Consumer Law & Policy Blog

Adam Levitin on How States Can Regulate National Bank Lending by Regulating the Secondary Market

Adam Levitin of Georgetown has written Hydraulic Regulation: Regulating Credit Markets Upstream, 26 Yale Journal of Regulation (2009), the imaginative thesis of which he presented at the AALS meeting in San Diego.  Here's the abstract:

Consumer protection in financial services has failed. A crisis is now playing itself out in the mortgage, credit card, auto loan, title loan, refund anticipation loan, and payday loan markets. Consumer protection was a traditional element states' regulatory power until federal preemption ousted states from almost all direct regulation of federally-chartered banks without substituting equivalent protections and enforcement.

This Article argues that one avenue may remain to permit states to engage in consumer protection regulation of federally-chartered banks. Recent changes in financial markets have placed the majority of consumer debt in the hands of secondary market entities, such as securitization trusts and debt collectors, which are not protected by federal preemption. States' ability to directly regulate the secondary consumer debt market also gives them the ability to indirectly regulate the primary market, even when direct regulation would be preempted.

States can impose targeted regulatory costs on the secondary market tied to the presence or absence of particular terms in consumer debts, regardless of what type of institution initiated the debt. By tying regulation to the terms of the debt, states can channel the hydraulic force of the market, which will pass these costs on to the originators of the debts - including federally-chartered banks. This would create an incentive for originating lenders to adjust the terms under which they originate consumer debts so as to avoid state regulatory costs. This Article contends that such regulation would not run afoul of preemption doctrine because it does not directly regulate federally-chartered banks; it affects them only indirectly, through the market.

House Financial Services Committee Passes Credit Cardholders' Bill of Rights Act on to House

The House Financial Services Committee is reporting here that it has passed the Credit Cardholders' Bill of Rights Act and reported it to the full House.

UPDATE: Here's the Committee press release:

The House Financial Services Committee today approved legislation that would provide credit card customers crucial protections against unfair, deceptive, and anti-competitive credit card practices, which include double-cycle billing, due-date gimmicks, and retroactive interest rate hikes. The bill would also increase the advance notice of impending rate hikes and give consumers the information and rights they need to manage their credit responsibly.

The Credit Cardholders’ Bill of Rights (H.R. 627), sponsored by Rep. Carolyn B. Maloney (D-NY), was passed by a vote of 48 to 19.  The bill now moves to the House of Representatives for consideration. 

“This landmark legislation helps level the playing field between cardholders and card companies. For too long the relationship has been one-sided; but markets function best when all sides know what they're getting into -- and these deceptive practices need to be stopped. The Credit Cardholders' Bill of Rights brings more transparency to the contractual relationship and give consumers the tools they need to responsibly manage their own credit," Rep. Maloney said.

“The substantial reforms in this bill are needed now more than ever, as working Americans have increasingly turned to credit cards to help pay medical bills, buy groceries, and make ends meet in this troubled economy," Rep. Maloney added.

New Proposed Credit Card Regulations

The Fed, OTS, and NCUA today announced proposed changes to their credit card regulations.  The press release is as follows:

The Federal Reserve Board, the Office of Thrift Supervision, and the National Credit Union Administration today proposed clarifications to aspects of their December 2008 final rules under the Federal Trade Commission Act (FTC Act) prohibiting certain unfair credit card practices. The Federal Reserve Board also proposed clarifications to its December 2008 final rule under the Truth in Lending Act (TILA) amending Regulation Z to improve the disclosures consumers receive in connection with credit card accounts and other revolving credit plans.

The proposals are intended to facilitate compliance with the December 2008 final rules without reducing protections for consumers. They would resolve areas of uncertainty and make technical corrections to ensure that institutions are able to come into compliance with the rules on or before the July 1, 2010 effective date. In particular, the proposals would clarify that:

• The key protections in the final rules would continue to apply to balances on a consumer credit card account when the account is closed or acquired by a different institution or when the balances are transferred to another account issued by the same institution. For example, an institution would not be permitted to increase the rate on a credit card balance because the account has been closed.
•  Institutions and retailers may continue to offer deferred interest and similar programs, but these programs are subject to all of the protections in the final rules. For example, if a consumer makes a purchase under this type of program, the terms governing interest charges on that purchase cannot be changed through a “hair trigger” or “universal default” rate increase. In addition, institutions and retailers must comply with enhanced disclosure requirements.

Links to the Federal Register notice and model forms can be found here.  Comments will be due within thirty days after publication of the notice in the Federal Register.

