Consumer Law & Policy Blog

Does Federal Law Bar Collecting Debts From the Dead?

by Jeff Sovern

Last week, on March 3, the Times ran a front page article, You’re Dead? That Won’t Stop the Debt Collector, about collecting debts from the families of the deceased.  Here's a particularly memorable quote:

“In times of illness and death, the hierarchy of debts is adjusted,” said Michael Ginsberg of Kaulkin Ginsberg, a consulting company to the debt collection industry. “We do our best to make sure our doctor is paid, because we might need him again. And we want the dead to rest easy, knowing their obligations are taken care of.”

Parts of the story are quite poignant.  For example:

The people on the other end of the line often have no legal obligation to assume the debt of a spouse, sibling or parent. But they take responsibility for it anyway.

“I am out of work now, to be honest with you, and money is very tight for us,” one man declared on a recent phone call after he was apprised of his late mother-in-law’s $280 credit card bill. He promised to pay $15 a month.

* * *

But sentiment also plays a large role, the agencies say. Some relatives are loyal to the credit card or bank in question. Some feel a strong sense of morality, that all debts should be paid. Most of all, people feel they are honoring the wishes of their loved ones.

But what do the recipients of these calls understand about their legal obligations?  Another quote:

Scott Weltman of Weltman, Weinberg & Reis, a Cleveland law firm that performs deceased collections, says that if family members ask, “we definitely tell them” they have no legal obligation to pay. “But is it disclosed upfront — ‘Mr. Smith, you definitely don’t owe the money’? It’s not that blunt.”

Sarah Waldeck of the Concurring Opinions blog commented that in fact it should be that blunt.  She's right.  But even thought the Fair Debt Collection Practices Act does not explicitly require such a disclosure, there's a pretty good argument the absence of such a disclosure violates the FDCPA.  Section 807 of the FDCPA prohibits "false, deceptive, or misleading representations in connection with the collection of any debt."  That includes the false representation of "the character . . . or legal status of any debt."  When a debt collector calls you up to ask for payment of your deceased relative's debt, isn't there an implied representation that you owe the debt?  The standard for deception under the FDCPA in many circuits is the "least sophisticated consumer" standard.  Wouldn't such a call deceive the least sophisticated consumer into thinking that he owes the debt, unless the caller says to the contrary?

And that's not the only problem under the FDCPA.  Section 808 bars debt collectors from using "unfair or unconscionable means . . . ."  I'd love to hear someone explain why taking advantage of grieving families in such circumstances is not unfair or unconscionable when no one has told them they don't have to pay.  Especially if the debt collector starts explaining how paying the debt would help the deceased rest easy.

The consumers have still another argument, though it's a bit strange.  Section 805(b) of the FDCPA bars collectors from communicating "in connection with the collection of any debt, with any person other than the consumer  . . . "  Well, the consumer's dead, so maybe the collector ought to be able to communicate with his family--except that that's not what the statute says.  Section 803(3) defines "consumer" as "any natural person obligated or allegedly obligated to pay any debt."  But the people receiving the calls apparently are not obligated to pay the debts; that's what the article's about.  Maybe you could argue that the point of this provision is to prevent debtors from embarrassment, and someone who's dead is beyond that, but I don't find that persuasive; certainly people have an interest in how they will be perceived after their death.  Maybe a better argument is that the family lacks standing to assert this claim (though the debtor's estate should be able to), but it certainly raises an interesting puzzle.  Anyway, I wonder if we're going to see some law suits arising out of this practice. 

ADDENDUM: As a commenter pointed out, section 805(d) has a special definition for "consumer" which may include some of those who have heard from the debt collectors, and to that extent would save debt collectors from violating section 805.

Hoofnagle and King on What Californians Understand About Online Privacy

After co-authoring What Californians Understand about Privacy Offline, Chris Jay Hoofnagle and Jennifer King, both of Berkeley, have collaborated on What Californians Understand about Privacy Online.  Here's the abstract:

The volume of online commerce grows every year, in absence of a federal law setting baseline protections for the collection, use, and disclosure of personal information. Instead, information collected by websites are governed by individual privacy policies.

In order to gauge Californians' understanding of privacy policies and default rules in the online environment, we commissioned a representative survey of adults in the State (N=991). The telephonic survey of Spanish and English speakers was conducted by the Survey Research Center of University of California, Berkeley.

