Consumer Law & Policy Blog

Adam Levitin Paper on the Consumer Financial Protection Agency

Still more on the proposed CFPA (a theme of the last few days): Adam Levitin of Georgetown, and one of the signatories of our letter, has written The Consumer Financial Protection Agency.  Here's the abstract:

The Obama administration has proposed restructuring financial services regulation by transferring all consumer protection functions from existing agencies to a new Consumer Financial Protection Agency (CFPA). The goal of the CFPA legislation is to address the flaws in the regulatory architecture that have inhibited effective responses to the substantive problems, rather than mandate specific new substantive consumer protection laws.

The current consumer financial protection is based on disclosure regime and is policed through supervisory feedback, enforcement actions, and occasionally prohibitions on terms, products, and practices that are deemed inherently unfair and deceptive. On the federal level, consumer protection in financial services is divided among a number of agencies: the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC and DOJ. Some of these agencies have the ability to promulgate regulations, some also exercise supervisory authority over financial institutions, and some may only enforce existing regulations. Sometimes authority is over a class of institutions, and sometimes it is over a particular type of product.

There are four main structural criticisms of the current regulatory structure: that consumer protection is a so-called 'orphan' mission; that consumer protection conflicts with, and is subordinated to, safety-and-soundness concerns; that no agency has developed an expertise in consumer protection in financial services, and; that regulatory arbitrage of the current system fuels a regulatory race-to-the-bottom.

Consolidation of consumer financial services protection authority could: place all financial services companies, regardless of the form of their charter, under a single regulator, thus ending its orphan status; separate consumer protection from safety-and-soundness regulation, thus ending subordination; encourage the development of a deep bench of regulatory expertise and knowledge, and; end the opportunity for regulatory arbitrage and any potential race to the bottom.

There are several potential concerns about a CFPA: conflicts with prudential regulators; ambiguity with respect to Consumer Reinvestment Act authority, and; potential overregulation resulting in higher costs of financial products, less product availability, and discouragement of innovation. Still, there are compelling reasons to believe that the present regulatory architecture cannot produce the optimal consumer protection regime and will continue to fail in its task, resulting in unfair treatment of consumers and a potentially significant source of systemic risk. To this extent, consideration of a CFPA should strive to distinguish between the basic thrust of the legislation - a consolidation of the regulatory authority of - and the proposed new substantive powers granted to the agency.

Call for Papers

We've received the following Call for Papers:  Papers are invited for the 5th edition of the Consumer Journal, a publication of the Consumer Awareness Organisation, a non-governmental organisation based in Nigeria. Interested contributors should send their papers to the address below for assessment and possible publication.

An Experiment on What Advertising Content is Worth

Marianne Bertrand of University of Chicago - Booth School of Business; National Bureau of Economic Research (NBER); Centre for Economic Policy Research (CEPR), Dean S. Karlan of
Yale University - Economic Growth Center; Massachusetts Institute of Technology (MIT) - Abdul Latif Jameel Poverty Action Lab; Center for Global Development, Sendhil Mullainathan of Harvard University - Department of Economics; National Bureau of Economic Research (NBER), Eldar Shafir of Princeton University, and Jonathan Zinman of Dartmouth College have written What's Advertising Content Worth? Evidence from a Consumer Credit Marketing Field Experiment.  Here's the abstract:

Firms spend billions of dollars each year advertising consumer products in order to influence demand. Much of these outlays are on the creative design of advertising content. Creative content often uses nuances of presentation and framing that have large effects on consumer decision making in laboratory studies. But there is little field evidence on the effect of advertising content as it compares in magnitude to the effect of price. We analyze a direct mail field experiment in South Africa implemented by a consumer lender that randomized creative content and loan price simultaneously. We find that content has significant effects on demand. There is also some evidence that the magnitude of content sensitivity is large relative to price sensitivity. However, it was difficult to predict which particular types of content would significantly impact demand. This fits with a central premise of psychology - context matters - and highlights the importance of testing the robustness of laboratory findings in the field.

Roberds and Schreft on the Economics Behind Data Security, Privacy, and Identity Theft

William Roberds and Stacey L. Schreft, both of the Fed, have written Data Security, Privacy, and Identity Theft: The Economics Behind the Policy Debates, 23 Economic Perspectives (2009).  Here is the (very short) abstract:

In this article, we explore the concept of efficient confidentiality, using some ideas from economic theory.