Fair Arbitration Coalition, Website & Blog Announced

A newly formed coalition is calling on Congress to stand up for employees and consumers and ensure companies are held accountable for misdeeds by passing legislation to end forced arbitration.  The goal of the Fair Arbitration Now Coalition is to pass the Arbitration Fairness Act (H.R. 1020).  Participants represent consumers, employees, homeowners, franchise holders and more. They range from Public Citizen, the National Association of Consumer Advocates, the National Employment Lawyers Association and the American Association of Justice to the National Consumer Voice for Long-Term Care, Home Owners for Better Building and the Leadership Conference on Civil Rights.

Website & Blog:  The coalition also has launched a blog that keeps readers up-to-date on the latest arbitration news and a web site, explaining what forced arbitration is, outlining the kinds of contracts in which forced arbitration clauses appear, providing links to news articles and telling stories of arbitration horrors.

Arbitration Fairness Day (April 29): The Fair Arbitration Now Coalition will hold a press conference and lobby day on Wednesday, April 29, with more than 50 consumers, employees and their representatives, who can speak about the injuries people suffer when they are forced into arbitration in an attempt to hold companies accountable for wrongdoing.

Signs of life at the FTC

by Steve Gardner

Yesterday, the FTC showed significant signs of life, announcing a consent decree against the Kellogg Company for claiming that it had scientific proof that its Frosted Mini-Wheats cereal improved children's attentiveness by 20 percent (!!!).

In terms of sheer gall in marketing food for kids, Kellogg's efforts to promote this sugary cereal as an alternative to ADD medication is surpassed recently only by Coke's claim (in Australia) that  Coca-Cola cannot contribute to weight gain, obesity and tooth decay (!!!!!). The Australian government shut down those claims.

In the FTC action, the most notable thing (aside from Kellogg's aforementioned gall) was this statement by the newly appointed Chair of the FTC, Jon Leibowitz:

We tell consumers that they should deal with trusted national brands. So it’s especially important that America’s leading companies are more ‘attentive’ to the truthfulness of their ads and don’t exaggerate the results of tests or research. In the future, the Commission will certainly be more attentive to national advertisers.

After years of not-so-benign neglect of consumers, it's good to see that the Commission will focus more attention on the companies who are setting the standards for deceptive advertising, rather than just taking action against smaller companies.

Judge Richard Posner Questions the Free Market and Calls for More Financial Regulation

Check this out.

I'm a Class Member!

by Jeff Sovern

Sometimes consumer law strikes home. I just received a notice of a proposed settlement of a consumer class action, and I might actually be a member of the class!  The defendant is Symantec, which makes the antivirus software I use.  Plaintiffs claim that when Symantec customers upgraded their subscription, Symantec didn't give them a credit for the unused portion of their old subscription, but started the new subscription right at that time, and that this failure is unlawful.  Symantec denies the allegations, but the parties have agreed to a settlement and are now seeking court approval.  

So far, this sounds great. Found money, right?  So what do I get?  Either a $15 dollar voucher good for use on Symantec products, or $2.50!  Wow!  Only, I'm not likely to use the voucher, because I just renewed my Symantec subscription which means I wouldn't renew again for nearly a year, and I'm not going to remember a year from now that I've got a voucher (of course, many consumers won't be in this position, because they might renew sooner, but would a consumer renewing even three months from now, say, remember?  If not, and I bet most won't, and if customer purchases are evenly distributed throughout the year then three-quarters of the class members won't get the voucher unless Symantec's purchase software remembers for them.  And what about consumers who no longer use Symantec products? Which might be likely to include the class members, because, after all, they've just been told of allegations that Symantec behaved badly). So that just leaves me $2.50.  

But wait--to get even that, I have to read through the form (more about that below) and submit the following:

I affirm the following: (1) I purchased an upgraded Symantec Subscription Product** online at the Symantec Renewal Center1 between December 5, 2001 and April 11, 2008; (2) I did notpurchase the upgrade at the Symantec Online Store; (3) I upgraded before the existing subscription on my previous Symantec Subscription Product expired; and (4) to the best of my knowledge, I did not receive the benefit of unexpired subscription time remaining on my previously purchased Symantec Subscription Product.

I have no idea whatsoever whether I bought my upgrade via the Online Store or at the Renewal Center, or whether my existing subscription had expired.  How many consumers will remember something like that  

Perhaps that won't stop consumers from affirming the facts (after all, with the amounts at stake, is anybody going to check?), but if no one remembers and no one is going to check--for $2.50?  even assuming that they could check--then what's the point of asking for the affirmance? In fact, for $2.50, what's the point of submitting the claim form?

