Consumer Law & Policy Blog

Jeffrey Stempel on Mandating Minimum Quality in Mass Arbitration

Jeffrey W. Stempel of UNLV has written Mandating Minimum Quality in Mass Arbitration, 76 Univ. Cincinnati L. Rev. 383 (2008).  Here's the abstract:

The Supreme Court's decision in McMahon and its progeny has led many businesses and employers to embrace what was once deemed a localized, industry-specific practice. The "new" or "mass arbitration" only mildly resembles the traditional system employed by niches in industry for settling commercial matters among commercial actors. While the "old" system involved parties who were relatively equal in bargaining power and knowledge, these systems for mass arbitration lack a freely entered bargain and resemble more closely, contracts of adhesion. Privatized arbitration resolves issues of both statutory and substantive law, and there is a strong argument, given the inexperience of the non-drafters, to impose both procedural and substantive due process controls on the system. The players arguably use arbitration as an alternative to litigation because of its efficiency and low costs as compared with litigation in the courts. However, the system cannot provide an equal forum for dispute resolution unless the relative outcomes are arguably the same. Otherwise, the system fails society's expectations of fairness, morality, effectiveness and market stability.

Several strides have been made, despite the Supreme Court's insistence that privatized arbitration is a fair system, to ensure that privatized arbitration produces fair results. Courts have invigorated the doctrine of unconconscionability to review arbitration clauses imposed on inexperienced players, judicial review of arbitration agreements, creation of due process protocols (both an Employment Protocol and Consumer Protocol), and various organization (AAA, JAMS) standards. While these advancements may better the system, they are of no use without some kind of lawful, meaningful enforcement. In particular, this article addresses the effect these concerns have had on securities arbitration. Securities investments have not declined, indicating that perhaps, the system is viewed as a fair means of resolution.

Even if the system is regarded as being beneficial to the market itself, it lacks the moral soundness necessary to be supported fully by the public and the legal community. To this end, it is suggested that the system provide neutral, quality, and independent arbitrators, provide equal access to sufficient information, eliminate unconscionable clauses (distant venue, high costs, one-sided arbitration rules), eliminate jurisdiction clauses that fail to provide adequate procedural and substantive due process, provide fairness in costs and fee shifting, allow the full range of remedies available in litigation, provide for equal access to representation and the legal market, and provide a meaningful, effective standard of review. Legislative authority may be the best solution for overall mass arbitration, but for securities arbitration, the SEC provides a legitimate, authoritative agency which could arguably effectuate these standards in a meaningful manner.

Hoofnagle & King on Company Sharing of Consumer Information

Chris Jay Hoofnagle and Jennifer King, both of Berkeley, have co-authored Consumer Information Sharing: Where the Sun Still Don't Shine.  Here's the abstract: 

In late 2007, the popular social networking site Facebook.com adopted "Beacon," an application that informs Facebook users' friends about purchases made and activities on other websites. For example, if a Facebook user bought a movie ticket on Fandango.com, that user's friends would be informed of that fact through a news "feed" on Facebook. Some users objected vigorously to the Beacon application, because their activities were reported on an opt-out basis, meaning that the user had to take affirmative action to prevent others from learning about their activities. An activism website, Moveon.org, organized a protest, calling users to action by asking, "When you buy a book or movie online - do you want that information automatically shared with the world on Facebook?" Facebook responded to these critiques by changing its policy to obtain express approval before activities on other sites would be shared with friends.

The Facebook folly demonstrates how intensely consumers reject the "sharing" of personal information for marketing purposes. In this instance, consumers learned of Facebook's strategy because it was transparent and obvious to the individual. But what most do not realize is that, in the absence of a specific law prohibiting information sharing, businesses are generally free to monetize their customer databases by selling, renting, or trading them to others. In fact, the sale of customer information is a common, albeit opaque practice that, if disclosed at all, is usually mentioned in a "privacy policy." Facebook's Beacon simply made information sharing obvious to users.

