UNSTACKING THE DECK? CONTRACT MANIPULATION AND CREDIT CARD ACCOUNTABILITY

University of Cincinnati Law Review

Volumn 78, Issue 4, 2010, Pages 1471-1515

  Zacks, Eric A ^a  

^a WAYNE STATE UNIVERSITY   (United States)

Author keywords

[No Author keywords available]

Indexed keywords

EID: 78049276288     PISSN: 00096881     EISSN: None     Source Type: Journal    
DOI: None     Document Type: Review

References (257)

1. See, e. g., Steven Gray & Michael Peltier, Exposing the Credit-Card Fine Print, TIME, Feb. 21, 2008, available at http:www.time.com/time/magazine/ article/0,9171,1715293,00.html ("There has never been such a spotlight on the [credit card] industry [with respect to issuer practices]" (quoting Curtis Arnold, founder of CardRatings.com, a website offering credit card guidance)). Gray and Peltier also find that "[t]he added interest and late fees⋯ are feeding a consumer backlash that is gaining strength."
2. Id.; Amy Schatz, White House to Put Credit-Card Rates in Cross Hairs, WALL ST. J., Apr. 20, 2009, at A3;
3. David Lazarus, It's Time To Hold Credit Card Issuers to Account, L. A. TIMES, Mar. 4, 2009, at B1;
4. Eileen Ambrose, Card Issuers Become Wary, Leaving Consumers Pinched, L. A. TIMES, Sept. 16, 2007, available at http://www.latimes.com/sns-yourmoney- 0916cards,0,4027435.story;
5. see also Julie L. Williams & Michael S. Bylsma, A Renewed Federal Focus on Credit Card Disclosures, 61 Bus. LAW. 867, 867 (2006) ("The perception that card issuers-and federally required disclosure statements-have failed to adequately inform consumers about certain material credit card terms and conditions has led to increased consumer complaints, criticism of card issuers, and criticism of federal disclosure rules.").
6. See, e.g., Editorial, The Credit Card Squeeze, N. Y. TIMES, May 10, 2009, at WK7 ("Many credit card holders are complaining about unexpected increases in fees or interest rates that double or triple for no reason.");
7. Drew Griffin & Kathleen Johnston, Credit Card Holders Livid About 'Rate-Jacking', Dec. 17, 2008, http://www.cnn.com/2008/US/12/17/credit.card. rates/index.html;
8. Connie Prater, Proposed credit card rule changes draw massive response, CREDIT CARDS.COM, Aug. 8, 2008, http://www.creditcards.com/credit-card-news/ unfair-practices-credit-cards-1282.php (noting that the Federal Reserve Board had received over 56, 000 responses (a record response) from banks, credit unions, credit card users, and advocates to proposed credit card industry regulation).
9. Melvin Aron Eisenberg, The Limits of Cognition and the Limits of Contract, 47 STAN. L. REV. 211,243 (1995).
10. See Oren Bar-Gill, Seduction By Plastic, 98 Nw. U. L. REV. 1373, 1373 ("The contract, itself commonly designed by the [Issuer], will be shaped around consumers' systematic deviations from perfect rationality⋯ [C]ompetitive forces compel sellers to take advantage of consumers' weaknesses.").
11. Credit Card Accountability, Responsibility and Disclosure Act of 2009, Pub. L. No. 111-24, 123 Stat. 1734 (codified in scattered sections of 15 U. S. C.) [hereinafter The CARD Act].
12. Samuel Issacharoff & Erin F. Delaney, Credit Card Accountability, 73 U. CHI. L. REV. 157, 166-67(2006).
13. Michael I. Meyerson, The Efficient Consumer Form Contract: Law and Economics in the Real World, 24 GA. L. REV. 583, 594 (1990);
14. see also Robert A. Hillman & Jeffrey J. Rachlinski, Standard-Form Contracting in the Electronic Age, 77 N. Y. U. L. REV. 429, 435 (2002).
15. See Meyerson, supra note 7, at 594.
16. Hillman & Rachlinski, supra note 7, at 439.
17. See also Robert Prentice, Contract-Based Defenses in Securities Fraud Litigation: A Behavioral Analysis, 2003 U. ILL. L. REV. 337, 361-62 (2003) (noting that "[consumers and investors not only think that adhesion contracts are generally nonnegotiable, they are correct (practically speaking) in so thinking.").
18. Meyerson, supra note 7, at 600.
19. See id.
20. See Prentice, supra note 10, at 371.
21. Id. at 372.
22. Id.
23. But see Meyerson, supra note 7, at 595 (suggesting that "consumers are well able to determine the subjective value of such purchases and can find a different seller, or forego a particular purchase altogether, if the deal is not perceived to be in their best interest.").
24. Prentice, supra note 10, at 372. Prentice expects that most "form takers" would "likely give up after being told that the agent had no authority to alter [the form contracts], that the forms came from the lawyers and could not be changed, or that an exception could not be made just for this particular investor [consumer]." Id. at 372-73.
25. Id. at 372-73.
26. Colin Camerer et al., Regulation for Conservatives: Behavioral Economics and the Case for "Asymmetric Paternalism", 151 U. PA. L. REV. 1211, 1224 (2003) (describing the "tendency [of individuals] to care much more about errors of commission than about errors of omission, even when there is no obvious normative reason to draw a distinction.");
27. see also Prentice, supra note 10, at 376.
28. Prentice, supra note 10, at 376-7 (citing Russell Korobkin, The Status Quo Bias and Contract Default Rules, 83 CORNELL L. REV. 608 (1998), where Professor Korobkin described experiments demonstrating that law students selected default or alternate contract terms based on whether an affirmative act or choice was required).
29. Prentice, supra note 10, at 358-62;
30. see also Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. MIAMI L. REV. 1263, 1269 (1993) (asserting that "[i]t is no secret that consumers neither read nor understand standard form contracts.").
