Consumer Law & Policy Blog

Buyology and Consumer Law

I've been listening to the audio version of Martin Lindstrom's Buyology, a book about the neurological basis of marketing.  Lindstrom is a branding expert and marketer and reports on what brain scans have contributed to the art of marketing.  For example, as Lindstrom recently wrote about in a New York Times op-ed, Inhaling Fear, brain scans of smokers indicated that not only did health warnings about smoking not light up the fear section of the brain, but they actually stimulated the brain's craving spot.  Lindstrom describes a host of other discoveries about how the brain responds to marketing.  Among these are "mirror neurons," neurons that fire in response to stimulation and cause us to feel what the people we observe are feeling.  For example, when we watch a movie with people who feel sad, we feel sad.  Similarly, when teens observe attractive models at Abercrombie and Fitch wearing Abercrombie clothes, their mirror neurons flash, and they think they too will feel attractive if they wear Abercrombie clothes (I still don't get why Abercrombie has shirtless guys at the front of their stores, though maybe I don't really want to know the answer to that one). 

Does this have any implications for consumer law?  I'm not sure.  You could argue that brain-scan-based marketing raises questions for consumer law, like is it fair or deceptive to use marketing that is based on how the brain reacts to stimuli.  In terms of the FTC's deception analysis, is seeing an attractive model in Abercrombie clothes likely to deceive the teenage consumer acting reasonably under the circumstances into thinking that he or she will be more attractive in Abercrombie clothes, given that the teen's mirror neurons are flashing just that message, even though nothing to that effect is said or implied?  I think we have a while to go before the FTC and courts adopt that approach, if indeed they ever do, which may only mean that our consumer protection laws have become somewhat outmoded.  Similarly, does the use of mirror neurons, using the FTC's unfariness analysis, cause a substantial injury which cannot reasonably be avoided by the consumer that is not outweighed by countervailing benefits to consumers?  It's hard to see a benefit to consumers in the triggering of mirror neurons to stimulate purchases, and consumers can't reasonably avoid something that they're not aware of.  Manipulating a consumer into making a purchase the consumer would otherwise not make seems like a substantial injury.  But do we want regulators to prohibit the use of this technology to stimulate sales?  I'm not sure. 

This seems like a fruitful subject for a law review article, and perhaps for FTC study.  Science fiction meets consumer law.  I hope someone will have fun with it.

A Comment on HUD's New RESPA Regulations

Last month, when HUD came out with its new RESPA regs, we blogged about it here.  I've been going through the regs more carefully in connection with an update to our casebook that my co-authors and I are preparing (we're hoping to get something out in time for the spring semester), and I am struck once again by what an improvement the new Good Faith Estimate appears to be over the former form, in most respects.  HUD did extensive consumer testing of the new form and alternatives, and it shows.  The form comes in somewhat long at four pages, but I guess HUD thought that struck the right balance between information overload and leaving out important information.  I suspect the new form will do as good a job as can be done in acquainting consumers with the terms of their loans--at least, those consumers who learn from reading such forms .  The one uncertainty I have about the form is the disclosure of yield-spread-premiums.  YSPs are the fees mortgage brokers charge their borrowers that are then added to the principal of the loan.  YSPs don't seem objectionable in principle, but in practice they have been subject to abuse.  Brokers have sometimes charged huge fees--ostenstibly for securing a lower interest rate--and studies have shown that people of color often get charged higher YSPs than whites.  It appears that YSPs have enabled brokers to obtain much larger compensation than other forms of compensation, and under the former form, it's easy to see why.  The old HUD-1, provided at settlement, disclosed the yield-spread premium under the heading “POC,” or “payment outside closing.”  Few consumers knew what this meant.  The new form discloses, on the second page, the orginator’s origination charge, and describes it as the “charge for getting this loan for you.”  So far, so good.  Presumably consumers who see a high number in that line will negotiate for a lower fee or else switch brokers.  A second block then states the credit the consumer receives for the interest rate, which is described as reducing the settlement charges; and the charge the consumer pays for the interest rate, which is described as increasing the settlement charges.  I find that confusing.  I think, though I'm not sure, that the credit will reflect the YSP, since the YSP is added to the principal, and so is not included in the settlement charges.  I wonder if consumers will read a high total, and then see the YSP styled as a credit, and think it's OK then because it's a credit.  But again I'm not sure.  Let's hope HUD's consumer testing reflects what consumers understand in the real world, and that I'm wrong.

Times Article About WaMu's Striking Lending Decisions

The Times has an amazing article today, By Saying Yes, WaMu Built Empire on Shaky Loans, about Washington Mutual's loan decision-making process.  The article describes how one now-jailed supervisor kept drug paraphernalia on his desk, claims by borrowers were rarely confirmed--no matter how outrageous, and loans were made to many unqualified borrowers.  Just to give the flavor, here are some excerpts, but the article has a lot more of this and puts it in a broader context:

* * * The borrower was claiming a six-figure income and an unusual profession: mariachi singer.