Studies have shown that most consumers oppose the sale of personal information. Unfortunately, most consumers are under the misimpression that a company with a "privacy policy" is barred from selling data. To learn more about information selling, the authors, using a California privacy law, made requests to 86 companies for a disclosure of information sharing practices. The results show that while many companies have voluntarily adopted a policy of not sharing personal information with third parties, many still operate under an opt-out model that is inconsistent with consumer expectations, and others simply did not respond to the request. Based on these results, the authors propose several public policy approaches to bringing business practices in information sharing in line with consumer expectations.

Peter Swire on Underenforcement in E-Commerce and Internet Harms

Peter P. Swire of Ohio State, and, as noted here, an adviser to the Obama Administration-to-be on consumer matters, has written No Cop on the Beat: Underenforcement in E-Commerce and Cybercrime.  Here's the abstract: 

This essay gives new reasons why we should expect underenforcement for E-commerce, cybercrime, and Internet harms more broadly. It also recommends a strategy for addressing that underenforcement, focusing on more federal or federated enforcement.

The essay stresses an information problem and a commons problem that have largely been overlooked to date. In brief, the information problem arises because only a tiny fraction of complaints and knowledge about an online fraudster or criminal comes from each jurisdiction. Enforcers thus lack the informational basis for telling good guys from bad guys. Priority bad guys are thus less likely to become the targets for enforcement.

This information problem is compounded by a commons problem. In light of the incentives facing enforcement agencies, priority will typically go to cases where many or all of the victims are local. No one will have the incentive to give priority to harms that occur across borders. This is a classic commons problem, because cross-border harms will be left to someone else. In short, no one will own these problems, and there will be underenforcement.

These information and commons problems exacerbate the forensic problem that has been the focus of the greatest legal attention to date, the problem that it is often technically and legally difficult to gather evidence where the perpetrator is physically distant from the victim.

The basic response should be to shift toward more federal and federated enforcement. Federal enforcement means a greater role, compared to offline activity, for the Federal Trade Commission in consumer protection and the Department of Justice for cybercrime. Federated enforcement means building new structures, compared to offline activity, to share information among local enforcers and to encourage local enforcers to bring more enforcement actions even when the perpetrator and many of the victims are outside of their jurisdiction.

Part I of the essay explains the information, commons, and forensic problems in greater depth, and explores policy and legal responses to those problems. Part II responds to five possible critiques, which I call: (1) The Internet hasn't really changed anything; (2) Enforcement works better on the Internet; (3) We actually don't want enforcement for what's done on the Internet; (4) States need to be the laboratories of experimentation; and (5) The Feds don't do small potatoes.

Stephen E. Friedman Argument that the Federal Arbitration Act Doesn't Apply to Internet Transactions

Stephen E. Friedman of Widener has written Protecting Consumers from Arbitration Provisions in Cyberspace, the Federal Arbitration Act and E-SIGN Notwithstanding, 57 Catholic University Law Review (2008). Here's the abstract:

Arbitration provisions are among the most significant of boilerplate contract terms. Yet the Federal Arbitration Act, which applies to written arbitration agreements, is generally understood as leaving little room for state regulation of these provisions. This article takes the position that arbitration provisions displayed on web-sites in consumer transactions are not written for purposes of the FAA. The FAA is therefore inapplicable to such arbitration provisions and states should be free to regulate them as they see fit.

When Congress enacted the FAA in 1925, Congress excluded oral and other non-written arbitration agreements from the FAA's coverage. In the current commercial environment, arbitration provisions on consumer web-sites are the closest equivalent to what oral and other unwritten arbitration provisions were in 1925 - a form of contracting notable for its casual nature and its failure in most instances to register meaningful choice or to impart seriousness. Arbitration provisions in consumer Internet transactions are thus properly excluded from the FAA.

This interpretation of the term written in the FAA must also be reconciled with E-SIGN. E-SIGN generally ensures that electronic documents be given the same effect as written documents. E-SIGN could thus be seen as requiring that all arbitration provisions in electronic form be treated the same as those in written form. While I acknowledge and discuss that argument, I take a contrary position and argue that E-SIGN does not dictate that text on an Internet web-site must always be considered written for purposes of the FAA.

