Consumer Law & Policy Blog

David Schmudde on the Subprime Crisis

David Schmudde of Fordham University has written Responding to the Subprime Mess: The New Regulatory Landscape.  Here's the abstract:

An era of unregulated financial markets has resulted in a global financial disaster the likes of which has never before been seen. Central banks of all major countries, and the governments of these countries, are scrambling in uncharted waters to avoid a complete meltdown of the worlds' financial markets. More than a trillion dollars has been allocated to try to fix the mess.

How did we get to this point? The unlikely culprit was residential mortgages in the United States. Regulatory bodies took no action while this market grew with increasing acceleration, increasing irresponsibility, and increasing greed. One of the great financial bubbles was created. Financial instruments were created, given an imprimatur by rating agencies, and sold the world over. These seemingly secure investments, backed by mortgages on residences in the United States, were purchased by millions of unwary investors, even the most sophisticated investors, and on an unparalleled international scale. The investment banks, anxious to ride a wave of profitability, created more and riskier investments as the bubble inflated. Part II of this article describes the mortgage landscape which predated the collapse.

In 2006, the housing market peaked and began its crash, bringing with it all of the purchasers of the mortgage backed financial instruments.

All the players in the residential housing market were devastated. Homeowners lost their homes. Mortgage lenders disappeared. Investment banks either went out of business, or merely survived thanks to government infusions of cash. Investors in the mortgage backed securities lost virtually all the value of their investment. And stock markets around the world crashed with a resounding thud, wiping out vast amounts of wealth.

How did this happen. Where were the regulators? What are the weaknesses in our residential mortgage funding system?

Part III of this article analyzes the mortgage market, its weaknesses, and its regulatory scheme. The causes of the problem, namely irresponsible borrowers, greedy lenders, unresponsive regulators, the overzealous mortgage backed securities market, the rush by foreign investors to place money in U.S. investments, the irresponsibility of the credit rating agencies, and the collusion of appraisers, are discussed and scrutinized.

Part IV breaks down the new regulations and legislation enacted in the wake of the financial meltdown.

Part V examines Fannie Mae and Freddie Mac, their ultimate decline, and resulting takeover by the federal government.

Part VI discusses and analyzes the various lawsuits which have arisen from the mortgage meltdown.

Finally, Part VII attempts to specify weaknesses in the residential mortgage funding system, and to propose elements which must be addressed in creating a more stable, yet responsive mortgage market in the future.

Washington Post: Credit Card Reform Legislation Not Really Needed

Today's Washington Post has this editorial claiming that although the credit card reform legislation on its way to enactment is good in substance it is largely unnecessary because, the Post asserts, it mainly apes new Federal Reserve Board rules.

The Fed's rules do not include a provision permitting visitors to national parks to carry concealed weapons. (Though we hear that the Comptroller of the Currency is considering a new rule that would allow customers to carry bazookas into national banks. The Comptroller is, however, going to take the position that its new rule would preempt recent efforts by some states to require their citizens to be armed when they enter national banks.)

Congress Sends Credit Card Bill to President

The Times has the story here.

I'm sure that in the days to come we'll see blog coverage of the bill, and of course there's already been quite a bit of news and blog coverage.  Here's one thought: one apparent goal of the bill is to make credit card contracts more accessible. To that end, the bill requires credit card companies to post their contracts on the web.  That may prove to be a treasure trove for academics but I wonder how helpful it will be to consumers; will consumers read through competing credit card contracts looking for the best terms?  I'm skeptical but would love to be proved wrong.  I've seen accounts in the press about how the bill will require plain English for contracts (e.g., see the editorial in today's Times here), but all I can see in the bill that serves that purpose is the usual requirement that disclosures be "clear and conspicuous," which has been in the Truth in Lending Act for decades.  Am I missing something?

Senate Passes Credit Card Bill

The Times story is here.

Plaintiffs Win Important Consumer Protection Case in California Supreme Court

by Brian Wolfman

The California Supreme Court today decided In re Tobacco II, an important case under California's Unfair Competition Law (UCL), Cal. Bus. & Prof. Code 17200 et seq. Early in the opinion, the Court described the issues in the case and its holdings:

On review, we address two questions: First, who in a UCL class action must comply with Proposition 64’s standing requirements, the class representatives or all unnamed class members, in order for the class action to proceed? We conclude that standing requirements are applicable only to the class representatives, and not all absent class members. Second, what is the causation requirement for purposes of establishing standing under the UCL, and in particular what is the meaning of the phrase “as a result of” in section 17204? We conclude that a class representative proceeding on a claim of misrepresentation as the basis of his or her UCL action must demonstrate actual reliance on the allegedly deceptive or misleading statements, in accordance with well-settled principles regarding the element of reliance in ordinary fraud actions. Those same principles, however, do not require the class representative to plead or prove an unrealistic degree of specificity that the plaintiff relied on particular advertisements or statements when the unfair practice is a fraudulent advertising campaign.

Both holdings are favorable to consumer plaintiffs. On the second question -- reliance -- the opinion indicates that reliance can be presumed in many circumstances where a plaintiff class alleges consumer fraud.