I'd love to know how many class members, and what percentage of the class actually receive the benefits.  I would also love to know how many class members actually read the notice.  It certainly contains enough verbiage to deter reading.  Here, for example, is how it identifies the addressees:

To: ALL PERSONS AND ENTITIES RESIDING IN THE UNITED STATES OF AMERICA WHO, BETWEEN DECEMBER 5, 2001 AND APRIL 11, 2008, PURCHASED ONLINE A SYMANTEC SUBSCRIPTION PRODUCT WITH A STOCK KEEPING UNIT THAT DESIGNATES THE PRODUCT AS AN UPGRADE, THE INSTALLATION OF WHICH RESULTED IN THE UNINSTALLATION OF ANOTHER SYMANTEC SUBSCRIPTION PRODUCT PRIOR TO THE EXPIRATION OF THAT PRODUCT’S SUBSCRIPTION.

A stock keeping unit?  What's that?  That's right at the beginning.  Want to bet that a lot of people stopped reading before they got through it?

So, as has no doubt become apparent, I have real doubts about how many class members will actually benefit from this settlement.  Incidentally, the settlement also provides for a release of Symantec. Symantec also will add the following language to its FAQ and its renewal center landing page:

Any subscriptions for upgrade products begin on the day of product installation. If you replace the Symantec subscription product that you currently have with an upgrade product, any unused subscription time on the replaced product will not be added to the upgrade subscription, when the new upgrade product subscription replaces your current product subscription.

So future buyers won't be misled about their rights.  That's good, right? That will surely be a big comfort to future subscribers, if they read it.  A big benefit to current class members too.  By the way, I kind of wonder whether Symantec added language like that to their renewal center page the day they got served.  Oh, and did I mention the attorney's fees?  $2,275,000.00 split among five firms.

Now maybe those lawyers did a great job.  I don't know anything about the underlying claim.  Maybe the suit was a long shot at best and the lawyers did an incredible job persuading the defendants to settle.  And maybe I'm wrong about the number of class members who will benefit from the suit.  I'm a believer in paying attorneys bigger fees than the class members get in damages if the attorneys benefited the class, their work justifies it,  and the damages are small.  But really, is this the kind of thing that makes consumer lawyers or our legal system look good?  Can't we do better than this?

More information about the case is available here.

Do Law Students Get What They Pay for When Law Professors Blog?

by Jeff Sovern

The question assumes that law students pay for faculty blogging, in that the tuition they pay goes to law faculty salaries.  That assumption is probably true, in that most law schools are largely tuition-driven, meaning that law student tuition pays for what most professors do.  You could, however, argue that blogging is something we do on our own time.  I don't know how to figure out whether that's true.  Certainly a lot of blogging gets done outside of normal business hours, but then so does teaching at the many law schools that offer evening program.  It's likely that a lot of bloggers put in more than the standard forty-hour week on their work, which suggests that blogging is an extra.  But then, probably most bloggers report to their deans that they blog, in the hope of eliciting higher raises, which would suggest that the bloggers view it as part of the job, and if it does generate larger raises, that the school does too.  Anyway, let's assume that blogging is part of the job that law students are paying for.

So what do law students get from professorial blogging?  At least three things: first, to the extent that blogging enhances a school's prestige, the students benefit from that.  Some compare being a student or an alum of a school to owning stock; as the stock/law school's reputation appreciates in value, so does the student/alum.  But does blogging really enhance prestige?  The argument that it does is that blog posts reach a lot of people which may enhance readers' views of the professor and hence the institution.  The argument that it doesn't is that the people it reaches may not vote in the reputation rankings for U.S. News, and unfortunately (in my view, at least), that seems to be the chief measure of prestige in the law school world.  At the end of the day, this is a question that can be tested empirically over the next few years: do schools with more and better bloggers rise in the rankings?  I'm not holding my breath, but we'll see.

Second, professors who blog may become more informed teachers.  My own experience, and I have no idea how universal this is, is that the fact that I blog increases my diet of consumer protection news, because I look for things to blog about.  Often what I blog about ends up as fodder for class.  But that helps only in my consumer protection class. 

Third, as my colleague Chris Borgen pointed out to me (Chris founded Opinio Juris, a leading international law blog), students also benefit when their professors blog because they can learn more about the subject by reading the blog.  Probably that also helps them understand their professor's thinking better.

