Consumer Law & Policy Blog

A Look Back at the Year 2007 in Federal Consumer Protection Legislation

Just in time for New Year's Eve, the folks at The Consumerist have compiled a handy list of significant federal consumer-protection legislation that was introduced in the year 2007. Of the 7,440 bills introduced this year, the editors identified less than 15 as "consumer friendly." And most of the bills are still pending, which means there's a lot of work to do in 2008.

Sarah Ludington Article on Liability for Traders in Consumer Information

Sarah Ludington of Duke's article "Reining in the Data Traders: A Tort for the Misuse of Personal Information, " in 66 Maryland Law Review, can be found at http://ssrn.com/abstract=1008343.

Here's the abstract:

In 2005, three spectacular data security breaches focused public attention on the vast databases of personal information held by data traders such as ChoicePoint and LexisNexis, and the vulnerability of that data. The personal information of hundreds of thousands of people had either been hacked or sold to identity thieves, yet the data traders refused to reveal to those people the specifics of the information sold or stolen. While Congress and many state legislatures swiftly introduced bills to force data traders to be more accountable to their data subjects, fewer states actually enacted laws, and none of the federal bills were taken to a vote before the election in 2006. In large part, individuals remain powerless to discover the information a data trader holds about them, to discover what information was sold or stolen, to prevent data traders from using their personal information in unauthorized ways, or to hold
data traders accountable for lax security.

The Article argues that a new common law tort should be used to force reform and accountability on data traders, and to provide remedies for individuals who have suffered harm to their core privacy interests of choice and control-choice about who may receive their information, control over the information revealed, and how the recipient of that information may use it. The Article examines the current legislative and common law regimes, concluding that there are no effective remedies for individuals who have suffered harm from data misuse. Given the ineffective legislative response to the security breaches of 2005, the Article argues that the existing scheme of common law privacy torts should be expanded to create a new tort for information misuse. The new tort borrows from existing privacy torts - in particular, the tort of appropriation - and existing privacy statutes, importing the Fair Information Practices from the Privacy Act of 1974 as a standard of care.

Dutch Government Mandates Open Source Software

A new Dutch law will require that Dutch government agencies use open source software - -  non-proprietary programs that anyone can modify and that work with a variety of technology - - unless proprietary software is necessary to accomplish their objectives.  As you might imagine, Microsoft thinks the Dutch law is a bad idea.  Read about it here.

Fourth Circuit FCRA Identity Theft Decision: Sloane v. Equifax

Readers of this blog will likely be interested in the Fourth Circuit's recent Fair Credit Reporting Act decision in Sloane v. Equifax, No. 06-2044 (Dec. 27, 2007). The case concerns an instance of identity theft that severely affected the plaintiff's home and work life. Equifax's failure to respond to the plaintiff's requests and to follow its own procedures are laid out in the court's opinion. The Fourth Circuit rejected all of Equifax's arguments on liability and most as to emotional distress damages, but did reduce the emotional damages from $245,000 to $150,000. (The jury's $106,000 economic damages award was left in place.) The opinion also discusses the societal scourge of identity theft. Well worth reading.

Jennifer Chandler on Negligence Liability for Breaches in Data Security

Jennifer A. Chandler of the University of Ottawa Faculty of Law has authored "Negligence Liability for Breaches of Data Security," forthcoming in the Banking and Finance Law Review.  Here's the abstract:

Due to the concern over identity fraud, data security issues are now attracting growing attention from legislators, legal scholars, and an increasing number of litigants. This article addresses the possibility of using liability in negligence as a means to deter unreasonably careless data security practices as well as to offer compensation to those harmed by data security breaches. Part I of the article discusses the need for civil liability in order to deter careless data security practices. Part II reviews U.S. cases involving negligence liability for breaches of data security, identifying the key problems facing plaintiffs. Part III addresses additional legal problems that may face plaintiffs in the Canadian context, and Part IV draws on case law and regulatory decisions to suggest some conclusions about what are "reasonable" security measures.

