Showing papers in "Boston College Journal of Law and Social Justice in 2017"

Quantifying the Tightness of Mortgage Credit and Assessing Policy Actions

Abstract: INTRODUCTIONMortgage credit has become very tight in the aftermath of the financial crisis Although experts generally agree that it is poor public policy to make loans to borrowers who cannot make their payments, failing to make mortgages to those who can make their payments has an opportunity cost, because historically homeownership has been the best way to build wealth And, default is not binary: very few borrowers will default under all circumstances, and very few borrowers will never default The decision where to draw the line-which mortgages to make-comes down to what probability of default we as a society are prepared to tolerateThis Article first quantifies the tightness of mortgage credit in historical perspective It then discusses one consequence of tight credit: fewer mortgage loans are being made The Article then evaluates the policy actions to loosen the credit box taken by the government-sponsored enterprises (GSEs) and their regulator, the Federal Housing Finance Agency (FHFA), as well as the policy actions taken by the Federal Housing Administration (FHA), arguing that the GSEs have been much more successful than the FHA The Article concludes with the argument that if we don't solve mortgage credit availability issues, we will have a much lower per© centage of homeowners because a larger share of potential new homebuyers will likely be Hispanic or nonwhite-groups that have historically had lower incomes, less wealth, and lower credit scores than whites Because homeownership has traditionally been the best way for households to build wealth, the inability of these new potential homeowners to buy could increase economic inequality between whites and nonwhitesI QUANTIFYING THE TIGHTNESS OF MORTGAGE CREDITBefore we can discuss whether mortgage credit is tight or loose, we must be able to measure it objectively Many researchers have looked at the Federal Reserve Senior Loan Officer Opinion Survey,1 while others use the mortgage denial rate as measured by Home Mortgage Disclosure Act (HMDA) data Neither source seems very useful for our purposes The Federal Reserve survey failed to pick up the loosening of credit in 2000 to 2007, although it did pick up recent tightening (Figure 1a) The denial rate using HMDA data is even less useful; it was highest in 2007, suggesting credit was tightest then, when we know that was when it was loosest (Figure 1b) Denial rates confuse supply and demand Although the supply of mortgage credit was very robust in 2007, the demand from marginal borrowers was even greater, leading to a high denial rate in the face of loose creditWe can look directly at the mortgages originated at any point in time to quantify the tightness of mortgage credit However, many different dimensions make up credit risk The most important dimensions include the loanto-value (LTV) ratio, debt-to-income (DTI) ratio, credit score (FICO is the measure traditionally used for mortgages), and whether the mortgage is a traditional product (fixed-rate mortgage with a term of 30 or fewer years, or an adjustable-rate mortgage with more than 5 years to the reset) or a nontraditional product (interest-only loan, loan with negative amortization, 40year mortgage, or hybrid adjustable-rate loan with a short fixed-rate period where the payment is initially low and rises considerably over the life of the mortgage) In 2016, mortgage credit looked very tight when measured by FICO scores and percentage of nontraditional products; it looked much looser when measured by LTV ratios and about average when measured by DTI ratios (Figure 2)So which measure should we be relying on? Li and Goodman (2014, 8-18) constructed a Housing Credit Availability Index (HCAI) that is updated quarterly2 The HCAI measures the ex ante credit risk of the mortgages originated in any given quarter-more precisely, it measures the likelihood that those mortgages ever default, which is defined as ever going 90 or more days delinquent …

Why Cyclicality Matters to Access to Mortgage Credit

Abstract: Virtually no attention has been paid to the problem of cyclicality in debates over access to mortgage credit, despite its importance as a driver of tight credit. Housing markets are prone to booms accompanied by bubbles in mortgage credit in which lenders cut underwriting standards, leading to elevated loan defaults. During downturns, these cycles artificially impede access to mortgage credit for underserved communities. During upswings, these cycles make homeownership unnecessarily precarious for many who attain it. This volatility exacerbates wealth and income disparities by ethnicity and race.The boom-bust cycle must be addressed in order to assure healthy and sustainable access to credit for creditworthy borrowers. While the inherent cyclicality of the housing finance market cannot be fully eliminated, it can be mitigated to some extent. Mitigation is possible because housing market cycles are financed by and fueled by debt. Policymakers have begun to develop a suite of countercyclical tools to help iron out the peaks and troughs of the residential mortgage market. In this article, we discuss why access to credit is intrinsically linked to cyclicality and canvass possible techniques to modulate the extremes in those cycles.