31. Meyerson, supra note 7, at 595-96.
32. Meyerson, supra note 7, at 605.
33. Bar-Gill, supra note 4, at 1373 ("Absent legal intervention, the sophisticated seller will often exploit the consumer's behavioral biases. The contract itself, commonly designed by the seller, will be shaped around consumers' systematic deviations from perfect rationality This broad theme is developed within a detailed case study of the credit card market and the credit card contract.");
34. see also Meyerson, supra note 7, at 595.
35. See JOINT ECON. COMM., VICIOUS CYCLE: HOW UNFAIR CREDIT CARD PRACTICES ARE SQUEEZING CONSUMERS AND UNDERMINING THE RECOVERY 9 (2009) [hereinafter VICIOUS CYCLE), http://jec.senate.gov/public/?a=Files.Serve&File-id= 42840b23-fed8-447b-a029-e977c0a25544 ("Credit card companies have the incentive to include provisions to increase interest rates on existing balances because the debt held by credit cardholders is not secured by any underlying assets.");
36. see also H.R. 627, The Credit Cardholders' Bill of Rights of 2009: and H. R. 1456, The Consumer Overdraft Protection Fair Practices Act of 2009: Hearing Before the Subcomm. on Fin. Insts. & Consumer Credit of the H. Comm. on Fin. Servs., 111th Cong. 161 (2009) (statement of Travis B. Plunkett, Legislative Dir., Consumer Fed'n of Am.) [hereinafter Plunkett Statement] (noting that "[t]he primary effect of a punitive retroactive rate increase appears to be to escalate the proportion of the consumer's debt owed to the card issuer").
37. See JOSHUA M. FRANK, CTR. FOR RESPONSIBLE LENDING, PRICELESS OR JUST EXPENSIVE? THE USE OF PENALTY RATES IN THE CREDIT CARD INDUSTRY 4 (2008) [hereinafter FRANK], http://www.responsiblelending.org/credit-cards/research- analysis/priceless-or-just-expensive.pdf (noting that critics have asserted that issuers "want their customers to turn into these higher risk borrowers with few options because they can charge higher rates, yet do not need to be concerned about the customer leaving for a competitor");
38. Carolyn Carter et al., The Credit Card Market and Regulation: In Need of Repair, 10 N.C. BANKING INST. 23, 39 (2006) (noting Issuer use of universal default provisions designed to leave "consumers stuck to pay often high balances at interest rates far higher than was originally agreed, with devastating consequences");
39. see also Plunkett Statement, supra note 24, at 162.
40. Plunkett Statement, supra note 24, at 163 ("A consumer who begins with no balance and pays off most but not all of the purchases he or she makes in the first month would still be charged interest for the entire amount of the balance in the second month." (emphasis omitted));
41. Carter et al., supra note 25, at 42 (describing Issuer practices to allocate payments to account balances with the lowest interest rates). Issuers also typically include "ridiculously early" payment cut-off times for crediting payments received on a particular day. Id. at 43.
42. Carter et al., supra note 25, at 42 (describing Issuer practices to raise interest rates "through change-in-terms notices and use penalty fees with punitive late payment and over-limit policies to subsequently entrap consumers.");
43. Plunkett Statement, supra note 24, at 162.
44. Comptroller of the Currency, Administrator of National Banks, Credit Card Practices, OCC Advisory Letter No. AL 2004-10 (Sept. 14, 2004), available at http://www.occ.treas.gov/ftp/advisory/2004-10.doc (cautioning national banks regarding current misleading or poor disclosure practices in credit card marketing and agreements).
45. U.S GOV'T ACCOUNTABILITY OFFICE, CREDIT CARDS: INCREASED COMPLEXITY IN RATES AND FEES HEIGHTENS NEED FOR MORE EFFECTIVE DISCLOSURES TO CONSUMERS 33 (2006) [hereinafter GAO REPORT], available at http://www.gao.gov/new.items/ d06929.pdf.
46. Id. at 37 (consequently concluding that the "disclosure documents provided to many cardholders likely were written at a level too high for the average individual to understand").
47. See Carter et al., supra note 25, (noting weaknesses in disclosures regarding "universal default" credit card agreement provisions);
48. GAO REPORT, supra note 29, at 39.
49. GAO REPORT, supra note 29, at 41, 42-45 (detailing how formatting weaknesses "likely reduce[] the usefulness of typical credit card disclosure documents.").
50. Id. at 46;
51. see also Prentice, supra note 10, at 372 (discussing the effect of the legal appearance of consumer contracts on consumers).
52. GAO REPORT, supra note 29, at 51.
53. Id. at 51-52.
54. Id. at 52. Interestingly, the GAO report does not identify the likely primary reason for inadequate disclosure, namely, the profit incentive of Issuers in the context of standard form contracting.
55. Id. at 46 (quoting an unnamed consumer).
56. Sean Hannon Williams, Sticky Expectations: Responses to Persistent Over-Optimism in Marriage. Employment Contracts, and Credit Card Use, 84 NOTRE DAME L. REV. 733, 780, 786 (2009) (noting that "[m]uch but not all of this [credit card] debt is benign ⋯. Only half of credit card users carry any balance on their credit cards. Among them, few get into deep trouble." (footnote omitted)).
57. see FRANK, supra note 25, at 5 (reporting that, based on survey results, over 10% of all outstanding credit card balances are priced at a "penalty" rate, and that over 50% of Holders being charged penalty rates are unaware of it).
58. Plunkett Statement, supra note 24, at 161 (noting that individuals earning under $50,000 annually were significantly more likely to be charged "penalty" interest rates than higher-income individuals with credit card debt). There also is evidence that certain Issuers have targeted subprime Holders with additional credit card solicitations, even as general economic conditions worsened. Id. at 157,164.
