Consumer Law & Policy Blog

FDA To Provide Public Listing of Drugs Under Investigation

In a major prescription drug safety development, the FDA has decided to post every three months a list of drugs whose safety is under investigation by the agency. This Washington Post story provides details.

The Bail Out of Freddie and Fannie

Following up on yesterday's Post, here's a detailed Washington Post article on the planned federal government bail out of Freddie Mac and Fannie Mae. The plan includes dismissal of the companies' top executives and their board members. Shareholders will be wiped out. Here's the most recent New York Times story on the subject.

Foreclosure Crisis - Bad and Getting Worse

By Alan White

Foreclosures in the United States have reached their highest level since the Great Depression. One of every eleven mortgages is now in default or foreclosure. That's more than five million American homes in trouble. Just in April, May and June, 600,000 foreclosures were started, and by June 30, 1.7 million mortgages were in foreclosure. Subprime adjustable-rate mortgages are a catastrophe: new foreclosures in that category are running at nearly 30% annually. Friday's MBA press release with the 2nd quarter numbers doesn't even disclose the total inventory of subprime ARMs in foreclosure. Delinquencies and foreclosures for "prime" adjustable-rate mortgages, which include option ARMs and other alt-A products, are rapidly deteriorating.

The Mortgage Bankers Association survey does not report on completed foreclosure sales, just foreclosure starts and total foreclosures in process. Completed foreclosure numbers are available from the HOPE NOW data releases. In 2007 they estimated there were roughly 1.5 million foreclosures started and 500,000 foreclosure sales completed. (The remaining million are on payment plans, caught up, or are working their way through the foreclosure process.) In the first half of 2008 there were 450,000 completed foreclosure sales, i.e. nearly as many in six months as in all of last year.

If you think of the foreclosure crisis as a hurricane, the eye has not hit the coast yet. We are now getting the hurricane-force winds of the first bands, i.e. the appallingly-underwritten subprime ARMs that defaulted before their rate resets. The full effect of this year's resets on subprime ARMs will come in the next few months, while 2009 will feature the breakdown of the option ARMs, with their resets that typically double the monthly payment. The continuing decline in home prices, as well as the lack of available refinancing options, mean that all the loans that are now in the delinquency categories will continue their way through the foreclosure process, adding to the numbers.

The imminent nationalization of Fannie Mae and Freddie Mac (NYTimes story) while perhaps restoring some confidence in the short-run, cannot resolve the underlying debt crisis. The GSE's are being hit by both the decline in home values and the losses on subprime mortgage-backed securities they hold. Without government intervention to stop the tide of foreclosures and their attendant loss and waste, taxpayers will have to absorb continuing losses after the GSE shareholders are wiped out. As the taxpayers become the mortgage investors of last resort, it seems all the more reasonable for taxpayers to demand action to broadly restructure existing mortgages to align them with home values, instead of allowing foreclosures at 50% loss rates to continue.

A note on numbers - the MBA reports 4 million mortgages in default or foreclosure, but that number is from their survey sample which covers 80% of all mortgages (45 out of 60 million residential mortgages). I extrapolate MBA's numbers to the entire mortgage market.

Government to Seize Fannie Mae and Freddie Mac?

The New York Times just reported that senior officials from the Bush Administration and the Fed say the government is preparing a plan to seize Fannie Mae and Freddie Mac and place them in a conservatorship. 

Reverse Redlining Predatory Lending Complaint

The Associated Press, via Law.com, reports here that a Texan has brought a reverse redlining predatory lending suit suit.  According to the article, the plaintiff charges that she was "victimized by a loan with onerous terms because of her skin color. "  Baltimore City in Maryland had previously sued a lender on a similar theory.  The article doesn't indicate the authority for the reverse redlining claim (perhaps section 3605 of the Fair Housing Act?), but notes that the plaintiff is suing under HOEPA and the Texas State Constitution.

Ninth Circuit Severs Non-Preempted Portion of CA Financial Information Privacy Act

by Leah Nicholls

Yesterday, a divided Ninth Circuit panel held that the preempted portions of California's Financial Information Act were severable from those that were not preempted by the federal Fair Credit Reporting Act (FCRA).  The California law sought to protect consumers' nonpublic personal information by requiring financial institutions to conspicuously notify consumers that their information may be shared with affiliates and to provide the opportunity for consumers to direct that the information not be disclosed.  The FCRA explicitly prohibits state restrictions on affiliates sharing information.