Waiting for Homeownership: Assessing the Future of Homeownership

Abstract: The decade-long decline in the homeownership rate in the United States has generated substantial discussion over its future path. In the face of continued uncertainty, this Article seeks to assess what we know and do not know about the sources of the decline and the likely trajectory of the homeownership rate in coming years. The analyses use the Annual Social and Economic Supplement (ASEC) of the Current Population Survey for 1985 to 2015 to examine the determinants of changes in the homeownership rate, using shift-share analyses to measure the extent to which changing demographics explain the observed changes. The results show that demographic trends—aging of the population, increasing racial/ethnic diversity, delayed marriage and childbirth, and related factors—explain only a small portion of the housing market’s boom and bust. Instead, the homeownership rate’s rise and fall have been due to broader changes in the economy, credit conditions, and housing markets. This Article then presents homeownership projections for 2015 to 2035, describing three scenarios that define a range of homeownership outcomes. The low and high scenarios presented in this Article produce a range for the national homeownership rate of 60.7% to 64.8% by 2035. The analyses describe the implications of each scenario for growth in the number of homeowner households, as well as the distributional implications of lower versus higher homeownership rates for homeownership outcomes by age, race/ethnicity, and family type.

ONE Mortgage: A Model of Success for Low-Income Homeownership

Abstract: INTRODUCTIONIn 1968, elected officials and bankers in Boston designed a mortgage program in the wake of the urban rioting that followed the assassination of Reverend Martin Luther King It was called Boston Banks Urban Renewal Group, or B-BURG, and the legacy of that program is one of foreclosure, redlining, and blockbusting "Drive-by" home inspections, 100% govern ment guarantees, lack of community input, and no down payments were just some of the problems that plagued the program from the outset and led to record foreclosure rates in just a few years, as detailed in the book The Death of an American Jewish Community: A Tragedy of Good Intentions (Levine & Harmon 1992)Some twenty years later, most banks had become wary of inner-city mortgage lending and had largely stayed away from engaging in Boston's communities of color Mortgage lending suffered and bank branches were closed in the communities that needed them most (Dreier 1991, 18-19) Eventually, a 1989 study by the Federal Reserve Bank of Boston was leaked to the press, and found a pattern of racial bias in Boston's mortgage lending over the intervening period that could not be explained by income, credit history, or other legitimate loan underwriting factors (Munnell et al 1992, 50-51)In response to public outcry and a community-led campaign about the Federal Reserve study, representatives from the Massachusetts Housing Partnership (MHP), the Massachusetts Bankers Association, the Commonwealth of Massachusetts, the City of Boston, the Massachusetts Affordable Housing Alliance (MAHA), and other community advocacy groups began meeting to find common ground and potential solutions This working group, informed by regular feedback from potential first-time homebuyers, focused on designing a mortgage product that would promote responsible new underwriting standards for inner-city properties It sought to address common barriers to low-income, first-time homeownership, particularly high minimum down payments and costly private mortgage insuranceThe process resulted in the SoftSecond Loan Program, a collaborative program between the banking industry and state government SoftSecond was initially launched as a pilot program in Boston in 1991 and expanded statewide in 1992 to ensure that mortgage lending would be available on reasonable terms to traditionally underserved borrowers and neighborhoods The program operated with few changes through 2013 when MHP launched SoftSecond's successor, the ONE Mortgage program ONE Mortgage maintained the same features that made SoftSecond so affordable, discussed in detail in Sections II and III below, and simplified the structure of the loan, enabling more lenders to participateSince the program's inception, it has served over 5,000 first-time homebuyers in the City of Boston and nearly 20,000 first-time homebuyers statewide Two-thirds of the loans in Boston support home purchases by households of color, and half of the loans statewide support households of color The program is administered by MHP, which oversees loan origination by participating lenders, and support services are delivered by homebuyer education and counseling partner agenciesThe program also has two other "owners"-the lenders themselves who originate, hold, and, in most cases, service the loans, and the community organizations, led by MAHA and its Homeownership Action Network, which work to encourage lender participation and increase the impact of the program across the state This unique buy-in from three sectors-public, private and non-profit-contributes to the staying power of the program There is no other multi-bank affordable mortgage lending program with the scale and duration of the ONE Mortgage Program anywhere else in the countryI LENDER PARTICIPATION AND LOAN PROCESSINGUnder the Community Reinvestment Act (CRA) and its Massachusetts counterpart, banks have an obligation to reinvest in the communities where they do business …