The Court agreed with many of the arguments advanced by amici Public Citizen and the Center for Auto Safety. For more detailed descriptions of the case and the views expressed by those amici, see earlier posts here and here.

Times Sunday Magazine Money Issue

Yesterday's Sunday Times Magazine was devoted to money.  The entire issue was worth reading, but two articles in particular were striking.  One, written by Times economics reporter Edmund Andrews and titled My Personal Credit Crisis, was excerpted from his forthcoming book, Busted: Life Inside the Great Mortgage Meltdown.  A divorce and child support obligations left Andrews with take-home pay of $2,777.  Nevertheless, he and his second wife were able to qualify for a substantial mortgage that didn't require him to disclose his income, alimony or child support obligations.  The only problem was that his monthly payments exceeded $2,500 for the first five years, after which his payments would rise still higher.  Eventually, he ran out of money and despite refinancing, stopped making payments on the mortgage.  Here's a revealing passage in which he quotes Bob Andrews, a loan officer at the now-defunct American Home Mortgage Corporation:

“I am here to enable dreams,” he explained to me long afterward. Bob’s view was that if I’d been unemployed for seven years and didn’t have a dime to my name but I wanted a house, he wouldn’t question my prudence. “Who am I to tell you that you shouldn’t do what you want to do? I am here to sell money and to help you do what you want to do. At the end of the day, it’s your signature on the mortgage — not mine.”

The other article is titled What Does Your Credit-Card Company Know About You? and is about how credit card companies have discovered that consumers who charge some items, like chrome skull accessories, are more likely to default than consumers who charge other items, like premium wild birdseed.  That, of course, is relevant to who gets a credit card and the rates they get charged.  The article also explores how credit card companies have learned which strategies are more likely to help in collections than others, based on what they know about the particular consumer.  An excerpt:

[C]redit-card companies are becoming much more interested in understanding their customers’ lives and psyches, because, the theory goes, knowing what makes cardholders tick will help firms determine who is a good bet and who should be shown the door as quickly as possible.

Luckily for the industry, small groups of executives at most of the large firms have spent the last decade studying cardholders from almost every angle, and collection agencies have developed more sophisticated dunning techniques. They have sought to draw psychological and behavioral lessons from the enormous amounts of data the credit-card companies collect every day. They’ve run thousands of tests and crunched the numbers on millions of accounts. One result of all that labor is the conversation between [credit card employee] Santana — a former bouncer whose higher education consists solely of corporate-sponsored classes like “the Psychology of Collections” — and the [consumer] from Massachusetts. When Santana contacted the [consumer] last month, he was armed with detailed information about his life and trained in which psychological approaches were most likely to succeed.

Are SEC Employees Trading on the Agency's Inside Information or Otherwise Abusing Their Power?

This front page story in today's Washington Post concerns a report on the alleged conduct of employees of the Securities and Exchange Commission. Here's a brief excerpt to give you a sense of the story:

A Securities and Exchange Commission official attempted "to intimidate and influence" a family member's broker on multiple occasions by invoking her position, potentially violating agency rules, according to the agency's inspector general.* * * Another investigation found that some of the agency's enforcement lawyers may have traded the stocks of Citigroup, United Health Group and other firms around the time the agency opened investigations into the companies.

Article on Supreme Court's Decision in Wyeth v. Levine

Check out my new article on the Supreme Court's recent decision in Wyeth v. Levine. It describes the Court's decision in detail and discusses its implications for future litigation. Wyeth held that FDA approval of a prescription drug and its labeling does not preempt a state-law suit seeking damages based on injuries caused by the failure of the drug's manufacturer to warn about the drug's dangers. The decision represented an empathic repudiation of the pro-preemption position taken by the Bush Administration.

Consumer Law Wedding Toast

by Jeff Sovern

Recently I was asked to speak briefly at an upcoming wedding but was admonished not to mention consumer law.  So that made me wonder: what would a consumer law wedding toast look like?  My effort follows:

The groom is a reporter, and so can be analogized to the Truth in Lending Act (TILA), a disclosure statute.  The bride is a doctor who travels to Africa regularly to provide services to underserved patients, analogous to the Community Revinvestment Act (CRA), which seeks to insure that underserved consumers are provided with access to loans.  The CRA is unusual among consumer lending statutes in that it, unlike TILA, is not included within the umbrella Consumer Credit Protection Act.  But now the CRA and TILA will be brought together!

Maybe the original plan to stay away from consumer law was a good one.

Judge Posner Blames Himself, Among Others, for Economic Crisis

This article explains that champion of deregulation Judge Richard Posner blames himself, among others such as Alan Greenspan, for the current economic crisis. He says that although deregulation is good for virtually every sector of the economy, he failed to appreciate that it is not good for the banking sector. Judge Posner's views are expressed in detail in his new book, "A Failure of Capitalism: The Crisis of '08 and the Descent Into Depression."  He has also written some interesting posts on the economic situation and the crisis of the modern conservative movement on the Becker-Posner Blog, and he is updating his book on the economic crisis in regular commentary on TheAtlantic.com called "A Failure of Capitalism."