Consumer Law & Policy Blog

Jonathan Zinman on What Borrowers Do When States Limit Payday Loans

Jonathan Zinman of Dartmouth has written Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the Oregon Rate Cap.  Here's the abstract: 

Many policymakers and some behavioral models hold that restricting access to expensive credit helps consumers by preventing overborrowing. I examine some short-run effects of restricting access, using household panel survey data on payday loan users collected around the imposition of binding restrictions on payday loan terms in Oregon. The results suggest that borrowing fell in Oregon relative to Washington, with former payday loan users shifting partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

Obama Reported to Want New Consumer Financial Protection Agency

Bloomberg News is reporting that tomorrow President Obama will propose creation of the Consumer Financial Protection Agency "to protect consumers of financial products with the power to punish offending firms and stripping the Federal Reserve of some of its powers."

Supreme Court Takes Arbitration Case

The Supreme Court yesterday granted cert in Stolt-Nielsen S.A. v. AnimalFeeds International, which raises the question, according to SCOTUSblog, of "when two companies agree to send their disputes to arbitration, may a court order that process to go forward as a class action, if the contract says nothing on that issue."  Because consumer arbitration clauses never provide for class actions, the case might have consequences for consumer contracts which provide for arbitration, but do not expressly bar class actions. Here is the question presented, as framed in the cert petition:

In Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003), this Court granted certiorari to decide a question that had divided the lower courts: whether the Federal Arbitration Act permits the imposition of class arbitration when the parties’ agreement is silent regarding class arbitration. The Court was unable to reach that question, however, because a plurality concluded that the arbitrator first needed to address whether the agreement there was in fact "silent." That threshold obstacle is not present in this case, and the question presented here--which continues to divide the lower courts--is the same one presented in Bazzle:

Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

Has the FDIC Kept Savers' Returns Down?

On Saturday, Ron Lieber's "Your Money" column in the Times, headlined F.D.I.C.is Watching as a Bank Sets Rates, raised interesting consumer law issues.  Ally Bank is an online bank owned by GMAC Financial, a recipient of federal bailout funds.  Ally markets itself as a "better kind of bank" with "No minimum deposits,  No monthly fees.  No minimum balance.  No sneaky disclaimers."  Its web site asks what your bank is trying to sneak by you.  Its web site also promises that its rates "will always be among the top."  If that's true, it sounds like a pretty good bank.  But not, apparently, to other bankers.  According to the article, Ed Yingling of the American Bankers Association wrote to the FDIC complaining that Ally's high interest rates on CDs posed a danger to the industry and the FDIC. The claimed fear is that for Ally to make enough money to make good on the CDs, Ally will invest its money (or maybe that should read "the government's money") unwisely or make risky loans and end up not being able to meet its obligations on the CDs.   In any event, the article reported that Ally had lowered its rates twice in the preceding six days, though Ally refuses to say whether that's because of conversations it's had with the FDIC. Leiber, noting that the FDIC's last letter to GMAC expressed concern about its rates, complains that the FDIC's actions "seem a bit arbitrary," apparently because he believes the FDIC hasn't acted against other banks offering high rates. 

It seems strange that the FDIC should intervene to cause a bank to offer worse terms to consumers.  But I suppose that's the "safety and soundness" mission: that is, regulators want to insure that bank actions keep the banks safe and sound so the FDIC doesn't have to pay out on its promise to keep bank depositors whole.  But has the FDIC now forced Ally into false advertising?  It doesn't sound like Ally's rates are among the top any more.  Does that preserve Ally's safety and soundness?