The Housing Market Cannot Fully Recover Without a Robust Rental Policy

Abstract: There is no one explanation for why access to mortgage credit remains so tight this far into the housing recovery, nor is there a consensus on why our national homeownership rate has fallen to a fifty-year low, but one thing is clear: the homeownership and rental markets are two sides of the same coin. As such, policymakers must understand that pressures and problems in one have implications for the other. As we disentangle and address the interwoven causes of our credit access and homeownership challenges, we do have a set of affordable rental policies and programs, proven effective and informed by ongoing research and best-practice executions. Free from legacy obligations, and with fresh eyes, new ideas, and a modest investment, the new administration has a tremendous opportunity to meet our most urgent affordable rental needs right out of the block. What should constitute that package of policies and programs is the focus of this article.

“Hurdling” Gender Identity Discrimination: The Implications of State Participation Policies on Transgender Youth Athletes’ Ability to Thrive

Abstract: The number of students, in grades kindergarten through high school, who identify as transgender has steadily increased during the last decade. These students seek the same opportunities as their cisgender peers, but are often denied participation in athletic activities because of their non-conforming genderbehavior. Currently, there is no federal law governing transgender participation in sports, which has resulted in an inconsistency among state athletic associations’ participation policies; the vast majority of states restricts participation. These states are limiting transgender students’ ability to receive the benefits that sports provide. To solve this inconsistency and provide equal opportunity for transgender students, this Note argues that the Civil Rights Act of 1964 be amended to prohibit gender-based discrimination. As a supplementary solution, the U.S. Department of Education should recommend Congress pass a bill conditioning federal funding of state after-school sports programs on the inclusion of all students, including transgender students.

A Call for Change: The Detrimental Impacts of Crawford v. Washington on Domestic Violence and Rape Prosecutions

Abstract: In 2004, the U.S. Supreme Court held in Crawford v. Washington that testimonial hearsay is inadmissible at trial unless the declarant is available for cross-examination. Courts have subsequently struggled to define “testimonial hearsay,” but have often vaguely defined it as an out-of-court statement made for the primary purpose of establishing past events for use in future prosecution. Although Crawford intended to protect a defendant’s Sixth Amendment right to confrontation, in doing so, it overlooked the holding’s detrimental effects on two particular types of victims: domestic violence and rape victims. Under Crawford, domestic violence and rape victims’ out-of-court statements are likely to be considered testimonial because the sensitive and personal nature of these incidents often results in substantial deliberation prior to any declaration, as opposed to the impromptu declarations made during so-called ongoing emergencies. In turn, these statements are likely viewed as made for future prosecution. Moreover, domestic violence and rape victims have especially compelling and uniquely fragile psychological reasons to be unavailable for cross-examination, including being at risk at for re-traumatization. Yet, despite these reasons, Crawford still places pressure on these victims to be cross-examined in front of their perpetrators because testimonial hearsay evidence is often determinative in these types of trials, and thus an unavailable victim would lead to an increased likelihood of the perpetrator escaping conviction. This sensitivity and consequential unreliability surrounding the admissibility of testimonial hearsay upon which domestic violence and rape cases rely also disincentives prosecutors from pursuing these cases, further exacerbating the unlikelihood of conviction. To alleviate the detrimental impacts that Crawford has on both victims and trials, this Article suggests that Crawford’s essential terminology must be narrowly defined, exceptions to the ruling must be expanded upon, and victims must be adequately safeguarded. © 2017, Anoosha Rouhanian. All rights reserved. * The George Washington University Law School, J.D. 2014; University of Maryland, B.A. 2010. I am grateful to my family members for their unconditional support, to the Rape, Abuse & Incest National Network (RAINN) for all of the wonderful work that it does, and to the Boston College Journal of Law & Social Justice editorial staff members for their feedback and edits. 2 Boston College Journal of Law & Social Justice [Vol. 37:1

