Consumer Law & Policy Blog

Using Misleading Keyword Advertising to Draw Consumers Away from Actual Complaint Web Sites

by Paul Alan Levy

The CBS affiliate in Atlanta has been running a series about Lifestyle Lift, a company previously discussed in this blog because of its attempt to suppress criticism by filing spurious trademark claims against Justin Leonard, who operated the consumer commentary site infomercialscams.com where criticisms as well as praise for Lifestyle Lift could be posted.  Lifestyle Lift has now sued the Atlanta news station for having had the temerity to provide both sides of the story, and the station has, in turn, run a story on Lifestyle’s penchant for suing its critics.  (See Part 5 of the story)

Contact with the station about their series inspired me to do a Google search for Lifestyle Lift for the first time since we defended Leonard against the Lifestyle Left suit.  The discussion pages about Lifestyle Lift at infomercialscams.com and RealSelf.com – another web site previously targeted by Lifestyle for trademark litigation – remained near the top of the unpaid search results, but I was intrigued to notice what seemed to be a new consumer complaint site at the top of the sponsored links: 

But clicking on this first ad leads not to a complaint site, or to a balanced review site, but to a web page created by Lifestyle Lift itself.  The page not only does not contain any complaints, it does not even discuss any complaints, even in the course of explaining why any complaints are ill-founded.  Toward the bottom of the page is hyperlinked anchor text that reads “Read Lifestyle Lift Client Reviews,” but that link leads to another Lifestyle Lift created page  that provides only positive reviews of the product.  The “former Stanford doctor” who supposedly speaks out is in fact the medical director of Lifestyle Lift.

New Jersey passes Foreclosure Relief Legislation

The New Jersey General Assembly passed legislation on Monday that provides homeowners with a six-month hold on foreclosure action while they seek a workout, and requires mortgage holders to maintain foreclosed properties.  The legislation also appropriates funds for non-amortizing second lien loans to homeowners.  The assistance loans are conditioned on the current lender modifying the existing mortgage to make the payment affordable and aligning the mortgage amount with the property's value.  Governor Corzine is expected to sign the bill into law today.

New Jersey joins New York and California in legislative efforts to slow the foreclosure process and encourage workouts, as well as other jurisdictions that are seeking to hold lenders responsible for the condition of foreclosed homes.  The restructuring loan program, to my knowledge, is unique, and may offer an interesting model to other states considering their options, while awaiting action at the federal level.

November 2008 CPSC and NHTSA Recalls

November 2008 Consumer Product Safety Commission recalls are here and National Highway Traffic Safety Administration recalls are here.

Could Truth in Lending Have Saved the World?

I have a theory: had Truth in Lending ("TILA") functioned better, many borrowers would have understood their payment obligations well enough not to take out the loans on which they later defaulted, the foreclosure fiasco would never have happened (or at least would have been less severe), and we would not now be in the midst of the Lesser Depression (though the economy would still be in bad shape).  TILA may help those who learn well by reading documents, but doesn't do much for those who don't.  So I wrote a piece which ran in today's Pittsburgh Post-Gazette, which suggests revisions to TILA to require applicants for credit to watch a video about the pain of foreclosure, work through a budget that takes into account their loan payments, and meet with a credit counselor to talk them through the process.  The essay, which appears below, can also be found at http://www.post-gazette.com/pg/08351/935371-432.stm. The Post-Gazette was kind enough to mention this blog.

Private Sector: 'Truth in Lending' needs to be updated

Tuesday, December 16, 2008

By Jeff Sovern

Imagine that a few years ago, at a time when you were renting your home, a fast-talking lender had approached you and explained how you could afford to buy your first house. The monthly payments seemed affordable.

At the closing, you were swamped with forms, dutifully signing where you were told. Recently you discovered that one of the forms you didn't read at the closing explained how your monthly payments would rise three years after the closing. Now that those years have passed, you can't afford the payments. You have defaulted, and now face the prospect of losing your home.

