Consumer Law & Policy Blog

More Regulation Z Amendments to Implement the Credit CARD Act

The Fed has announced new amendments to Regulation Z to implement the provisions of the Credit CARD Act that go into effect next month.  The Fed is still working on amendments to implement the Credit CARD Act measures that take effect in August.  Here's an excerpt from the Fed's press release summarizing the effect of the new amendments

Among other things, the rule will:

• Protect consumers from unexpected increases in credit card interest rates by generally prohibiting increases in a rate during the first year after an account is opened and increases in a rate that applies to an existing credit card balance.
• Prohibit creditors from issuing a credit card to a consumer who is younger than the age of 21 unless the consumer has the ability to make the required payments or obtains the signature of a parent or other cosigner with the ability to do so.
• Require creditors to obtain a consumer's consent before charging fees for transactions that exceed the credit limit.
• Limit the high fees associated with subprime credit cards.
• Ban creditors from using the "two-cycle" billing method to impose interest charges.
• Prohibit creditors from allocating payments in ways that maximize interest charges.

 

2010 Update to Consumer Law Casebook Available

by Jeff Sovern

Thomson/West should shortly make available via email the 2010 update to our consumer law casebook.  The update includes some developments from the last year, such as the Cuomo case, and of course earlier materials, such as problems based on the 2008 amendments to Regulation Z.  If you need the update before Thomson/West makes it available, feel free to email me.  The update is designed to be used with the 2009 edition of the Selected Consumer Statutes. 

A Consumer Protection Perspective on the AALS Conference

by Jeff Sovern

After attending the last three AALS conferences, I wanted to voice a consumer protection perspective. Professors attend the AALS conferences for three reasons that I know of: to learn from the programs; to network; and to travel somewhere else, typically someplace warm in the winter (that last, of course, is not a reason for law schools to pay for the travel, but it is an inducement for some).  Of these, the conference is probably weakest on the first.  Unlike conferences devoted to a single subject, like the National Consumer Law Center's terrific Consumer Litigation Conference, attendees are likely to encounter only a few panels on the subjects on which they teach and write about.  Accordingly, attendees are less likely to learn something that they find of value than at single-subject conferences.  In addition, if a few panels at a single-subject conference turn out not to be useful, attendees can still learn helpful information from the other panels.  But that is less likely at the AALS because other panels will cover other subjects.  To make matters worse, it is often difficult to tell in advance whether a particular panel will be useful.  Many of the program descriptions are written in very general terms, often to connect to a conference theme that may have nothing to do with what is worth discussing in a particular area of legal doctrine.  As a result, it can be hard to determine what the panelists will talk about.  From a consumer protection perspective, it would be much more helpful if the panel descriptions available at the time attendees must decide whether to attend the conference (say, two weeks before the early bird registration period expires), included at least a one-sentence description of what every speaker plans to discuss.  That would permit people to get a better sense of whether they will learn something useful from the conference, which would help them make a more-informed decision about whether to attend.  Unfortunately, it almost seems as if the AALS has a short-term incentive to be vague in the program descriptions, because that permits the illusion that the panels will cover more ground than they actually will, perhaps prompting more people to attend on the mistaken theory that more panels will touch something useful to them than is in fact the case.  Over the long term, as professors learn that the program descriptions are of limited predictive value, some may eschew attendance, including at conferences at which they would have learned something useful to them if they had attended.

There's also the issue of price.  Brian Leiter has expressed the view that the AALS registration fee is "quite a bit higher than the norm," and has posted a poll seeking comment.  Beyond that, the cost of the breakfast session at which Pat McCoy and I spoke was $40; for that, we received some mediocre scrambled eggs, bacon, hash browns, rolls, coffee, and juice.  I can only hope that the discussion merited the $40, for the food certainly did not.

Baltimore Fair Lending Suit Rejected

By Alan White

In an interesting application of the Iqbal/Twombley "I know it when I see it" plausibility standard, a second judge granted a motion to dismiss filed on essentially the same grounds as the motion that was denied by a different judge earlier in the case. 

Judge Motz's decision addresses many interesting questions of interest not only to consumer credit and civil rights specialists but also concerning the constitutional and prudential standing doctrines.  Among the facts whose plausibility the court determines under Rule 12 is whether the lender's reverse redlining and foreclosures caused home vacancies and resulting burdens on the City, or whether instead the City's distress was the result of "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." 

