Consumer Law & Policy Blog

Hillman and Barakat on Warranties and Disclaimers in the Electronic Age

Robert A. Hillman of Cornell and Ibrahim Barakat of White and Case have written
Warranties and Disclaimers in the Electronic Age.  Here's the abstract:

This paper reports on software-licensor express warranty and disclaimer practices on the Internet. Our data show that virtually all of the websites and End User License Agreements (EULAs) we sampled include express warranties on the website and disclaimers of the warranties in the EULAs that may erase all or much of the quality protection. Next, the paper reviews the reasons why consumers generally do not read their e-standard forms despite the prevalence of disclaimers and other adverse terms. We then argue that e-commerce exacerbates the problem of warranties and disclaimers and that lawmakers should address this issue. We contend that improved disclosure of disclaimers, including making them easily accessible on a website prior to any particular transaction and possibly even the subject of a pop-up window during a transaction, is the best of various imperfect solutions to the problem. Disclosure is inexpensive and, at minimum, creates the potential for more legitimate consumer assent to e-standard forms, including assent to disclaimers of warranty. Even if in the short term consumers do not read their forms, perhaps consumers will eventually learn of misleading warranties and disclaimers because the Internet creates communication possibilities and research tools unavailable to disgruntled purchasers in the paper world. The prospect of the word getting out that a licensor does not intend to stand behind its promises and representations may be sufficient to curtail the practice of misleading warranties and disclaimers.

Times Reports on Loan Fraud, Foreclosure Rescue Scams, Financial Advice, and More

Sunday's issue brought Robert J. Shiller's Economic View column, How About a Stimulus for Financial Advice?, suggesting that the government subsidize personal financial counseling and that if it had done so years ago, the housing bubble would have been less severe.  Along the way Shiller cites some recent papers on how many consumers are financially unsophisticated and how lenders take advantage of such consumers. Bob Tedeschi's Mortgages Column the same day, Loan Fraud Seen on the Rise, discussed a report by the Mortgage Asset Research Institute that says mortgage fraud has risen even while mortgage originations have fallen.  An excerpt:

The report, released in early December, found that 36 percent of the fraudulent mortgage activity involved loan professionals’ misrepresenting borrowers’ incomes, while another 20 percent involved misrepresentations of borrowers’ employment.

* * *

Jennifer Butts, the Research Institute’s director of operations, said the survey results surprised her. Some industry executives had believed that the more unscrupulous mortgage brokers and loan officers had fled the industry or lost their jobs in the recent downturn, once lending standards tightened and loan volumes dropped.

“But we have people in the industry who didn’t get weeded out,” Ms. Butts said. “And now they have fewer transactions on which to make a profit, so they’re just a little more desperate.”

Last Thursday, January 15, the Times published Swindlers Find Growing Market in Foreclosures, about foreclosure rescue schemes.  An excerpt:

Carol McClelland, 46, fell into foreclosure on her Chicago home when she lost her job as a waitress in two restaurants. She received a call from a company called Foreclosure Solutions Experts, promising to stop the foreclosure and lower her mortgage payments to around $550 a month, from $1,056, Miss McClelland said.

“She showed me other clients’ files, and they were paying $650 a month,” she said. The charge for the service was $1,300, which Miss McClelland paid in installments, borrowing the money from friends and relatives.

When the loan servicer notified her that the house was still in foreclosure, Miss McClelland said, the representative from Foreclosure Solutions Experts told her that the matter had been taken care of.

“She told me everything was all settled; I don’t have to worry about anything,” Miss McClelland said. “All I had to worry about was getting the rest of the money to her.”

According to a suit brought by the Illinois attorney general in November, Foreclosure Solutions Experts does little or nothing to help consumers, and when it does take action, the result is often a repayment plan unsuited to the borrower’s ability to pay. The suit alleges that the company never contacted Miss McClelland’s lender, HSBC.

On January 11, The Times ran a column by Andrew Martin, Inspecting Our Food: How Many Cooks?, arguing that it doesn't make sense to divide responsibility for food inspections between the Department of Agriculture and the FDA and discussing other problems in the food inspection system.   Here is a report from January 9 about Citibank's willingness to support the stripdown amendment to the bankruptcy law. 

 

 

Supreme Court Takes Bank Preemption Case

On Friday the Court took Cuomo v. Clearing House Association, 08-453.  After then-Attorney General Eliot Spitzer had sought information from national banks in connection with an inquiry into racial discrimination by the banks, the OCC sued the Attorney General's Office to block the inquiry, arguing that the inquiry was preempted by federal law.  The Second Circuit, over a dissent, agreed with the OCC.  The other 49 states had also filed a brief supporting Cuomo's position.  The SCOTUS Blog report is here and the Times's story is here.  I wonder if the Court will feel some pressure to rule for the states in light of what we now know about the inadequacy of federal regulation.  I also wonder how broad the Court's ruling will be and what it will tell us about the applicability of other state laws to federal institutions. 

