Consumer Law & Policy Blog

Karikari Paper on CRA and Subprime Lending

John A. Karikari of the US Government Accountability Office (GAO) has written The CRA and Subprime Lending in Neighborhoods: Myth or Reality?  Here's the abstract:

I examine the CRA’s impact on approvals of non-prime loans for riskier borrowers largely responsible for the current mortgage crisis in the United States. Using loan applications data for several major metropolitan cities, and recognizing the existing CRA regulations on assessment areas and affiliate lending, I find that while CRA lenders were likely to disproportionately approve subprime loans than FHA loans in most cities, these lenders were not more or less likely to approve subprime loans in low and moderate income (LMI) communities. Thus, the CRA may have played a role in proliferation of subprime lending across communities, but not disproportionately in LMI communities - the areas receiving the most intense CRA scrutiny.

Stephen P. King Paper on Tort Law Reform's Effect on Consumers

Stephen P. King of the Faculty of Business and Economics, Monash University has written Does Tort Law Reform Help or Hurt Consumers?.  Here's the abstract:

Legal limits on insurance damages claims have been introduced in Australia, the United States and other jurisdictions. In this paper I construct a simple competitive model to analyze the effect of tort law reforms on consumers. The model shows that reforms to limit non-economic losses make consumers unambiguously worse off ex ante. Although insurance premiums fall and these reductions are passed on to consumers in full, this gain is more than offset by the increased risk that consumers are forced to bear. In contrast, reforms for income related (i.e. economic) losses lead to ambiguous outcomes. The potential benefits from limits to economic loss arise due to the inability of insurers to price discriminate on the basis of income or expected loss. Because of this there is an implicit cross-subsidy from low-income to high-income consumers that is embedded in the insurance premium and relevant product price. Tort law reforms partially unwind this cross subsidy.

The results presented in this paper show that tort law reforms may achieve their stated goal, such as lowering monetary prices, but can still make consumers worse off by introducing an uninsurable risk. There is also an important difference between reforms that limit claims for economic and non-economic losses. Insurance for economic loss will generally include an implicit cross-subsidy and, as a consequence, reforms can alter the ex ante utility for different groups of consumers in different ways.

Carol Necole Brown Paper on Reverse Redlining Issues

Carol Necole Brown of North Carolina has written Intent and Empirics: Race to the Subprime.  Here's the abstract:

The United States’ history of racially discriminatory banking, housing, and property policies created a community of black Americans accustomed to exploitative financial services and vulnerable to victimization by subprime lenders. My thesis is that black borrowers are experiencing a new iteration of intentional housing discrimination in the twentieth and twenty-first centuries; lenders identified a vulnerable 'emerging market' of black homeowners and borrowers and knowingly targeted them to receive subprime or predatory loan products when equally situated white borrowers were given superior, prime mortgage products. This Article explores how disparate lending practices coupled with banking deregulation undermined the Congressional push for increased minority homeownership and widened the already burgeoning wealth divide. Millions of borrowers who accepted subprime loans between 1998 and 2006 already have or will lose their homes to foreclosure, resulting in a net loss in homeownership for nearly one million families. Blacks are disproportionately represented among the subprime victims, especially black women. The lending and financial services structure that caused this crisis is complicated by evidence of redlining and of steering blacks into subprime loans, all of which contributed to the present foreclosure crisis. This subprime dilemma merely adds new terminology to a long history of racial discrimination in housing in America. In the end, this Article argues that the search for an understanding of the cumulative events that facilitated the exploitation of blacks by subprime lenders illuminates the institutional and national impediments to reversing the present and future harm of the subprime crisis and to ensuring blacks equal access to one of the benefits of full citizenship - property. First, in Part II, I contend that the disparities in subprime lending experienced by black borrowers and especially by black women result from intentional reverse-redlining and steering by lending institutions, their loan officers, and brokers. Next, in Part III, I consider why blacks and black women are disproportionately victims of subprime mortgages and of predatory lending. Finally, Part IV concludes by discussing the after-effects of subprime and predatory lending and offers possible solutions for rethinking how blacks are to overcome this deeply profound experience with housing discrimination which I suggest made blacks prime subprime victims. It focuses on the property dilemma or rather the dilemma of the landless.

Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers

A draft of my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, parts of which I spoke about at the AALS, is now available on SSRN.  Here's the abstract:

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages - which were commonly used for subprime loans - and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous in reporting that borrowers never withdrew from a loan after reading the final TILA disclosures at the closing, and never used those disclosures for their stated purpose of comparison shopping for loans. In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans.

