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Arbitration Unconscionability Post-Concepcion

posted by Adam Levitin

My Georgetown colleague Rebecca Tushnet has a great post about a recent Missouri Supreme Court ruling, Brewer v. Missouri Title Loans, holding that an arbitration agreement in an auto title loan was unconscionable.  The case is important because it says that post-AT&T v. Concepcion arbitration agreements are still vulnerable to attack on generally applicable contract law grounds. Perhaps contract law isn't as dead as Justice Scalia claimed in Concepcion

It's a procedural unconscionability case; the court does mentions, but does not comment on, how payments of $1000 on a $2200 loan only reduced the loan balance by 6 cents. Even Walker-Thomas Furniture would be blushing.

While the procedural stance of the case means that the treading water issue isn't before the court, the use of procedural, rather than substantive unconscionability underscores the point made by another of my Georgetown colleagues, Robin West, in her amazing The Anti-Emphatic Turn article, namely that judging has moved from being an exercise in empathy to an attempt to be scientific. Substantive unconscionability just doesn't fit into the scientific paradigm. 

This makes me think that we might reconsider much maligned usury laws.  Usury laws function as a type of statutory unconscionability. They are adminstrable by courts without having to get into the nitty-gritty of what the parties knew, etc., and they enable ex-ante certainty, which unconscionability does not. 

I'm sure that someone in the comments will trot out all of the well-rehearsed arguments against usury laws and bring up Arkansas in the early 1980s.  Yes, well, there are usury laws and there are usury laws. A fixed rate usury law is a poorly designed one. A floating rate is better, and it makes sense to have different structures for different types of loans.  An APR-based rate doesn't make a lot of sense for short-term loans because the APR captures both fixed lending costs as well as profit margin, and then annualizes both.  The problem is that fixed lending costs shouldn't be annualized; doing so greatly inflates the APR on short-term loans and makes them actually incomparable to longer-term loans.  One way around this is to copy South Africa's in duplum rule, which permits interest and fees only until they are equal to principal.  (I'm oversimplifying the operation of in duplum, but the details aren't the issue here.) 

None of this is to say that there is an obviously correct rate limit for usury laws or that there couldn't be some untoward substitution effect if some credit sources are limited.  Usury laws of any sort are far from perfect.  They are commendable primarily in contrast to other methods of dealing with sharp practices. (Jeff Gordon at Columbia has made the nice argument that usury laws should be respected by Hayekian conservatives as representing a type of social learning that we should be slow to reject.) I will note, however, that there really isn't much evidence about the substitution hypothesis; Angie Littwin has one of the few studies on point, and she finds limited evidence of substitution.  I would also note that historically usury laws were coupled with governmental or elymonsynary assistance like monti de pietà, which would blunt substitution problems.  

The point here, is that if we are eschewing unconscionability (and presumably, then, its kith and kin unfairness, deception, and abuse), there will be pressure on the system to deal with shocking practices, and usury provides another method to do so that is more in keeping with scientific modes of judging and which creates ex-ante certainty.  


Way too much is made of substitution effects.

Yes, if predatory lending is outlawed, there will be some outlaws who make predatory loans. But these outlaws cannot lobby for friendlier law. Nor can they mount expensive ad campaigns touting how you deserve a fun! kicky! vacation, funded with their products.

Thank you, Adam. Your colleague is clearly a rock star. I love her post and her whole blog, of which I was unaware. The NCLC also has been putting together great materials on dealing with class actions post-Concepcion.

Also, those interested in substitution effects should check out Rob Mayer's article in the most recent issue of the Washington and Lee Law Review, entitled Loan Sharks, Interest Rate Caps, and Deregulation.

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