Consumer Law & Policy Blog

Is Enforcement of Credit Card Late Fees Unconstitutional?

Seana Shiffrin of UCLA discusses the constitutionality of the enforcement of credit card late fees in her article "Are Credit Card Late Fees Unconstitutional? 15 William & Mary Bill of Rights Journal 1 (2006).  Here's the abstract:

State Farm Mutual Automobile Insurance Co. v. Campbell articulated serious and specific constitutional constraints upon the imposition of punitive damages. Justice Kennedy's majority opinion announced that, apart from exceptional cases, punitive damages should not exceed nine times the amount of the actual losses sustained by the plaintiff and should usually be far lower. Indeed, the opinion observed, they typically should be much lower, citing double, treble, and quadruple multipliers as instructive examples. Some commentators have worried that the decision could adversely affect consumer interests by offering insulation for tortuous behavior that is difficult to detect or litigate. This Article will explore, however, the decision's unheralded ramifications for contract law, ones that may serve consumer interests.

The constitutional standards articulated in State Farm call into question the constitutionality of those statutes and regulations that authorize credit card issuers to charge legally enforceable late penalties but place no significant limitations on their size. Analyzed through the lens of traditional contract law, these penalties are punitive damages for breach that, as such, would typically be invalidated but for positive legislative efforts to override this traditional treatment. Through federal and state statutes and regulations, credit card companies have gained government authorization to levy enforceable penalties that far exceed what the guidelines identified in State Farm permit. To be precise, disproportionately high credit card late fees themselves are not unconstitutional, but State Farm calls into constitutional question their legal enforcement. It also calls into constitutional question the federal and state statutes that authorize and facilitate the imposition of these high late fees, which override both consumer protection statutes to the contrary and traditional contract doctrines that entirely disallow punitive damages.

You can find the article at http://ssrn.com/abstract=961030.

Mortgage Meltdown Web Page

The National State Attorneys General Program at Columbia Law School has assembled a web page of links pertaining to the subprime mortgage meltdown. Given the focus of the Program, the page focuses particularly on actions taken by state attorneys general. 

Research into the Payoff Disclosures for Open End Credit Under the 2005 Amendments to TILA

Thomas A. Durkin of the Fed has a Working Paper available here titled "Requirements and Prospects for a New Time to Payoff Disclosure for Open End Credit Under Truth in Lending." Here's the abstract:

The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Public Law 109-8, April 2005) made significant changes to procedures for managing consumer bankruptcy petitions, but it also included amendments to the Truth in Lending Act. Notable among the Truth in Lending changes is a section providing for new disclosures on the length of time it will take consumers to repay open end credit accounts in full if they make only the minimum required payments. This paper explores the range of assumptions necessary for the calculations underlying the new required disclosures, examines the sensitivity of the disclosures to variations in the assumptions, and explores the potential for inaccuracy in the required disclosures based upon consumers' use of their open end credit accounts. For the latter exploration, the paper examines consumer survey evidence and employs a large longitudinal sample of credit card accounts to measure how often consumers' actual patterns of use of their credit card accounts match the assumptions of the new disclosure.

Journal now online

The current issue of the Journal of Consumer and Commercial Law is no online. The Journal is published by the Center for Consumer Law at the University of Houston Law Center, as a service to the members of the Texas Bar. It focuses primarily on issues of interest to

Texas

attorneys. Consumer lawyers everywhere, however, will find many of the articles of interest, such as Mark Budnitz’s excellent article on payment systems. To see the Journal, visit http://www.jtexconsumerlaw.com/

Times Articles on Lemons, Nonprofit Payday Loans, Responses to the Mortgage Meltdown, and More

It's time for another roundup of recent New York Times articles on consumer law, including some articles that don't have anything to do with the mortgage crisis.  On Sunday, the Times ran a piece on cars that had been declared lemons but that were nevertheless resold without being so designated.  An excerpt: 

To see what happens to lemons, Experian Automotive, which specializes in collecting and analyzing automotive data, picked at random 1,000 Florida vehicles that were branded lemons, from a list on a state Web site. Experian found that 555 had been taken out of the state. And four-fifths of those 555 cars no longer had titles branding them as lemons, according to an analysis conducted for The New York Times.

The article also notes that some states require that lemons be so labeled, discusses litigation by those who have unwittingly purchased such lemons, reports on the FTC's failure to act, and quotes consumer advocates as suggesting a national database of lemons is needed.

Today's paper included a report on nonprofit payday loans, while yesterday's included an editorial titled "The College Credit Scam" in which the Times called upon colleges that allow credit card issuers to solicit students on campus to take steps to protect vulnerable students, an issue that is highlighted in the documentary "Maxed Out."  The editorial concluded "Congress, when it convenes next week, should move forward with planned legislation that would tighten federal supervision over the credit card industry while improving disclosure laws and outlawing deceptive practices."

