Consumer Law & Policy Blog

Adam Levitin Responds to ABA Study on Regulation of Credit Cards

Adam Levitin of Georgetown has written "All But Accurate: A Critique of the American Bankers Association's Study on Credit Card Regulation." Here's the abstract:

This review article takes issue with three of the main assertions of the American Bankers Association's Study on Credit Card Regulation.

First, this article addresses the ABA Study's claim that credit card pricing is risk-based, benefiting creditworthy consumers with lower costs of credit and subprime consumers with greater access to credit. This article demonstrates that credit card pricing is only marginally risk-based and that consumer benefits are illusory. To the extent that credit card interest rates have declined over the past two decades, it is attributable to issuers' decreased cost of funds. Increased subprime access to credit cards relates to issuers' ability to pass off risk through securitization, and increased credit card access is hardly a boon absent ability to repay debts.

Second, this article shows that contrary to the ABA Study's claims, credit card debt now supplements, rather than replaces other forms of consumer debt. And third, the article takes issue with the ABA Study's assertion that there is no basis for credit card regulation. Instead, seven of the eight standard independent reasons for government regulation apply squarely to credit cards, making regulatory intervention in the credit card market a question of how, not whether.

Hoofnagle and King on What Californians Understand About Privacy Offline

Chris Jay Hoofnagle, who has  made important contributions on identity theft, has teamed with Jennifer King, both of Berkeley, to produce "Research Report: What Californians Understand About Privacy Offline."  The Report raises disturbing questions about the extent to which consumers understand how data about their transactions is being used.  Here's the abstract:

Many online privacy problems are rooted in the offline world, where businesses are free to sell consumers' personal information unless they voluntarily agree not to or where a specific law prohibits the practice. In order to gauge Californians' understanding of business practices with respect to the selling of customer data, we asked a representative sample of Californians about the default rules for protecting personal information in nine contexts. In six of those contexts (pizza delivery, donations to charities, product warranties, product rebates, phone numbers collected at the register, and catalog sales), a majority either didn't know or falsely believed that opt-in rules protected their personal information from being sold to others. In one context--grocery store club cards--a majority did not know or thought information could be sold when California law prohibited the sale. Only in two contexts--newspaper and magazine subscriptions and sweepstakes competitions--did our sample of Californians understand that personal information collected by a company could be sold to others.

Respondents who shopped online were less likely to say that they didn't know the answer to the nine questions asked than those who never shopped online. In about half of the cases, those who shopped online answered correctly more often than those who do not shop online.

Professor Alan Westin has pioneered a popular "segmentation" to describe Americans as fitting into one of three subgroups concerning privacy: privacy "fundamentalists" (high concern for privacy), "pragmatists" (mid-level concern), and the "unconcerned" (low or no privacy concern). When compared with these segments, Californians are more likely to be privacy pragmatists or fundamentalists, and less likely to be unconcerned about privacy. Fundamentalists were much more likely to be correct in their views of privacy rules. In light of this finding, we question Westin's conclusion that privacy pragmatists are well served by self-regulatory and opt-out approaches, as we found this subgroup of consumers is likely to misunderstand default rules in the marketplace.

Melissa Jacoby on Mortgage Delinquency Management

Melissa B. Jacoby of North Carolina has written "Home Ownership Risk Beyond a Subprime Crisis: The Role of Delinquency Management," 76 Fordham L. Rev. (2008). Here's the abstract:

Public investment in and promotion of homeownership and the home mortgage market often relies on three justifications to supplement shelter goals: to build household wealth and economic self-sufficiency, to generate positive social-psychological states, and to develop stable neighborhoods and communities. Homeownership and mortgage obligations do not inherently further these objectives, however, and sometimes undermine them. The most visible triggers of the recent surge in subprime delinquency have produced calls for emergency foreclosure avoidance interventions (as well as front-end regulatory fixes). Whatever their merit, I contend that a system of mortgage delinquency management should be an enduring component of housing policy. Furtherance of housing and household policy objectives hinges in part on the conditions under which homeownership is obtained, maintained, leveraged, and - in some situations - exited. Given that high leverage or trigger events such as job loss and medical problems play significant roles in mortgage delinquency independent of loan terms, better origination practices cannot eliminate the need for delinquency management.

One function of this brief essay is to identify an existing rough framework for managing delinquency. Legal scholarship should no longer discuss mortgage enforcement primarily in terms of foreclosure law and instead should include other debtor-creditor laws such as bankruptcy, industry loss mitigation efforts, and third-party interventions such as delinquency housing counseling. In terms of analyzing this framework, it is tempting to focus on its impact on mortgage credit cost and access or on the absolute number of homes temporarily saved, but my proposed analysis is based on whether the system honors and furthers the goals of wealth building, positive social psychological states, and community development. Because those ends are not inexorably linked to ownership generally or owning a particular home, a system of delinquency management that honors these objectives should strive to provide fair, transparent, humane, and predictable strategies for home exit as well as for home retention. Although more empirical research is needed, this essay starts the process of analyzing mortgage delinquency management tools in the proposed fashion.

