Law Commons^™

Computer As Confidant: Digital Investment Advice And The Fiduciary Standard, Nicole G. Iannarone

Nicole G. Iannarone

Digital investment advisers are the fastest growing segment of financial technology (fintech) and are disrupting traditional investment advisory delivery models. The computer-led investment advisory service model may be growing particularly quickly due to a confluence of social and political factors. Politicians and regulators have increasingly focused on the standards of care applicable to investment advice providers. Fewer Americans are ready for retirement and many lack access to affordable investment advice. At the same time, comfort with digital platforms have increased, with some preferring electronic interaction over human interaction. Claiming that they can democratize retirement service by pro- viding advice meeting …

Countercyclical Regulation And Its Challenges

Patricia A. McCoy

“Whimsy Little Contracts” With Unexpected Consequences: An Empirical Analysis Of Consumer Understanding Of Arbitration Agreements, Jeff Sovern

Jeff Sovern

Arbitration clauses have become ubiquitous in consumer contracts. These arbitration clauses require consumers to waive the constitutional right to a civil jury, access to court, and, increasingly, the procedural remedy of class representation. Because those rights cannot be divested without consent, the validity of arbitration agreements rests on the premise of consent. Consumers who do not want to arbitrate or waive their class rights can simply decline to purchase the products or services covered by an arbitration agreement. But the premise of consent is undermined if consumers do not understand the effect on their procedural rights of clicking a box …

Underwriting Sustainable Homeownership: The Federal Housing Administration And The Low Down Payment Loan, David J. Reiss

David J Reiss

The United States Federal Housing Administration (“FHA”) has been a versatile tool of government since it was created during the Great Depression. The FHA was created in large part to inject liquidity into a moribund mortgage market. It succeeded wonderfully, with rapid growth during the late 1930s. The federal government repositioned it a number of times over the following decades to achieve a variety of additional social goals. These goals included supporting civilian mobilization during World War II; helping veterans returning from the War; stabilizing urban housing markets during the 1960s; and expanding minority homeownership rates during the 1990s. It …

Dirty Debts Sold Dirt Cheap, Dalie Jimenez

Dalie Jimenez

More than 77 million Americans have a debt in collections. Many of these debts will be sold to debt buyers for pennies, or fractions of pennies, on the dollar. This Article details the perilous path that debts travel as they move through the collection ecosystem. Using a unique dataset of 84 consumer debt purchase and sale agreement, it examines the manner in which debts are sold, oftentimes as simple data on a spreadsheet, devoid of any documentary evidence. It finds that in many contracts, sellers disclaim all warranties about the underlying debts sold or the information transferred. Sellers also sometimes …

Target, Negligence, Chips, And Chickens, Jesse D. Gossett

Jesse D Gossett

SHOPPING ON BLACK FRIDAY. It’s almost as American as baseball and apple pie. But during the 2013 holiday season, over forty million U.S. citizens experienced what is increasingly becoming a uniquely American problem: face-to-face (“FTF”) credit card fraud. This online article briefly explores the problems of data hacking and credit card fraud. It then looks at how European countries have largely avoided the problem and what American consumers can do to minimize the problem here.

The Law And Economics Of Microfinance, Katherine Helen Mary Hunt

Katherine Helen Mary Hunt

Financial inclusion may be jargon which appeals to international donors and academics, but the strategic implementation in developing countries is often based on international du jour priorities, such as microfinance. The topic of microfinance is highly debated in the academic literature, although little empirical work has been published. Further, no literature to date has considered microfinance from a law and economics perspective. This paper seeks to contribute to the gap in the literature by considering how microfinance has evolved to address the credit market failure, and how microfinance regulation should be designed to promote long term financial inclusion via financially …

The Future Of The Private Label Securities Market, David J. Reiss

David J Reiss

The PLS market, like all markets, cycles from greed to fear, from boom to bust. The mortgage market is still in the fear part of the cycle and recent government interventions in it have, undoubtedly, added to that fear. In recent days, there has been a lot of industry pushback against the government’s approach, including threats to pull out of various sectors. But the government should not chart its course based on today’s news reports. Rather, it should identify fundamentals and stick to them. In particular, its regulatory approach should reflect an attempt to align incentives of market actors with …

