Consumer Law & Policy Blog

Stripping the Meaning from Meaningful Choice

by Paul Bland and Alexis Rickher

In a series of decisions stemming back about 20 years, the U.S. Supreme Court has broadened the scope of the Federal Arbitration Act to make it possible for corporations to insist that their employees and consumers must submit more and more cases to mandatory arbitration. In making these decisions, the Court has effectively said “it’s alright to expand mandatory arbitration, because courts will guard individuals against unfair arbitration clauses using traditional rules of contract law.” Under the Supreme Court’s guidance, a consumer or employee can’t argue that mandatory arbitration is unfair in itself, but if a corporation has written an arbitration clause that tacks on other unfair provisions that are not necessarily a part of arbitration, courts can strike down those provisions as “unconscionable.” (See Footnote 1)

Following the Supreme Court’s guidance on this point, when corporations have tacked unfair provisions onto arbitration clauses, a host of courts have struck down those provisions as unconscionable and unenforceable in particular cases. There is a general rule of contract law in every state (although the contours and scope of this law varies quite a bit from state to state) that unconscionable — which can be roughly paraphrased as very unfair — contract terms will not be enforced, and courts have played an important role in blocking some of the most unfair types of arbitration clauses that some corporations have tried to force on their customers and employees. For example, some courts have struck as unconscionable the following types of arbitration clauses:

• Clauses that would require individuals with small claims to travel great distances across the country to arbitrate their claims. (See Footnote 2)
• Clauses that would not only send people to arbitration but would also re-write the laws, so that the statutes of limitations would be changed to the point that individuals would have to bring their claims within a few months of having been wronged, even where the laws normally applicable to their claims would give them several years to bring their claims. (See Footnote 3)
• Clauses that would require individuals to pay more in fees to the arbitrators than the amount of money at issue in their case. (See Footnote 4)
• Clauses that would require individuals to submit to gag orders that barred them from speaking to anyone — even relatives! — about the facts or outcome of their cases. (See Footnote 5)

Scam-Baiters Scam E-Mail Scammers

For those who would like to see e-mail scammers trapped in their own cons, Monday's Times had an article on people who do just that, headlined "A Web Cadre Turns the Tables on African Scam Artists."

More on "Another Form of Equity Skimming"

This equity skimming typically involves what we call a "foreclosure rescue scam" and NCLC has a detailed chapter on litigation approaches to saving the home and challenging the practice in the 2006 Supplement to our Foreclosures manual.  This discussion is updated in Foreclosures Second Edition (2007) which is at the printer and due for release at the end of this month.  (A money saving tip: buy the first edition and supp. within the next week at the old price and you will receive the second edition free when it comes out in a few weeks.)

Insurer Use of Credit Scores

NCLC has just released a report titled "Credit Scoring and Insurance: Costing Consumers Billions and Perpetuating the Economic Racial Divide," arguing against using credit scores to determine whether consumers will get home and auto insurance, and for what price.
    Insurance companies use credit scores - three digit numbers generated using a consumer's credit report - in insurance underwriting and ratesetting.  The new NCLC report documents the numerous problems with this practice, include a summary of the many studies indicating enormous racial disparities created by credit scoring.   
    "Credit scores are essentially a numerical expression of the huge economic divide we have based on race in this country," noted Chi Chi Wu, NCLC Staff Attorney and the report's primary author, "As such, the use of these scores in insurance perpetuates and reinforces this racial wealth divide."
    The NCLC report includes an analysis by Birny Birnbaum of the Center for Economic Justice on how insurance credit scores cost consumers billions of dollars every year, potentially in the neighborhood of $67 billion.  According to Birnbaum, "Insurers' use of credit scoring - the introduction of many, many rate levels based predominantly on the insurance score - has contributed to a dramatic increase in profitability."
Other issues addressed in the NCLC report include:

    Consumers lack information about the use of credit scoring in granting or pricing insurance, with only 36% in one survey indicating they know about the practice.

    Some of the factors used in insurance scoring models are questionable, such as penalizing consumers with fewer than 2 credit card accounts.  Credit scoring in general has been criticized for high rates of errors and data inconsistency between the major credit bureaus.

    The insurance industry alleges that credit scoring is predictive in forecasting which consumers will have higher losses yet they have not offered a satisfactory explanation as to why this correlation exists.

    Anti-discrimination laws present limited avenues to challenge the racial disparities created by credit scoring, especially with respect to home insurance.

    The report's authors call upon states to outlaw the practice of using credit scores in insurance.  The NCLC Insurance Scoring report is available at this link at NCLC's website.

Another Form of Equity Stripping

Tuesday's New York Times had an article, "New Scheme Preys on Desperate Homeowners".  A quote: 

With the housing market in decline, financial predators are finding yet another way to take advantage of people who fall behind on their payments.

The schemes take various forms and often involve promises to distressed homeowners of cash upfront, free monthly rent and a chance to retain their houses in the long run. But in the process, someone else takes over the deed, borrows as much as possible against the value of the house and pockets the cash. And, almost always, the homeowners still end up losing their homes.

Consumer Product Safety Commission Recalls for June 2007

You can find the Consumer Product Safety Commission's product recalls for June 2007 right here.

Airline Passengers' "Bill of Rights" Moving Through Congress

U.S. PIRG's Consumer Blog has this story on the movement of an airline passengers' "bill of rights" through Congress as part of Federal Aviation Administration reauthorization legislation.  The story explains why, in PIRG's view, the current version does not do enough to protect airline consumers.