The paper suggests several measures to increase the likelihood that borrowers will attend to and understand their loan terms. At present, disclosures are mandated by governmental entities that do not participate in the loan transaction - thereby reducing their control over how the disclosures are presented; provided by lenders who do not have a stake in having consumers understand the disclosures and in some cases have an interest in obscuring them; and received by consumers who may not appreciate their importance and may even have reasons to overlook them. The paper therefore suggests a switch from the current TILA disclosure regime to a comprehension regime under which lenders would be obliged to insure that borrowers understand their loan terms. Alternatively, the paper suggests that lenders should be required to determine what proportion of their borrowers understands their loan terms and disclose those figures in the hope of generating competition among lenders for better comprehension scores. The hope is that either choice would give a party to the loan transaction - the lender - a stake in borrowers understanding their loan terms. Creation of such an incentive might cause lenders to reduce distractions to consumers reading disclosure forms, enlist the aid of lenders in conveying key terms to consumers, increase the intelligibility of loan terms, and lead lenders to abandon loan terms that consumers cannot comprehend.

If such a proposal proves politically unfeasible, the paper also draws on the work of Cass Sunstein and Richard H. Thaler to suggest “nudges” that might enhance the current disclosure regime. Specifically, the paper advocates requiring borrowers to view a video of the pain and risk of default and foreclosure to make those risks more salient and increase the likelihood that consumers attend to disclosures. The paper also suggests that loan applicants be obliged to draft a budget, taking into account any future increases in loan payments, so that they will understand the consequences of their payment obligations. Finally, the paper calls for requiring borrowers to take a “placement exam” to demonstrate their mastery of their loan terms and the budgetary consequences. Those who fail the exam would not be permitted to borrow unless a neutral credit counselor worked with them and certified that they understand their loan terms.

Corey Ciocchetti Paper on the Future of Privacy Policies

Corey Ciocchetti has written The Future of Privacy Policies: A Privacy Nutrition Label Filled with Fair Information Practices, 26 John Marshall Journal of Computer and Information Law.  Here's the abstract:

E-commerce continues to blossom as evidenced by online retail sales in excess of $33 billion over the first quarter 2008. This growth helps spur the staggering economy but also magnifies the serious threats surrounding personally identifying information (PII) submitted during e-commerce transactions. The most common threats, such as identity theft and aggregated data files, do the most damage when companies are careless (i.e., losing laptops filled with unencrypted data) or callous (selling data on the open market) with the PII they collect. The first line of defense against these threats is the electronic privacy policy. In theory, privacy policies are supposed to force companies to analyze and strengthen their privacy practices and then provide Web surfers with a detailed picture of what happens to their information upon submission. Privacy policies are most effective when Web site visitors can locate, read and comprehend their terms. Armed with this knowledge, individuals are supposed to make accurate privacy assessments before submitting information online. Problematically, contemporary privacy policies fail to live up to their promise because they are posted inconspicuously, purposefully vague and filled with legalese. This inaccessibility leads Web surfers to ignore privacy practices completely while they continue to submit PII blindly.

Privacy policies can be effective if companies clearly and conspicuously discuss how their privacy terms relate to fair information practices (FIPs). FIPs are widely agreed upon guidelines covering the most important areas of the data trade - PII collection, use, storage and dissemination. The Federal Trade Commission has designated the five core FIPs to be notice, choice, access, integrity and enforcement. This article argues that a standardized privacy nutrition label - similar to the labels required by the Nutrition Labeling and Education Act - posted conspicuously on all e-commerce homepages can increase policy effectiveness. These federally mandated labels require companies to discuss their privacy practices in relation to each Key FIP. Although companies need not adopt specific policy terms or run their practices through a governmental clearinghouse, they must honestly disclose their practices. This is true of even the most unpopular practices such as external PII dissemination. Over time, consumers will become aware of these standardized labels, begin to understand FIPs, differentiate between privacy-protective and privacy-invasive practices and make better decisions before submitting PII.

Study of Medical Causes of Home Mortgage Foreclosures

Christopher T. Robertson of Harvard, Richard Egelhof , and Michael Hoke have co-authored Get Sick, Get Out: The Medical Causes of Home Mortgage Foreclosures, 18 Health-Matrix Journal of Law and Medicine.  Here's the abstract:

In recent years, there has been national alarm about the rising rate of home foreclosures, which now strike one in every 92 households in America and which contribute to even broader macroeconomic effects. The "standard account" of home foreclosure attributes this spike to loose lending practices, irresponsible borrowers, a flat real estate market, and rising interest rates. Based on our study of homeowners going through foreclosures in four states, we find that the standard account fails to represent the facts and thus makes a poor guide for policy. In contrast, we find that half of all foreclosures have medical causes, and we estimate that medical crises put 1.5 million Americans in jeopardy of losing their homes last year.