A gulf exists between California consumers' understanding of online rules and common business practices. For instance, Californians who shop online believe that privacy policies prohibit third-party information sharing. A majority of Californians believes that privacy policies create the right to require a website to delete personal information upon request, a general right to sue for damages, a right to be informed of security breaches, a right to assistance if identity theft occurs, and a right to access and correct data.

These findings show that California consumers overvalue the mere fact that a website has a privacy policy, and assume that websites carrying the label have strong, default rules to protect personal data. In a way, consumers interpret "privacy policy" as a quality seal that denotes adherence to some set of standards. Website operators have little incentive to correct this misperception, thus limiting the ability of the market to produce outcomes consistent with consumers' expectations. Drawing upon earlier work, we conclude that because the term "privacy policy" has taken on a specific meaning in the minds of consumers, its use should be limited to contexts where businesses provide a set of protections that meet consumers' expectations.  

Neuroscience and Consumer Protection

by Jeff Sovern

I've been listening to the audio version of Jonah Lehrer's How We Decide, which brings neuroscience to bear on the human decision-making process, and while I'm not done with it yet, I wanted to blog about some of what I've already heard.  

Lehrer offers a number of comments on credit card and subprime lending.  He reports that experiments have shown that when consumers charge items on credit cards, the loss section of brain is not activated.  If I understand correctly, the prospect of paying cash for something seems like incurring a loss--the reduction in cash--and so consumers feel the cost of paying for something in cash more keenly than when putting something on plastic.  In other words, consumers feel less restraint when charging something than when pulling money out of their pockets.  Lehrer discusses an experiment in which some consumers were permitted to bid for an item and pay via credit card while others were obliged to pay cash: those using credit were willing to pay much more for the item.  Lehrer also claims that using credit cards takes advantage of the tendency of the brain to overvalue current consumption and de-emphasize future costs. Initial low teaser rates exacerbate the problem.   And, he argues, subprime loans, such as 2/28 mortgages (lower payments for the first two years), exploit the same tendencies.

Interesting, but what does it have to do with consumer law?  Well, this is the second recent book I've come across that explores how neuroscience can affect consumer decision-making (we blogged about the other, Buyolgy, here).  Much of consumer law is concerned with giving consumers the tools to resist manipulation by businesses.  For example, the Federal Trade Commission Act bars unfair and deceptive practices, and the Truth in Lending Act obliges lenders to make certain disclosures to increase the likelihood that consumers will be able to make informed decisions.  But now businesses have developed the capacity to engage in different types of manipulation, based not on dishonest behavior, but rather on irrationalities in the human brain that impair human decision-making.  It would be a huge step to, say, prohibit conduct based on such irrationalities--to bar truthful representations, or even teaser rates, because of their appeal to these irrationalities--but how do you justify prohibiting some manipulation without also barring others?  Ideally, we would find some way to simulate the same feelings about paying with plastic as we would with cash, so that consumers would feel the same restraint about purchases no matter what form they used to pay for the item.  I wonder if future interdisciplinary law review writing in consumer law will bring in the insights of neuroscience.

Sign Up With NHTSA To Get Vehicle, Tire, and Child Restraint Recall Information

The National Highway Traffic Safety Administration now makes available safety recall information on vehicles, tires, and child safety restraints electronically. Go here to sign up for an email that will provide all recalls issued by NHTSA in the last seven days. Go here for instant RSS feeds to your computer, cell phone, or PDA device.

Foreclosure Crisis Still Getting Worse

One out of 8 American homeowners with a mortgage is now behind in mortgage payments (either delinquent or in foreclosure) according to the Mortgage Bankers Association quarterly survey, the most reliable and longstanding source for foreclosure data.  New foreclosure filings have not increased but every other category, including total loans in foreclosure and total loans more than 90 days past due, increased and continues to set new records.  In case anyone had any doubts, subprime adjustable-rate mortgages are a failed product.  A whopping 48% of these mortgages nationwide are delinquent or in foreclosure. 

The MBA numbers, however, are from December 31, and thus a bit out of date.  As the Congressional Oversight Panel notes in its report on the foreclosure crisis, there is still no comprehensive and timely report on foreclosures, comparable to data on unemployment, housing starts, retail sales and virtually every other important economic indicator.  The Administration's foreclosure plan refers to to this problem and promises to fix it. 

I have seen some evidence in January and February data that viable modifications are increasing significantly, although incrementally, and that foreclosure starts and sales may be slowing as a result of the various lender and state-imposed moratoria.  More on the February data shortly.

