Consumer Law & Policy Blog

Blueprint for Regulating Financial Services Released

The Bush Administration's Blueprint for Modernized Financial Regulatory Structure, released today, includes a proposal to consolidate consumer protection into a single federal agency. The press release provides a link to the full 218-page Blueprint. Although I have not digested the entire document, consumer protection strikes me as a bit of an afterthought in the overall scheme. The new agency, intended to consolidate functions now served to some extent by the FTC, Federal Reserve, HUD and banking regulators, would take charge of "business conduct" rules, including disclosure law, unfair and deceptive practices rules (including Section 5 of the FTC Act) and anti-discrimination laws like the Equal Credit Opportunity Act. Not surprisingly, the Blueprint is filled with free-market rhetoric ("price controls always result in inefficient outcomes"). Although unfair practice regulation is mentioned, one gets the sense that disclosure and nondiscrimination are the touchstones of the Treasury Department's vision for consumer protection.

While the Blueprint seems to preserve a role for state financial institutions regulators, it would impose federal oversight of the quality of state licensing for mortgage originators. More significantly, it calls for the Federal Reserve to take sole responsibility for regulating lender conduct in the mortgage market. Although it is not explicit, there seems to be a call for federal preemption of state mortgage regulation. This proposal is troubling, given the activity at the state level in regulating predatory mortgage practices (with North Carolina often cited as a model) during a time when Congress took virtually no action to curb mortgage abuses. In the enforcement arena, state regulators have been far more active than the FTC, HUD or the Fed in taking strong action against subprime market leaders, like UC Lending, First Alliance Mortgage, Household Finance, and Ameriquest. Consumer advocates have been understandably concerned about proposals that limit or preempt states' roles in writing and enforcing rules for the marketplace.

Fed Hearings on Countrywide merger

The Federal Reserve has announced public hearings in Chicago and Los Angeles on Bank of America's acquisition of Countrywide. The Fed will consider the public benefits and adverse effects of the merger as well as the Community Reinvestment Act performance of the two institutions, before deciding whether to approve the merger under the Bank Holding Company Act. Community groups are likely to appear and raise issues regarding Countrywide's efforts to prevent foreclosures. In many local jurisdictions Countrywide is the single servicer filing the largest number of foreclosures.

PIRG Report on On-Campus Credit Card Marketing

Over at U.S. PIRG's Consumer blog check out this comprehensive post about PIRG's new report on marketing of credit cards on college campuses. The post links to a number of useful items, including the report itself, which you can also find here.

Fitch Ratings: HOPE NOW not working

In a report dated March 25, 2008 (login required), Fitch Ratings has again revised (upward) its estimates of foreclosures and losses for subprime mortgages made in 2006 and 2007. The news is not good. Fitch reports that fewer homeowners who are behind are successfully catching up on payments ("rolling current") and far fewer are able to sell or refinance their homes to avoid foreclosure. Fitch predicts that 44% to 50% of 2006 subprime mortgages, and 40% to 45% of the 2007 subprime mortgages, will end in foreclosure and sale. It further predicts that loss severities will range from 56% to 64%. In other words, investors will recover 36% to 44% of the principal, interest and fees owed after foreclosure.

Their comment on the HOPE NOW Alliance and its efforts to reach out to borrowers: "Fitch has seen little evidence to date that these alternatives have helped mitigate foreclosure rates." Perhaps after being repeatedly accused of painting rosy scenarios to support its ratings, Fitch now is erring on the side of being too pessimistic. Let's hope so.

HT to Kevin B.

Arnold S. Rosenberg Paper Comparing Regulation of Unfair Bank Fees in the US and EU

Arnold S. Rosenberg has written Regulation of Unfair Bank Fees in the United States and the European Union: Current Trends and a Proposal for Reform, AN EVALUATION OF LEGISLATION REGARDING COMMERCIAL PRACTICES AND CONSUMER CREDIT IN THE EUROPEAN UNION, Bank of Malta, 2007, available at http://ssrn.com/abstract=1028163. Here's the abstract:

Due to the legislative power of the banking industry, the U.S. federal government has been more reluctant to place limits on bank fees and charges than the European Union (E.U.). There was a trend in the courts of several American states in the 1980s and early 90s toward striking down excessive bank fees charged to consumers, such as overdraft charges and late fees, through the application of state "Little FTC Acts," such as California's Unfair Business Practices Act. But this trend stalled due to the Supreme Court's decision in Smiley v. Citibank (1996); the assertion by the Office of the Comptroller of the Currency (OCC) of federal preemption of state laws on the subject; and state legislative and constitutional amendments, particularly in California, narrowing standing and remedies under the Little FTC Acts.

Meanwhile, the E.U. has been moving in the opposite direction. A casual reader of the Unfair Commercial Practices Directive adopted by the E.U. in May 2005 might think it is directed only at the sale of goods, because the Directive frequently refers only to "products." However, due to its expansive definition of "product" as including services, the Directive covers fees for bank services. These fees are also governed by the Distance Marketing of Financial Services Directive of 1998 and the Unfair Contract Terms Directive of 1993, as well as national regulations pursuant to the 1993 Directive such as those adopted by the United Kingdom in 1994 and 1999.

