Consumer Law & Policy Blog

Lauren E. Willis on Predatory Lending

by Jeff Sovern

Though the Truth in Lending Act ("TILA") was not necessarily aimed at predatory lending--I don't think the phrase "predatory lending" had even been coined when TILA was enacted--its disclosure rules should theoretically have prevented predatory lending to the extent predatory lending is based on consumer ignorance.  Consequently, the question of why predatory lending survives, if not thrives, despite the TILA disclosure requirements is worth exploring.  My co-blogger, Chris Peterson, in his book Taming the Sharks: Towards a Cure for the High-Cost Credit Market 291 (2004) addressed this question, concluding that TILA is  "a collective lie.”  See also Gian Ho & Anthony Pennington-Cross, The Impact of Local Predatory Lending Laws 7 (Fed. Reserve Bank of St; Louis Working Paper 2005-049B 2005) (“If borrowers actually read all the documents required by law at the time of closing it would take all day.  Moreover, many of the documents are written in a manner that is difficult for non-lawyers to understand.  . . . [T]he seller, buyer, and/or refinancer rely on the representations and interpretations of closing agents. . . . This makes it possible for unscrupulous agents to take advantage of that information gap.”).  The remarkable testimony of the pseudonymous “Jim Dough," a former employee of a predatory lender, before a hearing of  the Senate Special Committee on Aging on March 16, 1998, titled “Equity Predators: Stripping, Flipping and Packing Their Way to Profits,” about the tactics he used to persuade consumers to agree to onerous loan terms also sheds light on the issue. 

Now Loyola of LA Professor Lauren E. Willis, in a lengthy but important article Decisionmaking and the Limits of Disclosure: The Problem of Predatory Lending: Price, 65 Maryland Law Review 707 (2006), brings behavioral economics to bear on the problem.  A sample:

CL&P Roundup

by Deepak Gupta

• Congress to Limit Predatory Lending to the Military:  The groundbreaking Talent-Nelson amendment--which imposes limits on predatory lending to the military--is now part of the must-pass defense authorization bill.   Paul Bland and Elizabeth Warren make similar observations about different aspects of this legislation.  Paul, discussing the bill's precedent-setting ban on arbitration clauses, asks:

"If Congress recognizes that binding mandatory arbitration provisions are unfair as applied to all members of the military who deal with lenders, how does that jibe with the assertion often made that binding arbitration is fairer, cheaper, and better for other consumers who deal with lenders?" 

And Professor Warren, discussing the bill's 36% usury cap for interest rates on loans to servicemembers, asks:

"Soon it will be OK to roll an elderly person with a 400% interest rate, or a Hispanic worker, or a college student, but not someone in the military.  How long will that last?"

• Most Identity Thieves Are Unknown:  The other day, Jeff Sovern observed that Judge Posner, in his discussion of identity theft, seemed to operate on the mistaken belief that "much, maybe most" identity theft is the work of "friends or relatives" and is easily prevented by potential victims.  Similar claims have been made repeatedly in the media in recent weeks, particularly by industry representatives.  Now privacy expert Chris Hoofnagle of Berkeley has demonstrated, using FTC data, the problem with those claims.  He even includes a colorful pie-chart.  (via Ed Mierzwinski)

• More on Consumer Cases in the Supreme Court:  Over at the Credit Slips blog, Katie Porter of Iowa has some thoughts on the recently-granted Fair Credit Reporting Act cases and so-called "off-label" uses of credit reports; we discussed the cases here on Tuesday.   And Bob Lawless speculates about the practical implications of Watters v. Wachovia, the OCC preemption case.  We'll surely have a lot to say about the Watters case here in the coming months, including its administrative law implications.  (Disclosure:  Public Citizen joined an amicus brief in Watters and we'll be providing assistance to petitioner's counsel.  We're counsel for the respondents in the FCRA cases.)

• Emerging Issues in Class Actions:  The UCLA Law Review has published an interesting batch of papers from its symposium on emerging issues in class actions.  The papers include an empirical study on incentive awards to class action plaintiffs by Theodore Eisenberg and Geoffrey Miller; an article on Backdoor Federalization by Samuel Issacharoff and Catherine Sharkey; an article considering various proposals to enhance fairness hearings by William Rubenstein; and a piece by Richard Nagareda discussing the implications of Eisenberg & Miller's empirical research.