Mr. Parsons could not verify the singer’s income, so he had him photographed in front of his home dressed in his mariachi outfit. The photo went into a WaMu file. Approved.

* * *

“It was the Wild West,” said Steven M. Knobel, a founder of an appraisal company, Mitchell, Maxwell & Jackson, that did business with WaMu until 2007. “If you were alive, they would give you a loan. Actually, I think if you were dead, they would still give you a loan.”

* * *

On another occasion, Ms. Zaback asked a loan officer for verification of an applicant’s assets. The officer sent a letter from a bank showing a balance of about $150,000 in the borrower’s account, she recalled. But when Ms. Zaback called the bank to confirm, she was told the balance was only $5,000.

The loan officer yelled at her, Ms. Zaback recalled. “She said, ‘We don’t call the bank to verify.’ ” Ms. Zaback said she told Mr. Parsons that she no longer wanted to work with that loan officer, but he replied: “Too bad.”

Times Examines How the Bush Administration Contributed to the Subprime Crisis

Last Sunday, December 21, the Times published White House Philosophy Stoked Mortgage Bonfire, a lengthy study of how the Bush Administration contributed to the subprime bubble.  The article describes how the Bush administration policies of promoting both free enterprise and home ownership led to promoting home ownership by those who could not pay for those homes.  The entire article is worth reading, but here is an excerpt:

As for Mr. Bush’s banking regulators, they once brandished a chain saw over a 9,000-page pile of regulations as they promised to ease burdens on the industry. When states tried to use consumer protection laws to crack down on predatory lending, the comptroller of the currency blocked the effort, asserting that states had no authority over national banks.

The administration won that fight at the Supreme Court. But Roy Cooper, North Carolina’s attorney general, said, “They took 50 sheriffs off the beat at a time when lending was becoming the Wild West.”

Norm Silber on Late Payment Fees

One of my favorite writers on consumer law, Norm Silber of Hofstra, has written Late Charges, Regular Billing, and Reasonable Consumers: A Rationale for a Late Payment Act, 83 Chicago Kent L. Rev. 855 (2008).  Here's the abstract:

This essay considers the reasonable behavior of consumers in relation to law and the policies that tolerate the assessment of late payment penalties, fees, and surcharges. Attention is trained principally on the inadequately-regulated cycle of creditor billing and debtor repayment practices, rather than on excessively high fees. The focus here is on the credit card issuers and, to a lesser degree, the wireless telecommunication vendors. Problems associated with late fee billing cycles cut a wide swath of billing for recurring debt repayment, however. A variety of different demands on consumers imposed sector-by-sector interact to magnify the consumers' difficulties.

Part I addresses the multitude of ways that billers can impose late fee charges. This Part also identifies those deficiencies in legal regimes that aid and abet those who send out bills, by acquiescing to strategies that induce late fee revenue. Part II considers some information-processing and other cognitive difficulties that arise from the late payment regime, and contends that unearned redistribution from consumers to billers results from such incoherence and confusion, and also results in general welfare losses. Part III reviews existing statutory and common-law causes of action through which consumers might hope to recover from billers who intentionally or recklessly diminish the likelihood that deadlines will be met. Part IV proposes a Late Payment Act that illustrates the type of approach that could be adopted on a state - or nation - wide basis to address several of the key shortcomings.

Hoofnagle & King on Company Sharing of Consumer Information

Chris Jay Hoofnagle and Jennifer King, both of Berkeley, have co-authored Consumer Information Sharing: Where the Sun Still Don't Shine.  Here's the abstract: 

In late 2007, the popular social networking site Facebook.com adopted "Beacon," an application that informs Facebook users' friends about purchases made and activities on other websites. For example, if a Facebook user bought a movie ticket on Fandango.com, that user's friends would be informed of that fact through a news "feed" on Facebook. Some users objected vigorously to the Beacon application, because their activities were reported on an opt-out basis, meaning that the user had to take affirmative action to prevent others from learning about their activities. An activism website, Moveon.org, organized a protest, calling users to action by asking, "When you buy a book or movie online - do you want that information automatically shared with the world on Facebook?" Facebook responded to these critiques by changing its policy to obtain express approval before activities on other sites would be shared with friends.

The Facebook folly demonstrates how intensely consumers reject the "sharing" of personal information for marketing purposes. In this instance, consumers learned of Facebook's strategy because it was transparent and obvious to the individual. But what most do not realize is that, in the absence of a specific law prohibiting information sharing, businesses are generally free to monetize their customer databases by selling, renting, or trading them to others. In fact, the sale of customer information is a common, albeit opaque practice that, if disclosed at all, is usually mentioned in a "privacy policy." Facebook's Beacon simply made information sharing obvious to users.