You can download the article at http://ssrn.com/abstract=998305.

Video Professor Drops Lawsuit Against Anonymous Critics

by Greg Beck

Colorado infomercial company Video Professor this week dismissed its lawsuit against 100 anonymous defendants who had posted critical comments about its products and billing practices online. Earlier this month, the company withdrew subpoenas that had sought the identity of anonymous posters on the website infomercialscams.com. The company continued, however, to pursue a separate subpoena for the identity of a Wikipedia user who had allegedly written "flagrantly defamatory" (though unspecified) statements about the company in the online encyclopedia. Public Citizen this Monday filed an opposition to Video Professor's motion to extend the time for service of process, arguing that Video Professor's claims were too vague and that its pursuit of an entirely new subpoena threatened to turn the case into a roving commission, giving the company power to discover the identities of anyone criticizing it online. A day after the motion was filed, Video Professor dropped its case entirely.

Paul Alan Levy has a statement on Public Citizen's victory.

Robert Hunt Primer on Debt Collection

Robert M. Hunt on the Fed has written "Collecting Consumer Debt in America" available at   
http://ssrn.com/abstract=993249.  Here's the abstract:

Why should economic scholars study the consumer debt collection process? First, the cost and effectiveness of the collections process has implications for the pricing and availability of consumer credit. Second, changes in technology and the structure of credit markets have transformed the collections industry. Small mom-and-pop operations are increasingly being replaced by firms operating nationally, collecting on billions of dollars in bad debt purchased from
creditors.

This article explores how creditors and their agents attempt to collect past-due consumer debt, particularly unsecured debt.Creditors have a number of remedies open to them, but their
effectiveness is limited by the fact that consumers can file for bankruptcy. Even outside of bankruptcy, consumers enjoy a variety of legal protections, including some they may not be aware of.

More ABA cowtowing to the defense bar

Most plaintiff lawyers long ago concluded that the American Bar Association should really be called the "American Defense Bar Association," because of a  bias in favor of white-shoe, tall-building defense lawyers and the evildoers they represent. The ABDA (whoops, I mean, "ABA") tries to demonstrate its balance by creating a few oases within its organization where plaintiff lawyers can perceive themselves to be more at home.

One of these perceived oases (although "ghetto" would be more accurate) has been the Consumer & Personal Rights Litigation Committee.

That perception, at least on my part, came to a halt when I opened the Winter 2007 Newsletter of that Committee, which had arrived over the holiday.

In short, almost the entire issue is a puff promotional piece for defense firm Reed Smith, presented by way of an incorrect statement of the laws and the facts involving matters of which I have significant knowledge.

I was appalled (though sadly, not surprised) to see that (but for a short piece on class action certification standards), the entire issue was devoted to work we've been doing at CSPI.

There was an article by the lawyers from Reed Smith that discussed both our KFC lawsuit and our threatened litigation against Kellogg and Viacom on marketing to kids. And then the Reed Smith lawyers were given another four pages of “interview” to espouse their own views. (I don't know if they paid for what was really just four pages of trolling for clients, but they should have done.)

Neither the authors nor the editors of the Newsletter contacted me to get CSPI’s views. This was significant because the article is both factually and legally incorrect on several points. To name a few:

• The KFC suit was about trans fat  —  which is about heart disease and not weight —  but the authors falsely linked it to obesity litigation.
• The authors failed to mention that CSPI had withdrawn from the KFC lawsuit before the court dismissed the case (because we felt the case had become moot with KFC’s decision to get rid of trans fats).
• It mentions that CSPI “indicated” that it would not pursue legal action against Kellogg. CSPI did quite a bit more than "indicate" —  significant press coverage discussed the fact that CSPI negotiated a significant settlement with Kellogg, which then served as a basis for other companies’ agreements with the BBB to control kid marketing.
• In its discussion of the Kellogg suit, the article stated that plaintiffs would have to “establish that because of Viacom’s efforts children are actually consuming less healthy food than they otherwise would. But where is the evidence of that?” Two things are wrong here — first, Mass law does not require proof of consumption (as the Aspinall case made quite clear) and, second, there is plenty of evidence that kids are in fact consuming less healthy food because they are consuming more junk food.
• In a footnote to the article, the authors say that “CSPI presents no proof that so-called unhealthy foods are marketing as anything other than snacks and treats.” Any number of problems here — First, it is not incumbent on CSPI to “present proof” at the demand letter stage. Presumably, these Reed Smith lawyers understand this basic premise of our legal system. Second, how would they know what CSPI can do, since they did not contact us? Third, CSPI in fact has evidence that marketers market junk food as more than just “snacks and treats.” Fourth, the lawyers ignore the fact that the ads are directed to kids as young as three — who simply don’t have the cognitive capacity to understand what’s healthy and what’s not, but who do believe that what Sponge Bob tells them to do is a good thing (and SpongeBob is the prime offender in shilling junk foods on Nickelodeon).

And I’ve just scratched the surface. This is shameful, but not entirely surprising for the ABA. A pity that it is done by one of the few ABA committees that even pretend to be of direct interest to plaintiff lawyers.

As a sidelight, the Newsletter did not disclose any conflicts of interest that the Reed Smith lawyers might have had that could influence their objectivity. Recently, medical journals in this country finally (after pressure largely applied by one of my colleagues at CSPI) agreed to require their authors to disclose when research was paid by members of industry. Maybe the authors of those journal articles would not fudge their results, but it was important that readers know of the potential.

Lawyers ought to behave at least as professionally. Perhaps the ABA authors  assumed that EVERYONE KNOWS THAT REED SMITH LAWYERS ARE LACKEYS FOR BIG BUSINESS WHO WILL SAY WHATEVER GETS THEM THE MOST NEW CLIENTS.

Or perhaps they just forgot to mention this fact, just as they seem to have forgotten to check their facts or contact CSPI.

More Views of the Subprime Mess

Steve Chapman of the Minneapolis Star-Tribune offers a different take on the subprime crisis in his column "The First Thing We Do, Let's Blame all the Lenders," which appears to oppose government intervention.  Some excerpts:

Why should someone who has kept the terms of a contract be penalized for the benefit of the party that didn't? A lot of people took a calculated gamble on interest rates and home prices. Had they bet right, they'd be reaping the rewards. Since they bet wrong, they are entitled to bear the consequences.

It's true that if lenders have committed fraud with phony information about their loans, they deserve to be separated from their ill-gotten gains. At the same time, honest ones shouldn't be punished for offering creative terms just because the loans sometimes go bad.

* * *

If the government imposes the punitive option, another problem will arise down the road: Lenders will be far less willing to offer credit to people with flawed credit records.

The consequence of this approach is clear. We'd be robbing tomorrow's subprime borrowers for the benefit of today's. Of course, when it comes to proposed solutions, robbery seems to be the order of the day.

Nick Slade of the Caveat Emptor Blog responds here.

Meanwhile, Times columnist Joe Nocera has a piece on the FDIC's chair Sheila Bair, who conceived what became the Bush administration plan for dealing with the mortgage crisis.  Here are some excerpts on what led up to the crisis:

Particularly troubling to [Ms. Bair] was a series of popular adjustable-rate mortgages — loans with teaser interest rates of, say, 7 percent that would reset within a year or two at much higher interest rates. “That could often bring a payment shock of 30 to 40 percent,” she said.

The truth is, when these loans were made, nobody ever expected that they would be repaid. Instead, the widespread assumption was that they would be refinanced before the reset ever kicked in. “If you look at the 2003 originations,” she pointed out, “they were almost all refinanced instead of reset.” That was possible of course, because housing prices were still rising at a historic pace —and everyone believed they would keep going up forever.