• An Ideological Flip-Flop?:  It used to be the case, back in the 1960's, that the conservatives were the ones who supported tort law and the liberals/progressives were the ones that thought it needed to be "reformed" (with statutory consumer protection regimes).  Now it's just the opposite, and the reasons are complex and worth pondering.  So says Stephen Sugarman of Berkeley in a draft paper posted at SSRN, Ideological Flip-Flop: American Liberals are Now the Primary Supporters of Tort Law.  (via Point of Law)

Defense Department Appropriations Bill Includes Precedent-Setting Ban on Arbitration Clauses for Service People

by Paul Bland

I've just seen what I understand is the final language of Sen. Talent's amendment to the DoD appropriations bill, which is aimed at protecting service people against the predations of payday lenders.  Several weeks ago, the Defense Department released a ground-breaking report, which discussed how predatory lending by pay day lenders was harming our national security. There is a body of evidence showing that pay day lenders have particularly targeted service people for years (co-blogger Chris Peterson has published a study on this point that left little doubt), and many service people have had their military careers interrupted as they were unable to extricate themselves from the cycle of debt.  The DoD study brought a torrent of publicity -- USA Today broke the story on the front page a few weeks ago, and in the intervening weeks, literally dozens of newspapers have editorialized in support of the DoD's recommendations.  Senator Talent and a number of other legislators decided to take action.

While the centerpiece of the legislation is a hard 36% usury cap on loans to covered military personnel, there is also a provision dealing with mandatory arbitration.  This provision, which was also strongly supported by the DoD, states

"Notwithstanding section 2 of title 9, or any other Federal or State law, rule, or regulation, no agreement to arbitrate any dispute involving the extension of consumer credit shall be enforceable against any covered member [of the U.S. armed forces] or dependent of such member, or any person wh owas a covered member or dependent of that member when the agreement was made."

This language apparently has made it out of the conference committee!

Blogosphere Aboil

So the ABA Journal reports about New York's proposed ethics rules that would make it difficult for attorneys to blog.

Tackling the FDA's Preemption Arguments

by Deepak Gupta

Suits by injured consumers against drug companies and the regulation of drugs by the Food and Drug Administration have peacefully co-existed for many decades.  But since the Bush Administration came to Washington, the FDA has taken the position that consumers should not be able to sue drug companies for harm caused by medications.  Without citing any instance in which a verdict for a plaintiff has undermined federal regulation, the agency contends that lawsuits conflict with federal regulation by asking jurors to second-guess the FDA’s assessment of the safety of a drug and the adequacy of its label.  Emboldened by the FDA’s new view that federal regulation of drug labels preempts a broad range of personal injury claims, drug companies have been making motions to dismiss or for summary judgment in cases throughout the country.

Today, a group of public interest organizations filed this amicus brief, written by my colleague Allison Zieve, opposing a drug company's preemption arguments in a case before the U.S. Court of Appeals for the Third Circuit. The case, Colacicco v. Apotex and GlaxoSmithKline, was brought by a man whose wife committed suicide a few weeks after she began to take an SSRI antidepressant. He claims that the defendants failed to warn of the risk of suicide associated with the drug. (The drug’s label now carries such a warning.)

Two-Faced Policy Claims in Support of Mandatory Arbitration

by Paul Bland

Anyone with even a passing familiarity with trends in consumer law will have noticed that a large and rapidly growing number of corporations have inserted binding mandatory arbitration clauses in the fine print of their standard form contracts. Most consumers in the U.S. cannot get a loan, a checking account, a car, cell phone service, residential phone service, nursing home care, a computer, pest control service, or a host of other goods and services without submitting to an arbitration clause.

This growing trend raises an obvious question: why should tens of millions of Americans have to give up their constitutional right to a jury trial, and instead submit their legal disputes to private judges largely selected by corporations, in a process that is rather secretive and almost completely unreviewed by courts?

Corporate America answers this question with claims that mandatory arbitration is supposed to be much fairer, cheaper and faster than the American civil justice system.

While there are an enormous number of retorts that could be offered to these claims, perhaps the most telling is corporate practice itself: corporations don’t act like they believe these claims.

The American Pipe Rule and Successive Class Actions

by Brian Wolfman

    University of Pittsburgh law professor Rhonda Wasserman has written an interesting article on the question whether the American Pipe and Crown, Cork class action tolling rules apply to successive class actions.  The article, “Tolling: The American Pipe Tolling Rule and Successive Class Actions,” 58 U. Fla. L. Rev. 803 (2006), is available here.

