Consumer Law & Policy Blog

Joseph P. Mulholland Paper on Behavioral Economics and the FTC

Joseph P. Mulholland has written "Behavioral Economics and the Federal Trade Commission."  Here's the abstract:

This paper discusses the relevance of behavioral economics to consumer protection policy, especially to that practiced at the U.S. Federal Trade Commission. It finds that a good deal of the decision-making approach utilized at the Commission - as guided by the conventional economic model based on neoclassical principles - fits under the broad framework of what is commonly referred to as behavioral economics. This is especially so in regard to the primacy given to determining how consumers utilize information in the formulation of consumer policy. As a result, the contribution of behavioral economics to consumer protection policy has so far been quite limited. Its impact on future consumer policy will most likely come through improvements in empirical methods used to analyze the behavior of consumers, and in the development of ways to communicate more effectively with them.

Daniel Schwarcz on Resolving Consumer Insurance Disputes

Daniel Schwarcz of Minnesota has written "Towards a New Approach for Resolving Consumer Insurance Disputes."  Here's the abstract:

Much of insurance law and regulation is concerned with compensating consumers who have been wrongly denied coverage. But policyholders nonetheless have relatively few realistic options for challenging an insurer's adverse coverage determination. Litigation is often too slow and costly for those who have recently suffered significant financial loss. Meanwhile, the alternative dispute resolution options that do exist - such as the mediation services that insurance regulators offer or the existing variants of insurance arbitration - are generally either ineffective or unavailable for most disputes. This Article proposes a new way forward by looking to the United Kingdom's innovative Financial Ombudsman Service, which operates in parallel to the British regulator and is solely devoted to resolving consumer financial disputes. It argues that the comparative success of the Financial Ombudsman Service is primarily attributable to the ways in which it blends elements of the individual, uncoordinated insurance ADR schemes that are used in America. As such, the Article concludes that American lawmakers can significantly improve insurance compensation merely by strategically rethinking the institutional architecture of insurance dispute resolution.

The Arbitration Trap Debate

[cross posted from Citizen Vox]

July 29, 2008   

By David Arkush, Taylor Lincoln, and Peter Gosselar

Last November, Public Citizen released “The Arbitration Trap,” a scathing report exposing the one-sided nature of “justice” for consumers trapped by the National Arbitration Forum. The report inspired a lawsuit against the NAF by the city of San Francisco, Watchdog Blog) and an in-depth examination of the practice by BusinessWeek (previous Watchdog Blog coverage here, Watchdog Blog’s analysis of NAF’s response to the article here).

“The Arbitration Trap” also prompted the Chamber of Commerce to commission a Catholic University law professor, Peter B. Rutledge, to write an official response. The Chamber also gave Rutledge financial support for a law review article in which he reviews empirical evidence on arbitration. These papers claimed that the broad sweep of serious academic research shows that our report was just plain wrong – “both on the facts and in its ultimate conclusions.”

[cross posted from Citizen Vox]

Mark D. Shroder Study of RESPA

Mark D. Shroder evaluates RESPA in "The Value of the Sunshine Cure: The Efficacy of the Real Estate Settlement Procedures Act Disclosure Strategy," 9 Cityscape No. 1 (2007).  Here's the abstract:

This article examines the efficacy of the disclosure strategy of the Real Estate Settlement Procedures Act (RESPA). Four questions are critical in evaluating the efficiency of federally mandated disclosure by itself as a regulatory strategy: whether lending and title fees are large enough to be worth regulating; whether the Good Faith Estimate mandated by RESPA is an unbiased and consistent estimator of lending and title fees; whether state law has a negligible effect on fees (and therefore only national regulation is pertinent to the problem RESPA addresses); and whether RESPA achieves fairness, in the sense that disclosure so strengthens the negotiating position of buyers and sellers relative to service providers that the principals' personal characteristics do not influence the fees they pay. This article presents preliminary tests on these issues from a small and somewhat unrepresentative sample of FHA-insured loans.

Florencia Marotta-Wurgler Study of EULAs

Florencia Marotta-Wurgler of NYU has written "'Unfair' Dispute Resolution Clauses: Much Ado About Nothing?" in Boilerplate: Foundations of Market Contracts (Omri Ben-Shahar, ed., Cambridge University Press, 2007), analyzing dispute resolution clauses in end user license agreements.  Here's the abstract:

Dispute resolution clauses are a common and potentially important component of many types of standard form contracts. I examine the use of dispute resolution clauses in 597 end-user license agreements (EULAs) of software packages sold online. I find that 75% of EULAs include choice of law clauses, 28% include forum selection clauses, 6% include arbitration clauses, and none include class action waivers. Sellers are equally likely to include dispute resolution clauses in the EULAs of consumer-oriented and business-oriented products. Despite the concerns of some legal academics, I do not find much evidence of "strategic" use of DRCs to advantage sellers over buyers. For example, sellers located in states with "seller-friendly" laws are no more likely to include choice of law or choice of forum clauses than sellers in states with stronger consumer protections; despite UCITA's flexible choice-of-law rules and otherwise seller-friendly provisions, sellers do not go out of their way to select UCITA; and, there is no evidence that fora selected are intentionally inconvenient to buyers. These results question certain proposals to regulate dispute resolution clauses in consumer form contracts on the basis of strategic behavior by sellers.

