Consumer Law & Policy Blog

Arnold S. Rosenberg Paper Comparing Regulation of Unfair Bank Fees in the US and EU

Arnold S. Rosenberg has written Regulation of Unfair Bank Fees in the United States and the European Union: Current Trends and a Proposal for Reform, AN EVALUATION OF LEGISLATION REGARDING COMMERCIAL PRACTICES AND CONSUMER CREDIT IN THE EUROPEAN UNION, Bank of Malta, 2007, available at http://ssrn.com/abstract=1028163. Here's the abstract:

Due to the legislative power of the banking industry, the U.S. federal government has been more reluctant to place limits on bank fees and charges than the European Union (E.U.). There was a trend in the courts of several American states in the 1980s and early 90s toward striking down excessive bank fees charged to consumers, such as overdraft charges and late fees, through the application of state "Little FTC Acts," such as California's Unfair Business Practices Act. But this trend stalled due to the Supreme Court's decision in Smiley v. Citibank (1996); the assertion by the Office of the Comptroller of the Currency (OCC) of federal preemption of state laws on the subject; and state legislative and constitutional amendments, particularly in California, narrowing standing and remedies under the Little FTC Acts.

Meanwhile, the E.U. has been moving in the opposite direction. A casual reader of the Unfair Commercial Practices Directive adopted by the E.U. in May 2005 might think it is directed only at the sale of goods, because the Directive frequently refers only to "products." However, due to its expansive definition of "product" as including services, the Directive covers fees for bank services. These fees are also governed by the Distance Marketing of Financial Services Directive of 1998 and the Unfair Contract Terms Directive of 1993, as well as national regulations pursuant to the 1993 Directive such as those adopted by the United Kingdom in 1994 and 1999.

This article discusses these divergent trends, the factors that have contributed to them, and the rationales for and against bank fee regulation. It also sets forth a proposed solution to the problem of unfair bank fees through standardized regulation and review of consumer contract forms in the financial services industry.

Paper on Google and Privacy

Omer Tene of the College of Management - School of Law, Israel, has written What Google Knows: Privacy and Internet Search Engines, available at http://ssrn.com/abstract=1021490.  Here's the abstract:

Search engines are the most important phenomenon on the Internet today and Google is the gold standard of search. Google evokes ambivalent feelings. It is adored for its ingenuity, simple, modest-looking interface and superb services offered at no (evident) cost. Yet increasingly, it is feared by privacy advocates who view it as a private sector big brother posing perhaps the biggest privacy problem of all times. Google is an informational gatekeeper harboring previously unimaginable riches of personal data. Billions of search queries stream across Google's servers each month, the aggregate thoughtstream of humankind, online. Google compiles individual search logs, containing information about users' fears and expectations, interests and passions, and ripe with information that is financial, medical, sexual, political, in short - personal in nature. How did Google evolve from being a benevolent giant seeking to do no evil into a privacy menace reviled by human rights advocates worldwide? Are the fears of Google's omniscient presence justified or overstated? What personal data should Google be allowed to retain and for how long? What rules should govern access to Google's database? What are the legal protections currently in place and are they sufficient to quell the emerging privacy crisis? These are the main issues addressed in this article.

Elizabeth Renuart and Diane Thomspon Paper on APR Disclosure

Elizabeth Renuart and Diane E. Thompson of NCLC have written The Truth, the Whole Truth, and Nothing But the Truth:  Fulfilling the Promise of Truth in Lending, available at  http://ssrn.com/abstract=1021318. Here's the abstract:

Evaluating the cost of credit and comparison shopping in the modern credit environment can be a daunting task, even for the most sophisticated shoppers. Lenders increasingly unbundle the costs of their loans from the interest rate into an array of fees, outsource their overhead to third parties who add to the consumer's cost, and unveil amazingly complex loan products that dazzle and confuse borrowers.

At the same time, the preemption of state usury and consumer protection laws by Congress and the federal banking agencies spurred deregulation at the state level. Today, the consumer credit marketplace is governed almost exclusively by disclosure rules. The subprime mortgage crisis of 2007 resulted from allowing the market to police itself and from the failure of disclosure to curb abuses.