Obama Administration Takes Position in Fair Credit Reporting Act Preemption Case Before Supreme Court

U.S. PIRG's Consumer Blog has this excellent post on a petition pending before the U.S. Supreme Court. The petition in American Bankers Association v. Brown, No. 08-730, asks whether a California financial privacy law is preempted by the federal Fair Credit Report Act to the extent that the California law prohibits the sharing of consumer information among affiliated financial institutions. The U.S. Court of Appeals for the Ninth Circuit held that, in significant part, the California law is not preempted. The Obama Administration has now told the Supreme Court that the Ninth Circuit's no-preemption ruling was wrong. But it has also told the Court that it should not take the case because (i) no other appellate courts have weighed in on the preemption issue (which would generally only happen if other states passed similar legislation that was challenged in the courts), and (ii) the Ninth Circuit's decision may have little practical effect. Check out the Supreme Court's electronic docket sheet on the case. An order on whether the Court will take the case is expected on Monday, June 29.

Sergio Pareja on FTC Regulation of Pyramid Marketing Schemes

Sergio Pareja of New Mexico has written Sales Gone Wild: Will the FTC's Business Opportunity Rule Put an End to Pyramid Marketing Schemes? 39 McGeorge Law Review.  Here's the abstract:

This article analyzes the anticipated effect of the FTC's Business Opportunity Rule on pyramid marketing schemes. Pyramid marketing schemes consistently rank in the top ten lists of consumer complaints received by the FTC and state consumer protection divisions, victimizing 1.5 million Americans a year. One recent class action settlement demonstrated that the victims, who are often relatively poor and uneducated, had an average loss of approximately $8,000 each. The FTC has promulgated a new Business Opportunity Rule in an effort to end these abuses. Promotors of business opportunities will be required to comply with the new rule beginning on July 1, 2008. This article carefully analyzes the rule and concludes that it will not be effective at stopping these schemes. The article suggests several key changes to the rule and recommends congressional legislation to stop the abuses.

Chrysler's Bankruptcy and Product Liability Suits

Fellow consumer law professor Norman Silber of Hofstra is quoted in a TV news report here about how Chrysler's bankruptcy will bar future product liability plaintiffs from obtaining compensation from Chrysler.

A Bit More About Steering

Yesterday I posted excerpts from an affidavit claiming that Wells Fargo steered lenders who could have had prime loans to more expensive subprime loans.  In markets that work properly, steering wouldn't be effective.  If, for example, you walked into a grocery store and they offered milk at $30 a quart--but said you should buy at that price because they saved you some paperwork--you'd buy elsewhere.  But obviously in the home loan market, many consumers did not go elsewhere.  Why is that?  There are a number of reasons.  Among them are that home loans are far more complicated than shopping for groceries, so that many consumers can't easily tell that they're being charged more than they should be.  Home loans have numerous price variables (monthly payments, length of term, points and fees, adjustable rates, and so forth) and prices vary according to how credit-worthy borrowers are, so that many borrowers undoubtedly did not realize that they could have saved thousands of dollars (and perhaps their homes if they later ended up in foreclosure because the payments were higher) by obtaining prime loans.  The very fact that steering occurred adds additional force to the argument that the home loan market does not work properly, that existing regulation has failed for many consumers, and to arguments that regulation is needed to fix that market.

Wells Fargo and Steering

Commentators have complained for some time that some lenders steered borrowers who could have qualified for prime loans to more expensive subprime loans. Unsophisticated borrowers who don't shop around for loans or don't realize what their loans actually cost them can end up paying far more than they need to, and in some cases, the higher payments may even have proved unaffordable, thus triggering defaults.  But are the commentators right?  On Sunday, the Times ran an article, Bank Accused of Pushing Mortgage Deals on Blacks, about affidavits in Baltimore's suit against Wells Fargo claiming that Wells Fargo engaged in steering.  So I asked my research assistant, Cameron Fee, to see if he could come up with the affidavits.  Here, as one example, is some of what former Wells Fargo loan officer and sales manager Elizabeth M. Jacobson stated in her affidavit:

8. The commission and referral system at Wells Fargo was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer.  The commission and fee structure gave the A rep a financial incentive to refer the loan to a subprime loan officer.  Initially, subprime loan officers had to give 40% of the commission to the A rep who made the referral; later on A reps received 50 basis points of the available commission,  Because commissions were higher on the more expensive subprime loans, in most situations the A rep made more money if he or she referred or steered the loan to a successful subprime loan officer like me.  A reps knew about my success in qualifying customers for subprime loans; as a result, I received hundreds of referrals.

