Consumer Law & Policy Blog

More Consumer Law at the AALS

by Jeff Sovern

The AALS has announced a few additional panels on "hot topics," including the following event, at which Lauren Willis, whose work I greatly admire, will speak:

Friday, January 9, 2009, 8:30-10:15 am, The Financial Crisis, Marriott Salon 2, Marriott Pavilion/Lobby Level

Moderator:  Theodore P. Seto, Loyola Law School
Speakers:    William K. Black, University of Missouri - Kansas City School of Law; Michael Malloy, McGeorge Law School, University of the Pacific; Lauren E. Willis, Loyola Law School; Arthur E. Wilmarth, Jr., George Washington University Law School

A discussion of the causes, short-term solutions, and longer-term implications of the current financial crisis. Professor Willis will discuss the crisis at the retail level - the evolution from credit rationing to risk-based pricing of mortgages, the effects of risk-based pricing on consumers' mortgage decisions, the financial and psychological antecedents of borrower demand for mortgages posing a high risk of foreclosure, and the marketing and sales practices that respond to and create that demand. Professor Black will cover the securitization of home mortgages and the development of derivatives that contributed to the financial crisis. He will describe the legal and regulatory actions that allowed for these developments and explain why the securitization of heterogeneous subprime mortgages and the existence of an over-the-counter credit default swap market are fundamentally inconsistent with a stable financial system. Professor Wilmarth will speak on the role of large financial conglomerates and the failure of the various regulators (especially the OCC, the OTS, the Fed and the SEC) to control the risk-taking of those conglomerates. Professor Malloy will explore the extent to which the crisis, with its broad international repercussions, has prompted coordinated and/or harmonized responses among affected states, and whether this may lead to expanded regulatory cooperation in the future.

Countrywide settles predatory lending complaint

by Richard Alderman

Countrywide Financial Corp. has agreed to make loan modifications for about 395,000 mortgage holders and pay $150 million into a foreclosure relief fund to settle predatory lending complaints filed by various states. For more information, click here.

Different Take on New RESPA Reg

by Jon Sheldon

 

This is NCLC’s take on HUD’s new RESPA Regulation changes.  (Although under my name, this was written by Diane Thompson with input from other NCLC staffers.)  The new Good Faith Estimate Statement (GFE) does seem much more user-friendly—with a couple of serious caveats.

First, the form doesn’t tell borrowers what their APR is and consistently overemphasizes settlement costs over interest rate costs. The problem, of course, is that how expensive a loan is depends mostly on interest costs, and then on how you make your payments—how long do you hold the loan, how much of the loan do you actually get the use of and how much is fees, etc.

Second, the YSP disclosure is confusing and untested.  HUD did several rounds of testing.  But it never tested its disclosures to see if borrowers could choose the cheaper loan when the interest rate varied!  Its tests all assumed that the payment of a YSP only changed the settlement costs, not the amount of the loan, or the interest rate, or the monthly payment.  This is simply not how YSPs work in the real world. (A final test did assume a difference in interest rate and YSP—but borrowers were not asked to choose the cheapest loan in this example—only compare the GFEs to the final settlement statement for discrepancies).  Worse, HUD chose to assume that YSPs always operate as a credit against settlement costs, when virtually all available research suggests that in most cases the presence of a YSP increases the total settlement costs beyond any offset created by the YSP.

There are other problems with the final rule, including the difficulties it introduces in evaluating loans for Truth-in-Lending compliance, particularly with respect to the disclosure of origination and title fees, the removal of caps on origination fees for FHA loans, its blessing of average charge pricing, and its failure to make the GFE binding (only some fees are fixed, no interest dependent fees are fixed, other fees can vary within a 10% tolerance; originators can cure most underdisclosures up to 30 days after closing; and brokers can withdraw any guarantee as to settlement costs whenever they convince the borrower to apply for a slightly different loan product).

NCLC's more detailed, but still short, summary analysis of the final rule can be found here.

 

NCLC’s detailed comments on the proposed rule can be found here. 

Times Articles on Credit and Other Matters

by Jeff Sovern

I have accumulated a huge pile of articles from the New York Times on consumer issues, so here goes an attempt to shrink it somewhat.  Today's Times includes an editorial, A Voice for the Consumer, urging the Obama Administration to reinstate the White House Office of Consumer Affairs.  Today's issue also had an article, The Senator Behind the Window Sticker, on the fiftieth anniversary of the law mandating "Monroney Stickers," the stickers on new car windows.  

Yesterday's edition brought Willing to Deal about the willingness of credit card companies to modify credit card debts, in the interest of collecting something rather than nothing.  An excerpt:

Banks and card companies are bracing for a wave of defaults on credit card debt in early 2009, and they are vying with each other to get paid first. Besides, the sooner people get their financial houses in order, the sooner they can start borrowing again.

So even as many banks cut consumers’ credit lines, raise card fees and generally pull back on lending, some lenders are trying to give customers a little wiggle room. Bank of America, for instance, says it has waived late fees, lowered interest charges and, in some cases, reduced loan balances for more than 700,000 credit card holders in 2008.

* * *

Landmark changes to bankruptcy legislation passed in 2005, for which the industry aggressively lobbied, seem to have hurt card debt collections. Credit card industry data indicate the average debt discharged in Chapter 7 bankruptcy has nearly tripled since 2004. And in Chapter 13 bankruptcies, secured lenders like auto finance companies routinely elbow out unsecured lenders like card companies, trends that have contributed to the card lenders’ willingness to settle.