Studies have shown that most consumers oppose the sale of personal information. Unfortunately, most consumers are under the misimpression that a company with a "privacy policy" is barred from selling data. To learn more about information selling, the authors, using a California privacy law, made requests to 86 companies for a disclosure of information sharing practices. The results show that while many companies have voluntarily adopted a policy of not sharing personal information with third parties, many still operate under an opt-out model that is inconsistent with consumer expectations, and others simply did not respond to the request. Based on these results, the authors propose several public policy approaches to bringing business practices in information sharing in line with consumer expectations.

Foreclosures Ease a Bit

By Alan White

Two new foreclosure reports are out today, one from HOPE Now and one from the federal bank regulators (OCC and OTS).  November foreclosure filings are down in a trend that started in August, and modification numbers overall are increasing.  The number of foreclosure sales also eased off a bit in November, and we will probably end calendar 2008 with a little less than one million completed foreclosure sales.  The combined effect of various state (like Florida) and lender-initiated moratoria (like Citi and Marshall & Ilsley) and the growth in modification agreements seems to be having an impact. 

At the same time, the OCC/OTS report cautions that mortgages modified in the first quarter of this year were redefaulting at high rates.  After three months, 19% were more than 60 days past due, and that rate grew to 37% after six months.  Although the vast majority of mortgages are securitized (about 88% in the OCC/OTS sample) the regulators did find that redefault rates were substantially lower for mortgages held by lenders in their own portfolios.  This could be due to the lenders' greater flexibility to make aggressive modifications, such as reducing principal and forgiving past-due interest rather than capitalizing those amounts.  This hypothesis is consistent with data from Credit Suisse and Merrill Lynch showing that modifications that reduce interest, principal and payments have better performance than modifications that capitalize unpaid amounts and do not reduce interest.  The increasing number of modifications still consists mostly of the wrong kind.

In sum, modifications and moratoria are slowing down foreclosures but are not getting homeowners into sustainable debt repayment, yet.  Many of the failed modifications from 2008 will be back in 2009; the question is whether we will have learned enough, and broken through the legal and other obstacles, in order to start the process of deleveraging homeowners in earnest.   

New Class Action Fairness Act Decision

In a split decision, the Fourth Circuit has held in Palisades Collections LLC v. Shorts, No. 08-2188 (Dec. 16, 2008), that the Class Action Fairness Act's removal provision, 28 U.S.C. 1453(b), does not permit a counter-defendant to remove a class action counterclaim to federal court.

New Credit Card Regulations

OTS has now approved new credit card regulations.  Their fact sheet includes the following summary of the regs:

1. Interest rate changes — The rule (Section 535.24) requires savings associations to disclose at account opening the annual percentage rates (APRs) that will apply to the account and prohibits savings associations from increasing APRs unless expressly permitted. Savings associations are permitted to increase a rate at the expiration of a specified period, provided that the increasing rate was also disclosed at account opening. Once an account has been open for a year, a savings association may increase the rate for new transactions by providing a 45-day advance notice, as required by Regulation Z. Savings associations may also increase a variable rate due to the operation of an index. Finally, they may increase a rate on existing balances when the consumer is more than 30 days delinquent in paying the credit card bill.

2. Reasonable time to pay — The rule (Section 535.22) prohibits savings associations from treating a payment as late unless the consumer has been provided a reasonable amount of time to make the payment. As a “safe harbor,” a reasonable time would be considered to be 21 days.

3. Payment allocation — When an account has balances with different APRs, the rule (Section 535.23) requires savings associations to allocate amounts paid in excess of the minimum payment using one of two specified methods: either allocating the excess payment to the highest interest balance, or proportionately to all balances.

4. Double-cycle billing — The rule (Section 535.25) prohibits savings associations from using the practice sometimes referred to as two-cycle billing, when a savings association imposes finance charges based on balances associated with previous billing cycles.

5. High-fee subprime cards — The rule (Section 535.26) prohibits savings associations from charging fees for the issuance or availability of credit that consume the majority of the available credit during the first year after account opening. Fees exceeding 25 percent of the available credit must be spread over no less than the first six months that the account is open, rather than charged as a lump sum during the first billing cycle.

The regs appear here.

Update: the Fed approved the regs; the relevant web page is here.

New Credit Card Rules Expected to be Adopted Tomorrow

Reuters reports here that the Fed, the Office of Thrift Supervision, and the National Credit Union Administration are expected to adopt the regs, which run about 1,000 pages, tomorrow.  The regs are expected to bar double-cycle billing, universal default, and to limit the ability of credit card issuers to increase rates on balances.