Consumer Law & Policy Blog

State Anti-Predatory Lending Laws Mitigated Foreclosures

by Alan White

Following up on our prior studies, we have posted a new paper finding that states with effective anti-predatory mortgage lending laws had fewer risky subprime loan originations and lower default and foreclosure rates than states without effective laws.  This new paper relies on loan-level data for 1.2 million mortgages observed monthly through 2008, and standard regression analysis to control for non-legal variables differing between states with and without effective laws. The effectiveness of state laws holds both at the state-wide level and when looking at metropolitan areas on borders between states with and without effective laws. 

Amy Schmitz Article on Arbitration Clause Regulation

For those who haven't read enough yet on arbitration regulation, Amy Schmitz of Colorado Law has a new article in 15 Harvard Negotiation Law Review titled Legislating in the Light: Considering Empirical Data in Crafting Arbitration Reforms.  Here's the abstract:

Consumer advocates and policymakers call for abolition of predispute arbitration clauses in consumer contracts, while proponents of arbitration claim such abolition would increase companies’ dispute resolution costs, leading to higher prices and interest rates. Policymakers on both sides of the debate, however, rarely consider the empirical research necessary for crafting informed arbitration disclosure rules. This article therefore focuses on how varied research, including my own empirical studies, may inform policies regarding arbitration disclosure regulations. The article also offers suggestions for regulations tailored to have the most impact for the cost in light of this research. 

Want to publish an article about the new financial reform legislation?

Now that Congress has passed, and the president will soon sign, Wall Street reform legislation, the question is just what does the new law say and what does it do and not do? Many have blogged about the bill, and numerous articles have been printed in newspapers, but there does not appear to be a detailed analysis of exactly what we have enacted, and the potential reach of the new agency. The Journal of Consumer and Commercial Law would like to fill that gap, and be the first to publish a detailed analysis of the new law. If a manuscript is received by August 20th, we can get it in the September issue. Due to the short notice, we will be very flexible with respect to format and length. If you want to put something together in the next month, let me know, alderman@uh.edu.

Georgia State University Law Review Articles on Consumer Law

Longtime consumer law professor Mark Budnitz's home law review, Georgia State University Law Review, has published a quintet of consumer law articles, including an article by Mark himself, The Development of Consumer Protection Law, the Institutionalization of Consumerism, and Future Prospects and Perils.  The others include Kathleen E. Keest, Consumer Financial Services Law and Policy: 1968-20?? In the Thick of the Battlefield for America's Economic Soul; Alvin C. Harrell, The Great Credit Contraction: Who, What, When, Where and Why; and Fred Miller, Prime Interest Rates for Subprime Borrowers?.   I could find only one on the web, a piece by Peter A. Alces of William & Mary and Michael M. Greenfield of Washington University, titled They Can Do What!? Limitations on the Use of Change-of-Terms Clauses, with the following abstract:

Almost every contract that calls for ongoing services to consumers contains a provision that authorizes the provider of those services to modify the contract at any time, without any constraint on the modification. With some exceptions, the courts have not been very responsive to arguments that seek to enforce constraints on the provider’s discretion. In the recently enacted Credit CARD Act, Congress has declared that there are indeed some limits on the changes that may be made to one kind of ongoing consumer contract, viz., a contract to provide open-end credit. In this article, to be published in a forthcoming symposium issue of the Georgia State Law Review, we review several statutory rules and common-law doctrines that suggest limits, applicable to all kinds of consumer contracts, on the freedom of service providers to change the terms of the contract  

The articles appear in volume 26, number 4.

Not Everyone is Happy that the New CFPB Bill Will Give Denied Credit Applicants a Right to See Their Credit Score

by Jeff Sovern

Berin Michael Szoka of The Progress & Freedom Foundation has written The Dangerous Implications of a 'Right' to Free Credit Scores .  Here's the abstract:

Under the Fair Credit Reporting Act of 2003, every American has a right to a free credit report once a year from each of the three major credit bureaus - Experian, TransUnion, and Equifax. A search on any major search engine for "credit report" will lead the user (via the top search result) to AnnualCreditReport.com, which guides the user through getting these free reports after verifying their identity - a process that takes about 15 minutes. Having these reports empowers us all to take responsibility for verifying the accuracy of the borrowing history used to make assessments about our credit-worthiness, and also to detect fraud or identity theft. But for some lawmakers, this freebie isn't enough.

