Consumer Law & Policy Blog

Marotta-Wurgler Study finds Rolling Software License Agreements Are No More One-Sided Than Others

Florencia Marotta-Wurgler of NYU has written Are 'Pay Now, Terms Later' Contracts Worse for Buyers? Evidence from Software License Agreements, 38 J. Legal Studies -- (2009).  Here's the abstract:

The rise of commerce over the Internet and telephone has led to widespread use of "pay now, terms later" or "rolling" standard form contracts, in which buyers are not able to read the standard terms until after they have purchased the product. While some scholars and judges argue that rolling contracts do not merit special attention, others, including consumer advocates, are concerned that sellers take advantage of delayed disclosure by hiding especially unfavorable terms. I find no evidence for this view. In a large sample of software license agreements, I find that software publishers that use rolling contracts for their online sales offer do not offer more one-sided terms than those who make their licenses available prior to purchase. The results suggest that to the extent there are inefficiencies associated with standard form contracts, they are not made worse by delayed disclosure.

Update - January's Subprime Mortgage Modifications

By Alan White

Mortgage modifications in January continued converting risky subprime loans into risky modified loans.  Negative amortization and temporary rate reductions with future rate shock remain common in modifications.  Here is my summary of the January 25 investor reports (covering the 12/26/08 to 1/25/09 period).

Mortgage modifications increased in January 2009, but payment and balance increases still predominate.  There were 23,224 mortgage modifications in January in a database of 3.4 million subprime and alt-A mortgages, up from 20,391 in December and 19,112 in November.  Modifications increasing loan balances still dominate, with 89% of modifications involving some capitalization of arrears, and only 12% involving any write-offs of principal, interest or fees (See data tables).  Monthly payment reductions accounted for 49% of all modifications, essentially unchanged from November and December, while 13% of modifications did not change the payment and 38% increased the payment.

                  Investors lost $3.8 billion from foreclosure sales, compared with $73 million from write-downs in connection with mortgage modifications.  Looking only at the 12% of modified loans with write-offs, the average write-off was $26,000, or about 13.5% of the original loan amount.  For liquidated foreclosures, the average loss was $130,000, representing about 61% of the original loan amount.  There were more than ten times as many foreclosure liquidations as modifications with any write-off.  The ratio of foreclosure losses in dollars to modification write-downs was 52 to 1. (table 8). 

Journal of Consumer Education Now Available Online

The Journal of Consumer Education (JCE) is now available as a full-text electronic journal beginning with Volume 1 here.  As a sample of its issues, here is the table of contents for volume 24, dated 2007:

• Gift Card Practices and Policies: A Multiphase Analysis
  Elizabeth B. Carroll and Susan A. Reichelt

• Financial Education for Bankrupt Families: Attitudes and Needs      
  Deborah Thorne and Katherine Porter

• Measuring Financial Planning Personality Type Based on the Stages of Change
  Jean M. Lown

• Consumer Response to Corporate Scandal: The Case of Martha Stewart
  Sarah Roberto, Wendy Reiboldt, David Schult, and Lydia Sondhi

• Bringing an Emerging Consumer Issue to the Classroom: The Bisphenol-A (BPA) Controversy
  Russell N. James III and Diann C. Moorman

• The Impact of Financial Education Workshops for Teachers on Students' Economic Achievement
  John R. Swinton, Thomas W. De Berry, Benjamin Scafidi, and Howard C. Woodard

• Mandatory and Incentive-Based Adult Financial Education Programs: Opportunities for Consumer Educators
  Barbara O'Neill

New Javelin Report Finds 22% Increase in Identity Theft Victims

by Jeff Sovern

Javelin's latest identity fraud survey, released yesterday, contains, at best, mixed news on the progress made in preventing and detecting identity fraud.  Here's the first paragraph of the press release:

The 2009 Identity Fraud Survey Report – released today by Javelin Strategy & Research (www.javelinstrategy.com) – confirms that the number of identity fraud victims has increased 22 percent to 9.9 million adults in the United States, while the total annual fraud amount only increased slightly by seven percent to $48 billion over the past year. The report found detection and resolution efforts are working well—consumers and businesses are detecting and resolving fraud more quickly. As a result the mean consumer costs of identity fraud plummeted by 31 percent to $496 per incident in 2008. The study also found that women were 26 percent more likely to be victims of identity fraud than men this past year.

