied embedded advertising believe that it is under-regulated. Ineffective regulation, they claim, is deeply troubling because corporations may with legal impunity deceptively pitch products to trusting viewers. Critics charge that embedded advertising creates “hyper-commercialism,” distorts consumers’ tastes, taints the artistic process, and erodes faith in public discourse. This Article argues that the critics are wrong. Sponsorship disclosure law under the Communications Act of 1934 and related regulations is indeed largely ineffective, in part because the media industry has consolidated considerably and in part because media content is now created and consumed in diverse ways unimaginable to the drafters. The law was conceived for yesterday’s marketplace, but also for yesterday’s consumer. The media consumer today is what this Article calls a “venture consumer.” Often, she knows what she wants, knows where to get it, and is aware of the risks and costs involved. The mismatch between the consumer imagined by regulators and the contemporary consumer means that expanded regulation of embedded advertising according to current reform proposals could end up harming consumers more than helping them. Moreover, embedded advertising is not especially amenable to effective regulation, given the incentives for artists and advertisers to collaborate in the production of entertainment content. In light of the difficulty of correcting the regime’s flaws and the consumer interests threatened by expanded regulation, the Article concludes that the consumer is better served if the law is maintained as-is rather than expanded through the proposed reforms.

David Horton Article: Arbitration as Delegation

David Horton of Loyola Law School Los Angeles haw written Arbitration as Delegation, 86 N.Y.U. L. Rev. (2011).  Here's the abstract:

Hundreds of millions of consumer and employment contracts include mandatory arbitration clauses, class arbitration waivers, and other terms that modify the rules of litigation. These provisions ride the wake of the Supreme Court’s expansive interpretation of the Federal Arbitration Act (“FAA”). For decades, scholars have criticized the Court’s arbitration jurisprudence for distorting Congress’s wishes and ignoring the fact that companies use fine print dispute resolution provisions as a clandestine way to eliminate substantive rights. This Article claims that the Court’s reading of the statute suffers from a deeper, more fundamental flaw: it transforms the FAA into an unconstitutional delegation of legislative power. Article I, section 1 of the Constitution forbids Congress from conferring the right to make law upon private parties. As construed by the Court, that is exactly what the FAA does. Invoking the statute, firms have created a parallel system of civil procedure for consumer and employment cases.This widespread procedural rulemaking is especially troubling because it establishes a private regulatory regime in an area that Congress has already attempted to regulate. In light of these concerns, the Article proposes several ways that the Court can narrow the statute and thus assuage concerns about its constitutionality.

The Content of Consumer Law Classes II

Want to know what consumer law professors cover in class?  Read The Content of Consumer Law Classes, forthcoming in the Journal of Consumer and Commercial Law.  Here's the abstract

This paper reports on a 2010 survey of law professors teaching consumer protection, and follows up on a similar 2008 survey, which appeared in Jeff Sovern, The Content of Consumer Law Classes, 12 J. Consumer & Commercial L. 48 (No. 1, 2008), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1139894. The 2010 survey found more uniformity in topic selection than the 2008 survey. All thirteen professors who taught survey courses reported that they taught common law fraud, UDAP statutes, the Truth in Lending Act, and the Fair Credit Reporting Act, while all but one covered the Fair Debt Collection Practices Act, the Federal Trade Commission Act, and payday lending. In contrast, in 2008 no topics were explored by all the survey professors and three were discussed by all but one. Nevertheless, as in the 2008 survey, the professors varied considerably in selecting other topics. Professors responding to the 2010 survey reported keeping their syllabi current; for example, more than half the professors teaching survey courses covered the Credit CARD Act, enacted only a year before the survey was conducted, while all but two addressed the subprime crisis.

Call for Papers/Roundtable Participants for AALS Meeting Panel on Credit CARD Act

The AALS Section on Commercial and Related Consumer Law is seeking participants for a roundtable discussion at the AALS Annual Meeting and is also separately soliciting essays for a print symposium to follow.

The topic of both the roundtable discussion and the print symposium will be the federal Credit Card Accountability Responsibility and Disclosure Act of 2009 (commonly known as the CARD Act).   In this Act, Congress limited the use of some common practices by credit card issuers and mandated additional disclosures.  For example, card issuers now must give cardholders 45-days notice before increasing interest rates and fees, the increases can apply only to new charges, and the cardholder must be given the option to cancel the card before the increases take effect.  In addition, card issuers generally cannot increase rates for the first 12 months after an account is opened.  Credit card bills must include information about how long it will take to pay off balances, and various restrictions apply to when card issuers can make payments due. 

This new Act raises many new questions.   How have the new regulations affected credit contracts and practices since their enactment?  Will card issuers find ways around the legislation?  Will the restrictions reduce the availability of credit and, if so, is that a good or bad result?  Will the CARD Act's increased disclosure and opt-in provisions advance or hinder consumer protections?   If these restrictions are what consumers want, why did the market not provide them?  Will further reform be necessary?