Now suppose that the process had been completely different. Well before signing the papers, you had to watch a video warning you about the pain foreclosure brings. You were required to work through a budget that took into account the increase in your mortgage payments and helped you understand how much money you would have to meet your other expenses after you made your mortgage payments. A credit counselor explained the consequences of taking out the loan and countered the influence of the fast-talking lender. Might you have decided against taking out the loan? And if millions of other borrowers had had a similar experience, might we now not be in the crisis we are in?

Ideally, policy-makers will adopt new rules that would cause lenders and borrowers to agree only to those loans that will be repaid on time, and indeed the federal government is requiring lenders to consider the ability of borrowers to repay. But that may not be enough. Presumably, those holding the loans now in default also thought that borrowers would be able to make their payments. Policy-makers would do well to remember that the people now losing their homes had believed they would be better off by incurring the loans. Accordingly, policy-makers should also pursue rules that would help consumers understand the risks of such borrowing.

Our current system for informing borrowers of the risks they are taking is based on the Truth in Lending Act ("TILA"), enacted in 1968. The TILA disclosures obviously were of little aid to those caught in the mortgage crisis. The reasons may be many: Some consumers may not learn well from documents, while others may have been confused by the mountain of paperwork. Still others may have been deceived; thus, a predatory lender at a 1998 congressional hearing testified that he "can get around any figure on any loan sheet."

Policy-makers have responded by tinkering with the timing and content of some disclosures. But changing the written disclosures smacks of homeopathic medicine: the cure for written disclosures that failed is more disclosure. We know that some people learn well by reading, but that others learn better in other ways, and we should not ignore those other ways.

Instead, we should update our 40-year-old system for helping borrowers understand what they are doing. Policy-makers should make the risks of default clearer to borrowers by using modern technology like videos and computers. Instead of expecting borrowers to understand their payment obligations from passive reading, Congress should use methods that will force borrowers to understand the consequences of their actions. To be sure, these measures will increase the cost of borrowing, but they are far less costly than bailouts-and doesn't it make sense for consumers to understand the ramifications of what may be the largest payment obligation they ever assume?

While it may seem that memories of the current crisis would make such measures unnecessary, we cannot count on that. It would be just as much a mistake to assume that the current crisis will prevent unwise borrowing as it would have been to expect that the 1987 stock market crash would prevent later stock market bubbles-which of course it did not do. In 10 years or so, today's children will consider taking out mortgages. They deserve the tools to make better choices than their parents did.

Public Interest Freedom of Information Clinic Launched

Public Citizen's Litigation Group has recently launched a Freedom of Information Act (FOIA) Clinic that will provide expanded assistance to public interest organizations seeking government-held information. Non-profit organizations need statistics, reports, and other information collected or created by government agencies to advocate for under-served communities, and they rely on FOIA as a method of obtaining those crucial documents. The Clinic is designed to provide FOIA assistance to organizations without the resources or experience to litigate FOIA request denials. By providing litigation assistance, the Clinic will support the work of organizations fighting for a wide variety of causes, and leverage Public Citizen's FOIA expertise to aid the broader public interest community. The Clinic also hosts a database, which will help Public Citizen recognize and address the barriers public interest advocates encounter when making FOIA requests by inviting groups who have filed FOIA requests to share problems.

Pity the poor debt collector?

Consumers took on millions of dollars of credit card, medical, and other debt in the last five or six years, creating lots of work for debt collectors. But debt collectors say they are hurting along with everyone else in this recession, because fewer consumers are able to pay off those debts.

Apparently, more consumers are just "refusing" to pay their bills. Minneapolis debt collection lawyer William Hicks from Messerli & Kramer estimates a 25-40% drop in recoveries for some portfolios over the last sixteen months. According to University of St. Thomas professor David Vang, and finding out in the process that most debt collectors are really bluffing: "They really aren’t going to pursue their borrowers very hard."

