Consumer Law & Policy Blog

Cato Institute on Reining in Class Actions

by Steve Gardner

There are absolutely many bad class actions, but I fear that this has resulted more in bad court decisions on good class actions than anything else. I think our current framework adequately addresses the problems, provided the trial courts are adequate guardians of class members’ rights.

A senior fellow at the conservative Cato Institute has a different opinion. See Mark Moller, Class Action Lawmaking: An Administrative Law Model, 11 Texas Review of Law & Politics 39 (2006).  Starting with the premise that courts are making law and not just interpreting it, Moller advocates turning federal courts into little more than administrative agencies that defer to the Legislative Branch as much as possible, using the Chevron model for determining the amount of deference to be paid (which this fellow thinks should be mighty much).

Defense Department Seeks Comments

by Deepak Gupta

Wanna give the Pentagon a piece of your mind?  No, not about the War in Iraq.  In today's Federal Register, the Department of Defense is issuing a notice of proposed rulemaking to implement the landmark predatory lending protections enacted as part of the defense authorization bill earlier this year.  As many of you are probably aware, this legislation is a big deal; among other things, it included a ban on arbitration clauses and a usury cap, and may signal a new willingness on the part of Congress to limit mandatory binding arbitration in consumer contracts and rein in predatory lending abuses.  The impetus was a DoD report on predatory lending, which drew heavily on an empirical study by co-blogger Christopher Peterson.  (We've previously discussed the issue here, here, here, here, here, and here.)

The proposed rules cover a lot of ground.  Consumer advocates watching this issue had feared that the DoD would give in to industry pressure to severely limit the scope of the protections in the new bill; that appears to be what has happened.  For example, the rules define the scope of the protections so that they would not cover residential mortgages, home equity loans, auto finance loans, and a wide range of transactions other than payday loans, refund anticipation loans (a.k.a. RALs), and auto title lending.  The regs also set strict duration limits and monetary limits on the amount of loans included in the definition of "payday loans." 

Comments on the NPRM are due by June 11, 2007.   At this link, you can read the comments previously filed by the consumers groups that have been leading the charge on this issue: the National Consumer Law Center, Consumer Federation of America, Center for Responsible Lending, and Consumers Union, and the National Association of Consumer Advocates.

Two Consumer Lending Articles of Interest

I wanted to alert readers to two articles in today's USA Today, both concerning consumer debt.  This article is about the serious legal and practical difficulties faced by sub-prime mortgage borrowers who want to restructure their debt and avoid foreclosure.  And this article concerns New York Attorney General Andrew Cuomo's on-going antitrust investigation into the student loan market.  The investigation apparently focuses on unearthing exclusionary relationships between colleges and lenders.

Puffery, the Magic Dragon

by Steve Gardner

As with pornography, judges seem to believe that they know puffery when they see it.  More precisely, courts sometimes use puffery as a pretext for dismissing deceptive sales practice lawsuits that they don’t think much of. An excellent summary of exemplary opinions can be found in a new article in the National Law Journal for April 9, 2007, The Power of Puffery, by J. Russell Jackson.

The author is with a big old defense firm, so not surprisingly, he likes the variety of ways that courts use to boot a case based on a finding of puffery. Also not surprisingly, the author fudges somewhat in his description of consumer law, the better to meet his argument: “[T]he First Amendment to the U.S. Constitution protects commercial speech about products, so long as it is not false.”  More accurately, the Supreme Court has said that commercial speech can’t be “misleading.” Central Hudson Gas & Electric Co. v. Public Service Comm’n of New York, 447 U.S. 557 (1980).

There is a whale of a difference between outright falsity and misleading claims. For example, the author’s statement about commercial speech is false.  Other points in his article are merely misleading.

Class Action Settlement Scam

by Deepak Gupta

Oklahoma's Attorney General, W.A. Edmondson, is alerting the public to a new scam involving notices of a fictional class action settlement. This type of scam is particularly disturbing because it has the potential to make consumers wary of legitimate settlement notices, thereby decreasing response rates.

The scam, Edmonson said, comes in the form of a letter notifying consumers they have been identified as a victim of fraud in evidence presented in a class action lawsuit.

“The letter informs the consumer they have been selected to receive compensation under the terms of an out-of-court settlement,” Edmondson said. “The letter also contains a check in the amount of $2,975, and it directs the recipient to contact a specified law office within five business days to ‘facilitate the release’ of the full award – in this case $129,000.

“My suspicion is that when the consumer contacts the law firm, they are asked to provide bank account information so that the full award can be deposited. By the time the enclosed check bounces, the scammers will have had ample time to clean out the consumer’s bank account.”

Edmondson said his office has been unable to pinpoint the source of the scam, but there are several red flags within the letter.

“The letter states that all parties involved in the class action lawsuit are sealed, and no specific information is available regarding the type of scam to which the recipient has supposedly fallen victim,” Edmondson said. “The letter also requires the consumer to contact a Michigan law firm in a very short period of time, and because of a ‘gag order’ the consumer risks forfeiting his share of the money if he contacts anyone to check the validity of the settlement. Any one of these things would send up a red flag. Together, they set off lights and sirens.”

