Reforming the Law of Adhesion Contracts: A Judicial Response to the Subprime Mortgage Crisis

Abstract:     
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 “financial adhesion contracts” 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’s economic ills – free markets, monetary policy, and regulation – are found insufficient to resolve this challenge based on a review of the largest of country’s 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.

Keywords: contracts, adhesion, mortgage, installment sales, subprime, assent

JEL Classifications: K2, K12, K20

Accepted Paper Series