59. Williams, supra note 38, at 741 ("Policymakers need to be especially cognizant of the collateral costs that regulations might impose on the bulk of consumers who do not experience high costs from credit card debt.").
60. See Cass R. Sunstein, Boundedly Rational Borrowing, 73 U. CHI. L. REV. 249 (2006);
61. see also Issacharoff & Delaney, supra note 6, at 167 ("In effect, soft paternalism searches for mechanisms to improve decisionmaking without having the state assume responsibility for all decisions, most typically on a one-size-fits-all basis.")
62. It should be noted that this Article generally does not examine or compare the CARD Act to federal rules promulgated in December 2008 by the Board of Governors of the Federal Reserve System, the Office of Thrift Supervision, Treasury, and National Credit Union Administration.
63. See Unfair or Deceptive Acts or Practices, 74 Fed Reg. 5,498 (Jan. 29,2009) (to be codified at 12 C.F.R. §§ 227, 535, 706) [hereinafter Federal Rules].
64. The CARD Act, supra note 5, § 201(a).
65. Id.
66. These statements assume that no further advances are made. The statements also must include the total cost to the consumer (interest and principal) if only minimum payments were made until the total balance was paid as well as a toll-free telephone number offering access to credit counseling and debt management services.
67. Id.
68. Id. § 101(b).
69. Id.
70. Id.
71. Id. § 101(d).
72. See Part III.E infra.
73. Generally, the CARD Act restricts rate increases during the first year of an account being opened, but a "teaser rate" exception applies. The CARD Act, supra note 5, § 172(a).
74. See, e.g., Williams, supra note 38, at 782 (concluding, based on a recent study regarding the efficacy of providing additional credit card disclosures or warnings, that "most people either did not read, or did not understand, these warnings");
75. Issacharoff & Delaney, supra note 6, at 167 (concluding that disclosure is unlikely to be sufficient to address market manipulation).
76. Prentice, supra note 10, at 362;
77. see also Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: The Problem of Market Manipulation, 74 N. Y. U. L. REV. 630, 657-58 (1999) [hereinafter Hanson & Kysar, Taking Behavioralism Seriously] (concluding that "it seems that the optimistic bias is an indiscriminate and indefatigable cognitive feature, causing individuals to underestimate the extent to which a threat applies to them even when they can recognize the severity it poses to others");
78. Williams, supra note 38, at 783 (asserting that Holders' "nominal control" over credit card use and debt repayment "fosters overconfidence and probably leads at least a subset of credit card consumers to accrue more debt than they originally intended").
79. Williams, supra note 38, at 780 ("Most people who accrue credit card debt are not happy about it. In short, many people regret their choices to incur debt." (footnote omitted)). Williams suggests that Holders may accrue too much credit card debt either because they cannot calculate accurately how quickly the debt will increase over time or because they are unable to accurately predict the amount they will borrow and be able to repay in the future.
80. Id. at 781. Williams concludes that the former explanation suggests that better disclosure of the costs of borrowing will alleviate over-optimism and suggests such disclosures have been ineffective.
81. Id. On the other hand, the explanation regarding the inability of individuals to predict their future borrowing and repayment behavior suggests the existence of "sticky expectations," or an optimism bias that is strongly resistant to change.
82. Id. at 734, 782. If the optimism bias is due to "sticky expectations," then simply providing more factual information is unlikely to be effective since the over-borrowing is not a reaction to errors regarding objective facts. Others have focused on other reasons for over-borrowing.
83. See, e.g., Sunstein, supra note 41, at 251-53 (listing cumulative cost neglect, procrastination, myopia, self-control problems, and "miswanting" as potential explanations for over-borrowing).
84. Bar-Gill, supra note 4, at 1392. ("Despite the fact that most borrowing is done at the high post-promotion rates, consumers appear to be extremely sensitive to teaser rates."). Another manifestation of the optimism bias may be that Holders believe that their credit card agreement (including the teaser rate provisions) contain better terms from the Holders' perspective than they actually do.
85. See Prentice, supra note 10, at 363 (noting that consumers tend to believe "that the terms of their contracts are more favorable to them than they actually are").
86. Prentice, supra note 10, at 363-64.
87. This problem is likely solved by federal rules enacted at the end of 2008 which requires financial institutions to disclose the interest rate that will apply to each category of transactions charged to a credit card account.
88. See Federal Rules, supra note 42.
89. See discussion regarding the weaknesses of current credit card agreement disclosures in Part II, supra.
90. Robin Sidel, Card Firms' Loss Tally: Billions of Dollars in Fees, WALL ST. J., May 25, 2009,atA21.
91. Gray & Peltier, supra note 1 ("The credit card industry doesn't really want you to pay off your debt⋯ . It's like a sweat box. They want you in there as long as possible." (quoting Adam J. Levitin, a law professor at Georgetown University));
92. see also Sidel, supra note 58 (reporting that subprime customers (typically borrowers with credit scores of less than 600) represent almost one third of the portfolios at Bank of America, CitiGroup and Capital One Finance Corp.).
93. Meyerson, supra note 7, at 603.
94. See Hanson & Kysar, Taking Behavioralism Seriously, supra note 52, at 724 (suggesting that, in the product liability context, "it is in the manufacturer's interest for consumers to have the lowest estimate of product risks possible: The lower the consumer's risk estimate, the more consumers will be willing to pay for the product, leading to greater sales and increased profits for manufacturers"). It should be noted that, although others have examined the actions of sellers outside the contract context to determine whether buyer's perceptions of risk are manipulated by sellers, this Article does not generally examine any noncontractual market actions taken by Issuers with respect to Holders and credit card agreements.