I was a little perplexed that the abstract doesn't provide any reason why free credit scores are a bad idea, so I had a quick look at the paper.  Szoka is concerned about something called "information socialism," which is the name Szoka gives to the idea that someone can create a score or algorithm or some such thing and the government can force them to turn it over to others without charge, thereby reducing the incentive to create new similar inventions that depend on information.  Szoka fears that this provision is the slippery slope bringing us closer to such a state generally.  Personally, I'm not persuaded that free credit scores will have the effects Szoka fears.  Even assuming that information socialism is a problem, the information here has already been paid for by the creditor who purchased it and used it to turn down the consumer's application. I would have been more worried that making credit scores available would facilitate gaming them to produce higher scores that don't actually reflect that someone is more creditworthy--except that since you've been able to buy your credit score for years from Fair Isaac, that bird has flown. 

Brent White Paper on Underwater Mortgages

Brent T. White of the University of Arizona - James E. Rogers College of Law has written Underwater and Not Walking Away: Shame, Fear and the Social Management of the Housing Crisis.  With more than 12,000 downloads, it's the most downloaded paper to appear in the SSRN LSN Consumer Law Abstracts ejournal thus far.  Here's the abstract:

Despite reports that homeowners are increasingly “walking away” from their mortgages, most homeowners continue to make their payments even when they are significantly underwater. This article suggests that most homeowners choose not to strategically default as a result of two emotional forces: 1) the desire to avoid the shame and guilt of foreclosure; and 2) exaggerated anxiety over foreclosure’s perceived consequences. Moreover, these emotional constraints are actively cultivated by the government and other social control agents in order to encourage homeowners to follow social and moral norms related to the honoring of financial obligations - and to ignore market and legal norms under which strategic default might be both viable and the wisest financial decision. Norms governing homeowner behavior stand in sharp contrast to norms governing lenders, who seek to maximize profits or minimize losses irrespective of concerns of morality or social responsibility. This norm asymmetry leads to distributional inequalities in which individual homeowners shoulder a disproportionate burden from the housing collapse.

The Shadow Terms: Contract Procedure and Unilateral Amendments

David Horton of Loyola Law School has an interesting and timely new article in the UCLA Law Review exploring the increasing phenomenon of companies using the authority of blanket "change-in-terms" provisions to unilaterally revise the terms of consumer contracts, often in an attempt to evade or stay one step ahead of court review.  For example, cell phone companies whose arbitration clauses have been struck down as unconscionable have have invoked change-in-terms provisions to impose more consumer-friendly arbitration clauses on their customers in an attempt to salvage their bans on class actions.

The article makes a case for legislation that would ban such unilateral revisions. Here's the abstract:

For decades, courts and commentators have debated the normative implications
of contract procedure. Conservatives argue that mandatory arbitration clauses reduce
the burden on the judicial system and that class arbitration waivers, choice-of-law
clauses, and jury trial waivers allow businesses to pass litigation savings to their
consumers in the form of lower prices. In response, liberals object that contract
procedure dilutes substantive rights and runs roughshod over important jurisdictional
and constitutional values.

This Article argues that neither view has accounted for a defining trait of contract
procedure: the regularity with which drafters unilaterally amend procedural terms.
Indeed, many standard form consumer agreements and a growing number of state
statutes authorize drafters to revise procedural terms unilaterally. The frequency
with which drafters exercise this power undermines the foundational conservative
theory that sophisticated adherents can exert market pressure on drafters to offer
efficient procedural terms. However, the liberal model of contract procedure—which
urges courts to nullify procedural terms that erode substantive, jurisdictional, or
constitutional interests—creates perverse incentives. Drafters respond to judicial decisions
voiding procedural terms by amending their terms again. The target audience
for these revisions is not the adherents who will be subject to them, but the courts who
will adjudicate their validity. This “private conversation” between corporations and
courts not only widens the informational gulf between drafters and adherents, but
increases the burden on the judicial system. To end this pernicious feedback loop, the
Article encourages policymakers to eliminate drafters’ ability to amend procedural
terms unilaterally.