Oren Bar-Gill & Richard A. Epstein Debate Behavioral Economics vs. Neoclassical Economics in the Context of Consumer Contracts

Oren Bar-Gill of NYU and Richard A. Epstein of Chicago and Stanford's Hoover Institute have each contributed a piece to "Consumer Contracts: Behavioral Economics vs. Neoclassical Economics,"  92 Minnesota Law Review (2007-2008).  Here's the abstract:

In the past decade behavioral economics has established itself as a contender to the throne of neoclassical economics in the economic analysis of law. The pros and cons of behavioral as compared to neoclassical economics have been vigorously debated at the general, methodology level. But the success or failure of the behavioral challenge will be judged by its ability to improve upon neoclassical economics - both descriptively and prescriptively - in specific legal applications. Consumer contracts provide an important test case for behavioral economics. In this exchange we offer the first comprehensive debate between the behavioral and neoclassical perspectives as applied to the law and economics of consumer contracts.

Study Finds that Firms That Use Arbitration Clauses in Consumer Contracts Often Do Not Use Such Clauses in Nonconsumer Contracts

In "Arbitration's Summer Soldiers: An Empirical Study of Arbitration Clauses in Consumer and Nonconsumer Contracts," Theodore Eisenberg of Cornell, Geoffrey P. Miller of NYU, and Emily L. Sherwin of Cornell report that firms that use arbitration clauses in consumer contracts often do not use arbitration clauses in nonconsumer contracts.  Here's the abstract:

We provide the first study of varying use of arbitration clauses across contracts within the same firms. Using a sample of 26 consumer contracts and 164 nonconsumer contracts from large public corporations, we compared arbitration clause use in consumer contracts with their use in the same firms' nonconsumer contracts. Over three-quarters of the consumer agreements provided for mandatory arbitration but less than 10% of the firms' material nonconsumer, nonemployment contracts included arbitration clauses. The absence of arbitration provisions in nearly all material contracts suggests that, ex ante, many firms value, even prefer, litigation over arbitration to resolve disputes with peers. The frequent use of arbitration clauses in the same firms' consumer contracts appears to be an effort to preclude aggregate consumer action rather than, as often claimed, an effort to promote fair and efficient dispute resolution. Other common features of civil litigation reform discussion, avoidance of juries and loser-pays attorney fee rules, find little support in the pattern of contractual terms we observe.

Kurt Eggert Paper: What Prevents Loan Modifications?

Kurt Eggert has written What Prevents Loan Modifications? 18 Housing Policy Debate No. 2.  Here's the abstract:

This comment describes the barriers to preventive servicing for securitized residential loans and assesses the importance of loan modifications, given the recent increases in default and foreclosure rates for subprime loans. Several hurdles slow or reduce such modifications, even those that help borrowers and investors alike. For example, self-interest may reduce servicers' willingness to modify loans rapidly.

In addition, underlying securitization agreements may impede servicers' ability and discretion in this area. Further, tax laws that govern a common securitization entity may limit modifications, as may accounting standards. Finally, "tranche warfare," the sometimes contradictory fiduciary duties servicers have toward investors holding different tranches of securitized pools, may decrease their ability or their willingness to modify loans.

This comment concludes that barriers to effective loan modifications should be reduced or eliminated where feasible, but that the securitization of subprime loans creates risks for borrowers.

Upcoming Journal of Consumer Affairs Issue on Financial Literacy

Here is the table of contents for the upcoming Summer 2008 issue of the Journal of Consumer Affairs, Volume 42, Number 2 :

Special Issue on Financial Literacy: Public Policy and Consumers’ Self-Protection

Editorial Prelude: Financial Literacy, Public Policy, and Consumers’ Self-Protection—More Questions, Fewer Answers by John Kozup and Jeanne M. Hogarth

A Framework for Promoting Retirement Savings by Josh Wiener and Tabitha Doescher

Toward a General Model of Consumer Empowerment and Welfare in Financial Markets with an Application to Mortgage Servicers by Paula Fitzgerald Bone

Is Ignorance Bliss? Consumer Accuracy in Judgments about Credit Ratings by Vanessa Gail Perry

Saving for Retirement: The Effects of Fund Assortment Size and Investor Knowledge on Asset Allocation Strategies by Maureen Morrin, Susan Broniarczyk, J. Jeffrey Inman, and John Broussard

The Role of Self-Regulation, Future Orientation, and Financial Knowledge in Long-Term Financial Decisions by Elizabeth Howlett, Jeremy Kees, and Elyria Kemp

The Financial Rationality of Consumer Loan Choices: Revealed Preferences Concerning Interest Rates, Down Payments, Contract Length, and Rebates by Nicholas Wonder, Wendy Wilhelm, and David Fewings

Consumer Financial Literacy and the Impact of Online Banking on the Financial Behavior of Lower-Income Bank Customers by Lisa J. Servon and Robert Kaestner

Editorial Postlude: Financial literacy by Herbert Jack Rotfeld

Update on Adam Levitin Paper

On Friday, we blogged about Adam Levitin's paper here.  Professor Levitin has posted to SSRN a significantly revised version of the piece, titled "A Critique of the American Bankers Association's Study on Credit Card Regulation."