Vang apparently does not consider harassment to be "very hard" pursuit by debt collectors. If debt collectors are recovering less, they seem to be trying harder than ever, if complaints to the Federal Trade Commission (PDF link) and the Better Business Bureau are any indication. Perhaps unsurprisingly, complaints about debt collectors are on the rise.

Collection revenues down; harassment up. Just a sign of the times.

Collectors hurt by recession as consumers walk away from unpaid bills | Finance & Commerce (via Caveat Emptor)

(photo: Wikimedia Commons)

More on Consumer Transaction Costs

Two years ago I published an article on consumer transaction costs, Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 William and Mary L. Rev. 1635 (2006).  Now I've posted to SSRN a short companion piece, The Coase Theorem and the Power to Increase Transaction Costs, which uses the specific example of consumer financial privacy and the Gramm-Leach-Bliley Act.  If you hurry, you can be among the first to read it!  (In fact, you don't even have to hurry to be among the first.  Sigh)  I would be interested in comments.  And yes, I know the SSRN cover page has a typo.  Here's the abstract:

The Coase Theorem maintains that in the absence of transaction costs, in Francesco Parisi's words, "regardless of the initial allocation of property rights and choice of remedial protection, the market will determine ultimate allocations of legal entitlements, based on their relative value to different parties." The paper explores the consequences for Coase's Theorem when a party without the initial allocation of a property right can manipulate the transaction costs of the party with the initial allocation in asserting that right. A party wishing to obtain the ultimate entitlement may find it preferable not to purchase the entitlement but to increase the transaction costs faced by the party with the initial entitlement in asserting that entitlement. The paper uses the example of the sale of consumer financial information in connection with the Gramm-Leach-Bliley Act as a vehicle for showing that in some cases the power to manipulate transaction costs will not interfere with parties bargaining to reach the highest-valued use of property, but that in other cases it will. Indeed, in some circumstances, someone contracting with a party with the power to inflate transaction costs will be better off without the initial allocation of rights. The paper also provides other examples of inflated consumer transaction costs. Finally, it discusses how federal regulators have attempted to address the problem of inflated consumer transaction costs under Gramm-Leach-Bliley and suggests another solution to the problem.

Why true conservatives aren't the enemies of plaintiffs: Musings on CAFA Jurisdiction

Yesterday, Brian Wolfman posted a piece to this blog about a recent article by law prof and Cato ally Mark Moeller on why CAFA may be an unconstitutional extension of federal court jurisdiction. I'll leave it to y'all to read this article, because I want to address what its substance says about true conservatives versus the pro-business judges we too often encounter.

One of the most frequent battles consumer lawyers have to fight is whether their client (whether individual or class representative) has standing to assert claims, particularly in federal court. Pro-business courts seize on this concept as a way of booting out the lawsuit at an early stage.

The result is very favorable to crooked defendants, and is at least conceptually justified as a conservative approach to jurisdiction, just so much and no more.

However, CAFA's pirating of state court jurisdiction turns this conservative approach on its head, so it's nice to see a Cato type actually applying conservative principles to the law, in a way that does not favor big bidness.

This is in stark contrast to the radical activist judges we see too often, who are intent on crossing branches of government to undo what a legislative body (whether Congress or a City Council) has done.

There's been ranting about activist judges on the left, but as far as I can see, all those folks did was apply the law to current reality. This conflicts perhaps with the Scalia approach to Constitutional interpretation--that the Constitutional Convention meant what it said and said what it meant and it's wrong to read the Constitution in a way that does not reflect the words and not the intentions of those good men--but it does not rewrite the law.

What we see now is courts (including but not limited to the Texas Supreme Court) that have never met a businessman they didn't like, and are willing to perform jurisprudential backflips in order to please.

The result is truly a radical revision to the separation of powers. It's not getting much attention, but that's probably because advocates (1) don't have nearly the resources of the Chamber of Commerce and (2) are restricted by principles and honesty, and thus have not been as effective in demonizing what is truly a radical and dangerous trend.