More Coverage of Rent-A-Center v. Jackson

by Deepak Gupta

 Last week, I blogged about Rent-a-Center v. Jackson, a very important arbitration case that will be argued before the U.S. Supreme Court on April 26. My post focused on the bottom-side amicus briefs in the case, particularly a brief of arbitrators and arbitration scholars supporting the plaintiff/respondent. You can read more coverage of the case at Text & History, PrawfsBlog, and ContractsProfBlog.  The Virginia Law Review's online component has just published an interesting essay by David Horton (Loyola Law School, Los Angeles) called "The Mandatory Core of Section 4 of the Federal Arbitration Act."  Here's an abstract:

This Essay . . . argues that parties cannot arbitrate the issue of whether the arbitration clause is unconscionable, even when there is "clear and unmistakable" evidence of their intent to do so, because courts possess the exclusive right to decide whether all or part of an arbitration clause is valid. The judiciary's monopoly on settling this matter arises from Section 4 of the FAA, which provides that if the "making of the arbitration agreement" is "in issue," the "court shall proceed summarily to the trial thereof." In fact, Section 4 only allows a court to submit a case to arbitration if it is "satisfied that the making of the agreement for arbitration . . . is not in issue." This language bars parties from contracting around the judicial duty to evaluate "the making of the arbitration clause." Moreover, this reading dovetails with the FAA's legislative history, which reveals that the statute's proponents cited this layer of judicial protection to allay concerns about privatizing a customary governmental function.

Ann Graham Article on the CFPA

Ann Graham of Texas Tech has written The Consumer Financial Protection Agency: Love It or Hate It, U.S. Financial Regulation Needs It, forthcoming in the Villanova Law Review.  Here's the abstract:

As the U.S. economy begins a tentative recovery from recession, Congress is debating financial regulatory reform legislation. Whether a stand-alone consumer financial protection agency becomes a centerpiece of the new regulatory regime or a throw-away bargaining chip remains to be seen. In any assessment of the subprime-mortgage-crisis-gone-global, with the benefit of honest hindsight, failures of consumer protection loom large.

In the wake of this crisis, just as in the aftermath of the banking collapse of the 1930s, Congress has an opportunity to restructure a broken financial regulatory system. More than band aids are required. If the reforms Congress adopts now are to secure a lengthy period of financial stability, as was the case following the New Deal era’s reenvisioning of financial regulation, consumer protection cannot continue to be marginalized. Congress could muster the leadership and political backbone to create a new, independent agency whose sole mission is to protect consumers of financial products from the abuses which contributed to the present financial crisis. The prospect of such a major shift in the allocation of regulatory authority has already raised a hue and cry from beneficiaries of the status quo in the federal regulatory agencies and the financial industry lobby.

This article analyzes The Consumer Financial Protection Agency Act of 2009, as passed by the House of Representatives. Each section of the article identifies a key point of controversy, with arguments pro and con, coming down in favor of an independent consumer financial protection agency.

Immergluck on Federal Preemption of State Antipredatory Lending Laws

by Jeff Sovern

I've been reading Dan Immergluck's fine book, Foreclosed: High-Risk Lending, Deregulation, and the Undermining of America's Mortgage Market (2009).  At pages 177-78, he has as good a description of the competition among regulators for lenders as I've seen:

 

[S]ome state regulators have a vested interest in preempting state consumer protection laws.  The ability to preempt state law is perhaps the greatest source of value in the federal thrift and national bank charters. Regulators can gain political power based on the number and size of the banks that fall under their regulatory supervision. In some cases, a regulator's operations are funded by levying fees on the institutions they regulate.  This can encourage an agency to pursue policies that are friendly to banks--especially larger ones. If a regulator does not use its ability to allow banks under its supervision to preempt state consumer protection regulations, the bank may change its charter so that it is regulated by a more lender-friendly agency.  . . . Even if an agency's funding is not directly tied to the banking assets under its supervision, if fewer and fewer institutions fall under its supervisory umbrella, its power and relevance will be called into question.  In the long run, this could jeopardize the agency's very existence.

* * *

In 1974, Arthur Burns, chairman of the Federal Reserve Board, expressed concerns over a "competition in laxity" among the regulators . . . . Since then, there have been repeated concerns that banks "forum shop" to find the most comfortable regulator . . . . Since at least the late 1990s, this "race for the bottom" includes regulators vying to offer banks as much preemption power as they can. Demonstrating the important of preemption to the value of a charter type, a banking attorney was quoted in the American Banker regarding the OCC's preemption actions as asking "Why would you want a national charter but for the preemption authority?" * * *

[After noting that the Office of Thrift Supervision (OTS) moved before the Office of the Comptroller of the Currency (OCC) to preempt state antipredatory lending laws, Immergluck continues:] The OCC was not about to let the thrift charter gain a clear regulatory advantage over the national bank charter. [Immergluck then describes the OCC's preemption efforts]

Perhaps this explains why the federal regulators have been so aggressive in preempting state laws. It's not just a matter of ideology or even generating fees; it's a matter of survival.  Another argument for the CFPA, which of course would not need to preempt state laws to survive.