Deborah Thorne and Katherine Porter Paper on Financial Education for Bankrupt Families

Deborah Thorne of Ohio University's Department of Sociology and Katherine Porter of Iowa have co-authored Financial Education for Bankrupt Families: Attitudes and Needs, 24 Journal of Consumer Education 15 (2007).  Here's the abstract:

This paper examines bankrupt families' attitudes toward, and need for, financial education. The data are derived from a longitudinal study of families who filed for personal bankruptcy. We examine the implications of bankrupt debtors' attitudes and experiences for the content and delivery of bankruptcy financial education, which in 2005 was made a prerequisite to consumer debtors' eligibility for discharge of their debts. We report the degree to which bankrupt families believed a financial education course would have helped them avoid bankruptcy and describe how these attitudes vary by demographic characteristics. We examine key financial difficulties that families face after bankruptcy and highlight ways in which bankruptcy financial education could be responsive to the realities of families' lives after they file bankruptcy.

You can download the paper at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=1032968.

Call for Papers on the Subprime Mortgage Crisis

We've received a call for papers on the subprime mortgage meltdown:

The Albany Government Law Review is planning an issue dedicated to the pressing topic of the Subprime Mortgage Crisis.  The issue will offer a varied look into the subprime mortgage crisis by examining the origins of the crisis, federal, state, and municipal government response to the growing crisis, and a multi-viewed perspective on who bears the responsibility of solving the crisis as well as other insights into the issue. The issue is expected to be published in the winter of 2008 and manuscripts must be received by August 1, 2008 in order to be considered for publication. In addition, the AGLR offers a $500 honorarium to contributing authors.  Submissions may be sent to Daniel Leinung, Managing Editor for Submissions at dleinung@albanylaw.edu.

AGLR is a student-edited law review publishing semi-annually using an all-symposia format. It released its inaugural issue on campaign finance reform on January 29, 2008 with an introduction from (now-former) Governor Spitzer, and featuring the scholarship of Melvin Urofsky, Richard Briffault, and Daniel Ortiz. its second issue will be published in Spring 2008 and will feature articles contributed by speakers from the conference held at Albany Law School in October 2007 entitled Firearms, the Militia and Safe Cities: Merging History, Constitutional Law and Public Policy. These authors include Mark Tushnet, Robert Spitzer, Saul Cornell and Carl Bogus. The website is still under development but the articles from the inaugural issue are available at http://www.albanygovernmentlawreview.org/.

New Consumer Law Symposium from Competition Policy International

by Chris Peterson

Competition Policy International, a peer reviewed antitrust journal, has just come out with a new symposium on consumer protection. Among other highlights, you might check out Emory Law Professor Paul Rubin's argument that government should ignore advertising claims that are deceptive or misleading. Here are the articles with links to abstracts for each:

Consumer Protection Policies, Economics, and Interactions with Competition Policy
by Paul Pautler (Federal Trade Commission)
Interactions between Compeition and Consumer Policy
by Mark Armstrong (University College London)
Consumer Protection and Behavioral Economics: To BE or Not to BE?
by Howard Beales (George Washington University)
Regulation of Information and Advertising
by Paul Rubin (Emory University)
Unfair Commercial Practices and Misleading and Comparative Advertising: An Analysis of the Harmonization of EU Legislation in View of the Italian Implementation of the Rules
by Claudio Tesauro (Bonelli Erede Pappalardo) & Francesco Russo (Amsterdam Center for Law and Economics)

Thanks to new University of Florida law professor Danny Sokol for the heads up.

Journal of Family and Economic Issues

The following papers appear in 29 Journal of Family and Economic Issues Number 2 (June 2008), a thematic issue on consumer financial issues:

Lucia Dunn, Guest Editor's Introduction

Sumit Agarwal, Souphala Chomsisengphet, and Lawrence Mielnicki, Do Forbearance Plans Help Mitigate Credit Card Losses?

David A. Evans and Jean M. Lown, Predictors of Chapter 13 Completion Rates: The Role of Socioeconomic Variables and Consumer Debt Type

Diann C. Moorman and Steven Garasky, Consumer Debt Repayment Behavior as a Precursor to Bankruptcy

Tim R.L. Fry, Sandra Mihajilo, Roslyn Russell and Robert Brooks, The Factors Influencing Saving in a Matched Savings Program: Goals, Knowledge of Payment Instruments, and Other Behavior

Marc Anthony Fusaro, Hidden Consumer Loans: An Analysis of Implicit Interest Rates on Bounced
Checks

Anna Paulson and Sherrie L. W. Rhine, The Financial Assimilation of an Immigrant Group: Evidence on the Use of Checking and Savings Accounts and Currency Exchanges

Douglas J. Lamdin, Does Consumer Sentiment Foretell Revolving Credit Use?