95. See, e.g., Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: Some Evidence of Market Manipulation, 112 HARV. L. REV. 1420 (1999) [hereinafter Hanson & Kysar, Some Evidence of Market Manipulation] (describing the manipulation of consumer cognitive biases by market sellers to lower consumer perceptions of product risk). One would expect, however, that many of the same concerns identified by Hanson and Kysar would be raised in this context, especially given that the risks of additional borrowing costs (such as higher interest rates or penalty fees) are beneficial to Issuers (as opposed to the product liability context, where the seller is merely able to externalize the cost of injury by shifting the risk to the consumer). Similarly, one would expect the advertising and marketing practices of credit card companies to manipulate consumer perceptions (e.g., the "No-Hassle Card") to reinforce the "status quo" of credit card agreements.
96. Of course, there are other risks to be allocated, such as fee-shifting provisions in the event of dispute, and businesses are similarly incentivized in that situation to "impose hidden risks on consumers where possible." Hillman & Rachlinski, supra note 7, at 440.
97. Meyerson, supra note 7, at 603.
98. Id. at 607.
99. Similarly, it has been argued that competitive pressures force Issuers to interest rates and other "long-term, borrowing-contingent elements of the credit card price" above the marginal cost and price below marginal cost with respect to "short-term, non-contingent elements (such as teaser rates), because consumers underestimate the risk and costs of future borrowing." Bar-Gill, supra note 4, at 1376 ("Issuers that do not take advantage of the underestimation bias, and offer lower interest rates instead of short-term perks, would not succeed in the marketplace.").
100. Meyerson, supra note 7, at 608.
101. In a similar vein, the lack of compensation to Issuers to provide better "boilerplate" terms in credit card agreements may result in such Issuers reducing the "quality" of their agreements to avoid losing potential customers to other Issuers.
102. See Eisenberg, supra note 3, at 244 (suggesting that "[i]f, as a result of imperfect information, the market price of a product is low because of the product's perceived low quality, high-quality producers must lower quality to ensure that they will turn a profit at the low market price. As applied to form contracts, this means that competition may actually degrade preprinted terms that involve nonsalient risks.").
103. See Sunstein, supra note 41, at 260-61 (noting that "[i]f borrowers are both myopic and excessively optimistic, there is a serious risk that purely informational responses will do little or nothing").
104. The CARD Act, supra note 5, § 101(a)(1)(i)(1)-(2).
105. Id. § 101(a)(1)(i)(3).
106. Id. § 101(a)(1)(i)(4).
107. See discussion of approved repayment methods in Part III.D, infra.
108. See Part III. D, infra.
109. See FRANK, supra note 25, at 8;
110. see also Hillman & Rachlinski, supra note 7, at 453 (providing evidence that people male "inferences consistent with what they want to believe" and therefore interpret a form contract as containing more favorable terms that may otherwise exist because the consumer's motivation to consummate the transaction).
111. For example, Holders may prefer not to act as a result of their preference for inaction rather than action.
112. FRANK, supra note 25, at 8 (Issuers' ability to modify interest rates to penalty rates "strategically raises the prices on consumers precisely when they are least able to switch to a lower rate competitor.").
113. The CARD Act, supra note 5, § 102(a). The CARD Act also restricts how often "over-thelimit" fees can be imposed.
114. Id.
115. Id.
116. Id.
117. Id.
118. Id.
119. See discussion of optimism bias in Part III. A, supra.
120. See discussion of quantity effect in Part III. A, supra.
121. The CARD Act, supra note 5, § 102(b).
122. See Bar-Gill, supra note 4, at 1394 ("The high fees that issuers charge for late payments and for exceeding the credit limit have no basis in the extra cost to issuers⋯ even accounting for the potentially heightened risk of accommodating a consumer who failed to pay on time or remain within the specified credit line. This disparity between price and cost is especially striking when the late and over-limit fees are set at fixed dollar amounts, irrespective of the tardiness of the payment or the magnitude of the deviation from the credit limit.").
123. See discussion in Part II, supra.
124. The CARD Act, supra note 5, § 101(a).
125. VICIOUS CYCLE, supra note 24, at 2;
126. see also Plunkett Statement, supra note 24, at 165. It also has been suggested that changing to penalty rates is useful to motivate borrowers more responsibly.
127. See FRANK, supra note 25, at 8 (citing American Bankers Association study).
128. This contention is also contradicted by empirical data. FRANK, supra note 25, at 11 (concluding that empirical data suggests that Issuer practices with respect to imposing penalty interest rates more resembles "excuse-based pricing" in that "issuers try to find excuses to increase rates as much as possible rather than making a legitimate attempt to correlate rate with risk.").
129. Id. at 12 ("Both the card holders and card issuers would benefit from responsible underwriting in the beginning, and the integrity of a competitive market would be enhanced by transparent, and real price information when consumers first choose a card.").
130. The CARD Act, supra note 5, § 101(a).
131. See Jeffrey J. Rachlinski, The Uncertain Psychological Case for Paternalism, 97 Nw. U. L, REV. 1165, 1225 (2003) ("Paternalistic constraints on choice cannot be justified with psychology absent a showing that the costs of privately developing better ways to make choices are greater than the costs of restricting individual choice.").
132. See FRANK, supra note 25, at 7-8 (suggesting that current Issuer disclosure regarding the potential for penalty interest rates are designed based on Holders' inattention to such disclosures and "plays into known behavioral biases such as excessive optimism");
133. see also Prentice, supra note 10, at 362-63.
134. Williams, supra note 38, at 788.
135. The CARD Act also sets forth a number of restrictions with respect to issuances of credit cards to individuals under the age of twenty-one, including requiring either a co-signer on the account or submission of financial information evidencing ability to repay before issuing a card and also requiring institutions of higher education to publicly disclose any agreement with a financial institution for credit card marketing purposes. The CARD Act, supra note 5, § 301-305. A complete analysis of these restrictions is beyond the scope of this Article, but the author wonders whether any of the justifications for the protections for underage individuals would also justify additional protections for overage individuals.