The Price Of Crisis: Eminent Domain, Local Governments, And The Value Of Underwater Mortgages, Raymond H. Brescia, Nicholas Martin

Raymond H Brescia

In response to the lingering fallout from the Financial Crisis of 2008, local governments have begun to explore whether it is wise and legal to use the power of eminent domain to seize distressed home mortgages. This Article attempts to situate this approach to such mortgages within the larger economic, legal and policy context and asks three key questions. First, are local governments appropriate actors to address the lingering problem of underwater mortgages? Second, assuming they are appropriate actors to address this problem, how should localities and, if necessary, courts, value underwater mortgages in the context of condemnation proceedings: i.e., …

Armed, Unarmed Or Harmed By Knowledge? A Comment On The Fha's Housing Counseling Pilot Program, David J. Reiss

David J Reiss

The FHA has requested input on its Homeowners Armed with Knowledge (HAWK) for New Homebuyers pilot program. This comment letter argues that housing counseling is not a proven solution to the problem it is meant to solve, excessive defaults by FHA borrowers. HAWK is a traditional housing counseling program but the scholarly literature casts into doubt the efficacy of such programs. It would be better to take time to research which counseling strategies, if any, are proven to be effective. This is true for the FHA but also for other government agencies, such as the Consumer Financial Protection Bureau, that …

The Cra Implications Of Predatory Lending, Kathleen Engel, Patricia Mccoy

Patricia A. McCoy

Traditionally, policymakers, communities, and industry have regarded the Community Reinvestment Act ("CRA") as a positive mandate for banks and thrifts to do good by increasing investment in low- and moderate-income ("LMI") neighborhoods. When Congress enacted CRA, it was inconceivable that LMI neighborhoods might eventually receive too much credit in the form of abusive mortgages. However, by the late 1990s, predatory mortgages- exploitative high-cost loans to gullible borrowers-were ravaging the inner cities. We address the question: given the surge in predatory lending, how should CRA respond? CRA and federal subsidies to regulated lenders can create perverse incentives for lenders to engage …

Testimony To The Committee On Financial Institutions, Kansas House Of Representatives March 13, 2014, Brian M. Mccall

Brian M McCall

This document contains the text of testimony given before the Committee on Financial Institutions, Kansas House of Representatives March 13, 2014, in a hearing to address potential changes to the regulation of payday lending in Kansas.

Public School Governance And Cyber Security: School Districts Provide Easy Targets For Cyber Thieves, Michael A. Alao

Michael A. Alao

School districts rely on information systems to a similar extent as private, business organizations, yet the rules and regulations to ensure that school districts maintain adequate security to prevent data breaches and theft have failed to keep pace with private-sector developments. Advances in the private sector include notice-of-breach laws, consumer protection laws limiting individual liability for fraudulent electronic funds transfers, and auditing and reporting of internal controls. The public sector, including school districts, has also made advances in cyber security rules and regulations, but to a more limited extent than the private sector. Because of the sheer number of public …

The Home Mortgage Foreclosure Crisis: Lessons Learned

Patricia A. McCoy

From 2007 through 2011, the United States housing market suffered a severe imbalance in supply and demand due to an excessive number both of foreclosed homes and homes awaiting foreclosure in the shadow housing inventory. Foreclosure prevention can help reduce the shadow housing inventory by keeping troubled mortgages from entering that inventory to begin with. The loan modification experience post-2008 yielded four main lessons about the best way to optimize foreclosure prevention. First, servicers should design loan modifications to lower monthly payments, including through principal reduction whenever appropriate. Second, servicers should evaluate loss mitigation as soon as possible following delinquency. …

Entender Los Males Económicos Modernos A La Luz De La Doctrina Social Católica, Brian M. Mccall

Brian M McCall

In a general sense, St. Thomas Aquinas predicted the paralysis and chaos of the financial and economic systems in America and Europe which occurred in 2008, when he predicted that in a society where unjust exchanges dominate, eventually all exchanges will cease. St. Thomas also points out that although human law cannot prohibit all injustice, society cannot escape the consequences of transgressing the divine law which leaves “nothing unpunished.” Thus, at least part of the explanation for that crisis whose effects remain with us today lies in continuous violations of natural justice by our economic system. Neither one product nor …

E-Commerce And Electronic Payment System Risks: Lessons From Paypal, Lawrence J. Trautman

Lawrence J. Trautman Sr.