So what does this say about the effectiveness of the 2003 FACTA Act, which was aimed in large part at identity theft?  It's too soon to be certain, but so far FACTA does not seem like an adequate solution to the problem of identity theft.  There are at least three reasons it's hard to be certain. First, many of the regulations FACTA directed regulators to draft took years to produce and become effective, so it's probably too soon to evaluate them.  Second, the state of the economy is likely to have driven more people to take up identity theft, and that alone may be responsible for some of the increase.  And third, because some of the FACTA provisions increase the likelihood that identity theft victims will learn about the crime more quickly, it may be that some of the increase in consumers reporting their victimization is in part a function of earlier or increased awareness that identity theft has occurred (the Javelin study is based on telephone interviews).  So it's too soon to give up on FACTA, but so far FACTA is not looking promising as an identity theft preventative.  

Where FACTA seems likely to have succeeded is in reducing the mean losses caused by identity theft.  For example, the fraud alert provisions and rules requiring credit bureaus to provide consumers free annual credit reports--which may have helped consumers detect identity fraud more quickly--might have contributed to the reduction in mean losses.  But then again, perhaps some of the reduction in losses is attributable to greater public awareness of identiy theft.  Reducing the average loss caused by identity fraud is a worthy accomplishment, but less worthy than preventing the losses in the first place.  My own view remains that the best way to prevent identity theft from occurring is to impose liability on credit bureaus and furnishers of information for reporting errors, to give them an incentive to improve accuracy, as stated in The Jewel of Their Souls: Preventing Identity Theft Through Loss Allocation Rules, 64 University of Pittsburgh Law Review 343 (2003) (as I mentioned in a post on Sunday).

Ten New NCLC Publications with Companion Websites

Automatic subscribers to NCLC manuals by now have received their updates:  two revised editions, six supplements and a new Consumer Law Pleadings.  All 18 consumer law manuals now come with companion websites, including an updated Consumer Law on the Web.  The new updates include:

Unfair and Deceptive Acts and Practices Seventh Edition with Companion Website (1216 pp.)

Consumer Law Pleadings Website with 2008 Index Guide (one year website access and 640 pp. guide)

Consumer Bankruptcy Law and Practice 2008 Supplement with Companion Website (534 pp.)

Fair Credit Reporting 2008 Supplement with Companion Website (500 pp.)

Truth in Lending 2008 Supplement with Companion Website (330 pp.)  

 Consumer Arbitration Agreements 2008 Supplement with Companion Website (190 pp.)

Access to Utility Service Fourth Edition with Companion Website (788 pp.) 

Student Loan Law 2008 Supplement with Companion Website (320 pp.)

Repossessions 2008 Supplement with Companion Website  (230 pp.)

Consumer Law on the Web (everything on the 18 individual websites in one location)

 

These publications can be ordered at 617-542-9595 or on-line at www.consumerlaw.org/shop

New 50 State UDAP Report Card

A new report by the National Consumer Law Center: “Consumer Protection in the States: A 50-State Report on Unfair and Deceptive Acts and Practices Statutes,” issued February 5, 2009, analyzes and summarizes unfair and deceptive acts and practices (UDAP) laws in the 50 states and the District of Columbia. 

 

The report identifies gaps and weaknesses in the substance, scope, and remedies of these laws.  In some states the UDAP statutes have so many gaps and weaknesses, or have been so severly undermined by judicial decisions, that they are of little or no use to consumers.

 

The report identifies a number of measures that states can take to strengthen consumer protections, including

● enact broader prohibitions on deceptive and unfair acts.

● fill gaps in the scope of UDAP statutes.

● increase penalties for violations.

● eliminate financial barriers and risks that prevent victims from filing UDAP lawsuits.

● lower technical obstacles that impede consumer redress.

 

The report is available at www.nclc.org, and more particularly at this link.

NCLC Report on Credit Report Dispute System

by Jeff Sovern

The National Consumer Law Center released a report authored by Chi Chi Wu last week, Automated Injustice: How a Mechanized Dispute System Frustrates Consumers Seeking to Fix Errors in Their Credit Reports, that charges that Equifax, Experian, and TransUnion handle credit reporting disputes "in an automated and perfunctory manner." Here's an excerpt from the accompanying press release:

* * * The report details how credit bureaus: translate detailed disputes painstakingly written by desperate consumers into two or three digit codes; Fail to send documents submitted by consumers, such as cancelled checks or payoff statements, to creditors and other information providers involved in the dispute; [and]  Limit the role of their employees who handle disputes, or of the foreign workers employed by their offshore vendors, to little more than selecting these two or three digit codes. Workers do not examine documents, contact consumers by phone or email, or exercise any form of human discretion in resolving a dispute.