Previously, the Ninth Circuit had held that the FCRA preempted the information-sharing restriction in the California law as to information considered to be "consumer report" information under the FCRA.  On remand, the district court found that no portion of the California statute survived preemption, and even if it did, was not severable.  A majority of the Ninth Circuit reversed, noting first that the parties had conceded on appeal that not all the nonpublic personal information covered by the California statute was "consumer report" information as defined by the FCRA.  The court then reasoned that California law would permit severing the application to "consumer report" information from the statute, thereby upholding the application of the statute to non-consumer report nonpublic personal information.  The dissenting judge disagreed only with the majority's severability analysis.

The case is American Bankers Ass'n v. Lockyer, No. 05-17163 (9th Cir. Sept. 4, 2008).

Butler and Johnston Provide Economic Analysis of UDAP Statutes

Henry N. Butler of Northwestern and Jason Scott Johnston of Penn have written "Consumer Harm Acts? An Economic Analysis of State Consumer Protection Acts."  Here's the abstract:

State Consumer Protection Acts (CPAs) were adopted in the 1960s and 1970s to protect consumers from unfair and deceptive practices that would not be redressed but for the existence of the acts. In this sense, CPAs were designed to fill existing gaps in market, legal and regulatory protections of consumers. From an economics perspective, CPAs were designed to solve two simple economic problems: 1) individual consumers often do not have the incentive or means to pursue individual claims against mass marketers who engage in unfair and deceptive practices; and, 2) because of the difficulty of establishing elements of either common law fraud or breach of promise, those actions alone are too weak an instrument to deter seller fraud and deception. The most striking lesson of our analysis is that the typical state CPA - with relaxed rules for establishing liability, statutory damages, damage multipliers, attorneys fees and costs, and class actions - solves the basic economic problem that CPAs were intended to address several times over. The effect of this redundancy in solutions is that CPAs can deter the provision of valuable information to consumers and, thus, harm consumers. That is, as currently applied state Consumer Protection Acts harm consumers. This need not be the case. A few modest reforms would dramatically improve the impact of CPAs on consumer welfare.

Links to Some Articles in the Journal of Consumer Affairs

Last Saturday, I posted here the table of contents for the Fall 2008 Journal of Consumer Affairs.  Some of the pieces are available for free on the web; here are the links:

Pet Peeves: Trademark Law and the Consumer Enjoyment of Brand Pet Parodies

            Ross D. Petty

            http://www3.interscience.wiley.com/cgi-bin/fulltext/121390306/PDFSTART

The Often-Forgotten Non-Funeral Consumer Grief for the Grieving

            Elizabeth Taylor Quilliam

            http://www3.interscience.wiley.com/cgi-bin/fulltext/121390303/PDFSTART

Cautions and Concerns in Experimental Research on the Consumer Interest

            Marla B. Royne

            http://www3.interscience.wiley.com/cgi-bin/fulltext/121390307/PDFSTART

Can You Really Say That?

            Herbert Jack Rotfeld

           http://www3.interscience.wiley.com/cgi-bin/fulltext/121390302/PDFSTART

You can read the abstracts for the remaining articles here.

Rebecca Tushnet on Commercial Speech Regulation and the First Amendment

Rebecca Tushnet of Georgetown has written "It Depends on What the Meaning of 'False' is: Falsity and Misleadingness in Commercial Speech Doctrine," 41 Loyola L.A. L. Rev.  Here's the abstract:

While scholarship regarding the Supreme Court's noncommercial speech doctrine has often focused on the level of protection for truthful, nonmisleading commercial speech, scholars have paid little attention to the exclusion of false or misleading commercial speech from all First Amendment protection. Examining the underpinnings of the false and misleading speech exclusion illuminates the practical difficulties that abolishing the commercial speech doctrine would pose. Through a series of fact patterns in trademark and false advertising cases, this piece demonstrates that defining what is false or misleading is often debatable. If commercial speech were given First Amendment protection, consumer protection and First Amendment protection would be at odds. Rebutting the idea that constitutionally protected commercial speech could effectively address consumer abuses through fraud statues and would not be offensive to the First Amendment, the piece explains that subjecting commercial speech to First Amendment scrutiny would almost completely contract the scope of false advertising law and erode consumer protection. The piece concludes that while excluding commercial speech from constitutional protection has real costs, we are better off in a system that regulates false and misleading commercial speech without heightened First Amendment scrutiny.