What are the major risks perceived by those engaged in e-commerce and electronic payment systems? What development risks, if they become reality, may cause substantial increases in operating costs or threaten the very survival of the enterprise? This article utilizes the relevant annual report disclosures from eBay (parent of PayPal), along with other eBay and PayPal documents, as a potentially powerful teaching device. Most of the descriptive language to follow is excerpted directly from eBay’s regulatory filings. My additions include weaving these materials into a logical presentation and providing supplemental sources for those who desire a deeper look (usually in …

Dodd-Frank Act And Remittances To Post-Conflict Countries:, Raymond Natter

Raymond Natter

The Dodd-Frank Act established a new Federal framework for the regulation of international remittance payments that originate in the U.S. However, the statute and implementing regulations may have the unintended consequence of disrupting the flow of remittance funds to post-conflict nations. Recent revisions to the regulations have made significant improvements, but additional work is still necessary

Dodd-Frank Act And Remittances To Post-Conflict Countries: The Law Of Unintended Consequences Strikes Again, Raymond Natter

Raymond Natter

The Dodd-Frank Act established a new Federal framework for the regulation of international remittance payments that originate in the U.S. However, the statute and implementing regulations may have the unintended consequence of disrupting the flow of remittance funds to post-conflict nations.

Dirty Remics, Revisited, David J. Reiss, Bradley T. Borden

David J Reiss

We review the differences between two visions for the residential mortgage markets, one driven by the goal of efficiency and the other driven by the goals of efficiency and consumer protection. Both visions advocate for structural reform, but one advocates for industry-led change and the other advocates for input from a wider array of stakeholders. Broader input is not only important to ensure that a broad range of interests are represented but also to ensure the long-term legitimacy of the new system. This is a response to Joshua Stein, Dirt Lawyers Versus Wall Street: A Different View, PROBATE AND PROPERTY …

Dirt Lawyers And Dirty Remics: A Debate, David J. Reiss, Bradley T. Borden, Joshua Stein

David J Reiss

In mid-2013, Professors Bradley T. Borden and David J. Reiss published an article in the American Bar Association’s PROBATE & PROPERTY journal (May/June 2013, at 13), about the disconnect between the securitization process and the mechanics of mortgage assignments. The Borden/Reiss article discussed potential legal and tax issues caused by sloppiness in mortgage assignments.

Joshua Stein responded to the Borden/Reiss article, arguing that the technicalities of mortgage assignments serve no real purpose and should be eliminated. That article appeared in the November/December 2013 issue of the same publication, at 6.

Stein’s response was accompanied by a commentary from Professors Borden …

Barriers To Foreclosure Prevention During The Financial Crisis

Patricia A. McCoy

The number of modifications to distressed residential loans following the 2008 financial crisis has been disappointingly low compared to the number of foreclosures. This raises concerns about the presence of artificial barriers to loan modifications in situations where foreclosure should be avoidable. There are three pressing reasons to care about what the real barriers to foreclosure prevention are. First, foreclosures that could have been avoided inflict enormous, needless losses on borrowers, investors, and society at large. Second, overcoming artificial barriers to foreclosure prevention will result in loan modifications with higher rates of success. Finally, knowing what to fix is necessary …

Keeping Tabs On Financial Innovation: Product Identifiers In Consumer Financial Regulation

Patricia A. McCoy

The financial crisis of 2008 gave rise to renewed discussion about whether financial innovations should undergo higher scrutiny for potential harm and, if so, what type? In this Article, the authors propose a new system for monitoring financial innovations through a system of registration, data collection and analysis using unique product identifiers. Creating product identifiers would increase monitoring abilities substantially at relatively low cost by facilitating the linkage of separate databases. The assignment of unique product identifiers would also minimize errors in the identification and classification of different financial products. These identifiers would be available to both the government and …

Standard Contract Clauses As Public Goods: A New Way To Approach The Problem, Enrico Baffi

enrico baffi

The aim of this work is to show how it is possible to identify market failures other than those traditionally identified by lawyers and law and economics scholars to justify the mandatory provisions of contracts between professionals and consumers and the equally mandatory provisions governing the abuse of economic dependency. This is a new approach that can be extended to other provisions and appears to rest on fairly solid microeconomic foundations. There is no doubt, however, that many criticisms can be leveled against it. Very briefly, I shall argue that the production of clauses characterized by being rather vague, indeterminate …

