Consumer Law & Policy Blog

Katherine Porter on the Credit Industry's Business Model for Postbankruptcy Lending

Katherine Porter of Iowa and the Credit Slips Blog has an article forthcoming in the Iowa law Review, Bankrupt Profits: The Credit Industry's Business Model for Postbankruptcy Lending.  Here's the abstract:

Consumer credit and consumer bankruptcy filings have grown rapidly over the last two decades, and several researchers have attempted to understand the relationship between these two intertwined features of the modern American economy. Teasing out causation is almost impossible, as consumer advocates lay blame on the industry and the industry responds by citing the same data to show consumer misbehavior. Using a novel vantage point, this analysis examines what the credit industry's behavior toward recently bankrupt families reveals about its internal profit models and the likely causes of consumer bankruptcy. The empirical evidence on postbankruptcy credit solicitation belies the industry's characterizations of bankrupt families as opportunistic or strategic actors. Original data from longitudinal interviews with consumer debtors show that many lenders target recent bankrupts, sending these families repeated offers for unsecured and secured loans. The modern credit industry sees bankrupt families as lucrative targets for high-yield lending, a reality that has important implications for developing optimal consumer credit policy and bankruptcy law.

You can download the article at http://ssrn.com/abstract=1004276

In Australian Gold Case, Court Protects Consumers from Low Prices

by Greg Beck

The Eastern District of New York's recent decision in S&L Vitamins v. Australian Gold is another troubling case for consumers who shop online. The case involves one of a series of claims by Australian Gold, which makes tanning lotions, against those who sell its products for discounted prices on the Internet. Australian Gold sells its lotions to distributors, who contractually promise to resell the products only to retailers that offer a "salon environment." According to Australian Gold, this contract term is designed to ensure that retailers receive adequate training on how to use the products. Although I can't say whether Australian Gold's tanning lotion really requires a lot of training to use, a more likely explanation for the provision comes from the fact that the company's products are sold by third parties on the Internet at prices far below the prices available at salons. By cutting out low-priced Web resellers, the company can keep its products priced at a level that the market could not otherwise support.

S&L Vitamins bypassed Australian Gold's business model by purchasing the lotions from salons in bulk and reselling it online at half the retail price. Australian Gold claimed that S&L's conduct gave rise to several causes of action, including copyright and trademark infringement, unfair competition, tortious interference with contract, and false advertising.

Nancy Nord Responds

Acting Consumer Product Safety Commission chair Nancy Nord responds to criticisms of her agency and of travel that she and her predecessor took paid for by industry in this letter to the editor in today's Washington Post. Decide for yourselves whether Nord adequately defends the industry-paid travel. Nord also challenged one factual statement that has appeared in the Post.  She says that "the assertion that the agency has only one toy inspector is just flat-out wrong" and that the Post's statement in that regard is an "insult" to the CPSC.

NHTSA Safety Recalls for October 2007

The National Highway Traffic Safety Administration has issued its vehicle recall report for October 2007.

Frank bill lets Wall Street off the hook

by Alan White
Assistant Professor, Valparaiso U. School of Law

   Many thanks to Deepak for inviting me to post here. I'd like to begin with a note about the serious flaws in HR 3915, the predatory lending bill introduced by Barney Frank recently. Yesterday's New York Times editorial alluded to the bill's shortcomings. There has also been some false advertising on the part of the sponsors, who claim that "securitizers" will be liable for violations. This poorly-defined term simply camouflages the fact that the bill immunizes most subprime mortgage assignees from any liability. Consumers with loans from bankrupt lenders will be out of luck.

The bill would require mortgage originators to make a reasonable determination of repayment ability, and prohibit making loans without a tangible net benefit to the borrower. So far so good. However, the bill also bars any liability for "pools of loans" or "securitization vehicles". The critical language is buried in proposed Section 129B(d)(9). For most subprime mortgages, trusts, which are nothing more than pools of mortgage loans, are the entities that are the legal owners of the mortgage, and the only entity with any assets or ability to provide consumer redress. This is particularly true when the original lender has filed bankruptcy, as in the case of New Century and countless others.