But the mortgage meltdown has also come in for its share of attention.   Last Friday the Times reported here on state statutes intended to limit the damage from subprime lending.  North Carolina, Maine, Minnesota, and Ohio have enacted such statutes and other states are considering them.  And an article in today's paper reports on possible federal responses to the problem.

Selected Consumer Statute Book Available

Here comes a blatant piece of self-promotion: an announcement of the publication of our book, "Selected Consumer Statutes."  Though the book was originally conceived of as a statutory supplement for our casebook, my co-authors (Professors Spanogle, Rohner, and Pridgen) and I concluded that it might be useful to others--including lawyers practicing consumer law---and so we have molded it into a general compilation of statutes, regulations, and other materials on consumer law.  The volume includes the Consumer Credit Protection Act (the Truth in Lending Act, Fair Credit Reporting Act, Equal Credit Opportunity Act, Fair Debt Collection Practices Act, Electronic Fund Transfer Act) and associated regulations (including Regulations Z, M, B, E, and the regulations implementing the Fair and Accurate Credit Transactions Act); excerpts from the Federal Trade Commission Act and selected FTC regulations and guides, the Magnuson-Moss Warranty Act and implementing regulations, telemarketing materials, CANSPAM, excerpts from the Gramm-Leach-Bliley Act and associated regulations, excerpts from the UCC and the U3C, various other federal, state, and international materials, and a list of helpful web sites.  You can find it on Amazon's web site here.

Counting (and Reducing?) Identity Thefts

We previously blogged here about media coverage of the proposal by Chris Jay Hoofnagle of Berekeley to require lenders to report figures on identity theft.  Mr. Hoofnagle's article on that subject will appear in the Harvard Journal of Law and Technology.  Here's the abstract:

There is widespread agreement that identity theft causes financial damage to consumers, lending institutions, retail establishments, and the economy as a whole. Surprisingly, there is little good public information available about the scope of the crime and the actual damages it inflicts. The publicly available data on identity theft come mainly from survey research. Methodologically, these survey polls of the public suffer from being both under and over-inclusive in measuring the problem. As a result, low estimates attribute tens of billions of dollars in costs to the economy and consumers, the highest estimates place losses in the hundreds of billions.

To identify proper interventions and appropriately allocate resources we need comprehensive, hard data on the scope and effect of identity theft. One way to provide concrete data is to require lending institutions to publicly report figures on identity theft. Such public reporting will help identify the relative need for intervention and the likely efficacy of interventions. These disclosures are necessary to provide a sound baseline for investment by businesses and action by regulators. They are also warranted because the public pays the price of identity theft directly when they are the victim, and indirectly through higher fees, interest rates, and because the losses are tax subsidized.

The author hypothesizes that if lending institutions reported limited information about identity theft, it would reveal that identity theft is both more prevalent and economically damaging than currently acknowledged, in part because of the rise of synthetic identity theft, a form that cannot be measured by victim surveys because they are unaware of the crime. Furthermore, the disclosure requirement would birth an anti-identity theft market, and the prevalence and severity of the crime would decrease dramatically as institutions compete to offer the safest financial products to consumers.

You can download the full article here.

More Times Stories on the Mortgage Meltdown

A number of articles in the Times in the last week have been inspired by the mortgage meltdown.  An editorial in today's paper, titled  "Foreclosure and Taxes," after noting problems with taxation of forgiven debts (our earlier posts on that subject can be found here), including erroneous tax assessments, argues:

Congress needs to pay attention. * * * the help that is most needed now is for overwhelmed state, local and nonprofit agencies that counsel beleaguered homeowners on how to renegotiate loans and how to get free or low-cost advice on tax and legal issues. There is no reason for Congress to delay on this.

An article earlier this week reported on Democratic proposals to deal with the broader mortgage problems; the link is here.  In general, the Democrats favor more aggressive approaches than the Bush administration.  Finally, an article in last Sunday's Real Estate section, "Short Sales: Saving Borrowers the Stigma of Foreclosure," reported on how consumers can avoid foreclosure by agreeing to a short sale, though at the cost of damage to their credit report, the loss of their home (and perhaps, in light of the later reports, a hefty tax bill).

Subprime Mortgage Advertising Still At Full Throttle

Today's Washington Post has this article indicating that, despite the crunch in the subprime mortgage market, advertising to subprime borrowers has been largely unaffected.

Links for Consumers Facing Foreclosure

The Federal Reserve Board has put together a list of links for consumers facing foreclosure or having difficulty making mortgage payments.