Interpreting written to exclude at least some electronically displayed text from the scope of the FAA recalibrates the balance between state and federal arbitration law in an appropriate way and in an appropriate context

Carillo on the Needs of Consumers in Multilingual Housing Markets

Jo J. Carrillo of Hastings has written In Translation for the Latino Market Today: Acknowledging the Rights of Consumers in a Multilingual Housing Market, 11 Harvard Latino Law Review 1 (2008).  Here's the abstract:

The Federal Truth in Lending Act (TILA) requires lenders to disclose the full cost of credit to borrowers. In the case of linguistic minorities, California law goes one step further. Under California Civil Code section 1632, lenders are required to provide unexecuted translations of loan documents to consumers whose language of proficiency is Spanish, Chinese, Tagalog, Vietnamese, or Korean. This Article considers the needs of consumers in a multilingual housing market and then offers a sketch of California Civil Code section 1632, which represents an important step toward affirming the economic, legal, and civil rights of consumers who, by reason of their language proficiencies, are vulnerable in credit markets.

Oren Bar-Gill and Elizabeth Warren Co-author Making Credit Safer

Oren Bar-Gill of NYU and Elizabeth Warren of Harvard have joined forces to write Making Credit Safer, 157 U. Penn. L. Rev. (2008).  Here's the abstract: 

Physical products, from toasters and lawnmowers to infant car seats and toys to meat and drugs, are routinely inspected and regulated for safety. Credit products, like mortgage loans and credit cards, on the other hand, are left largely unregulated, even though they can also be unsafe. Because financial products are analyzed through a contract paradigm rather than a products paradigm, consumers have been left with unsafe credit products. These dangerous products can lead to financial distress, bankruptcy and foreclosure, and, as evidenced by the recent subprime crisis, they can have devastating effects on communities and on the economy. In this Article, we use the physical products analogy to build a case, supported by both theory and data, for comprehensive safety regulation of consumer credit. We then examine the current state of consumer credit regulation, explaining why the current regulatory regime has systematically failed to provide meaningful safety regulations. We propose a fundamental restructuring of this regime, urging the creation of a new federal regulator that will have both the authority and the incentives to police the safety of consumer credit products.

Michael S. Barr et al. on Behaviorally Informed Home Mortgage Regulation

Michael S. Barr of Michigan, Sendhil Mullainathan of Harvard's Economics Department and the National Bureau of Economic Research (NBER), and Eldar Shafir of Princeton have co-authored "Behaviorally Informed Home Mortgage Regulation."  Here's the abstract:

Choosing a mortgage is one of the biggest financial decisions an American consumer will make. Yet it can be a complicated one, especially in today's environment where mortgages vary in dimensions and unique features. This complexity has raised regulatory issues. Should some features be regulated? Should product disclosure be regulated? And most basic of all, is there a rationale for regulation or will the market solve the problem? Current regulation of home mortgages is largely stuck in two competing models of regulation - disclosure and usury or product restrictions - neither of which take adequate account of behavioral psychology or market incentives. This paper seeks to use insights from both psychology and economics to provide a framework for understanding both these models as well as to suggest fundamentally new models. We understand outcomes as an equilibrium interaction between individuals with specific psychologies and firms that respond to those psychologies within specific markets. Regulation must then account for failures in this equilibrium.

Ray Brescia on the Social Capital Response to the Subprime Mortgage Crisis

Ray Brescia of Albany has written "Capital in Chaos: The Subprime Mortgage Crisis and the Social Capital Response," 56 Cleveland St. L. Rev. 271 (2008).  Here's the abstract:

This article explores the extent to which social capital theory can respond to the crisis in the subprime mortgage markets. Building on the groundbreaking theories of Robert Putnam in his book BOWLING ALONE: THE COLLAPSE AND REVIVAL OF AMERICAN COMMUNITY, this article seeks to explore the role of trust and social capital in micro-economic transactions, specifically those involving homeownership in general and the subprime mortgage crisis in particular. The article posits that asymmetries of information, the lack of fiduciary obligations between the mortgage broker and the subprime borrower, the incentives built into the subprime mortgage market as a result of mortgage securitization that promote abusive lending practices, deregulation that led to the influx of subprime mortgage products into communities of color, the limits of anti-discrimination laws to address this influx adequately, and restrictions on refinancing built into securitization agreements have all led to the current crisis. In response to these causes of the current crisis, this article suggests changes to the broker-borrower relationship, the promotion of greater consumer education and the creation of problem-solving courts to address the looming foreclosure crisis.