    Assume that a class action is timely filed on behalf of the named plaintiff and all of the absent class members.  May an absentee pursue an individual action if class certification is denied without worrying about whether the limitations period is blown?  Generally, yes.  In American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), the Supreme Court held that the statute of limitations is tolled from the filing of the class action complaint to the denial of class certification for an absentee who thereafter seeks to intervene in the action to pursue her individual claims.  And, in Crown, Cork & Seal Co. v. Parker, 462 U.S. 345 (1983), the Court applied the same tolling rule for absentees who, after certification is denied, file separate actions rather than seeking to intervene in the original action.

    But what is the rule where, after certification is denied, the absentee initiates another class action?  Generally, Professor Wasserman concludes that tolling is appropriate in two circumstances:

Supreme Court Grants Fair Credit Reporting Act Petitions

by Scott Nelson

The Supreme Court granted two cases this morning, Safeco v. Burr and GEICO v. Edo, which present the question whether a "willful" violation of the Fair Credit Reporting Act (FCRA) can be established by proof that the defendant recklessly disregarded the law.  The cases arise from a set of related cases in which the Ninth Circuit, following Third Circuit precedent under FCRA as well as Supreme Court precedents interpreting other statutes with willfulness requirements, held that reckless disregard would suffice and remanded for discovery and, ultimately, decisions on whether the defendants' conduct met that standard. (We mentioned these cases last week, in a post previewing the Court's "long conference.")

The defendants in the cases sought Supreme Court review based largely on the Ninth Circuit's statement that it disagreed with an Eighth Circuit decision requiring knowing disregard of legal requirements to satisfy the willfulness standard.

There were a number of reasons we had hoped the Court would choose to deny certiorari, including distinctions among the cases in the different circuits and the absence of a developed factual record to frame the issue of willfulness.  (Here's our Brief in Opposition.)  Nonetheless, the Court's decision to hear the cases is not terribly surprising in light of the Ninth Circuit's express statement that it was choosing to side with the Third Circuit over the Eighth on the willfulness issue.

Soliciting Thoughts about Teaching Consumer Law

by Orly Lobel

Next spring, I will be teaching for the first time a full-fledge course entitled Consumer Law. I have taught courses in the past called “welfare and justice” and I have included in them and in my employment law seminars questions about consumer protection; corporate social responsibility and the roles of consumers in the global economy. Yet I have never taught a full consumer law course. Also in terms of research, I am only now getting more into the field. My scholarship up till now has been more focused on employment policies and regulatory law, but I feel there are many parallel question that span across these areas and I would love to develop more thinking about private law theory and its relation to new governance and regulatory practices.

I am in the process of putting together some materials, as I was not quite satisfied with the casebooks that are out there. I would love to get comments on what readers think a consumer law course should include. My idea is to offer a survey on legal issues that pertain to business strategies, commercial transactions, and consumerism. Here are some of the issues that I hope to cover: information privacy and e-commerce -- identity theft, unsolicited commercial e-mail (SPAM), data-mining, Computer Fraud and Abuse Act and the Uniform Computer Information Transactions Act and other aspects of consumer privacy; warranties, price discrimination, lemon laws, false advertisements, predatory lending and other unfair business practices, such bait-and-switch, and non-binding estimates; current developments in product liability; consumer arbitration, class actions, and political consumerism. I think there are lots of possibilities in such an upper level course to weave legal doctrine with insights from social sciences, business strategies and managerial theories, and experimental psychology on consumer behavior (for example, my own collaborative research on consumer decision making and some more elaborate empirical findings here). There is also much going on on the EU front on consumer law so possibly I could add some comparative inquiry into the mix.

I posted some of these questions on prawsblawg and here are some of the suggestions I got in the comments:

New York Sun on Attorney Advertising

by Greg Beck

Since this blog first covered the effect that New York's proposed advertising rules will have on attorney bloggers, the blogosphere has been abuzz about the new rules.  Legal blogs that have weighed in against the rules include the Volokh Conspiracy, the Trademark Blog, Recording Industry vs. the People, Law.com, Real Lawyers Have Blogs, and New York attorney Nicole Black at Sui Generis, one of the first to start blogging about the issue.  The FTC has also come down against the rules, concluding they are bad for consumers.

Now the story has  made the jump from the blogosphere to the mainstream press, as reporter Joseph Goldstein covered the issue in today's New York Sun.  It is clear from the article just how confusing the new rules would be in practice.  A federal defender who blogs on the Second Circuit Blog was unsure whether the rules would affect his blog.  Because the blog includes a short biography of the lawyer, there is no reason they would not.

Hopefully, the blog storm on the issue has resulted in some useful comments to New York's Office of Court Administration.  If you haven't yet commented, it's not too late.  The deadline has been extended until November 15.