House Hearing Today on Consumer Product Safety Reform

The House Committee on Energy and Commerce's subcommittee on Commerce, Trade, and Consumer Protection is convening a legislative hearing this morning on the pending bill to beef up the Consumer Product Safety Commission's authority, particularly with regard to regulation of children's toys.  Go here to find links to the witness list and a live webcast beginning at 10 a.m.

More on CPSC Travel Controversy

by Brian Wolfman

Today's Washington Post has more on the controversy over Consumer Product Safety Commission agency heads traveling at the expense of businesses regulated by the agency. The article presents differing points of view on the legality and wisdom of the practice. I had previously suggested that legality was besides the point and that, legal or not, it's a poor idea for an agency official to have her travel paid for by the businesses the official is supposed to be regulating. Today's article quotes a government ethics expert making a similar point more eloquently:

It's never a good idea to have your expenses paid for by a party or parties who will be advocating on a matter before your agency," said a career ethics lawyer at another government agency who requested anonymity because he was not cleared to comment for the record. "It's legal . . . but it is clearly an abuse of discretion. . . . It exhibited at best enormous insensitivity, and at worst outright disdain for the ethical principles of government service."

Jim Hawkins on Rent-to-Own Transactions

I've been reading an interesting article by Jim Hawkins on rent-to-own transactions, called "Renting the Good Life," to appear in the William & Mary Law Review.  Here's the abstract: 

Academic literature and court decisions are replete with calls to ban or severely inhibit the rent-to-own industry. The argument is simple enough: Rent-to-own firms charge exorbitant prices to the most needy and vulnerable segments of society.

The case for burdensome regulations, however, is much more difficult to make out than past scholarship has admitted. For the most part, academics have proceeded directly to propose specific regulations for the industry without first carefully analyzing the rent-to-own business or the reasons for imposing drastic regulations.

This Article examines the theoretical justifications for regulating the rent-to-own industry against the backdrop of interviews I conducted with key participants in the market, recent empirical data about the industry, and the industry's unique business model. I find that the case for completely banning the rent-to-own transaction is very weak. On the other hand, guided by insights from behavioral law and economics, policy makers have strong justifications for imposing regulations tailored to address the cognitive defects from which customers are most likely to suffer.

The article can be found at: http://ssrn.com/abstract=1003784

Stephen Colbert Exposes the "Center for Consumer Freedom"

by Deepak Gupta

Judging by the name alone, you might think that the Center for Consumer Freedom is an independent organization that advocates for consumers' rights to make informed choices in the marketplace. But consumer choice and consumer rights are pretty malleable concepts. As my favorite prankster faux-conservative Stephen Colbert revealed in a recent segment (below), CCF is an industry front group; its way of defending "consumers' rights" is to lobby aggressively for the interests of the industries that fund its public-relations campaigns. Here's Colbert with Rick Berman, the lawyer-lobbyist behind CCF:

Colbert: What do you do for the Center for Consumer Freedom?

Berman: I defend consumers' rights.

Times Editorial on CPSC

by Jeff Sovern

For more on the Consumer Product Safety Commission travel issues that Brian blogged about here, an editorial in today's Times, Playing Games With Toy Safety rejects calls for the resignation of Nancy Nord, acting chair of the CPSC, seemingly because the Times fears that "another vacancy might mean that even less would get done."  The Times opines:

Ms. Nord’s poor performance has taken on a more troubling cast with the disclosure that she has been traveling on the industry’s dime. As The Washington Post reported last week, she and her predecessor, Hal Stratton, accepted “gift travel” from those with business before the commission. It is hard to believe the agency’s lax approach was not affected by trips to places like China, Spain and a golf resort on Hilton Head Island, S.C.