Last Wednesday, December 31, the Times noted that Consumers Union [Was] to Buy Gawker Blog Consumerist.  And going back to last Sunday, December 28, the Times published Gretchen Morgenson's column, A Paper Trail That Often Leads Nowhere, about problems in obtaining mortgage loan modifications and proving that payments have been made.  The article described a Wells Fargo case in which Wells Fargo denied the borrowers' claim that they had made their payments and demanded proof beyond what the borrowers could supply.  An excerpt:

In his opinion, [Judge Sidney B. Brooks] fumed that Wells Fargo had asked the borrowers for canceled checks as proof of payment, even though such checks were often not available. Wells Fargo’s request for canceled checks was especially troubling, the judge said, given that the bank was a proponent of the 2003 law that allowed banks to stop returning canceled checks to customers.

The only institution that could have the original checks is Wells Fargo, he concluded.

“The payments have, evidently, been lost in a black hole of the creditor’s organization or through accounting mismanagement,” the judge wrote. “This is a major lender/mortgage loan servicer where the left hand does not know what the right hand is doing — the collection department does not know what the check processing and accounting departments are doing.”

* * *

“This dispute might portend a widespread abuse of collection practices or creditor overreaching,” he wrote, “demanding of debtors what it, the creditor itself, is unable to provide: accurate and reliable record keeping and billing practices.”

The day before Christmas, the Times printed Rules Set for Mortgage Loan Appraisals, about the new rules agreed to by Fannie and Freddie.  And, switching gears, that same day included an editorial, More Privacy Online, calling Yahoo's decision not to retain personally-identifiable search information for more than 90 days "a welcome step."

December 2008 CPSC Product Safety Recalls

Check out the Consumer Product Safety Commission's December 2008 product safety recalls.

Jeffrey Stempel on Mandating Minimum Quality in Mass Arbitration

Jeffrey W. Stempel of UNLV has written Mandating Minimum Quality in Mass Arbitration, 76 Univ. Cincinnati L. Rev. 383 (2008).  Here's the abstract:

The Supreme Court's decision in McMahon and its progeny has led many businesses and employers to embrace what was once deemed a localized, industry-specific practice. The "new" or "mass arbitration" only mildly resembles the traditional system employed by niches in industry for settling commercial matters among commercial actors. While the "old" system involved parties who were relatively equal in bargaining power and knowledge, these systems for mass arbitration lack a freely entered bargain and resemble more closely, contracts of adhesion. Privatized arbitration resolves issues of both statutory and substantive law, and there is a strong argument, given the inexperience of the non-drafters, to impose both procedural and substantive due process controls on the system. The players arguably use arbitration as an alternative to litigation because of its efficiency and low costs as compared with litigation in the courts. However, the system cannot provide an equal forum for dispute resolution unless the relative outcomes are arguably the same. Otherwise, the system fails society's expectations of fairness, morality, effectiveness and market stability.

Several strides have been made, despite the Supreme Court's insistence that privatized arbitration is a fair system, to ensure that privatized arbitration produces fair results. Courts have invigorated the doctrine of unconconscionability to review arbitration clauses imposed on inexperienced players, judicial review of arbitration agreements, creation of due process protocols (both an Employment Protocol and Consumer Protocol), and various organization (AAA, JAMS) standards. While these advancements may better the system, they are of no use without some kind of lawful, meaningful enforcement. In particular, this article addresses the effect these concerns have had on securities arbitration. Securities investments have not declined, indicating that perhaps, the system is viewed as a fair means of resolution.

Even if the system is regarded as being beneficial to the market itself, it lacks the moral soundness necessary to be supported fully by the public and the legal community. To this end, it is suggested that the system provide neutral, quality, and independent arbitrators, provide equal access to sufficient information, eliminate unconscionable clauses (distant venue, high costs, one-sided arbitration rules), eliminate jurisdiction clauses that fail to provide adequate procedural and substantive due process, provide fairness in costs and fee shifting, allow the full range of remedies available in litigation, provide for equal access to representation and the legal market, and provide a meaningful, effective standard of review. Legislative authority may be the best solution for overall mass arbitration, but for securities arbitration, the SEC provides a legitimate, authoritative agency which could arguably effectuate these standards in a meaningful manner.

Collective Bargaining with Card Issuers?

by Alan White

Happy New Year to all, and may I say, good riddance to 2008 (economically speaking that is).  Yesterday's New York Times has a good story about the relationships between credit card issuers and universities.  Banks offer kickbacks to colleges who sign students up for credit cards, and also have arrangements to link student ID cards with debit card products.  While one could simply express Puritan outrage at the academy's complicity in the consumer debt crisis, it occurs to me that there is an opportunity here.  Those of us associated with higher education institutions who also value consumer protection might consider ways in which universities could set standards for good and bad credit and debit card practices, and insist that products offered to students provide safe and sustainable financial services at fair and transparent prices.  If anyone is aware of any college or university that has already taken steps to set standards for card companies with which it deals, please comment.  

Additional note (thx to Jeff Sovern): US PIRG has a white paper on fair campus credit card marketing practices here.  These provide a useful starting point for schools seriously interested in trying to set a new standard for credit card terms.  I would suggest also giving serious consideration to a similar list of standards for an acceptable debt card and deposit account agreement.