CL&P Blog

Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees

Over the past decade, overdraft fees and abuses have spiraled out of control, snaring millions of consumers while generating billions in profits for banks. In 2011, consumers paid $29.5 billion in overdraft fees.

A new white paper by the National Consumer Law Center explores why overdraft fees should be subject to a “reasonable and proportional" standard, how overdraft fees are currently excessive and unreasonable, and why the ability to charge excessive overdraft fees encourages banks to engage in abusive practices to maximize overdrafts.  The white paper also describes how excessive overdraft fees are contrary to a centuries-old legal doctrine that prohibits punitive damage clauses in contracts. 

 The Consumer Financial Protection Bureau (CFPB) has legal avenues to restore the standard of “reasonableness” to overdraft fees. One venue is through the Credit Card Accountability, Responsibility, and Disclosures (CARD) Act of 2009, by treating debit cards as “credit cards” for which penalty fees must be “reasonable and proportional.”  Another avenue for the CFPB is to use its authority to prevent unfair, deceptive, or abusive practices.

Download a three-page issue brief with key points and solutions:
Common Sense from the Common Law: Why a Longstanding Legal Doctrine Supports Limiting Bank Overdraft Fees to a “Reasonable and Proportional” Standard at:
http://www.nclc.org/images/pdf/high_cost_small_loans/ib-common-sense-common-law.pdf

Download the white paper at:
http://www.nclc.org/images/pdf/high_cost_small_loans/common-law-overdraft-fees.pdf

A plague of defense lawyers

by Steve Gardner

Well, I see that yet another law firm has announced its hope of attracting new food companies as clients. 

It tickles me to see how many large defense firms are getting into the business of offering to defend companies from deceptive marketing practices relating to food and nutrition.

Some food industry front groups like to whine about all the food lawsuits that are being brought by consumer lawyers. For example, there’s the [irony alert] “Center for Consumer Freedom,” a long-time advocate for smoking, drinking, and food fraud, which claims that its purpose is “promoting personal responsibility and protecting consumer choices.”

And how does the Center go about “promoting personal responsibility and protecting consumer choices”? By spending almost 80% of its income (check out its IRS filing) to hire the private PR firm Berman and Company, whose president Rick Berman is the same Rick Berman who is the Executive Director of the Center. 

One way the Berman money tree sought to fulfill its claimed purpose was by issuing a vitriolic screed against “a growing cabal of activists [which] include self-anointed “food police,” health campaigners, trial lawyers, personal-finance do-gooders, animal-rights misanthropes, and meddling bureaucrats.”

This extremely well-compensated Executive Director of an avowedly non-profit organization is not alone in shilling for food companies. Take, for example, the recent remarks by a law professor (and former white-shod defense lawyer) who commented that a California bill that would require companies to let consumers know if their products contained GMOs would be a “‘boondoggle’ for litigation attorneys, because it authorizes citizen lawsuits against alleged violators.”

Of course, this law professor avoids saying that the best way to avoid this speculated “boondoggle” is simple.

Companies could simply comply with the law.

It’s pretty easy for companies to comply with consumer protection laws. They don’t need lawyer to help them do that. What they do need lawyers for is to help them avoid responsibility for their illegal, deceptive, and abusive practices.

Lots of highly paid defense lawyers and, of course, people like the perhaps even-more highly paid Rick Berman. 

Now, it’s true that the number of lawsuits involving deceptive food marketing claims has grown significantly since I became Litigation Director for CSPI eight years ago (there were only a couple of them when I started) to the point that there are dozens of them today.

And it’s also true that an increasing number of plaintiff lawyers are turning their attention to this type of much-needed consumer protection litigation.

But it’s also true that if you counted the number of lawyers in the plaintiff firms involved in food marketing lawsuits, that number would be crushed by the number of lawyers in the defense firms who defend the food industry. Take, for example, my friend (frenemy?) Russell Jackson, who writes an honest (but pro-company) blog that covers food marketing litigation.

Russell’s firm Skadden Arps has over 1800 lawyers, which alone is perhaps 20 times as many as the combined number of lawyers who advocate for consumers in this area.

So I urge those on the side of the food companies to clean up their dialectic and instead focus on cleaning up their illegal practices.

The best way to avoid getting sued for violating consumer protection laws is simply not to violate them.

C’mon, Big Food, step up and put those plaintiff lawyers out of business!