This article discusses these divergent trends, the factors that have contributed to them, and the rationales for and against bank fee regulation. It also sets forth a proposed solution to the problem of unfair bank fees through standardized regulation and review of consumer contract forms in the financial services industry.

ABA Antitrust Section Consumer Protection Roundup

Rebecca Tushnet of 43(B)log has a detailed consumer protection roundup from the spring meeting of the ABA's Antitrust Section.

Obama on foreclosures

Senator Obama gave a speech this morning in New York with his views and proposals on the foreclosure crisis. The advance text is available here (login may be required). It will probably be posted on the campaign web site soon. The other two leading candidates' recent speeches can be read via the links posted here on Tuesday. Senator Obama expresses support for the Frank bill and an unspecified version of the bankruptcy mortgage modification legislation, offers a $10 billion fund to help homeowners sell homes they cannot afford, penalties for fraud and better disclosures.

Paper on Google and Privacy

Omer Tene of the College of Management - School of Law, Israel, has written What Google Knows: Privacy and Internet Search Engines, available at http://ssrn.com/abstract=1021490.  Here's the abstract:

Search engines are the most important phenomenon on the Internet today and Google is the gold standard of search. Google evokes ambivalent feelings. It is adored for its ingenuity, simple, modest-looking interface and superb services offered at no (evident) cost. Yet increasingly, it is feared by privacy advocates who view it as a private sector big brother posing perhaps the biggest privacy problem of all times. Google is an informational gatekeeper harboring previously unimaginable riches of personal data. Billions of search queries stream across Google's servers each month, the aggregate thoughtstream of humankind, online. Google compiles individual search logs, containing information about users' fears and expectations, interests and passions, and ripe with information that is financial, medical, sexual, political, in short - personal in nature. How did Google evolve from being a benevolent giant seeking to do no evil into a privacy menace reviled by human rights advocates worldwide? Are the fears of Google's omniscient presence justified or overstated? What personal data should Google be allowed to retain and for how long? What rules should govern access to Google's database? What are the legal protections currently in place and are they sufficient to quell the emerging privacy crisis? These are the main issues addressed in this article.

Foreign Courts Wary of U.S. Punitive Damages

The New York Times reports that Italy’s Supreme Court has refused to enforce a U.S. punitive damage award, finding that “a peculiarity of American law — punitive damages — was so offensive to Italian notions of justice that it would not enforce the Alabama judgment.” The article then goes on to discuss how the rest of the world generally does not use punitive damages the way the U.S. does. As the article notes, in other countries, punishment is meted out by the criminal justice system, not a civil jury.

         To me, the interesting aspect of the article is the discussion of how U.S. legislatures and courts, particularly the Supreme Court, are limiting the use of punitive damages, bringing the U.S. more inline with the rest of the world. The article correctly reports that many states have eliminated or reduce punitive damages, mostly in response to “tort reform” lobbying. What the article does not discuss, however, is the fact that as punitive damages are eliminated, nothing else is put in place to punish or deter the wrongful conduct punitive damages punished. Unlike much of the world, which uses public enforcement, both civil and criminal, to regulate the marketplace, the U.S. has long relied on private lawsuits and the civil justice system to punish wrongful conduct. The movement to eliminate punitive damages continues, but not even a whisper is heard regarding the enactment of alternative methods of regulation.

Elizabeth Renuart and Diane Thomspon Paper on APR Disclosure

Elizabeth Renuart and Diane E. Thompson of NCLC have written The Truth, the Whole Truth, and Nothing But the Truth:  Fulfilling the Promise of Truth in Lending, available at  http://ssrn.com/abstract=1021318. Here's the abstract:

Evaluating the cost of credit and comparison shopping in the modern credit environment can be a daunting task, even for the most sophisticated shoppers. Lenders increasingly unbundle the costs of their loans from the interest rate into an array of fees, outsource their overhead to third parties who add to the consumer's cost, and unveil amazingly complex loan products that dazzle and confuse borrowers.

At the same time, the preemption of state usury and consumer protection laws by Congress and the federal banking agencies spurred deregulation at the state level. Today, the consumer credit marketplace is governed almost exclusively by disclosure rules. The subprime mortgage crisis of 2007 resulted from allowing the market to police itself and from the failure of disclosure to curb abuses.

Nearly forty years ago, Congress addressed the problems caused by lack of transparency in credit pricing when it enacted the Truth in Lending Act (TILA). Congress intended to promote informed consumer shopping and a level playing field for lenders by requiring standard disclosure of the cost of credit, most simply through the annual percentage rate (APR) and the finance charges upon which the APR is based. The value of the APR disclosure has deteriorated since 1968 due to exclusions from the finance charge definition created primarily by the Federal Reserve Board.

The article documents the history of this decline for the first time and describes the consequences of an APR disclosure that has become incrementally weaker as an indicator of the true cost of the credit. This article draws upon financial literacy, cognitive psychology, and behavioral economics literature to justify the need for a more effective APR.

The authors posit a simple litmus test for the finance charge that creates a more effective APR. They discuss why this test is superior to other proposed definitions of the finance charge and respond to arguments that a fee-inclusive APR is unhelpful to consumers and harms the industry.

This article is particularly timely because the Federal Reserve Board is currently undertaking a sweeping overhaul of TILA disclosure regulations, including the finance charge definition. Given the state of the credit marketplace, the authors conclude that a robust APR is more critical now than it was in 1968.