Mortgage Supply Chain Failure and Innovation

Abstract: INTRODUCTIONAccording to recent Urban Institute estimates, 6.3 million more mortgage loans might have been made between 2009 and 2015 if underwriting standards prevailing in 2001, when lending was relatively safe, had been used. (Goodman, Zhu & Bai 2016, 1). This credit contraction post-2008 disproportionately affected lower-income and minority households. (Goodman 2017, 235, 250). There are perhaps many reasons for the insufficient amount of mortgage lending to low- and moderate-income households and to communities of color, but one that is perhaps overlooked is that the big banks have decided not to do it because they don't have a workable business model for it. (Andriotis 2016, 1; McCoy & Wachter 2017, 4). The decisions by big banks to refuse to lend to this population of homeowners is not because of regulation and not because of credit scores. It is because the business model of lending to low- and moderate-income (LMI) borrowers and people of color does not work for the big banks. So if the big banks are pulling out of lending, what do we do to make sure that average Americans can get home mortgages?This in turn raises the question, why do we care about ensuring a sufficient provision of LMI mortgages? The first reason is access. Residential mortgages are the primary way that people get access to the middle class in this country. Disparities in access to credit also represent a huge aspect of inequality, which is the racial wealth gap. This shortage of adequate mortgage credit in our communities produces a disparate racial impact, both in terms of wealth and income, which drives inequality. Although the U.S. Supreme Court recently upheld the disparate impact theory in housing discrimination cases (Texas Department of Housing and Community Affairs v. The Inclusive Communities Project, Inc. 2015, 2525-26), proving disparate impact remains difficult. Disparate treatment of individuals is easier to establish. However, proving disparate impact and proving it in a way that actually drives towards a solution and an agreement that is going to ameliorate the problem is much more difficult.We also need to care about access to mortgage credit because everybody is affected. Ultimately, that includes the big banks. At some point the banking system will need to realize that there will not be the same base of retail customers that the banks are used to without the wealth-building potential that home ownership represents. There will be fewer and fewer people who can afford to buy consumer goods and services on the scale they could ten years ago. For these reasons, an efficient mortgage system is critical to the economic future that we would all like to see.I. THE MORTGAGE SUPPLY CHAINThe mortgage supply chain is a critical component of an efficient mortgage system. The supply chain refers to the operational system both for delivering mortgages to borrowers and financing those mortgages. This is not as much about policy as it is about the business practices and the institutions that allow for the provision of mortgages in the private sector.To illustrate the complications in the mortgage supply chain, I have broken that chain down into two parts: an origination part and a secondary market and servicing part. Figures 1 and 2 demonstrate that there are different actors at each step of the way that are not interconnected. Consider housing counseling agencies, which may interact with borrowers at points during the home-buying process. Studies have shown that counseling provided by these agencies can mitigate risk and thus loan losses on the back end. (See, e.g., Brown 2016, 167-68; Quercia & Riley 2017, 328-29). Indeed, housing counseling can mitigate risk to such an extent that if we had a better supply chain, secondary market buyers of those mortgages would price them more efficiently. But currently, we do not have a mortgage supply chain system that actually establishes communication between the risk mitigation that happens on the front end through counseling, all the way into pricing in the secondary market. …

Discussion of Papers on Cyclicality in Mortgage Markets

Abstract: INTRODUCTIONUS mortgage markets can be likened to a gigantic machine with many real and financial "moving pieces" These pieces move cyclically and are too many to be covered in a few papers Table 1 lays out my understanding of the main parts of this machine and sorts out which of these parts have and have not been specifically addressed so far in this sessionI LAURIE GOODMAN'S PAPER: COMPLICATIONS IN THE LENDING PROCESSAmong the things that make mortgage markets different from other financial markets are the ways borrower information is assembled, verified, and used Lenders burned by bad information during the housing bubble need to rethink how they generate, double-check, and use measures of household creditworthinessLaurie Goodman (Goodman 2017, 239-43, 247-49) produces evidence of a post-crisis slowdown in resetting three parts on the supply side of the machine:1Lending standards, especially FICO scores: Realtors and lenders are learning more and more about how to inflate scores artificially, so that threshold scores must move up as well, if only to compensate for this bias2 Regulator and investor resistance to nontraditional mortgage contracts: This reinforces lenders' difficulty in laying off mortgages which reflect low FICO scores3 Servicing costs for Federal Housing Administration (FHA) loansTo complement her presentation, I want to call attention to parallel slowdowns occurring on the household demand side of the machine My main point is to note that homeownership has become more than ever an obstacle to job mobility and to relocation on retirement Relatedly, the career economy and gig economy differ in ways that affect the age and ownership structure of household demand for mortgage credit:1 In the career economy, employees had to provide evidence of their loyalty to the employer In part, owning a home bonded an employee's loyalty to his or her employer and community Employers responded in ways that encouraged or discouraged particular employees to move up or out2 In the gig economy, it makes much more sense to rent, especially at the beginning of one's career If an employer wants highvalue employees to show loyalty to their firm, the employer will selectively bond the career options it has to offer and make sure that benefits improve progressively with length of serviceIn my opinion, the changing role of loyalty in employer-employee relations is fueling extra-long delays in reworking and restoring major pieces of housing and mortgage demand today These delays include:1 Delays in launching the careers, family sizes, and mortgage debt of unemployed and underemployed young people: Increasingly dismal career prospects for those without at least some college education raised the percentage of 18- to 34-year-olds living at home in 2014 to 32% (Fry 2016, 4-5)2 Delays in launching moves to warmer climates by would-beempty-nesters who are still housing adult children or in neighborhoods hurt badly by the crash3 Delays in turning over homes and temporarily lower prices in warm-weather states for homeowners planning to move into assisted-living facilities4 Delays in launching new ways for Congress to deliver mortgage-related subsidies to lenders, builders, realtors, and landlords The shape of reform of the government-sponsored enterprises (GSEs) remains unknowable, while post-crisis investment in a common GSE securitization platform is going to make it all the harder to replace the GSEs with something entirely newII MCCOY-WACHTER PAPERS: HOW TO AMELIORATE CYCLICALITY IN TRUSTThe McCoy-Wachter papers (McCoy & Wachter 2017a; McCoy & Wachter 2017b, 377-78) pay special attention to the difficulty of relying on representations and warranties in the distrustful environment the housing crash has produced Trust is always in short supply and adverse information is hard to surface …