Kurt Eggert Article on Securitization

Kurt Eggert of Chapman has written The Great Collapse: How Securitization Caused the Subprime Meltdown, 41 Conecticut Law Review.  Here's the abstract:

This Article builds on existing criticism of securitizing subprime loans and argues that one of the primary causes of the subprime meltdown and the resulting economic collapse was the structure of securitization as applied to subprime and other non-prime residential loans, along with the resecuritization of the resulting mortgage-backed securities. Securitization weakened underwriting by discouraging originators from gathering “soft information” about the likelihood of borrower default and instead caused loan originators and other market participants to focus almost exclusively on such “hard information” as FICO scores and loan to value ratios. At each stage of the loan and securitization process, securitization encouraged market participants to push risk to the very edge of what the applicable market standards would tolerate, to make the largest, riskiest loans that could be sold on Wall Street, to bundle them using the fewest credit enhancements rating agencies would permit, and then to repeat the securitization process with many of the lower-rated mortgage-backed securities that resulted. Loan originators could profit by bargaining down the due diligence of other market participants and so reduce their own underwriting standards. Securitization also created a business model for subprime lenders whereby they could “profitably fail.” Thinly capitalized subprime lenders could generate large numbers of loans likely to default, along with substantial profits for the executives who directed them, and then simply exit the market when they predictably lost their access to the securitization pipeline.

Andrew Serwin on Privacy Litigation

Andrew B. Serwin of Foley & Lardner LLP has written Poised on the Precipice: A Critical Examination of Privacy Litigation.  Here's the abstract:

A collection of factors has caused the United States to be poised on the precipice of a new wave of litigation - litigation arising from the improper use or collection of information. Public concern over privacy is ever increasing while, and some would say because, information has become critical to our everyday existence. In what is now a self-reinforcing cycle, increased public concern has caused an exponential increase in regulations, and the new regulations have caused increased attention and public concern because many of the new laws require public disclosure of security breaches, which increases societal concerns over privacy.

Security breach laws, the laws that mandate public disclosure of data incidents, provide the best example of the increase in regulation - Just a few short years ago California passed the first security breach law. Now, 43 other states, the City of New York, Washington, D.C., and Puerto Rico, have adopted laws and many other countries have either adopted, or are likely to adopt, security breach laws as well. Restrictions on the collection and use of Social Security number laws provide another such example as now more than 35 states have adopted these type of laws.

Whether the increasing public concern over privacy is caused by, or reflected in, the new privacy laws, the phenomenal expansion in the number of privacy laws will have a predictable effect - a geometric increase in the number of privacy laws will result in an equally geometric increase in the number of violations of privacy laws. As violations increase there is an equally predictable consequence - increased incentives for individuals to attempt to enforce these new rights.

One of the first challenges in privacy litigation is to define what "privacy" litigation actually is. While consumer-based privacy litigation gains much of the attention, to focus exclusively on consumer-oriented privacy litigation misses half the picture. The increase in value of information has increased the number of businesses that are bringing litigation to protect their intellectual capital and their networks. Though these claims are not thought of as "privacy" litigation in the traditional sense, these claims are no less about the improper use of information than actions brought by individuals. This litigation is frequently brought under the Computer Fraud and Abuse Act, the Electronic Communications Privacy Act, CAN-SPAM, the unfair competition law, including portions of the Lanham Act.

In the privacy realm, the Federal Trade Commission ("FTC") serves as the primary federal privacy enforcer. However, the FTC does not have unlimited resources, privacy is not its only responsibility, and the actual number of enforcement actions is not as high as one might guess. As a result, state attorney generals have an important role to play in privacy enforcement. However, with limited exceptions, state attorney generals have not brought a significant number of privacy matters. As a result, enforcement in many cases falls to private plaintiffs, and they play a role in enforcing privacy laws where violations are alleged to have occurred.

However, the road to plaintiffs' recovery in privacy litigation is littered with a number of issues that can derail a case before it truly starts, not the least of which is that plaintiffs in many cases cannot prove actual damage, and may actually lack standing to bring an action. Moreover, even if the case clears this hurdle, many class actions fail the certification requirements because of issues unique to privacy litigation.