But of course, the rise in housing prices was unsustainable, and by 2007, the housing bubble was over. Suddenly all those new homeowners with adjustable-rate subprime mortgages poised to reset in 2008 and 2009 were stuck.

The article also describes some of the other events leading up to the Bush plan and offers criticism of the plan.  It's worth reading.  Another Times columnist, Floyd Norris, compares the Fed's proposed rules to the movie "It's a Wonderful Life" here.

Then there's the litigation.  The Times reports here on the Illinois Attorney General's investigation of Countrywide and suit against mortgage broker One Source.  An excerpt:

The attorney general’s lawsuit contended that One Source put borrowers into loans with terms they did not understand, especially so-called pay option adjustable-rate mortgages. * * * These Countrywide was One Source’s main provider of pay option loans, documents in that case show.

* * *

Donald Wagner, a professor . . . at North Park University on Chicago’s North Side, is a One Source client who has talked to the attorney general about his troubles with a Countrywide pay option loan. In March 2005, he refinanced his fixed-rate mortgage to help pay for his daughter’s college education. He said the One Source broker did not tell him his low teaser rate — less than 2 percent — would jump after just one month.

“I kept asking them and checking on that,” Mr. Wagner said. “Then it jumped to more than 7 percent and now it’s up to 8 percent plus and it’s going to jump again. I am actually paying out over 60 percent of my monthly income, and it’s only so long that I can do that.”

* * *

One Source also used high-pressure tactics to rush borrowers through their loan closings, according to the suit. Most of the closings took less than 30 minutes, the attorney general said, with some only 10 to 15 minutes. One borrower was told that “it would take two days to explain everything,” and that the closing had to take place before that.

Some borrowers told Illinois investigators that they did not know One Source brokers had inflated their incomes to get them a larger mortgage. One consumer provided pay stubs and tax returns to One Source showing her income to be $2,200 a month, the suit said. Only later did she discover that One Source had listed her monthly income as $9,000.

Is this a case of dueling stories?  It seems more likely that different borrowers had different reasons for taking out their loans. 

What about mediation?  They're trying that in Iowa, as discussed here.

Oh, and want to find out the real cost of mortgages but don't trust (or can't decipher) the TILA and RESPA disclosures?  Try http://www.feedisclosure.com/, as discussed here.

And here is another story on the impact of the crisis and foreclosure on a family.

More on the Fed and Subprime Lending

by Jeff Sovern

The Fed's role in regulating subprime lending--or not--continues to draw comment. Boston Globe cartoonist Dan Wasserman's take on the Fed's proposed regulations is on the right. Times columnist Paul Krugman's withering column on the Fed's failures to regulate can be found here.  Krugman refers to the Fed's proposal as "the Fed’s locking-the-barn-door-after-the-horse-is-gone decision to modestly strengthen regulation of the mortgage industry."  He adds:

With millions more foreclosures likely, it’s a good bet that homeownership will be lower at the Bush administration’s end than it was at the start.

* * *

So where were the regulators as one of the greatest financial disasters since the Great Depression unfolded? They were blinded by ideology.

* * *

In a 1963 essay for [Ayn] Rand’s newsletter, Mr. Greenspan dismissed as a “collectivist” myth the idea that businessmen, left to their own devices, “would attempt to sell unsafe food and drugs, fraudulent securities, and shoddy buildings.” On the contrary, he declared, “it is in the self-interest of every businessman to have a reputation for honest dealings and a quality product.”

It’s no wonder, then, that he brushed off warnings about deceptive lending practices, including those of Edward M. Gramlich, a member of the Federal Reserve board. In Mr. Greenspan’s world, predatory lending — like attempts to sell consumers poison toys and tainted seafood — just doesn’t happen.

I'm not sure Mr. Greenspan still holds by what he wrote in 1963, especially since he recently said in an interview that the government should help homeowners facing foreclosure by giving them direct financial assistance (an account is here) but it's still interesting.  Krugman also discusses how federal regulators have preempted state attempts to stop predatory lending.