Nearly forty years ago, Congress addressed the problems caused by lack of transparency in credit pricing when it enacted the Truth in Lending Act (TILA). Congress intended to promote informed consumer shopping and a level playing field for lenders by requiring standard disclosure of the cost of credit, most simply through the annual percentage rate (APR) and the finance charges upon which the APR is based. The value of the APR disclosure has deteriorated since 1968 due to exclusions from the finance charge definition created primarily by the Federal Reserve Board.

The article documents the history of this decline for the first time and describes the consequences of an APR disclosure that has become incrementally weaker as an indicator of the true cost of the credit. This article draws upon financial literacy, cognitive psychology, and behavioral economics literature to justify the need for a more effective APR.

The authors posit a simple litmus test for the finance charge that creates a more effective APR. They discuss why this test is superior to other proposed definitions of the finance charge and respond to arguments that a fee-inclusive APR is unhelpful to consumers and harms the industry.

This article is particularly timely because the Federal Reserve Board is currently undertaking a sweeping overhaul of TILA disclosure regulations, including the finance charge definition. Given the state of the credit marketplace, the authors conclude that a robust APR is more critical now than it was in 1968.

Paper on Enforcement of Consumer Law in the US and EU

Fabrizio Cafaggi and Hans-W Micklitz, both of the European University Institute - Department of Law, have written Administrative and Judicial Collective Enforcement of Consumer Law in the US and the European Community, available at http://ssrn.com/abstract=1024103. Here's the abstract:

In the consumer society, as it stands today in Western-type democracies, consumers have a far larger choice of products and services originating from all over the world than they did decades ago. Risks associated with products and services have also increased, as have mass problems and mass damages, often in a transborder dimension. The US and the European Community, though battling against common problems, maintain different standard setting and enforcement regimes. This paper focuses on enforcement regimes, thereby distinguishing between administrative enforcement via agencies and judicial collective enforcement via European collective actions and US class actions. The existing theoretical framework depicting administrative and judicial enforcement as alternative strategies is contrasted against modern developments in the US and the EC. In the field of consumer protection administrative control and judicial collective enforcement are being understood more as functional complements than alternatives. Enforcement covers negotiation, settlement, adjudication and arbitration. The analysis of the institutional variables determining the choice between administrative and judicial control - ex ante vs. ex post control, injunctive relief versus damages, personal injuries and economic losses, sector specificity vs. general instruments to protect consumers, public agencies vs. private organisations - provide the ground for preliminary thoughts on a revised theoretical approach.

Paper Comparing US and European E-Commerce Protections

Michael L. Rustad of Suffolk has an article titled Circles of E-Consumer Trust: Old E-America v. New E-Europe in the Michigan State University College of Law Journal of International Law, available at http://ssrn.com/abstract=1023659.  Here's the abstract:

Robert Kagan's article in The Economist entitled, Old America v. New Europe, obliterates the American assumption that Europe is a clapped-out old continent while America is the young teenager. For example, Kagan notes how America's political system is old in comparison to the upstart European Community. The transnational divide in consumer rights in electronic commerce is yet another example of Old America and New Europe. The American free market approach to consumer e-commerce relies largely upon private ordering generally taking the form of one-sided clickwrap license agreements that disclaim all warranties, meaningful remedies, and require consumers to litigate in the functional equivalent of Siberia. U.S. courts have been inclined to enforce mass-market license agreements so long as consumers have a right to manifest assent after reviewing the terms. European courts will not enforce these adhesive contracts because of mandatory consumer protection rules such as the Unfair Contract Terms Directive and the Distance Selling Directive. As a result, there is a chasm between U.S. and European consumer protection rules in cyberspace. The U.S. is from Mars and Europe from Venus when it comes to mandatory consumer protection rules in e-commerce transactions.