Half of all respondents (49%) indicated that their foreclosure was caused in part by a medical problem, including illness or injuries (32%), unmanageable medical bills (23%), lost work due to a medical problem (27%), or caring for sick family members (14%). We also examined objective indicia of medical disruptions in the previous two years, including those respondents paying more than $2,000 of medical bills out of pocket (37%), those losing two or more weeks of work because of injury or illness (30%), those currently disabled and unable to work (8%), and those who used their home equity to pay medical bills (13%). Altogether, seven in ten respondents (69%) reported at least one of these factors.

If these findings can be replicated in more comprehensive studies, they will suggest critical policy reforms. We lay out one approach, focusing on an insurance-model, which would help homeowners bridge temporary gaps caused by medical crises. We also present a legal proposal for staying foreclosure proceedings during verifiable medical crises, as a way to protect homeowners and to minimize the negative externalities of foreclosure.

More on Vincent DiLorenzo's Mortgage Market Article and the CFPA

by Jeff Sovern

In October, I posted a link to my colleague Vince DiLorenzo's article Mortgage Market Deregulation and Moral Hazard: Equity Stripping Under Sanction of Law.  I've since had a chance to read the article, and wanted to post an additional comment. The article demonstrates the gulf between Congress's intent in enacting various consumer protection measures--generally, to protect consumers--and the philosophy that underlies the actions of administrative agencies in interpreting and implementing those measures--generally, a much more pro-business, anti-regulatory approach.  Though the article never mentions the idea of a Consumer Financial Protection Agency, it offers considerable support for such an agency by documenting how dramatically existing agencies failed to live up to the legislative intent. 

Sprague & Ciocchetti Paper on Protecting Personal Identifying Information

Robert Sprague and Corey Ciocchetti have written Preserving Identities: Protecting Personal Identifying Information through Enhanced Privacy Policies and Laws, 19 Albany Law Journal of Science & Technology.  Here's the abstract:

This article explores the developing phenomenon of the ongoing collection and dissemination of personal identifying information (PII): first, explaining the nature and form of PII, including the consequences of its collection; second, exploring one of the greatest threats associated with data collection - unauthorized disclosure due to data breaches, including an overview of state and federal legislative reactions to the threats of data breaches and identity theft; third, discussing common law and constitutional privacy protections regarding the collection of personal information, revealing that United States privacy laws provide very little protection to individuals; and fourth, examining current practices by online commercial enterprises regarding privacy policy disclosure and conduct. This section reveals that there is almost no legal regulation of online privacy policies. This paper concludes that new, stronger laws are required to protect individuals regarding the collection and dissemination of their PII. A model law is therefore proposed to address those areas where PII protection is lacking.

Philip Lehman Keitel Paper on Gift Card Laws

Philip Lehman Keitel of the Philadelphia Fed has written The Laws, Regulations, Guidelines, and Industry Practices that Protect Consumers Who Use Gift Cards.  Here's the abstract:

This paper discusses consumer protections available to gift-card users. Specifically, it examines the ways in which value loaded at the time of purchase is protected for future card use or returned to consumers when the card is not used or has expired. The consumer protection information included in this paper is derived from a number of sources, including several types of state statutes, Federal Trade Commission decisions, financial industry regulatory agency guidelines, and previous interviews with payments industry experts regarding practices concerning network-branded gift cards. This paper expands research begun by the Payment Cards Center in 2004 into prepaid cards generally and the protections available to consumers who use gift cards specifically.

Shauhin A. Talesh on the Privatization of Public Legal Rights

Shauhin A. Talesh has written The Privatization of Public Legal Rights: How Manufacturers Construct the Meaning of Consumer Law, 43 Law  & Society Review 527 (2009).  Here's the abstract:

This article demonstrates how the content and meaning of California’s consumer protection laws were shaped by automobile manufacturers, the very group these laws were designed to regulate. My analysis draws on and links two literatures that examine the relationship between law and organizations but often overlook one another: political science studies of how businesses influence public legal institutions, and neo-institutional sociology studies of how organizations shape law within their organizational field. By integrating these literatures, I develop an ‘‘institutional-political’’ theory that demonstrates how organizations’ construction of law and compliance within an organizational field shapes the meaning of law among legislators and judges.

This study examines case law and more than 35 years of California legislative history concerning its consumer warranty laws. Using institutional and political analysis, I show how auto manufacturers, who were initially subject to powerful consumer protection laws, weakened the impact of these laws by creating dispute resolution venues. The legislature and courts subsequentlyincorporated private dispute resolution venues into statutes and court decisions and made consumer rights and remedies largely contingent on consumers first using manufacturer-sponsored venues. Organizational venue creation resulted in public legal rights being redefined and controlled by private organizations.