Nudging Mortgage Borrowers

Now that the Fed is moving closer to a libertarian paternalism Nudge-like approach to credit card statements (we blogged about it here; and there's more on the Nudge web site about it here), perhaps it will consider using a similar approach with closed end lending disclosure statements.  For example, suppose after stating the monthly payments, and especially the maximum payments under an adjustable mortgage, what would happen if the disclosure statement explicitly asked "Are you sure you can make these payments on time?  If you can't, you may lost your home."  Or is that going from a nudge to an annoying nag--and if so, would that be bad?  The late payment fee is already required to be in the "Federal Box" set of disclosures, and so won't be far away from the statement of when payments are due, but the regulations could be amended to require that it be right next to the notice of when payments are due, just as with the credit card statement.  It seems pretty clear that the existing closed end disclosures did not adequately warn subprime borrowers about their payment obligations so something more is called for.  Would a stronger nudge have kept some of the borrowers now being foreclosed upon from taking out their loans in the first place?

A Nudge to Make Timely Credit Card Payments

One of the things I love about the new amendments to Regulation Z is that they require that credit card monthly statements have a "Late Payment Warning" next to the payment due date.  The Late Payment Warning advises consumers that failure to pay on time may result in imposition of a late fee and cause an increase in their interest rate.  Proximity to the due date appears likely to increase its effectiveness.  You can see how it looks here.  This seems like the kind of libertarian paternalism urged in Richard H. Thaler and Cass R. Sunstein's book Nudge (about which we blogged here)--a rule that might change behavior for the better but still preserves consumer choice.  It will be interesting to see if this nudge reduces late credit card payments after it is implemented.  I gather that this nudge, together with another, the nearby "Minimum Payment Warning," which gives consumers information about how long it will take to pay off balances if they make only the minimum payments, are products of the 2005 bankruptcy legislation.

New Fair Credit Reporting Act Ruling From 11th Circuit

by Brian Wolfman

Check out Levine v. World Financial Network, No. 08-10416 (11th Cir. Jan. 12, 2008), a new Fair Credit Reporting Act decision from the Eleventh Circuit. Experian, the mammoth credit reporting company, sold a credit report about the plaintiff to the plaintiff's former creditor. The plaintiff had paid the debt in full and had no existing account with the creditor. At the time Experian sold the credit report, there purportedly existed differing views on whether providing a credit report to a former creditor violates the Fair Credit Report Act, with the Fifth Circuit arguably holding that it doesn't and a Federal Trade Commission advisory letter holding that it does. (To see why the Fifth Circuit's ruling does not necessarily authorize what Experian did in Levine, take a gander at Wilting v. Progressive County Mut. Ins. Co., 227 F.3d 474 (5th Cir. 2000).) So, based on this difference of opinion, and the Supreme Court's recent decision in Safeco Ins. Co. of Am. v. Burr, 127 S. Ct. 2201 (2007), the Eleventh Circuit held that Experian could not be held liable for a "willful" violation of FCRA (which is required to obtain statutory damages under the Act). FCRA has become pretty darn hard to enforce in a private case.

2009 Email Supplement to Casebook Now Available

My co-authors and I have put together a new supplement to our consumer law casebook and the accompanying Selected Consumer Statute.  As a measure of how much has been happening in consumer law, this is our third update since the books were published about a year and a half ago. In addition to the materials in the previous updates, the new supplement takes into account the November amendments to the RESPA regs and the December amendments to Regulations AA and Z.  As in the past, West will probably make it available via a web site to any professor using the book, but if you need it right away, I can email it to you.

Scientists at FDA's Medical Device Center Claim Agency is Mismanaged and Bends to Manufacturers' Demands

CNN is reporting that nine scientists at the Food and Drug Administration's Center for Devices and Radiological Health (CDRH) have written a six-page letter to President-elect Barack Obama and his transition team, alleging gross mismanagement at the agency that has "placed the American public at risk." Among the charges are that scientists have been threatened and told, on occasion, to ignore FDA regulations, that FDA managers have ignored serious safety and effectiveness concerns, and that FDA experts have been excluded from product meetings because manufacturers felt that they were "biased." An AP story provides additional details.

UPDATE: We have not located a copy of the letter to the President-elect, but it is believed to be a somewhat more detailed version of a letter CDRH scientists sent to Rep. John Dingell last October.

NHTSA Recalls for December 2008

The National Highway Traffic Safety Administration issued these recalls in December 2008.

Good Judgment by the Martin Luther King Estate in Not Misusing Trademark Law to Suppress Racist Speech

by Paul Alan Levy

We have often discussed the misuse of intellectual property law claims by corporations and public figures to suppress speech that they do not like (for example, here, here, and here). 

A recent story in the Atlanta Journal Constitution indicates that the estate of Martin Luther King exercised good judgment in not invoking trademark law to try to suppress a racist web site that prominently displays Dr. King’s name and image to depict a leader of the civil rights movement that the site plainly deplores.  The name appears both in the domain name of the web site and throughout the site, and consequently the site is prominently displayed – with its description meta tag promising “the truth about Martin Luther King” – when one uses “Martin Luther King” as a search term on Google.  The AJC quotes a spokesman for the King estate explaining the estate’s forbearance on the ground that the doctrine of fair use and the First Amendment would doubtless protect the creators of the web site.  Even though the racist site may have a slight commercial angle, because it promotes the sale of books by the likes of David Duke, this judgment was certainly correct (here is a recent case on that topic).  The estate also, no doubt, recognized that the white supremacist organization that runs the web site not only would not back down to a threat, but would probably benefit from the notoriety of litigating against the King estate.

There is an ironic angle to this story, at with the Journal-Constitution barely hints with a passing reference to the King heirs having “aggressively defended his name from unauthorized exploitation.”