Expanding the Mortgage Credit Box: Lessons from the Community Advantage Program

Abstract: INTRODUCTIONMortgage credit became less available with the onset of the Great Recession. The Federal Reserve's low interest rates and quantitative easing policies have kept interest rates at historically low levels. As such, lending should have increased following its traditional relationship to low interest rates. As interest rates decrease, we expect to see the demand for credit increase. Unfortunately, the supply of credit has receded as mortgage lenders have pursued a flight-to-quality approach by focusing on the credit needs of borrowers considered less risky: those with high credit scores.In all likelihood, uncertainty is making the flight to quality worse. The reform of the housing finance system is yet to be finished; in particular, decisions have yet to be made about what to do with the two housing government-sponsored enterprises (GSEs) since they were taken into conservatorship at the onset of the Great Recession. The future of the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac") has been hotly contested. There is no consensus between Republicans and Democrats, or within either party, about what that future should look like. Should the current GSEs be replaced with something similar in the future? Should they be replaced with a purely private alternative? Should they be replaced with something between these two extremes? Similarly, the role of the Federal Housing Administration in a reformed system remains open to debate. Under the new Administration and Congress, it is uncertain when or if such reforms will occur.The mortgage credit retrenchment has been well documented. Goodman (2016) found that "borrowers who took out mortgages in the last five years have rarely defaulted, making them better at paying their mortgages than any other group of mortgage borrowers in history." She explains that this pattern has two causes: "only the best borrowers are getting loans today and these loans are so thoroughly scrubbed and cleaned before they are made that hardly any of them end up going into default." Goodman believes that this is clear evidence that there is a need to extend credit to borrowers with less than perfect credit.Prior to the subprime debacle, extending credit to those with less than perfect credit, especially low- and moderate-income and minority borrowers, was supported through lending products put in place under the auspices of the Community Reinvestment Act (CRA).1 These so-called "affordable" lending products met one of the two criteria identified by Goodman as leading to negligible default rates among mortgage borrowers today: rigorous underwriting. Though often originated to borrowers with less than perfect credit, CRA products were thoroughly reviewed during the underwriting process. As a result, default rates in traditional CRA lending have been significantly lower than in subprime lending, which targets similar borrowers. (Ding et al. 2011, 245-46).A variety of lending programs, some private and some public, have promoted homeownership for low-income households. (Avery, Bostic & Canner 2000, 711; Galster & Santiago 2008, 60-61, 65). Although some of these initiatives appear to be associated with objective increases in average wealth and higher standards-of-living among program participants, considerable outcome variability exists. (Galster & Santiago 2008, 68-76). Thus, key questions remain as to which aspects of targeted lending programs contribute to favorable outcomes and which do not, as well as whether those features conducive to success can be manipulated to improve program outcomes systematically, including better mortgage performance.We provide some answers to these questions by considering the experiences of the homeowners who received CRA mortgages through the Community Advantage Program (CAP). CAP was designed as a secondary mortgage market demonstration program targeting low- and moderate - income households. …