Nancy Ammon Jianakoplos and Alexandra Bernasek, Family Financial Risk Taking When the Wife Earns More

Tansel Yilmazer, Saving for Children's College Education: An Empirical Analysis of the
Trade-off between the Quality and Quantity of Children*

More information on the papers can be found at: http://www.springerlink.com/content/104904/

Marsha Courchane Paper on Explaining the Pricing of Home Mortgage Loans to Minority Borrowers

Marsha Courchane's paper The Pricing of Home Mortgage Loans to Minority Borrowers: How Much of the APR Differential Can We Explain? can be found in 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

The public releases of the 2004 and 2005 HMDA data have engendered a lively debate over the pricing of mortgage credit and its implications regarding the treatment of minority mortgage borrowers. This research uses aggregated proprietary data provided by lenders and an endogenous switching regression model to estimate the probability of taking out a subprime mortgage, and annual percentage rate (APR) conditional on getting either a subprime or prime mortgage. The findings reveal that up to 90% of the African American APR gap, and 85% of the Hispanic APR gap, is attributable to observable differences in underwriting, costing, and market factors that appropriately explain mortgage pricing differentials. Although any potential discrimination is problematic and should be addressed, the analysis suggests that little of the aggregate differences in APRs paid by minority and non-minority borrowers are appropriately attributed to differential treatment.

McCoy Paper on HMDA's Legislative History

Patricia A. McCoy, who has been an important scholar on predatory lending, has authored The Home Mortgage Disclosure Act: A Synopsis and Recent Legislative History, 29 Journal of Real Estate Research No. 4 (2007).  Here's the abstract:

This article describes the provisions of the federal Home Mortgage Disclosure Act (HMDA), tracing its legal evolution since 1989, when Congress expanded HMDA to require reporting of home mortgage lending by ethnicity and race. HMDA requires most lenders to report the demographic makeup and geographic distribution of home mortgages to the federal government. The 1989 amendments and later developments transformed HMDA from a law exclusively concerned with geographic disinvestment to one concerned with lending disparities by ethnicity and race. In the process, HMDA evolved from an obscure reporting statute to a flashpoint for debates over lending discrimination and subprime lending.

Elizabeth Schiltz Paper on the Supreme Court's Watters Decision

Elizabeth Rose Schiltz's paper Damming Watters: Channeling the Power of Federal Preemption of State Consumer Banking Laws, 35 Florida State University Law Review, is available at  http://ssrn.com/abstract=1028886.  Here's the abstract:

In Watters v. Wachovia, 127 S. Ct. 1559 (2007), the Supreme Court reversed two presumptions about federal preemption of state law that historically have guided the delicate balance between state and federal authority over consumer protection in banking services - the presumption that issues involving consumer protection are quintessentially matters of state rather than federal prerogative and the presumption that national banks are subject to nondiscriminatory laws of the states where they are located, except where federal law expressly preempts such law.

This article analyzes the dramatic impact of Watters' reversal on two different areas - consumer protection in banking services and the continued vitality of the uniquely American dual banking system. The first part of the article traces the evolution of consumer protection law in the banking industry through three stages. The first was the gradual expansion of the preemptive effect of a particular federal usury statute for national banks through a combination of action by federal banking agencies and case law. The second stage was the assertion by federal banking regulators of a broad theoretical framework for federal preemption of state banking law based not on any particular federal statute, but rather on a theory of congressional intent to permit national banks to provide consistent banking services nationwide. The third stage was the validation of that broad conflict preemption theory by the Supreme Court in Watters. The article demonstrates how the reversal of the historic presumption has recently played itself out in the preemption of state laws governing bank-issued gift cards, culminating in the first citation of Watters in SPGGC, LLC v. Ayotte, 488 F.3d 525 (2nd Cir. 2007).

While challenging the proposition reflected in most recent scholarship in this area that federalization of consumer protection law necessarily entails deregulation, in this article I nevertheless conclude that Watters will have a significant adverse effect on the continued vitality of the dual banking system. Arguments for preserving the "dual banking system" arise out of our nation's fundamentally federalist sensibilities. From that perspective, a recent shift in the tenor of arguments for the preserving the dual banking system from the benefits of competition (states as laboratories of reform) to arguments based on the principle of subsidiarity (states as more responsive units of government where democratic ideals are more fully realized) can be observed. I argue that the subsidiarity arguments are likely to be more persuasive in convincing Congress to intervene to address the imbalance between the state and national banking system exacerbated by the Watters decision. I conclude by proposing that Congress partially reverse Watters by validating a recent proposal by the primary federal regulator of state banks to extend preemption authority to state banks, thus preserving to states the authority to offer a meaningful alternative to the national banking system on the level of consumer protection.