This article examines the common theories of privacy litigation, the issues faced by plaintiffs, and examines class action issues generally, as well as some class issues that are unique to privacy litigation. While privacy cases have had mixed success, the increased importance of information, coupled with increased public attention, and the ever-increasing number of privacy laws guarantees that we will be stepping off of the precipice and into privacy litigation.

John Infranca on Protecting Exempt Social Security Payments from Freezes and Garnishment

John Infranca of NYU has written Safer than the Mattress? Protecting Social Security Benefits from Bank Freezes and Garnishments, 83 St. Johnb's Law Review (2009). Here's the abstract:

This Article analyzes the tensions between the anti-assignment provision of the Social Security Act-which exempts benefits from garnishment by creditors seeking payment for outstanding debts-and state-law garnishment procedures. Although federal law explicitly prohibits the garnishment of Social Security and other federal benefits, recipients routinely discover that these funds, which they believed were safely deposited in a bank account, have been temporarily frozen or, even worse, permanently garnished at the behest of a judgment creditor. The problem has been exacerbated in recent years as the collection industry has grown and changes in state laws have made it easier for creditors to garnish bank accounts. At the same time, increasing numbers of benefit recipients are receiving direct electronic deposits, further complicating matters.

Banks, seeking to avoid liability under state law, typically comply with garnishment orders and automatically freeze accounts. This often causes substantial hardship for low-income benefit recipients, who can be left for weeks without access to funds they rely upon for subsistence. A few states have attempted to remedy the problem through legislative and administrative solutions, with mixed success. Congress has also recently held hearings on the issue and federal agencies have proposed a possible response. This Article analyzes these efforts and discusses their limitations before urging a federal legislative response in the form of a five-part policy proposal.

Jonathan Zinman on What Borrowers Do When States Limit Payday Loans

Jonathan Zinman of Dartmouth has written Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the Oregon Rate Cap.  Here's the abstract: 

Many policymakers and some behavioral models hold that restricting access to expensive credit helps consumers by preventing overborrowing. I examine some short-run effects of restricting access, using household panel survey data on payday loan users collected around the imposition of binding restrictions on payday loan terms in Oregon. The results suggest that borrowing fell in Oregon relative to Washington, with former payday loan users shifting partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

Sergio Pareja on FTC Regulation of Pyramid Marketing Schemes

Sergio Pareja of New Mexico has written Sales Gone Wild: Will the FTC's Business Opportunity Rule Put an End to Pyramid Marketing Schemes? 39 McGeorge Law Review.  Here's the abstract:

This article analyzes the anticipated effect of the FTC's Business Opportunity Rule on pyramid marketing schemes. Pyramid marketing schemes consistently rank in the top ten lists of consumer complaints received by the FTC and state consumer protection divisions, victimizing 1.5 million Americans a year. One recent class action settlement demonstrated that the victims, who are often relatively poor and uneducated, had an average loss of approximately $8,000 each. The FTC has promulgated a new Business Opportunity Rule in an effort to end these abuses. Promotors of business opportunities will be required to comply with the new rule beginning on July 1, 2008. This article carefully analyzes the rule and concludes that it will not be effective at stopping these schemes. The article suggests several key changes to the rule and recommends congressional legislation to stop the abuses.

Gerardi & Willen on Subprime Mortgages, Foreclosures, and Urban Neighborhoods

Kristopher Gerardi and Paul Willen, both of the Boston Fed, have written Subprime Mortgages, Foreclosures, and Urban Neighborhoods. Here's the abstract:

This paper analyzes the impact of the subprime crisis on urban neighborhoods in Massachusetts. The topic is explored using a dataset that matches race and income information from HMDA with property-level, transaction data from Massachusetts registry of deeds offices. With these data, we show that much of the subprime lending in the state was concentrated in urban neighborhoods and that minority homeownerships created with subprime mortgages have proven exceptionally unstable in the face of rapid price declines. The evidence from Massachusetts suggests that subprime lending did not, as is commonly believed, lead to a substantial increase in homeownership by minorities, but instead generated turnover in properties owned by minority residents. Furthermore, we argue that the particularly dire foreclosure situation in urban neighborhoods actually makes it somewhat easier for policymakers to provide remedies.