Part I of this Article introduces New Europe's substantive consumer rules governing e-commerce (as well as the bricks and mortar world). Part II explores, compares and contrasts U.S. style cyberspace jurisdiction with the mandatory consumer rules of the Brussels Regulation. Part III compares U.S. conflict of law to the mandatory private international law of Europe. In each of these areas, the twenty-seven countries of the European Community have promulgated minimum adequate consumer remedies. In contrast, U.S. consumers have, in effect, anti-warranties and remedies in e-commerce transactions. The Old America and New Europe must harmonize their radically different approaches to build circles of consumer trust in cyberspace.

Journal of Consumer Affairs Call for Papers on Privacy

The Journal of Consumer Affairs plans a special issue on Privacy Literacy -- How Consumers Understand and Protect Their Privacy.  Here is the Call for Papers:

Special Issue Guest Editors
Jeff Langenderfer                   Anthony Miyazaki
Meredith College                   Florida International University
 
Consumers increasingly confront a wide array of privacy-related information and are called upon to make decisions impacting their privacy in a growing number of arenas and contexts.  Existing research suggests that many consumers do not understand the decisions they are forced to make nor the impact of those decisions.  For this special issue of the Journal of Consumer Affairs, manuscripts are being solicited devoted to the effects of privacy literacy on consumer welfare.  The goal of this special issue is to extend our theoretical and practical knowledge of how consumers obtain, process, and use information and mechanisms that relate to their privacy.  We seek contributions from multiple disciplines including communications, consumer education, economics, finance, law, public policy, psychology and marketing.  Authors may submit empirical studies or conceptual work.  Papers that are theoretically grounded and also contain significant implications for consumer welfare are especially appropriate.
 
Topics that would be appropriate for this special issue include, but are not limited to:

• Consumer understanding of privacy and privacy-related information
• The interplay between privacy knowledge and consumer behavior
• Cost assessments for the surrender of personal information
• Tradeoffs between the surrender of private information and online access
• Deceptive or covert practices in information exchange
• Measurement and assessment of privacy literacy
• Legal and regulatory issues in privacy
• How consumers respond to solicitations for private information
• Consumer understanding of privacy certifications, trustmarks, and seals of approval
• Methods to improve privacy literacy
• The privacy literacy of vulnerable consumers (e.g., children, low-income, etc.)
• Relationships between desire-for-privacy, privacy concern, trust, and privacy knowledge
• Disclosure versus practice regarding privacy-related behaviors
• Consumer awareness regarding seller use of private information
• Consumer understanding of medical and financial privacy practices and disclosures

Submission Information
Manuscripts are due by June 1, 2008. Please follow the submission guidelines for The Journal of Consumer Affairs as detailed under "JCA Author Guidelines" on the Blackwell Publishing web site (http://www.blackwellpublishing.com/submit.asp?ref=0022-0078&site=1).  Authors wishing to submit a manuscript should send two (2) electronic copies of their manuscript (one with the full title page and one copy cleaned of all information that identifies the authors) to the special issue co-editor:

Shmuel Becher Papers on Consumer Contracts

Shmuel I. Becher has two papers on consumer contracts.  One is Behavioral Science and Consumer Standard Form Contracts, 68 Louisiana Law Review, available at http://ssrn.com/abstract=1016002. Here's the abstract:

Asymmetric information is a serious threat to the market of consumer standard form contracts. Yet, legislatures, courts, and market-forces do not provide an adequate solution to this threat. This Article argues that a considerable part of this failure is due to the fact that important and relevant social science insights regarding consumers' behavior is widely overlooked. This gap results in the prevalence of unfair or inefficient consumer form contract provisions. More profoundly, it entails that current approaches towards consumer contracts are fundamentally flawed and bound to reach erratic and sometimes unjust conclusions.

Cognitive biases and consumers' actual behavioral patterns should have an important role - descriptively and normatively - in the law of consumer contracts. This Article explains how psychological phenomena contribute (i) to consumers' tendency not to read form contracts even when by doing so they fail to maximize their utility; (ii) to consumers' inability to evaluate correctly contract terms once they do read them; and as a result (iii) to sellers' capability of manipulating consumers.

The end point of this discussion is twofold: First, it seeks to expand our understanding regarding the inadequacy of current approaches to consumer contracts and the harm that consumers are exposed to when actual behavioral patterns are ignored. Secondly, it provides policy makers with better insights as to the way in which contract law should design the alternative approach to consumer contracts.

