{"id":9464,"date":"2010-03-26T15:20:13","date_gmt":"2010-03-26T20:20:13","guid":{"rendered":"http:\/\/law.marquette.edu\/facultyblog\/?p=9464"},"modified":"2010-03-26T15:21:53","modified_gmt":"2010-03-26T20:21:53","slug":"for-finance-industry-a-possible-alternative-to-the-deregulation-bust-bailout-reregulation-cycle","status":"publish","type":"post","link":"https:\/\/law.marquette.edu\/facultyblog\/2010\/03\/for-finance-industry-a-possible-alternative-to-the-deregulation-bust-bailout-reregulation-cycle\/","title":{"rendered":"For Finance Industry, a Possible Alternative to the Deregulation-Bust-Bailout-Reregulation Cycle"},"content":{"rendered":"

No one wants a replay of the financial meltdown of the past couple years, but\u00a0can new regulations really provide a long-term solution?\u00a0 Periods of heightened regulatory oversight seem inevitably followed by periods of deregulation, while the prospect of government bailouts may create\u00a0a moral hazard that promotes excessive risk-taking.\u00a0 Thus, in an interesting new article on SSRN<\/a>, Shelley Smith <\/a>suggests an alternative response that does not involve government regulatory agencies.\u00a0 Her proposal instead focuses on the courts and reform of the law of adhesion contracts — those take-it-or-leave-it agreements that consumers routinely sign without reading or understanding.<\/p>\n

Shelley argues that contracts of adhesion played an important role in creating the subprime mortgage mess, as consumers took on\u00a0ruinous financial obligations without fully understanding the terms of the deals.\u00a0 She suggests that courts should create stronger incentives for the drafters of contracts of adhesion to make the key terms comprehensible to ordinary consumers.\u00a0 Thus, she would relax the normal presumption that the terms of the written contract will be strictly enforced where there is reason to doubt whether a reasonable person would have read and understood those terms.\u00a0 If the “reasonable person” test is not satisfied, and extrinsic evidence fails to establish that the consumer actually received notice of the disputed term, then the court would not enforce the term as written, but would instead treat the case as a “missing term” case.<\/p>\n

The article, entitled “Reforming the Law of Adhesion Contracts: A Judicial Response to the Subprime Mortgage Crisis,” is forthcoming in the Lewis and Clark Law Review.\u00a0 <\/em>The abstract appears after the jump.\u00a0 <\/p>\n

This Article examines the role of contracts of adhesion, in the form of home mortgages, installment sale agreements and other standardized contracts that impose future financial commitments on consumers, in causing the subprime mortgage crisis and the Great Depression. By shifting the focus to these \u201cfinancial adhesion contracts\u201d the Article suggests that the harm from the absence of mutual assent in adhesion contracts extends beyond specific terms that are unduly burdensome for consumers generally to economic risks that vary from consumer to consumer. When millions of consumers are convinced to sign unsuitable financial adhesion contracts, their collective risk-taking can undermine the stability of the entire financial system. The most common cures for the nation\u2019s economic ills \u2013 free markets, monetary policy, and regulation \u2013 are found insufficient to resolve this challenge based on a review of the largest of country\u2019s financial disasters, the Great Depression, the Savings & Loan crisis of the 1980s, and the subprime mortgage crisis. The Article then discusses why current doctrine and the proscriptions offered by scholars do not resolve the threat posed by financial adhesion contracts, and proposes a new method for salvaging mutual assent in adhesion contracts for the benefit of consumers and the security of the economy.<\/p><\/blockquote>\n","protected":false},"excerpt":{"rendered":"

No one wants a replay of the financial meltdown of the past couple years, but\u00a0can new regulations really provide a long-term solution?\u00a0 Periods of heightened regulatory oversight seem inevitably followed by periods of deregulation, while the prospect of government bailouts may create\u00a0a moral hazard that promotes excessive risk-taking.\u00a0 Thus, in an interesting new article on 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