I felt a twinge of disloyalty to other consumer protection lawyers when I typed that last sentence, until I realized that the chances of that happening are only slightly greater than the chances of my winning the Texas lottery.

Wait, let me retract that because there is a chance (albeit very slight) that I could win the Texas lottery.

 

 

State & Local Reforms Urgently Needed for Tax Lien Laws

The National Consumer Law Center has a new report: The Other Foreclosure Crisis: Property Tax Lien Sales by NCLC attorney John Rao.

Advocates are urged to work with state and local governments to reform property tax lien laws to safeguard homeowners while still bringing in needed tax revenue to address this growing problem.

A tax lien sale may be started over nonpayment of a tax bill of only a few hundred dollars. A $200,000 home may be sold at a tax lien sale for $1,200 and then quickly resold for a huge profit. Homeowners may lose not only a homestead but also hundreds of thousands of dollars in equity, representing their sole savings and security for retirement.

• Populations most at risk: Low-income older and disabled homeowners who have fallen into default because they are incapable of managing their financial affairs, such as individuals suffering from Alzheimer's, dementia, or other cognitive disorders.
•  Most states and local governments need improvement but those known to be at high risk: States: Florida, Illinois, Iowa, Mississippi, New Jersey, New York, and Texas
  Cities: Baltimore, MD; Louisville, KY; and Washington, DC

Key State Recommendations

1. Make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions. The interest rate should seek to discourage speculation and promote redemption.
2. Place reasonable limitations on additional fees and costs. States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys' fees, and other fees.
3. Establish a tax sale procedure, with court supervision. States should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner.

Key Local Recommendations

1. Implement redemption payment programs. Local tax offices should collect redemption payments to eliminate the possibility that an unscrupulous purchaser may thwart the owner's attempt to redeem. The local tax office should accept partial and installment payments.
2. Adequate notice should be given at every stage of the tax sale process. Notifications should be used as a tool to avoid loss of homeownership Comprehensive notices should use plain language; include information about tax exemptions, abatements, and repayment plans; and note the consequences of each stage of the tax sale process.
3. Provide detailed notice of redemption rights. The notice should give all of the essential details on how the redemption right can be exercised, including the name and address to which the homeowner can remit payment; itemized costs; and the deadline for the redemption payment.

All state and local recommendations may be found in the full report.

FTC Affirms Consumer Rights Under "Holder" Rule

On May 10, 2012, the Federal Trade Commission (FTC) issued an advisory opinion affirming that consumers retain certain important rights under the FTC Rule on the Preservation of Consumers’ Claims and Defenses (16 CFR § 433).  The opinion was requested by the National Consumer Law Center (NCLC), and joined by Public Citizen, U.S. PIRG, the Center for Responsible Lending, and the National Association of Consumer Advocates.

The Rule allows consumers to raise their seller-related claims against the holder of their loan agreements.  Such claims can offset the remaining indebtedness, but some courts had found, despite the Rule’s clear language, that consumers could not utilize such claims to recover amounts already paid to the lender.  The FTC staff in 1999 had provided an informal opinion to NCLC rejecting such a limiting interpretation of the Rule, but some courts continued to misapply the Rule. 

Now that the full Commission has issued a formal advisory opinion interpreting its own rule, it is hoped that this issue will be laid to rest, so that consumers who have already made substantial payments on a loan are not treated worse than those who have not. By insuring that the Rule is properly applied, the FTC has strengthened one of the most important pieces of consumer protection in the United States.

The FTC Rule on the Preservation of Consumers’ Claims and Defenses is a cornerstone of consumer protection. It makes it far more practical for consumers to raise claims against sellers, even when the seller is insolvent or skipped town, and it encourages lenders to scrutinize the sellers with whom they form business relations.

For example, it is far more practical when a car dealer sells a defective vehicle to raise that claim as a reason not to repay a car loan than for the consumer to have to bring a separate affirmative action against the dealer, while at the same time having to continue making car payments.  The lender is in a far better position to recover any loss from the dealer.  Moreover, the Rule encourages the lender to police its related sellers to insure that they treat consumers fairly so that consumers are not raising seller-related claims on the loan.  