Has the Mortgage Pendulum Swung Too Far? Reviving Access to Mortgage Credit

Abstract: INTRODUCTIONStarting in 2007, the United States experienced a sharp decline in home mortgage originations, leading to a serious overcorrection of credit. The situation is slowly improving, with mortgage originations on the upswing since first quarter 2014 in total dollar volume. (US Mortgage Originations). Nevertheless, lenders are still too risk averse and millions of lower-income and minority households who would normally qualify are unable to get mortgages.Why should we care that the mortgage pendulum swung too far? Obviously, the homeownership proposition has become more freighted since the financial crisis of 2008. The collapse in home values and the ensuing wave of foreclosures were a shocking reminder of the financial risks that come with homeownership and the mortgage debt that most people incur to acquire a home. Yet despite those risks, the evidence shows that purchasing a home remains a powerful path-many would say the most powerful path-to building wealth for families of modest means. (Herbert, McCue & Sanchez-Moyano 2016, 6-7).This symposium issue asserts that society needs to redouble its commitment to access to mortgage credit while doing it smarter. The challenge going forward is to expand mortgage financing to underserved, creditworthy borrowers while boosting the success rate of mortgages for borrowers, lenders, and communities.In this issue, a talented array of housing finance experts diagnose the obstacles to affordable lending today and propose innovative solutions for making mortgage credit more sustainable. Although progress has been made to date (particularly in the area of consumer protection), much more needs to be done. Fortunately, there is a wealth of new data from pilot projects around the country on better ways to underwrite and deliver mortgages and to prepare new homeowners for the financial demands of owning homes. Our symposium authors report on a number of those findings and propose new policies to expand the opportunities for successful homeownership. Their recommendations span the entire lending process, from loan products, counseling, and underwriting to servicing, the business model of lending, and broader macroeconomic and environmental factors. In this foreword, I preview and comment on the contributions to this issue by the symposium authors.This symposium issue grows out of a conference titled Has the Mortgage Pendulum Swung Too Far?, held by the Rappaport Center for Law and Public Policy at Boston College Law School on September 30, 2016. I am especially grateful to the Rappaport Center's founders, Jerry and Phyllis Rappaport, for their heartwarming encouragement and generous support. Many others generously gave of their time and effort to make the conference and this symposium issue possible. Above all, we thank Elisabeth Medvedow, the Executive Director of the Rappaport Center, Professor Michael Cassidy, the Center's faculty adviser, Vincent Rougeau, the Dean of Boston College Law School, Hillary Bylicki, John Gordon, Judy Yi, the superb Brittany Campbell and the other outstanding student editors of the Boston College Journal of Law & Social Justice, Judy Jacobson at the Massachusetts Housing Partnership, and our symposium speakers and commentators.I. TIGHT MORTGAGE CREDIT AND THE DECLINING HOMEOWNERSHIP RATEWhere does access to mortgage credit stand today? The total annual dollar volume of home mortgage originations sharply declined when the housing bubble burst starting in first quarter 2007. But since then, residential mortgage lending in the U.S. has improved in overall terms for the last three and a half years. Originations staged a recovery in first quarter 2014 and have been on the rise ever since. (US Mortgage Originations).However, total origination volumes do not answer the question posed by this symposium, which is the extent to which historically underserved customers, including lower-income households and minorities, are able to get mortgage loans. …

A Motion to Compel Changes to Federal Arbitration Law: How to Remedy the Abuses Consumers Face When Arbitrating Disputes

Abstract: Arbitration, as a form of alternative dispute resolution, is a favored method of settling legal disputes because it resolves disputes faster and more cost effectively than in-court litigation. Corporations often exploit the private nature of arbitration by including complex provisions in consumer contracts that require certain disputes to be resolved through arbitration. Consumers subject to these arbitration provisions often do not realize the existence of the provisions, and do not understand that because of undue corporate influence over arbitrators, arbitration tends to favor the corporations against which they arbitrate. Unfortunately, because the U.S. Supreme Court has declared that the Federal Arbitration Act (the “FAA”) preempts states’ ability to declare forced arbitration agreements unconscionable, consumers struggle to challenge unfavorable arbitration awards. To remedy the abuses consumers face in the arbitration arena, this Note argues that Congress should amend the FAA to allow states to declare forced arbitration agreements unconscionable.