Regulation Not Prohibition: The Comparative Case Against The Insurable Interest Doctrine, Sharo Michael Atmeh

Sharo M Atmeh

American law requires an insurable interest—a pecuniary or affective stake in the subject of an insurance policy—as a predi-cate to properly obtaining insurance. In theory, the rule prevents both wagering on individual lives and moral hazard. In practice, the doctrine is avoided by complex insurance transaction structuring to effectuate both origination and transfers of insurance by individuals without an insurable interest. This paper argues that it is time to ab-andon the insurable interest doctrine. As both the English and Aus-tralian experiences indicate, elimination of the insurable interest doctrine will have little detrimental pecuniary effect on the insurance industry, while freeing …

Mortgage Product Substitution And State Anti-Predatory Lending Laws: Better Loans And Better Borrowers?

Patricia A. McCoy

Mounting foreclosures and disclosures of abusive lending practices led many states to adopt new anti-predatory lending (APL) laws. Researchers have examined the impact of such laws on credit flows and the cost of credit. This research extends the literature by examining whether the market responded to these laws by substituting different mortgage products for those restricted by APL provisions. The evidence indicates that the laws were effective in restricting loans with targeted characteristics, and that the market substituted other product types to maintain access to credit and affordability in the face of these restrictions. The laws reduced the involvement of …

False Security: How Securitization Failed To Protect Arrangers And Investors From Borrower Claims, Kathleen C. Engel, Thomans J. Fitzpatrick

kathleen c engel

False Security: How Securitization Failed to Protect Arrangers and Investors from Borrower Claims

by Kathleen C. Engel and Thomas J. Fitzpatrick IV

The future of housing finance is in a state of flux. Fannie Mae and Freddie Mac, the two largest loan arrangers in the United States, are in conservatorship. Private sector securitization of mortgages has almost completely stopped. As a result, Fannie, Freddie and Ginnie Mae now own or guarantee almost all new residential mortgage loans. In February 2011, the Obama Administration released a proposal outlining three plans for the future of housing finance. In all three plans, Freddie …

Barriers To Market Discipline: A Comparative Study Of Mortgage Market Regulation, Vincent Di Lorenzo

Vincent Di Lorenzo

This paper explores mortgage market reforms in the U.S. and U.K. in response to the recent mortgage market crisis. Two issues are examined. First, the paper explores the extent to which regulatory bodies have recognized behavioral barriers to market discipline on the part of not only consumers but also industry actors. Second the paper examines the varied response in the U.S. and U.K. to both market limitations and behavioral limitations to self-protection and self-discipline that led to unsafe lending practices in the period 2003 through 2007. The greater emphasis on rules-based regulation in the U.S. after 2008 is compared with …

The Subprime Virus: Reckless Credit, Regulatory Failure, And Next Steps

Patricia A. McCoy

In this lively new book, Kathleen C. Engel and Patricia A. McCoy tell the full story behind the subprime crisis. The authors, experts in the law and economics of financial regulation and consumer lending, offer a sharply reasoned, but accessible account of the actions that produced the greatest economic collapse since the Great Depression.

Book Review: Dan Immergluck, Foreclosed: High-Risk Lending, Deregulation, And The Undermining Of America’S Mortgage Market, David J. Reiss

David J Reiss

This is a book review of Dan Immergluck, FORECLOSED: HIGH-RISK LENDING, DEREGULATION, AND THE UNDERMINING OF AMERICA’S MORTGAGE MARKET (Cornell University Press 2009).

The Impact Of Predatory Lending Laws: Policy Implications And Insights

Patricia A. McCoy

Over half the states and several localities have enacted statutes and ordinances to regulate abuses in the residential mortgage market. The effect of these statutes is a matter of debate. This paper seeks to improve the understanding of this increasingly important issue and pays particular attention to the role that legal enforcement mechanisms play in this context.

We created a legal index of laws governing mortgage lending terms and practices, giving each state an overall score for the strength of its laws. In addition, we disaggregated the index to create sub-indices along three dimensions: (1) the scope of loans covered …