House Holds Hearing on Used Cars

by Deepak Gupta

Yesterday, the House Subcommittee on Commerce, Trade, and Consumer Protection held a hearing on “Consumer Protection in the Used and Subprime Car Market."  The hearing focused on two types of problems for consumers, especially lower-income consumers: (1) a lack of available information about a vehicle's true history (which can lead to consumers becoming victims of salvage fraud, title-washing, and related practices, and, in many cases, to serious injury or death) and (2) abuses in financing and sales of used cars, some of which are quite similar to predatory mortgage practices.  Here is Public Citizen's statement on the hearing.

I was pleased that there was much discussion at the hearing about the National Motor Vehicle Title Information System, a subject we've blogged about several times here.  Last year, Public Citizen sued the U.S. Department of Justice to force it to implement the system, a long-delayed vehicle history database that Congress first mandated in 1992. The database is intended to gather information from the states, insurers, and junk and salvage yards, and to allow consumers and law enforcement to instantly verify the salvage history of a vehicle.  In our lawsuit, the court ordered the government to issue final regulations and launch consumer access by January 30, 2009, which the government did, right on the deadline. But many states still are not participating. The focus now is on getting all 50 states to comply with the system (including California--which is reporting data but barring consumers from accessing it) and getting the Federal Trade Commission, through its Used Car Rule, to require the placement of NMVTIS data on the car itself.

Fifth Circuit Holds Manifest Disregard of the Law is Not a Valid Basis to Vacate an Aribtration Award

Today, in Citigroup Global Market v. Bacon, the U.S. Court of Appeals for the Fifth Circuit held that manifest disregard of the law is not a valid, non-statutory basis for vacating an aribtration award subject to the Federal Arbitration Act. The Fifth Circuit said that its ruling was demanded by the reasoning of the Supreme Court's decision last year in Hall Street Associates v. Mattel, 128 S. Ct. 1396 (2008).

A Bit More on Whether Consumers Read

by Jeff Sovern

I posted yesterday the abstract of Debra Pogrund Stark's and Jessica M. Choplin's article, A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, NYU Journal of Law & Business (2009), but I wanted to mention a bit more about it. One way the authors tested whether people read forms was to have students fill out a thee-page consent form to participate in a study.  Here's an excerpt which I suspect will become a classic:

The second paragraph was a long-winded explanation of informed consent, but buried three quarters of the way through this paragraph, was a sentence suggesting that participants should not sign this consent form as its terms were clearly not in their best interests. The third and fourth paragraphs described unproblematic aspects of studies typically conducted at the university. Buried within the fifth paragraph, however, were clauses that were certain to be unacceptable if read by participants. In particular, these clauses committed participants to administering electric shocks to fellow participants, if instructed to do so, even if that participant screamed, cried, and asked for medical assistance. It also required participants to do push-ups, if the experimenter instructed them to do so. Contrary to human-subject protection guidelines, the form required participants to remain in the laboratory until and unless the experimenter allowed them to leave.

So how many signed?  87 of the 91 participants, or 95.6%.  The authors report: "Very few read any provisions or even skimmed enough to get a vague idea of those provisions. The average time that these participants spent looking at the bogus consent form was 2.0 seconds."  To be sure, that may not say very much about whether consumers read other contracts, or even that these students were typical of consumers, but it sure rings true, doesn't it.  I should also note that the authors also surveyed 207 people on whether they read contracts.

Supreme Court Rules 6-3 That State-Law Drug Injury Claims Are Not Preempted By FDA Drug Approval

The Supreme Court ruled 6-to-3 today that a state-law tort claim alleging that a drug manufacturer failed to warn of a drug's hazards is not preempted by federal law, specifically the FDA's authority to approve the drug and its label. All of the Court's opinions in the case are available here. Public Citizen's press statement is available here.

Studies Explore Whether Consumers Read Contracts

Two recent studies explore whether consumers read contracts.  One, by Shmuel I. Becher and Esther Unger-Aviram, is titled Myth and Reality in Consumer Contracting Behavior.  Here's the abstract: 

Most legal scholars regard consumer contracts with distrust, calling on courts and legislators to intervene to protect consumers from biased contract terms. Other scholars opine that in competitive markets there is basically no need to intervene, since some consumers do read their contracts and thus discipline sellers. Surprisingly, very few legal writings rely on data gathered from surveys and field or laboratory settings when discussing consumers' contracting behavior.