To bring this back to the CAFA article, what is refreshing is to see someone who follows a conservative line of thought to its logical end, rather than taking a detour (or laying down a new road) in order to arrive at the desired end.

For this reason, advocates can feel fine when they draw a conservative judge, if that judge is an honest conservative, who will apply the law to the facts, regardless the end result.

Peter Swire on Underenforcement in E-Commerce and Internet Harms

Peter P. Swire of Ohio State, and, as noted here, an adviser to the Obama Administration-to-be on consumer matters, has written No Cop on the Beat: Underenforcement in E-Commerce and Cybercrime.  Here's the abstract: 

This essay gives new reasons why we should expect underenforcement for E-commerce, cybercrime, and Internet harms more broadly. It also recommends a strategy for addressing that underenforcement, focusing on more federal or federated enforcement.

The essay stresses an information problem and a commons problem that have largely been overlooked to date. In brief, the information problem arises because only a tiny fraction of complaints and knowledge about an online fraudster or criminal comes from each jurisdiction. Enforcers thus lack the informational basis for telling good guys from bad guys. Priority bad guys are thus less likely to become the targets for enforcement.

This information problem is compounded by a commons problem. In light of the incentives facing enforcement agencies, priority will typically go to cases where many or all of the victims are local. No one will have the incentive to give priority to harms that occur across borders. This is a classic commons problem, because cross-border harms will be left to someone else. In short, no one will own these problems, and there will be underenforcement.

These information and commons problems exacerbate the forensic problem that has been the focus of the greatest legal attention to date, the problem that it is often technically and legally difficult to gather evidence where the perpetrator is physically distant from the victim.

The basic response should be to shift toward more federal and federated enforcement. Federal enforcement means a greater role, compared to offline activity, for the Federal Trade Commission in consumer protection and the Department of Justice for cybercrime. Federated enforcement means building new structures, compared to offline activity, to share information among local enforcers and to encourage local enforcers to bring more enforcement actions even when the perpetrator and many of the victims are outside of their jurisdiction.

Part I of the essay explains the information, commons, and forensic problems in greater depth, and explores policy and legal responses to those problems. Part II responds to five possible critiques, which I call: (1) The Internet hasn't really changed anything; (2) Enforcement works better on the Internet; (3) We actually don't want enforcement for what's done on the Internet; (4) States need to be the laboratories of experimentation; and (5) The Feds don't do small potatoes.

Is CAFA Unconstitutional In Some Applications? One Scholar Says Yes.

by Brian Wolfman

Mark Moller, a law professor, adjunct scholar at the Cato Institute, and former editor-in-chief of Cato's Supreme Court Review, has just written an article entitled "A New Look at the Original Meaning of the Diversity Clause." Based on evidence of the original meaning of the Diversity Clause of Article III of the Constitution, Prof. Moller argues that the Clause does not allow Congress to confer original jurisdiction on federal courts under a minimum diversity theory based on the citizenship of persons who have not been brought within a court's “power to bind.” Prof. Moller explains that, for originalists, this discovery reveals a serious constitutional problem with the Class Action Fairness Act (CAFA). If one accepts the conventional understanding of preclusion in class actions, says Prof. Moller, absent class members are not within the court’s power to bind prior to completion of the certification process. That means, according to Prof. Moller, that CAFA’s extension of diversity jurisdiction over uncertified classes in which the named plaintiffs and defendants are nondiverse, based on the citizenship of absent class members, exceeds the limited jurisdiction conferred on federal courts by Article III. If Prof. Moller is correct, Article III negates Congress's ability to bring certain interstate class actions into federal court, including some within CAFA's intended scope.

Prof. Lawrence Solum's Legal Theory Blog has this post on Prof. Moller's article. Prof. Moller himself has discussed the article on CATO's blog.