136. See, e. g., Meyerson, supra note 7, at 610 (arguing that the law should protect the consumer class interests because consumers are unable to evaluate accurately the standard form contract terms similar to the way in which the law differentiates between contracts with adults and contracts with minors);
137. see also Williams, supra note 38, at 743 (finding that college students and Americans in general exist similar tendencies with respect to exhibiting an optimism bias). In addition, the use of credit cards does not necessarily result in more "risky" behavior by underage individuals. See Karen Blumenthal, Teaching Kids About Money The Hard Way, WALL ST. J., July 15, 2009, at D1.
138. The CARD Act, supra note 5, § 104. Similarly, if the payment due date falls on a weekend or holiday, then the Issuer may not treat a payment received on the next business day as late.
139. Id. § 106(a).
140. Id. § 104.
141. Id. § 102(a).
142. See generally Hanson & Kysar, Some Evidence of Market Manipulation, supra note 61;
143. Jon D. Hanson & Douglas A. Kysar, Taking Behavioralism Seriously: A Response to Market Manipulation, 6 ROGER WILLIAMS U. L. REV. 259 (2000).
144. Sidel, supra note 58.
145. Angela Littwin, Testing the Substitution Hypothesis: Would Credit Card Regulations Force Low-Income Borrowers Into Less Desirable Lending Alternatives?, 2009 U. ILL. L. REV. 403, 453 (2009) ("A regulation that increased the transparency of credit card practices and caused issuers to seek the lost revenue elsewhere would still leave them considerable room to increase interest rates without triggering substitution away from their products.").
146. The CARD Act, supra note 5, § 107.
147. Id. § 204(a). Individually negotiated changes to agreements are not required to be disclosed.
148. Id.
149. Id. § 502(a).
150. Id. § 502(b).
151. Id. § 502(c)-(d). If the Board determines that no changes are needed, it must disclose the reason for its determination.
152. Id. § 502(c).
153. Id.% 502(e).
154. Although beyond the scope of this Article, it is possible that the posting requirement for credit card agreements could assist not only in enforcing credit card laws and rules (by both providing the public with relevant information) but also act as a "shaming sanction" where Issuers with agreements that violate the laws are identified or otherwise have their agreements corrected (publicly) on the same website.
155. See, e. g., Joshua D. Blank, What's Wrong With Shaming Corporate Tax Abuse, 62 TAX L. REV. 539 (2009) (discussing the arguments for and against imposing "shaming sanctions" on corporations that violate tax laws).
156. Of course, to the extent that the exact structure of such notice is required by rules of the Board, then this concern may be alleviated. Regardless, it would be preferable for the public to be able to review and verify the form and presentation of such notices.
157. See, e. g., Feds Take Overdue First Step To Curb Credit Card Business, USA TODAY, May 6, 2008, at A10 (noting that "[o]ne major obstacle [to the promulgation of final rules] is the regulators' own tendency to debate and delay");
158. see also Keith N. Hylton, When Should We Prefer Tort Law to Environmental Regulation?, 41 WASHBURN L. J. 515, 520 (2002) (noting the general disconnect between regulatory agencies and protected citizens).
159. Cass R. Sunstein, Paradoxes of the Regulatory State, 57 U. CHI. L. REV. 407,425 (1990).
160. See Williams & Bylsma, supra note 1, at 874 (expressing concern about using fixed rules that do not have the flexibility "so that disclosure requirements will not be outpaced by rapidly evolving market practices."). Williams and Bylsma also raise the concern that the "piecemeal" process of promulgating rules in response to particular concerns will "lead to rules that over time highlight terms and conditions that are no longer most relevant to a consumer in shopping for credit, result in unwieldy disclosure statements, and impose unjustifiable costs on creditors relative to the consumer benefits."
161. Id.
162. Consequently, this Article proposed permitting the evolving common law to address concerns about the adequacy of disclosure.
163. See Part IV. B, infra.
164. Carter et at., supra note 25, at 45 ("The use of arbitration provisions in credit card agreements has been a tremendous barrier for consumers seeking redress.").
165. Issacharoff & Delaney, supra note 6, at 173.
166. Id at 176.
167. See Linda J. Demaine & Deborah R. Hensler, "Volunteering" to Arbitrate though Predispute Arbitration Clauses: The Average Consumer's Experience, 67 LAW & CONTEMP. PROBS. 55, 73 (2004) (indicating that "this study provides little basis for believing that consumers are making informed decisions when they 'agree' to arbitrate");
168. see also Issacharoff & Delaney, supra note 6, at 173 (noting that "there is every reason to believe" that Holders will not act upon disclosure of an arbitration clause).
169. Jean R. Stemlight, Creeping Mandatory Arbitration: Is it Just?, 57 STAN. L. REV. 1631, 1649(2005).
170. Id.
171. (also noting that "psychologists have shown that people are risk-seeking with respect to certain prospective losses. Given the motivation for profit maximization, it seems inevitable that, absent regulation, companies will seek to take advantage of consumers' irrational behavior by manipulating arbitration clauses." (footnote omitted));
172. see also Michael I. Meyerson, The Reunification of Contract Law: The Objective Theory of Consumer Form Contracts, 47 U. MIAMI L. REV. 1263, 1301 (1993) (suggesting that "[c]ourts and sellers should realize that consumers do not knowingly assent to terms that effectively discard their legal rights," because they "rarely consider even the possibility of a subsequent legal action").
173. JOHN O'DONNELL, PUBLIC CITIZEN, THE ARBITRATION TRAP: HOW CREDIT CARD COMPANIES ENSNARE CONSUMERS 8 (2007) ("Unlike judges, arbitrators are paid only when they are assigned cases by arbitration companies.");
174. Carter et at., supra note 25, at 46 (noting that arbitration proceedings are "often conducted by arbitration providers that are amazingly biased against consumers.").
175. Stemlight, supra note 117, at 1650 (noting how arbitration providers compete to provide dispute services for companies that require their customers to sign contracts with arbitration provisions).