This essay attempts a first step toward narrowing this gap by examining intended consumer behavior in different contracting contexts. We discuss and analyze the answers to two questionnaires. The first focuses on the intent of consumers to read form contracts ex ante and ex post in four different scenarios. The second examines the extent to which prevalent rational-economic factors influence potential consumers in their intent to read form contracts ex ante and ex post.

Our findings support some of the common assumptions found in the literature and contradict others. The findings from the first questionnaire support the assumption that most consumers do not read most of the contracts in their entirety at the time of contracting. But they do not support the assumption found in some literature that a substantial minority of consumers read their contracts and thus might discipline sellers. The results also show that many more consumers indicate a tendency to read contracts after the fact. The findings of the second questionnaire show that at the time of contracting, the most prevalent rational-economic reasons for reading the contact are cost, length of contract and the prospects of influencing or changing contract terms. Cost and the chance to influence or change contract terms are also detrimental factors in consumers' intention to read form contracts after the fact, as is the opportunity to learn new things about their rights and obligations under the contract. Surprisingly, however, legal jargon, print density and font size are not key factors in consumers' decisions on whether to read their contracts. 

The other is A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, NYU Journal of Law & Business, by Debra Pogrund Stark of John Marshall and Jessica M. Choplin of DePaul. Their abstract follows:

Are consumers "foolish" or "negligent" when they trust what salespersons falsely tell them rather than read all of the terms of the contracts they sign? Should consumers be barred from bringing a fraud action on the ground that they have not "reasonably relied" upon such false statements or deceptive conduct when the form contract they sign states that they have not so relied? Currently seven states' courts have interpreted their consumer fraud statutes to require "reasonable reliance," and three-quarters of the states' courts impose this requirement for a common law action for fraud. Some courts have also ruled that the presence of a "no reliance" type clause bars a consumer from being able to raise the alleged false statement or deceptive conduct.

The attached article, "A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities," provides an interdisciplinary analysis of this important aspect of consumer fraud law. The article proposes law reforms based upon the results of our fraud simulation study, reading contracts survey, and an analysis of the cognitive and social psychological reasons why consumers trust what salespersons tell them rather than read all of the contract terms.

In our survey of consumers, we found that on average 67% of the consumers reported that they failed to read all of the terms of the contracts they signed among the six different categories of consumer transactions surveyed (agreements relating to computer software, rolling contracts, car rentals, apartment leases, home purchase and home loans). As detailed in the article, the primary reasons why consumers rely upon what the salesperson tells them and fail to carefully read and understand all of the terms of the contracts they sign are due to cognitive barriers such as: (i) visual and comprehension challenges based upon the manner in which many form contracts are drafted, (ii) analytic deficiencies based upon schema deficits, (iii) positive confirmation biases, (iv) inability to imagine possible negative outcomes (i.e. the availability heuristic), (v) default assumptions, and (v) sunk cost effects. The article also explores some of the social psychological reasons why consumers fail to read the contracts they sign including: (i) misplaced trust in the defrauders due to a variety of factors which creates a strong motivation to trust which is exacerbated when the consumer is of a lower socio-economic status, (ii) social norms not to read contracts in certain contexts and a concomitant social value to trust, and (iii) a perceived (and often real) inability to negotiate the terms of the contract.

In light of these cognitive and social psychological barriers to reading and understanding all of the terms of the form contracts that consumers sign, we contend that courts are enforcing a contractual myth and creating a license to deceive when they enforce no reliance type clauses in contracts when in fact many consumers do in fact rely upon such statements in making the decision to purchase the product or service. Ninety percent of the public we surveyed reported that they expect that the terms of the contracts they sign will be consistent with the salesperson's statements and eighty percent reported that if there is an inconsistency they think the company should honor the statements made by the salespeople when the consumer has not read the terms of the agreement.

While promoting certainty of contractual obligations is a legitimate goal, and the enforceability of "no reliance" type clauses through the reasonable reliance requirement is sensible under certain conditions in transactions between sophisticated companies, this article contends that based upon our empirical data it is not sound policy to make it a bar to a consumer bringing a common law fraud action or a statutory fraud action (the consumer would of course still have the burden to prove that the parol false statement or deceptive conduct took place).

This article comprehensively addresses an important aspect of consumer fraud among the fifty states and provides very important data relative to the issue of consumer protection in general and consumer fraud in particular.