The New York Times coverage of the report is here.  I'm inserting below two excerpts from the Times' story: first the industry response, which personally I found unpersuasive, and a paragraph on planned federal rules:

Stuart K. Pratt, the president of the Consumer Data Industry Association, said consumers were partly to blame for the lack of detail about their discrepancies. He acknowledged that the credit bureaus “do have the opportunity to add some granularity to the coded dispute that goes off to the lender.” But 55 to 60 percent of consumer disputes contained no supporting documentation, he said.

And most consumers who supply documentation, Mr. Pratt added, include only standardized forms offered on a credit bureau’s Web site, rather than extensive documentation of their own.

“Most consumers don’t want to work too hard to have it taken care of,” he said.

* * *

The Obama administration is expected to announce new rules later this year that would allow consumers who find mistakes in their reports to contact the creditors directly. The creditors would be required to respond to the consumers. “That way,” [assistant director of the Federal Trade Commission’s division of privacy and identity protection] Ms. Kuehn said, “we won’t be cutting out the most important line of information — from the consumer to the company that’s providing the information in the first place.”

Given the at least theoretical independence of the FTC from the Obama administration, it seems odd to characterize the proposed rules' source as the Obama administration, but they sound like an improvement over the current situation.  For what it's worth, my own view is that credit bureaus should be strictly liable for reporting errors, to give them an incentive to improve accuracy, as stated in The Jewel of Their Souls: Preventing Identity Theft Through Loss Alloaccation Rules, 64 University of Pittsburgh Law Review 343 (2003).

[Sorry about the formatting; as you can see, I'm having some trouble getting the post to appear correctly.]

The Wrong Foreclosure Plan

By Alan White

All indications are that the Administration will announce a foreclosure plan next week that consists largely of throwing taxpayer money at investor losses.  This is as wrong-headed as it could possibly be.

Absent from all discussions are any proposals to stop, delay, or reduce the number of foreclosures.  Loose campaign talk about a moratorium seems to have been forgotten.  Remember those "troubled assets" that are dragging down the financial system?  Many are linked to mortgages that are currently valued based on the last 3 to 6 months' performance, which consisted largely of foreclosing mindlessly at 50% to 60% loss severities.  The value of bank assets would be enhanced, not further diminished, if mortgage servicers, with some help from bankruptcy courts, stopped foreclosing and started writing down mortgage debt to sustainable levels for every homeowner willing to make payments.  There is absolutely no reason to fork over taxpayer dollars to cover 25% losses on loan modifications, when investors are today absorbing 60% losses on foreclosures.

Three ingredients are necessary for a successful foreclosure plan.  First, foreclosures have to be stopped, for a long enough period to work out every salvageable loan.  Second, servicers must be compelled, by bankruptcy or other legislation, to write down mortgage principal and interest for every homeowner who can afford her house.  Third, any taxpayer funds should be used to compensate mortgage servicers directly for good performance, i.e. for successful sustainable modifications.  The servicers, not the investors, are making the (wrong) decisions now about foreclosures.  Changing their behavior can stop the simultaneous housing and banking catastrophes, and do far more for investors than Treasury payments or guarantees.

National Motor Vehicle Title Information System Begins

Last Friday, the National Motor Vehicle Title Information System began operations.  The database is to list cars that have been determined to be too badly damaged to be worth repairing or that were stolen, so that consumers can avoid buying such cars.  At present the database includes 27 states, but it is supposed to include all of them by next year.  You can read the Times Wheels Blog report here, and here is an excerpt, which quotes blog co-coordinator Deepak Gupta:

[C]onsumer advocates said the biggest improvement is that for the first time salvage yards, junkyards and insurance companies will be required to report on vehicles that had been totaled. That doesn’t start until March 30.

Getting information from junkyards and insurance companies is important because it will provide consumers with information on “the worst of the worst” vehicles, said Rosemary Shahan, the president of Citizens for Auto Reliability and Safety.

Ms. Shahan’s group is one of three consumer organizations that sued the Justice Department early last year in an attempt to force the department to carry out the law. The other groups are Public Citizen and Consumer Action.

There are, however, a few glitches already. One is that the California and New York departments of motor vehicles are balking at providing information, said Deepak Gupta, a lawyer for Public Citizen.

“They are making money by selling data to private companies,” Mr. Gupta said. “They are concerned if the data is available publicly they won’t get that revenue. That is really what is happening here.”

The National Law Journal's coverage is here.

The impending sell-out

The Naked Capitalism blog has an excellent discussion today of why the Administration's likely plan to rescue banks is a rescue for shareholders and bondholders and a disaster for taxpayers.