176. See Paul D. Carrington, Self-Deregulation, The "National Policy" of the Supreme Court, 3 NEV. L. J. 259, 285 (2003) (noting that "many predispute arbitration agreements, as they are written, load the dice
177. See O'DONNELL, supra note 119, at 7.
178. Cairington, supra note 121, at 283;
179. see also Sternlight, supra note 117, at 1649.
180. See Carrington, supra note 121, at 283 ("It is clear that [arbitration's secrecy] is one of its attractions to predatory business because it diminishes the likelihood that the success of one claim by a consumer or employee will encourage others like it.").
181. See generally Issacharoff & Delaney, supra note 6 (examining the prohibition on collective actions as a result of mandatory individual arbitration clauses in various contexts).
182. Issacharoff & Delaney, supra note 6, at 158 (noting that in "all markets characterized by large sellers and relatively atomized consumers, there is the risk of improper practices that impose small, almost inconsequential costs on individuals but yield significant returns in the aggregate.")
183. See Sternlight, supra note 117, at 1655 (noting that a particular Issuer filed over 50,000 arbitration claims against Holders during a two-year period as opposed to four claims made by Holders against the Issuer).
184. Robin Sidel & Amol Sharma, Credit-Card Disputes Tossed into Disarray, Wall St. J., July 22, 2009, at Al (reporting that The American Arbitration Association and The National Arbitration Forum would cease resolving credit card debt disputes).
185. Id.
186. Meyerson, supra note 7, at 610;
187. see also Williams, supra note 38, at 789 ("If consumers systematically underestimate their borrowing and overestimate their ability to repay, and debiasing is not a realistic option, policymakers should explore insulation strategies that decrease the costs of these erroneous expectations" and "impose little or no burden on most credit card consumers.").
188. A default rule "is both libertarian and paternalistic if it retains freedom of choice while also leading people to make decisions that will improve their well-being." Sunstein, supra note 41, at 256;
189. see also Bar-Gill, supra note 4, at 1421 ("Individuals tend to make fewer mistakes when a decision involves higher costs. It is rational to invest more (e. g., in improving one's understanding of the future implications of a contract), when there is a cost associated with signing the contract [such as reading the disclosure and affirmatively opting in].").
190. See Williams, supra note 38, at 783.
191. See VICIOUS CYCLE, supra note 24, at 5 (noting how Issuers "share the risk" of Holder default by increasing the interest rates on other cardholders, including in situations (such as a recession) where it is difficult for credit cardholders to obtain an alternative lower interest rate credit card);
192. see also Lazarus, supra note 1 (criticizing Issuers' "decidedly shortsighted approach to punish those customers who still pay their bills [by increasing their interest rates] and haven't shown themselves to represent any greater risk" during a downturn in the economy.).
193. Sidel, supra note 58, at A21 ("Industry executives say that credit is likely to become less available, particularly to risky borrowers, and more fees likely will be loaded into the front end of the account, rather than being assessed after a customer falls behind on payments.");
194. see also Joseph William Singer, Normative Methods for Lawyers, 56 UCLA L. REV 899, 974 (2009) (describing generally the argument that "adverse consequences of regulation could overwhelm any benefits sought by imposing minimum standards on the contractual relationship").
195. See also Meyerson, supra note 7, at 622-23 (suggesting that "enforcing all standard contract terms as drafted merely to lower sales prices for poor consumers falls into the category of paternalism: a nonefficient regimen whose sole justification is the protection of the welfare of certain individuals," as opposed to a regimen that "reduces information costs and decreases the likelihood of one party's unknowing assumption of risk, [which] is easily justified on nonpatemalistic, economic grounds.").
196. In fact, it has been suggested that, rather than a required opt-in, Issuers would be required to permit other lenders to "bid" on the existing credit card account if the current Issuer desired to modify unilaterally a term of the provision. Holders could then either stick with the existing Issuer (with the modified contract term) or switch to a new Issuer.
197. See Ian Ayres & Barry Nalebuff, A Market Test for Credit Cards, FORBES, July 13, 2009, available at http://www.forbes.com/forbes/2009/0713/ opinions-market-credit-cards-why-not.html. Such a "market test" is not necessarily incompatible with an opt-in mechanism as an additional feature.
198. See Ryan Bubb & Alex Kaufman, A Fairer Credit Card? Priceless, N.Y. TIMES, June 23, 2009, at A25 (concluding, based on a comparison of credit cards issued by banks (owned by shareholders) to those issued by credit unions (owned by customers), that the lending model used by credit unions would be feasible for banks, even though credit card unions typically charged lower fees and were less likely to charge penalty or late fees).
199. Williams, supra note 38, at 790 ("The main pattern that emerges is that debiasing is unlikely to correct above-average effects and errors that people make when they are predicting their likelihood of suffering some future negative event," such as being unable to pay accrued debt at the nonteaser rate);
200. see also Bar-Gill, supra note 4, at 1378, 1418 ("If a consumer believes that she will not borrow on her card, she will not mind the high interest rate, no matter how large the font⋯. Knowledge of credit terms is meaningless if the consumer mistakenly believes that she will not borrow.").
201. See Sunstein, supra note 41, at 268 (suggesting that outright prohibitions may be appropriate with respect to certain credit card practices such as teaser rates).
202. Bar-Gill, supra note 4, at 1418 (suggesting that disclosure to Holders regarding their anticipated or predicted borrowing behavior must address the over-optimism effect to be effective);
203. see also Sunstein, supra note 41, at 258 (suggesting that over-optimism could be addressed by "vivid narratives of possible harm" involved with over-borrowing, which would be intended to permit Holders to appreciate better the future costs of borrowing).