* * *

 Because I worked on the subprime side of the business, once I got the referral the only loan products that I could offer the customer were subprime loans.  My pay was based on the volume of loans I completed.  It was in my financial interest to figure out how to qualify referrals for subprime loans.  Moreover, in order to keep my job, I had to make a set number of subprime loans per month.

11. Wells Fargo, like any other mortgage company, had written underwriting guidelines and pricing rules for prime and subprime loans.  There was, however, more than enough discretion to allow A reps to steerprime loan customers to subprime loan officers like me.  Likewise, the guidelines gave me enough discretion to figure out how to qualify most of the referrals for a subprime loan once I received the referral.

12. In many cases A reps used their discretion to steer prime loan customers to subprime loan officers by telling the customer, for example, that this was the only way for the loan to be processed quickly; that there would be less paperwork or documentation requirements; or that they would not have to put any money down.  Customers were not told about the added costs, or advised about what was in their best interest.

13. Once I received a referral from an A rep, I had discretion to decide which subprime loan products to offer the applicant.  Most of the subprime loans I made were 2/28s.  * * * These loans typically included a prepayment penalty for two or three years which ultimately made it more difficult for the borrower to refinance later out of the loan.  * * * I know that some loan officers encouraged customers to apply for these loans by telling them that they should not worry about the pre-payment penalty because it could be waived.  This was not true--the pre-payment penalty could not be waived.

14. According to company policy, we were not supposed to solicit 2/28 customers for re-finance loans for two years after we made a 2/28 subprime loan. Wells Fargo reneged on that promise; my area manager told his subprime loan officers to ignore this rule and go ahead and solicit 2/28 customers within the two year period, even though this violated our agreement with secondary market investors.  The result was that Wells Fargo was able to cash in on the pre-payment penalty by convincing the subprime customer to refinance . . . .

18. I also know that there were some loan officers who did more than just use the discretion that the system allowed to get customers into subprime loans.  Some A reps actually falsified the loan applications in order to steer prime borrowers to subprime loan officers.  * * *

Some states have statutes barring steering.  See, e.g., Cal. Fin. Code § 4973(l)(1).  I have a feeling that we're going to see more states enacting such statutes soon.  Even if Maryland lacks such a statute, some of the conduct described above sounds fraudulent or likely to violate a UDAP statute.  I wonder what the OCC thinks about all this.  Here's a statement from an OCC statement we quoted back in 2008:

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem.  Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators

The full affidavit, by the way, also describes how Wells Fargo targeted African-American communities; hence, the Times headline.

William McGeveran on Social Marketing

William McGeveran of Minnesota has written Disclosure, Endorsement, and Identity in Social Marketing, University of Illinois Law Review (2009).  Here's the abstract

"Social marketing" is among the newest advertising trends now emerging on the internet. Using online social networks such as Facebook or MySpace, marketers can send personalized promotional messages featuring an ordinary customer to that customer's friends. Because they reveal a customer's browsing and buying patterns, and because they feature implied endorsements, the messages raise significant concerns about disclosure of personal matters, information quality, and individuals' ability to control the commercial exploitation of their identity. Yet social marketing falls through the cracks between several different legal paradigms that might allow its regulation-spanning from privacy to trademark and unfair competition to consumer protection to the appropriation tort and rights of publicity. This Article examines potential concerns with social marketing and the various legal responses available. It demonstrates that none of the existing legal paradigms, which all evolved in response to particular problems, addresses the unique new challenges posed by social marketing. Even though policymakers ultimately may choose not to regulate social marketing at all, that decision cannot be made intelligently without first contemplating possible problems and solutions. The Article concludes by suggesting a legal response that draws from existing law and requires only small changes. In doing so, it provides an example for adapting existing law to new technology, and it argues that law should play a more active role in establishing best practices for emerging online trends.