The conclusion that students benefit from professorial blogging (blogging is also useful in other ways, but I'm just focusing here on student benefits) answers only part of the question, because of the opportunity costs of blogging.  If professors weren't blogging, what would they do with the time?  If they would, say, go to theater or watch TV, then students are better off when professors blog because the alternative doesn't benefit them. But if professors would work on a scholarly article, would students be better off?  I'm not sure.  First, there's the broader question, which I'm not addressing at the moment, of whether conventional scholarship benefits students, and on which people are divided.  But assume that it does benefit students.  Blogging seems to reach a lot more people.  SSRN gives us some measure of how many people read articles, and the answer is not many.  An awful lot of papers never get as many as 300 downloads.  In contrast, many blogs register that many hits in a day; this blog, which is fairly specialized, gets far more than that a day, and still others read our posts via email. SSRN is not a complete record of who reads a particular paper, since once a paper is published, people can read it in print without it showing up on SSRN, and some papers are posted elsewhere, but the available evidence suggests that more people read blog posts than law journal articles.  On the other hand, a blog post, which typically reflects far less thought, research, and care than an article in print, surely adds much less to the prestige of a writer or institution than an article.  A further complication is that all of this ignores the connections between blog posts and law journal writing.  For example, authors can use blog posts to try out ideas they will later use in articles, then post links to the article on their blogs.

But that assumes that the alternative to blogging is conventional writing.  What if it's something that benefits students more directly?  For example, many law school doctrinal classes famously base grades on a single exam at the end of the semester.  Suppose that professors took all the time they put into writing and instead administered midterms, and provided feedback to students on those midterms?  Or gave drafting assignments with feedback?  Or--well, you get the idea.  My own suspicion is that while students might not be enthusiastic about more work and feedback (remember the famous quote: "education is the only thing people pay for that they want less of"), the extra work and feedback would do more for them than any writing we could do for any outside audience.  But most of us would rather do our own writing than grade, say, and as Adam Smith wrote in his 1776 book, On the Wealth of Nations, universities are run for the faculty.

Skiba and Tobacman on Patterns of Borrowing, Repayment, and Default in Payday Loans

Paige Marta Skiba of Vanderbilt and Jeremy Tobacman of Penn have co-authored Payday Loans, Uncertainty and Discounting: Explaining Patterns of Borrowing, Repayment, and Default.  Here's the abstract:

Ten million American households borrowed on payday loans in 2002. Typically, to receive two weeks of liquidity from these loans households paid annualized (compounded) interest rates over 7000%. Using an administrative dataset from a payday lender, we seek to explain demand-side behavior in the payday loan market. We estimate a structural dynamic programming model that includes standard features like liquidity constraints and stochastic income, and we also incorporate institutionally realistic payday loans, default opportunities, and generalizations of the discount function. Method of Simulated Moments estimates of the key parameters are identified by two novel pieces of evidence. First, over half of payday borrowers default on a payday loan within one year of their first loans. Second, defaulting borrowers have on average already repaid or serviced five payday loans, making interest payments of 90% of their original loan's principal. Such costly delay of default, we find, is most consistent with partially naive quasi-hyperbolic discounting, and we statistically reject nested benchmark alternatives.

Using the DMCA to Remove a Video Because It Is Embarrassing

by Paul Alan Levy

The New York Times has a story today about a video prank and its consequences for Domino's.  Two employees made up a story about polluting products at Domino's pizza with mucus and such, made some short videos in which they claimed that they were producing such Domino’s cheese steaks for delivery, then posted them online. In one of the videos, the female voice remarks that the employees’ manager doesn’t know what they are doing because the manager “is back in the back reading the newspaper, like always, while we are out here, clowning around, putting snot in people's food.”

The story reports that the videos have been removed from YouTube "because of a copyright claim from Ms. Hammonds" (one of the two employees).  But the Times links to a YouTube video from the CEO of Domino's profusely apologizing for the actions of the two "team members" (that awful euphemism for "employees") and assuring the public that the food available for purchase at Domino's is not adulterated.

Somehow it seems hard to judge all this without seeing the context of the YouTube posting.  We may presume the falsity of the assertions that these food products were actually prepared for delivery to customers (and the implicit assertion that Domino's staff engage in such abuses regularly).   And yes, Domino's deserves protection from having knowingly false statements about it online.  But somehow it seems a perversion of copyright law for the DMCA to have been used to take the video down.  Since it was Hammonds who made the copyright complaint, she must not have been the one who posted it to YouTube (she could take down her own video after all).  Once there is a controversy, might not the posting of the video, as a way of informing the public about the misconduct of Domino's staff, be fair use?  Or perhaps this is really a commentary on the hostility of low-paid fast food "team members" toward a higher paid "team member." Why should the video be removed before the the poster has had a chance to respond to the copyright infringement charge?

Taking down the YouTube "prank video" about Domino's seems a bizarre abuse of the DMCA.  Yes, Domino's would be entitled to complain about a libelous video, and to publicize its response, but here we are seeing only the Domino's response, but not the subject of the response.

I wonder if this doesn't tend to reinforce the need to change the DMCA so that takedowns don't happen without notice and an opportunity to respond 

Note: the videos are still available on the always reliable Consumerist.