204. See Sunstein, supra note 41, at 254-55 (discussing generally the arguments against "strong paternalism").
205. Williams, supra note 38, at 790.
206. See Camerer et a!., supra note 18, at 1253 (advising caution when determining whether "patterns of apparently irrational behavior are mistakes or expressions of stable preference."). Camerer et al. highlight the popularity of extended warranties and discuss how the profitability for retailers from warranties may lead to the inference that buyers are "overpurchasing" them. The author concluded that fully informed purchasers may realize actual benefits from such purchases, which may lead to policy recommendations for increased disclosure rather than prohibitions.
207. Id.
208. Similarly, from an efficiency standpoint, mistakes are not relevant, either. Meyerson, supra note 7, at 614 (asserting that "[s]ince efficiency is only concerned with informed risk taking, not with whether a given gamble pays off, the consumer should have no valid complaint if she knowingly elects to take a chance that she will be unable to pay all her debt, and thereafter defaults.").
209. See Sunstein, supra note 41, at 253-54 (noting that "for particular people, it is difficult to know whether a particular level of borrowing is optimal⋯. In addition, what seems to be bounded rationality may simply involve idiosyncratic tastes.");
210. see also Camerer et al., supra note 18, at 1218 ("In a sense, behavioral economics extends the paternalistically protected category of 'idiots' to include most people, at predictable times.").
211. Williams, supra note 38, at 785 (suggesting that the link between credit card debt and bankruptcy indicates that Holders incur more debt than they actually desire).
212. Id at 785-86 (footnote omitted).
213. See Jon Hanson & David Yosifon, The Situation: An Introduction to the Situational Character, Critical Realism, Power Economics, and Deep Capture, 152 U. PA. L. REV. 129, 302 (2003) ("Making someone liable for outcomes over which she wielded comparatively little dispositional control and where her situation is relatively controlling would be unjust, unfair, or inefficient, depending on the theoretical focus.").
214. Littwin, supra note 101, at 426, 454 (concluding that "credit cards are actually among lowincome consumers' least-preferred sources of credit, meaning that there is no 'worse' alternative to which they would turn if credit card access were reduced," and noting that "credit cards, in and of themselves, may stimulate spending").
215. See Meyerson, supra note 7, at 610;
216. see also Hillman & Rachlinski, supra note 7, at 460 (explaining that, in some contexts, "the doctrine of reasonable expectations thus creates an affirmative duty on the part of the business to point out and explain reasonably unexpected terms even if they clearly were stated in the contract"). This Article, as will be seen, proposes that, rather than determining which provisions are "reasonably unexpected," there would be a presumption of unexpected terms with respect to the entire credit card agreement, which would induce the desired information-sharing behavior by Issuers. The prevailing theory of "blanket assent," which suggests that reasonable (both in presentation and substance) standard form contracts should be enforced, even though most consumers do not read them, would be set aside and remove the "difficult task of drawing a line between permissible and impermissible pressure and terms."
217. Id at 462. Instead, courts would review the adequacy of disclosure and leave it to sellers to determine what "unreasonable terms" to include and to seek the most effective method of disclosure.
218. See also Eisenberg, supra note 3, at 246-48 (arguing that the "law is properly moving toward basing the enforceability of preprinted terms, as well as the role of such terms in contract formation, purely on the limits of cognition, rather than on unfairness").
219. Meyerson, supra note 7, at 610-11 (arguing that "because the seller is better able to control the conveying of information, sellers who give incorrect or misleading information to consumers should be held liable for the error"). Requiring a different standard for information disclosure is an example of an "asymmetrically paternalistic" technique, which is designed to have large benefits on those individuals who may be influenced by behavioral biases (such as the optimism bias) versus those who are not so biased. Camerer et al., supra note 18, at 1212. Shifting the presumption of enforceability regarding disclosure (with respect to unfavorable changes in terms) should impose very little costs on unbiased Holders (because such unbiased Holders probably already understand or are unaffected adversely by the disclosures), while at the same time providing a significant benefit to biased Holders that might otherwise discount the possibility (versus the certainty) of an unfavorable term being imposed.
220. Meyerson, supra note 7, at 611.
221. Id.
222. Id.
223. See Bar-Gill, supra note 4, at 1377, 1416 (suggesting that "[i]f a contracting party misconceives the future consequences of the contract, then the normative power of contractual consent is significantly weakened⋯. Freedom of contract may thus prevent, rather than promote, the fulfillment of the consumer's true ex ante preferences.");
224. see also Meyerson, supra note 7, at 611-13. Meyerson suggests that consumers give explicit consent only to central terms, such a price, in the standard form contract, and as a result, this presumption should be reserved for subordinate clauses. In the credit card agreement context, however, given the uncertainty of most credit card holders of their interest rate, it is not clear why this presumption should not be extended to the interest rate (the price) as well.
225. Meyerson, supra note 7, at 612-13 (noting that "[m]erely using a contract with plain language and without fine print is not sufficient, even though such a contract would somewhat decrease the consumer's information costs.")
226. Note that enforcing a particular contract for the benefit of the Holder does not suggest that Holder would be entitled to any provision beyond her reasonable expectations. Thus, although the credit card agreement may not be enforced to the detriment of the Holder beyond her reasonable comprehension, neither will it be interpreted to Holder's benefit beyond Holder's reasonable expectations.
227. Meyerson, supra note 7, at 613 (suggesting that it would be "hard to imagine" a court not enforcing a term if the significance of the terms was explained orally to the consumer).
228. See Sunstein, supra note 41, at 255 ("One of the advantages of weak paternalism [such as shifting default rules] is that it may be technology-forcing, in the sense that it can spur innovations that respond to individual needs in ways that government may be unable to imagine.").
229. See, e. g., Anne Erikson Haffher, The Increasing Necessity of the Tort System In Effective Drug Regulation in a Changing Regulatory Landscape, 9 J. HEALTH CARE. L. & POL'Y 365, 398 (2006) (noting that "[u]nder the common law tort system, pharmaceutical companies are encouraged to go beyond the minimal safety and warning requirements of the FDA because regulatory compliance does not presume satisfaction of the standard of care"). In the lending context, lenders are insulated from civil liability for any act in good faith that conforms to any Federal Reserve System interpretation. 15 U. S. C. § 1640 (2006).