Wright Paper on Behavioral Law and Economics and Consumer Contracts

Joshua D. Wright of George Mason has an article in 2 NYU Journal of Law & Liberty, Behavioral Law and Economics, Paternalism, and Consumer  Contracts: An Empirical Perspective, available at http://ssrn.com/abstract=1015899.  Here's the abstract:

Modern legal scholars frequently and increasingly base their analyses on the assumption, grounded largely in the extensive experimental literature, that individuals are subject to a number of systematic behavioral biases. Within the legal literature, behavioral economic analysis has been relied upon to generate a significant number of proposals for paternalistic regulation. These proposals are frequently accompanied by claims that neoclassical economics is insufficiently flexible to deal with these empirical observations, and that behavioral law and economics is as a superior guide for policy analysis. These claims must ultimately be resolved empirically and turn on whether incorporating insights from behavioral economics improves our ability to explain the law, understand the behavior of economic agents, or predict the consequences of legal change. This paper focuses on the shared interest of both neoclassical and behavioral economists in empiricism and explanatory power. It asks whether behavioral economic analysis of law has increased our knowledge in an area of “consumer contracts.” Specifically, the paper surveys the available empirical evidence to assess claims from the behavioral law and economics literature involving exploitation of consumer biases with credit cards, standard form contracts, and shelf space contracts. I find that the empirical studies of firm and consumer behavior in these examples do not support the claims that behavioral law and economics generates greater predictive power than conventional price theory.

Matt Edwards Paper on the FTC's Use of Behavioral Law and Economics

Matt Edwards's article, The FTC and the New Paternalism, can be found at http://ssrn.com/abstract=1014652.  Here's the abstract

During the past decade, we have witnessed a renaissance of paternalism in legal scholarship fueled by the rise of behavioral law and economics ("BLE"). This paper addresses the potential impact of BLE and the "new paternalism" on the Federal Trade Commission's consumer protection mission. After providing a survey of some of the basic teachings of BLE, the paper reviews the fascinating political and legal history of the FTC's unfairness authority to show how a major political battle helped to transform the legal concept of unfairness from a market morality norm into a law and economics concept grounded in the concept of consumer sovereignty.

The latter parts of the paper use three examples - mail-in consumer rebates, inducement of supermarket impulse purchases, and payday lending - to explore the challenges that the FTC faces if it decides to press unfairness claims based on alleged behavioral exploitation. These tasks include weighing uncertain costs and benefits of business practices, determining what harms are "reasonably avoidable" in cases of purported consumer irrationality, and elaborating a principle to mediate disputes between consumers' multiple selves. Given these empirical and normative challenges, and the FTC's unfairness history, one might expect the Commission to be cautious in its use of BLE and resistant to more radical strains of the new paternalism.

Angela Littwin Paper on How Low-Income Borrowers Respond to Restraints on Credit Card Use

Angela K. Littwin of Harvard has written a  paper, Testing the Substitution Hypothesis: Would Credit Card Regulation Force Low-Income Borrowers Into Less Desirable Lending Alternatives?, available at http://ssrn.com/abstract=1014460.  Here's the abstract:

One of the strongest arguments against regulating credit cards is the substitution hypothesis, which states that if a restriction on one form of credit decreases access, borrowers will respond by using other, less desirable forms of credit. For low-income consumers, the argument is more powerful still, because their other options are high-cost lenders such as pawn shops and rent-to-own stores. But the substitution hypothesis has been more frequently assumed than investigated, and the empirical research that has taken place does not support the theory as strongly as has been supposed. The theory is based on a naïve presumption about the constancy of demand for consumer credit and a failure to account for a more nuanced view of the role of credit supply. This Article presents original data from a study of low-income women. The findings suggest that lenders such as pawn shops and rent-to-own stores may function as complements more than substitutes. In addition, the research uncovered another form of credit that low-income families routinely use and participants evaluated favorably, but that has never been discussed in the academic literature. These findings suggest a more nuanced formulation of the hypothesis that better predicts the consequences of credit card regulation.