Amanda E. Quester and Kathleen E. Keest on Watters v. Wachovia

Amanda E. Quester of the Center for Responsible Lending and consumer advocate and writer Kathleen E. Keest have coauthored Looking Ahead after Watters v. Wachovia Bank: Challenges for the Lower Courts, Congress, and the Comptroller of the Currency, 27 Review of Banking and Financial Law, No. 187 (2008).  Here's the abstract:

The Supreme Court's recent decision in Watters v. Wachovia Bank, 127 S. Ct. 1559 (2007), shields operating subsidiaries of national banks from the reach of state banking officials. This article argues that lower courts must take care not to read more into the decision than it held or to overlook the majority's silence on key matters. The primary question on which the Court granted certiorari was whether it should defer to a federal agency's interpretation of that agency's own preemptive authority. The authors contend that the majority's evasion of this issue, combined with language from the dissent and earlier Court opinions, suggests that Chevron deference would not apply.

The article also discusses a number of key preemption and visitation issues that the Watters Court left open in interpreting the National Bank Act. Although Watters held that operating subsidiaries of national banks may use the NBA to shield themselves from state visitorial laws, the authors argue that the Court's emphasis on certain unique features of operating subsidiaries suggests that other entities should not be allowed to invoke the NBA's protections. The article also points out that Watters reiterated the established test for what substantive laws are preempted under the NBA and did not resolve what the term visitorial powers means in the NBA.

The article argues that in the wake of Watters Congress should pass legislation that rolls back the federal banking regulators' unprecedented preemption efforts. The authors also contend that the Office of the Comptroller of the Currency has an obligation to greatly step up its efforts to protect consumers.

Mortgage Crisis Scholarship

The mortgage crisis is rightfully drawing the attention of scholars.  Here are links to a few papers on SSRN:

My St. John's colleague, Vincent DiLorenzo, is working on "Mortgage Market Deregulation and Equity Stripping Under Sanction of Law."  The abstract reads as follows:

Who is to blame for the large mortgage market losses borne by consumers, communities, the financial services industry and others? This paper explores government's responsibility. It explores whether the decision to deregulate the mortgage market to a degree that permitted both unsafe and unfair mortgage practices was the decision of Congress or the federal regulatory agencies. Part one of this paper explores Congress' viewpoint toward deregulation of the mortgage market. It differentiates two types of deregulation: (a) lifting of statutory requirements and substituting regulatory constraints, and (b) lifting of all government mandates and substituting a preference for market forces to police abusive practices. This paper examines Congress' actions and motivations over a thirty year period and initially concludes that Congress embraced the former view and not the latter. This view was consistently embraced in the period 1982 to 1994 to address unsafe banking practices and unfair banking practices. Unfortunately, Congress then provided mixed signals regarding its deregulation viewpoint in legislative enactments in 1994 when faced with unfair banking practices. This permitted regulatory agencies to continue to pursue a deregulatory agenda even when faced with evidence of abusive lending practices.

Part two of this paper explores the viewpoint of the federal regulatory agencies toward deregulation of the mortgage market. It examines the actions and viewpoints of the federal banking regulators in the last three decades. Two conclusions emerge. First, the agencies preferred a free market approach and implemented such an approach whenever statutes provided the discretion to do so. Second, the regulatory agencies embraced a decision making model that relied on predictions of net societal benefits as the determinant of a decision to intervene in the mortgage markets. Such a viewpoint led the agencies to typically shun government intervention. That decision led to equity stripping for over a decade, especially in low-income communities, more equity stripping in recent years as lax lending practices led to defaults and foreclosures, and even more in the coming year as foreclosures multiply.