Glad to Be Back!

by Deepak Gupta

Last May, I was sad to have to give up blogging when I joined the new Consumer Financial Protection Bureau. Blogging and government service don't go well together. Now that I've rejoined private life (to start my own appellate litigation and policy consulting shop), I'm excited to be able to blog again. I'm very grateful to Brian Wolfman and Jeff Sovern for keeping the blog alive every day with their excellent posts, which have included a greater emphasis on policy and politics. And I'm grateful to Public Citizen for continuing to host this blog as the truly open-ended group organism it was always intended to be.

It's hard to believe, but this blog has been around for nearly six years! Jeff Sovern and I started hatching plans for a diverse group blog on consumer law and policy back in May 2006, at Richard Alderman's consumer law conference at the University of Houston.  (The latest iteration of that conference, by the way, is next week; I look forward to seeing some of you there.) A bunch of contributors have dropped off along the way -- particularly the international consumer law scholars and conservative critics that we had hoped would be a part of the dialogue -- but the blog has generally remained consistent with our original vision.

As I said, I'm excited to be back in the blogosphere. I've been insanely busy over the past few weeks -- crisscrossing the country attending legal conferences, taking on exciting new cases, and trying to set up the infrastructure for my new law firm. But I've got some ideas for new blog content, and am looking forward to bringing back features like the CL&P Roundups and more reporting on recent appellate decisions affecting consumers' rights. I'd also like to help add some much-needed diversity to the contributors' list. (And, yes, we've noticed that conference list and blogroll are hopelessly outdated.)

Over the past year, I've had the opportunity to witness firsthand some momentous events in the world of consumer law & policy -- none of which I could blog about (and many of which I still can't)! Just before I joined the agency, for example, the Supreme Court handed down its earth-shattering decision in AT&T Mobility v. Concepcion, a devastating loss for consumers and employees (and for me personally, as the lawyer who argued the case). Concepcion's effects, it seems, have been felt on a daily basis since then. It's interesting to observe the phenomenon that Scott Michelman noted this morning -- that coverage of the decision's one-year anniversary may transform public consciousness.

The big consumer law and policy story of the past year, of course, was the creation of the CFPB itself and the continuing debate over its existence and leadership, from Elizabeth Warren to Rich Cordray. I had the opportunity to work with both of them, and incredibly talented people throughout the agency, and to dive into a boatload of fascinating and weighty issues: the OCC's preemption rule, which retained sweeping federal preemption of state consumer laws; the agency's defense of lawsuits challenging its regulations on day one; the creation of an affirmative amicus curiae program to shape appellate decisions; coordination with the Solicitor General on Supreme Court cases affecting consumer rights, including First American Financial Services v. Edwards (another potential sleeper bombshell on the order of Concepcion); the constitutionality of the recess appointment; countless hard questions of adminsitrative law, legal authority, and consumer regulatory policy; and the beginnings of an agency enforcement strategy. It's hard to believe that the CFPB's staff could fit in a single room a year ago! It's been an incredible year.

Two Bloomberg Pieces on Disclosure Issues

Robert H. Gertner of Chicago's Booth School of Business has a particularly interesting piece, Consumer Protection Bureau Can Teach Financial Self-Help, on the limits of disclosures, the need for financial counselors, and how to make such counseling better and more accessible.  Here's an excerpt:

The only regulatory regime that has a chance of making substantial progress is one that helps the market-based solution for advice work better. Structuring disclosure regulation to make advice markets more efficient rather than to make disclosure more understandable to consumers should be a goal. For example, my Chicago Booth colleague Richard Thaler has recommended requiring standard machine-readable disclosure of all financial terms to reduce the costs of comparisons across offerings. In a world of individualized offerings, the savings could be huge.

A second policy is for the government to develop an effective certification program for consumer financial advisers. In addition to knowledge requirements, the government would require that advisers have no financial incentives to prefer some products to others. Rather than teaching financial literacy, outreach programs could focus on educating consumers on the need for a competent, unbiased, certified financial adviser.

In another piece, Bloomberg reports Senators Introduce Bill for Counseling on Private Student Loans.

 

New Foreclosures Report from NCLC

A new report from the National Consumer Law Center, documents, for the first time, how foreclosure mediation can keep paying borrowers in their homes while saving billions of dollars for local governments and investors. The report concludes that allowing homeowners to face mortgage servicers and their attorneys without third-party intervention is a recipe for disaster.