230. See Meyerson, supra note 7, at 612-13.
231. Id. at 617.
232. See Prentice, supra note 10, at 372.
233. See Hanson & Kysar, Some Evidence of Market Manipulation, supra note 61, at 1565 (suggesting that forcing manufacturers to bear the risk of all product liability costs may alter consumer perceptions of product warnings as the "handiwork of overly cautious manufacturer attorneys" and instead provide consumers with "incentives to read, comprehend, and follow them.").
234. See Jeffrey J. Rachlinski, Rulemaking Versus Adjudication: A Psychological Perspective, 32 FLA. ST. U. L. REV. 529,545-46 (2005) ("[T]he rulemaking approach seems to have a perspective that is better suited to managing social and economic interactions. Adjudicative bodies are apt to be persuaded by misleading signals from individual cases' emotional content, unable to see how the resolution of the disputes before them fits into a broader scale, and focus excessively on individual conduct rather than social forces.").
235. Meyerson, supra note 7, at 621.
236. Id. at 622 (noting that after a court decision was announced, "it is available to guide future contracting parties and reduce contract transaction costs").
237. See Part Ul. E, supra.
238. Issacharoff & Delaney, supra note 6, at 167 (explaining that "soft paternalism searches for mechanisms to improve decisionmaking without having the state assume responsibility for all decisions.").
239. Id. at 169 (noting that "[potential legal representatives armed with doctrines such as unconscionability may well provide sufficient smoothing in a market characterized by asymmetric bargaining power and access to information.");
240. see also Hillman & Rachlinski, supra note 7, at 463 (arguing that "[w]hen the courts find reason to believe that market forces have failed to discipline businesses, they intervene to protect consumers.").
241. See Jane J. Kim, What Consumers Can Expect As Arbitration Firms Back Away, WALL ST. J., July 22, 2009, at A2 (reporting that President Obama's proposed Consumer Financial Protection Agency would have the authority to ban or restrict mandatory arbitration clauses in consumer financial-services contracts).
242. But see Bar-Gill, supra note 4, at 1423 ("Given the institutional constraints on common law adjudication, it may well be better to leave the regulation of credit card contracts to legislatures and administrative agencies."). Rather than focusing on the substantive unfairness of the agreement, such as doctrines of unconscionability or the penalty doctrine, however, this Article suggests that courts could focus on the substantive fairness of the disclosure.
243. Issacharoff & Delaney, supra note 6, at 177;
244. see also Jean R. Sternlight & Elizabeth J. Jensen, Using Arbitration to Eliminate Consumer Class Actions: Efficient Business Practice or Unconscionable Abuse, 67 L. & CONTEMP. PROBS. 75, 85 (2004).
245. See Sternlight & Jensen, supra note 171, at 82-83 (explaining the State ex. rel. Dunlap v. Berger, 567 S. E. 2d 265 (W. Va. 2002), decision in light of the court's emphasis on the class action tool as an effective remedy);
246. see also Joshua D. Blank & Eric A. Zacks, Dismissing the Class: A Practice Approach to the Class Action Restriction on the Legal Services Corporation, 110 PENN ST. L. REV. 1, 10-14 (2005) (discussing generally the legal and social benefits of the class action as a device to serve poor or marginalized individuals). Although this Article focuses on the ability of the class action device to provide legal redress for poor litigations, many of the same principles apply in the context of credit card holders who are unaware of the significance of the provisions of their credit card agreement, especially given the number of credit card holders in a difficult socioeconomic position.
247. See, e.g., Blank & Zacks, supra note 172, at 12 (describing how a class action lawsuit protected Medicare recipients who had been, without their knowledge, denied services or entitlements);
248. Sternlight & Jensen, supra note 171, at 89 (noting that "one of the virtues of the class action is that it requires that putative class members be notified of the potential violation of their rights").
249. See Blank & Zacks, supra note 172, at 13 (suggesting that "class action lawsuits draw public attention to issues that are unique to the poor community.");
250. Sternlight & Jensen, supra note 171, at 90, 92 (noting that many important remedies only can be provided on a group-wide basis rather than through individual claims or through government enforcement actions).
251. See Blank & Zacks, supra note 172, at 12 (arguing that "[c]lass action lawsuits also eliminate power imbalances by allowing a class of underrepresented people with similar claims to attract more effectively the attention of a powerful defendant.");
252. see also Marie A. Failinger & Larry May, Litigating Against Poverty: Legal Services and Group Representation, 45 OHIO ST. L. J. 1,17 (1984) (noting that an individual suit cannot "restore the political balance of power between the institution and the individual. By contrast, the class suit can secure relief for the client that is not only longer-lasting but also broader-based.").
253. See generally Marc Galanter, Why the "Haves " Come Out Ahead: Speculations on the Limits of Legal Change, 9 LAW & SOC'Y REV. 95 (1974) (suggesting that class action lawsuits address some of the disadvantages faced by poor plaintiffs).
254. See Blank & Zacks, supra note 172, at 13 (suggesting that " [t]he class action lawsuit⋯ can be viewed as a tool that requires potential defendants to internalize the costs of socially injurious policies").
255. At least one court has taken some steps towards this approach. In Discover Bank v. Superior Court, 113 P. 3d 1100 (Cal. 2005), the court concluded that class action waivers were unenforceable when the waiver was obtained though "passive disclosure" (a "bill stuffer") and to the extent that such waivers "operate effectively as exculpatory contract clauses."
256. Id. at 1008;
257. see also Issacharoff & Delaney, supra note 6, at 182 (discussing the "soft paternalism" approach that would permit waivers of class action so long as "the scope of conscionability" was not exceeded by Issuer practices