Foreclosure Prevention Guide

by Jon Sheldon

     NCLC just got back from the printer today a new  book, Foreclosure Prevention Counseling: Preserving the American Dream (340 pp. with CD-Rom). The guide provides detailed advice on the mechanics of obtaining a workout, with specific options for Fannie Mae, Freddie Mac, subprime, FHA-insured, VA, and Rural Housing Service loans.  The book also examines ways families can reduce expenses, increase income, and avoid loans that can get them into even more trouble. Other topics include legal defenses to foreclosure, special rights of those in the military, challenges to overcharges and servicer errors, bankruptcy as a way to stop a foreclosure, and steps to take even after the foreclosure.  (View the table of contents here.)

The appendices and companion CD-Rom contain sample forms, checklists, and other key documents, along with state by state summaries of foreclosure and real estate tax abatement laws. Math software helps evaluate workout possibilities.  For more details and ordering information, visit the NCLC website here, or call 617-542-9595.

Dangerous Kitchen Stoves

By Brian Wolfman

Public Citizen, U.S. PIRG, and the Consumer Federation of America held a press conference on Thursday alerting the public to dangerous kitchen stoves that, because they are so light-weight, have a tendency to tip over and maim and kill consumers.  For more information, go to the "Killer Stoves" website.  Here's an excerpt from the beginning of the groups' joint press release:

Approximately 15 to 20 million kitchens in the United States are equipped with a range that can tip over and crush, scald or burn whoever is standing in front of it....  Public Citizen, U.S. PIRG and the Consumer Federation of America detailed the longstanding problem in most brands of electric and gas ranges that affect households throughout the country.

According to documents from the Consumer Product Safety Commission and the national retailer Sears, manufacturers and the government have known about this lurking danger for more than twenty years. Since the early 1980s, manufacturers of ranges began using lighter-gauge steel to reduce costs, even though they quickly learned that this resulted in a tendency for the lighter-weight appliances to tip over when weight was applied to the oven door.

The press release goes on to detail the number of deaths and serious injuries resulting from these stoves and the failure of regulators and manufacturers to insure that anti-tipping brackets are installed on the stoves.

Do Poor Cash Customers Subsidize Credit Card Rewards for Affluent Consumers?

Adam Levitin of Georgetown University Law Center argues that they do in a paper titled "Priceless? The Social Costs of Credit Card Merchant Restraints," available at http://ssrn.com/abstract=973970. The abstract is as follows:

Who pays for credit card rewards? This Article demonstrates that credit card rewards programs are funded in part by a highly regressive, sub rosa subsidization of affluent credit consumers by poor cash consumers. In its worst form, food stamp recipients are subsidizing frequent flier miles. The subsidization is created by a set of credit card network rules called "merchant restraints" that combines with a cognitive bias known as the framing effect to limit merchants' ability to price payments systems according to cost.

The Article also shows how the subsidization of credit card use increases the use of credit cards for transacting. A set of cognitive biases amplifies increased transacting usage into an increase in credit card debt. Credit card merchant restraints thus ultimately contribute to credit defaults, reduced consumer savings and purchasing power, inflation, and consumer bankruptcy filings.

There are profound policy implications to the social externalities caused by credit card merchant restraints, including whether private control of essential services like payment systems is appropriate. In light of the negative social externalities of credit card merchant restraints, the Article proposes regulatory or legislative intervention to ban merchant restraint rules.

Here's some blog commentary on the paper.

Working Paper on Net Neutrality

Net neutrality continues to draw attention.  Nicholas Economides' paper working paper, "'Net Neutrality', Non-Discrimination and Digital Distribution of Content Through the Internet" can be found on SSRN at http://ssrn.com/abstract=977096.  The abstract is as follows:

The vast majority of US residential consumers face a monopoly or duopoly in broadband Internet access. Up to now, the Internet was characterized by a regime of net neutrality where there was no discrimination in the price of a transmitted information packet based on the identities of either the transmitter or the receiver or based on the application or type of content that it contained. The providers of DSL or cable modem access in the United States, taking advantage of a recent regulatory change that effectively abolished net neutrality and non-discrimination protections, and possessing significant market power, have recently discussed implementing a variety of discriminatory pricing schemes. This paper discusses and evaluates the implication of a number of these schemes on prices, profits of the network access providers and those of the complementary applications and content providers, as well as the impact on consumers. We also discuss an assortment of anti-competitive effects of such price discrimination, and evaluate the possibility of imposition of net neutrality by law.

FTC Roundtable on the Economics of Internet Auctions

SSRN recently posted "FTC Bureau of Economics Roundtable on the Economics of Internet
Auctions: An Executive Summary"  The abstract reads as follows:

On October 27, 2005, the Bureau of Economics at the Federal Trade Commission hosted a roundtable on the Economics of Internet Auctions. This one-day conference brought together academic experts, industry professionals and government economists to discuss and learn about Internet auctions. This paper is a brief summary of the papers presented and panel discussions at the conference. The conference covered three main issues: (1) fraud and information problems on consumer-to-consumer Internet auction sites like eBay, (2) competition between auction sites and amongst auction site users,
and (3) the data generated from auction sites and what inferences may be drawn from such data. The keynote address was given by Prof. Hal Varian. Varian discussed the auctions used by Google to sell keyword searches.

The full text can be found at  http://ssrn.com/abstract=912672