Adam Levitin of Georgetown has written "Resolving the Foreclosure Crisis: Modification of Mortgages in Bankruptcy," 2009 Wisconsin L. Rev. ----.  Here's the abstract:

For over a century, bankruptcy has been the primary legal mechanism for resolving consumer financial distress. In the current foreclosure crisis, however, the bankruptcy system has been ineffective because of the special protection it gives most home mortgages. Debtors may modify the terms of all debts in bankruptcy except those secured by mortgages on their principal residences. A bankrupt debtor who wishes to keep her house must pay the mortgage according to its original terms down to the last penny. As a result, many homeowners who are unable to meet their mortgage payments are losing their homes in foreclosure, thereby creating significant economic and social deadweight costs and further depressing the housing market.

This Article empirically tests the economic assumption underlying the policy against bankruptcy modification of home mortgage debt - namely that protecting lenders from losses in bankruptcy encourages them to lend more and at lower rates, and thus encourages homeownership. The data show that the assumption is mistaken; permitting modification would have little or no impact on mortgage credit cost or availability. Because lenders face smaller losses from bankruptcy modification than from foreclosure, the market is unlikely to price against bankruptcy modification.

In light of market neutrality, the Article argues that permitting modification of home mortgages in bankruptcy presents the best solution to the foreclosure crisis. Unlike any other proposed response, bankruptcy modification offers immediate relief, solves the market problems created by securitization, addresses both problems of payment reset shock and negative equity, screens out speculators, spreads burdens between borrowers and lenders, and avoids both the costs and moral hazard of a government bailout. As the foreclosure crisis deepens, bankruptcy modification presents the best and least invasive method of stabilizing the housing market.

Lauren E. Willis of Loyola L.A. has written "Stabilize Home Mortgage Borrowers, and the Financial System Will Follow;" Alan White quoted some of her views here.  At the risk of repetition, the abstract follows:

To halt the Great Depression, the federal government nullified all clauses in contracts that pegged debt to the price of gold. By taking these contracts off the gold standard, debts were reduced by roughly 40 percent. Economist Randall Kroszner, now a governor on the Federal Reserve Board, examined the effects of this sweeping debt reduction and found that both stocks and bonds responded favorably. Investors and creditors decided that the elimination of debt overhang and the avoidance of threatened corporate bankruptcies more than offset the cost to creditors of receiving 60 cents on the dollar. And the taxpayer did not pay a penny.

This trick could only be performed once, now that gold clauses are out. So is there a way to eliminate today's mortgage debt overhang, staunch foreclosures, and restore liquidity and stability in our financial markets? Yes. We have not yet used our most potent weapon against the crisis: eminent domain.

John Tatom of Indiana's Business School has written "The U.S. Foreclosure Crisis: A Two-Pronged Assault on the U.S. Economy."  A final abstract:

The U.S. mortgage loan foreclosure crisis has been called the worst financial crisis since the great depression. There are two distinct channels of influence of the subprime problem. The first is the rise in foreclosures that affects homeowners and the real estate industry most directly. The second channel is financial, flowing from the effects on lenders' financial viability and on financial markets. The timing of developments in these two channels will determine how fast markets work through these problems and restore stability and growth to the nation's housing and financial markets. The problem is rooted in the housing market, and this market is likely to be very slow to adjust. It takes time for good mortgages to go bad and to then move through to the end of the foreclosure process. While financial markets work much more quickly, they will be held hostage to the unfolding effects of the foreclosures in the housing markets and among lenders. Mortgage loan related losses will continue along with foreclosures over the next year or so and these losses will plague firms even if they have already taken adequate write-downs on their asset values. Complicating the picture is the response of the Federal Reserve, which has reacted chaotically by creating new lending programs that have transformed its credit supply from government securities to private financial institutions, and in the process, violated the first rule of central banking to lend liberally in a liquidity crisis. This failure, compounded by providing a backstop to questionable securities, has slowed market adjustment and risks lengthening and deepening the financial crisis. This paper reviews the emergence of the foreclosure crisis and its real impacts in the economy, the financial market effects of the surge in mortgage foreclosures, the monetary policy response to the problem, and provides an assessment of the outlook for the crisis.