Rebuilding America: How States Can Save Millions of Homes Through Foreclosure Mediation calls on all states to adopt strong foreclosure mediation programs. The report reviews existing programs in 19 states and makes recommendations for best practices for all states to adopt, using foreclosure mediation data from the last three years to draw its conclusions. The report includes examples of programs that are more successful (Connecticut, Nevada, and New York) and those that are less so. Judicial enforcement of mediation program requirements in several states is also included.

The NCLC website also includes information regarding court decisions, pending mediation state legislation, model documents and a summary of all current state programs as well as a link to each program. 

Deepak's Departure

by Jeff Sovern

I have been consumed by other matters recently (chiefly, grading), but I did want to thank Deepak Gupta for his work on the Blog. Deepak did the heavy lifting in creating and running the Blog, and so our readers--and I--owe him considerable gratitude.  I'm sorry you're leaving us, Deepak, and I'm sure Public Citizen is disappointed to lose you too, but i take comfort in my certainty that your work at the CFPB will be good for the country and consumers.  I look forward to watching your accomplishments in the coming years and wish you the best of luck.

Moving on to the CFPB

Dear Consumer Law & Policy Blog readers,

In September 2006, Jeff Sovern and I decided to start this blog as co-coordinators -- an outgrowth of a discussion we had at Richard Alderman's consumer law conference at the University of Houston Law School.  As we explained in our first post, we had in mind a group blog, with diverse contributors from both practice and academia, covering everything from the latest Supreme Court cases and law review articles to legislative battles, news coverage of consumer law, and more.

For me, running the blog has been a great way to help myself stay on top of the issues, despite a busy litigation practice, and learn what's going on in the wide world of consumer law and policy.  We've covered the foreclosure crisis, the battle over class-action bans in the courts, the enactment of the Dodd-Frank Act, and much much more.  I'm always surprised and pleased when someone at a legal conference comes up to me and tells me that they read the blog every day.

Sadly, today is my last day at Public Citizen and therefore my last day as a co-coordinator of this blog.  Starting Monday, I will be joining the General Counsel's office at the new Consumer Financial Protection Bureau.  I'm looking forward to the challenge of helping to build a new consumer agency from scratch, but sorry that I'll have to leave extracurricular activities like blogging behind.

The blog, however, will go on. Jeff will stay on as coordinator and will be joined by Greg Beck and Brian Wolfman, who already posts up a storm.  I look foward to reading the blog from my post at the CFPB.

So long,

Deepak Gupta

New Review of 40 States’ Unemployment Compensation Prepaid Cards

This new groundbreaking report from the National Consumer Law Center looks at unemployment compensation (UC) prepaid cards currently used by 40 states (the remaining states are expected to soon follow suit). The comprehensive survey includes a state-by-state highlights comparison chart, including bank issuer and notable fees; a national overview of fees; and recommendations for card improvements.

Unemployment Compensation Prepaid Cards: States Can Deal Workers a Winning Hand by Discarding Junk Fees, analyses the payment options, fees, and access to account information available to workers in every state that uses UC prepaid cards. It also surveys the laws that do (or do not) protect workers and offers recommendations for how states can design a card that works well for both the state and its unemployed workers.

The report singles out as especially problematic the overdraft fees that U.S. Bank has on prepaid cards in five states: Arkansas, Idaho, Nebraska, Ohio, and Oregon. No other bank’s UC prepaid card charges overdraft fees, which the U.S. Department of Labor (DOL) has found are “inconsistent with federal law.” And the Tennessee card (issued by JP Morgan Chase) draws the two of clubs for the card with the most junk fees, including ATM, PIN debit, denied transaction, and balance inquiry fees.

So who holds the winning hand? California and New Jersey currently have the best UC cards (both issued by Bank of America), although both could benefit from fees more clearly and prominently displayed on websites. The State of California loses one trick for not offering direct deposit.

The report urges the new U.S. Consumer Financial Protection Bureau, which starts work in July, and U.S. Department of Labor to work together to ban overdraft fees and other unfair fees and to improve transparency and competition by posting all fee schedules in one place so that states and consumers can compare who has the best hand.

The trump card? States can design an unemployment prepaid card that works well for both the state and doesn't lose workers in the shuffle. They are generally an improvement over paper checks for the unbanked but there is room for improvement to ensure they deliver every penny to unemployed Americans (at last count, more than 13 million folks).

Now that National Consumer Law Center has laid the cards on the table, let's hope states use the report to cut a better prepaid card deal for their unemployed workers.