The plaintiffs are not out of court, because the ruling permits Baltimore to file an amended complaint, alleging more specific harms flowing from the particular homes left vacant after Wells Fargo foreclosures, an invitiation plaintiffs will no doubt accept. 

I recently posted a paper on SSRN discussing some related issues, "Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing."

Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers

A draft of my article Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers, parts of which I spoke about at the AALS, is now available on SSRN.  Here's the abstract:

This paper argues that one cause of the current economic crisis was that the federal Truth in Lending Act failed to provide mortgage borrowers with the tools to determine whether they would be able to meet their loan obligations, and that as a result many borrowers assumed loans on which they would later default. The paper first explores the disclosures for adjustable rate mortgages - which were commonly used for subprime loans - and explains how those disclosures misled borrowers about their monthly payments. Next, the paper reports on a survey of mortgage brokers conducted in July of 2009. The brokers were nearly unanimous in reporting that borrowers never withdrew from a loan after reading the final TILA disclosures at the closing, and never used those disclosures for their stated purpose of comparison shopping for loans. In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans.

The paper suggests several measures to increase the likelihood that borrowers will attend to and understand their loan terms. At present, disclosures are mandated by governmental entities that do not participate in the loan transaction - thereby reducing their control over how the disclosures are presented; provided by lenders who do not have a stake in having consumers understand the disclosures and in some cases have an interest in obscuring them; and received by consumers who may not appreciate their importance and may even have reasons to overlook them. The paper therefore suggests a switch from the current TILA disclosure regime to a comprehension regime under which lenders would be obliged to insure that borrowers understand their loan terms. Alternatively, the paper suggests that lenders should be required to determine what proportion of their borrowers understands their loan terms and disclose those figures in the hope of generating competition among lenders for better comprehension scores. The hope is that either choice would give a party to the loan transaction - the lender - a stake in borrowers understanding their loan terms. Creation of such an incentive might cause lenders to reduce distractions to consumers reading disclosure forms, enlist the aid of lenders in conveying key terms to consumers, increase the intelligibility of loan terms, and lead lenders to abandon loan terms that consumers cannot comprehend.

If such a proposal proves politically unfeasible, the paper also draws on the work of Cass Sunstein and Richard H. Thaler to suggest “nudges” that might enhance the current disclosure regime. Specifically, the paper advocates requiring borrowers to view a video of the pain and risk of default and foreclosure to make those risks more salient and increase the likelihood that consumers attend to disclosures. The paper also suggests that loan applicants be obliged to draft a budget, taking into account any future increases in loan payments, so that they will understand the consequences of their payment obligations. Finally, the paper calls for requiring borrowers to take a “placement exam” to demonstrate their mastery of their loan terms and the budgetary consequences. Those who fail the exam would not be permitted to borrow unless a neutral credit counselor worked with them and certified that they understand their loan terms.

Product Recalls for December 2009

The last set of product recalls for the decade: Go here for December 2009 motor vehicle recalls from the National Highway Traffic Safety Administration and here for December 2009 product safety recalls from the Consumer Product Safety Commission.

Study Shows That Spending in Economic Stimulus For Transportation Has Had Virtually No Effect on Local Unemployment

A study conducted by the Associated Press and reviewed independently by five economists shows that conomic stimulus projects approved by Congress for transportation (that is,for building and repairing roads and bridges) has had virtually no effect in bringing down local unemployment rates. Read about it here.

The Right of Publicity Takes a Hit

by Paul Alan Levy

Two controversies about the use of images of the Obama family received attention this week, with resulting recognition that possible right of publicity claims would not only be unwarranted but would offend the First Amendment.  Given the frequency with which bogus right of publicity claims are used to try to suppress truthful commentary, this slap at the right of publicity is welcome.

The first controversy involves the portrayal of Michele Obama in a line of lesser celebrities — Oprah Winfrey, Tyra Banks, and Carrie Underwood  — with the headline, “Fur-free and Fabulous.”  Michele Obama did not appear physically in the line to be photographed (she was photo-shopped into the lineup), but the ad is based on the truthful statement that not only in the image, but also more generally, she does not wear furs.  Although public opinion seems to vary about whether it is ethical or tasteful for PETA to use her image without her consent, nobody seems to dispute that the First Amendment would protect PETA’s right to use the photo without her consent, even though it effectively aligns her with PETA’s policy positions and, indeed, with PETA itself.

A related controversy, resulting perhaps in a more interesting limit on the right of publicity, relates to a new ad from Weatherproof, a maker of jackets, that portrays Barack Obama standing at the Great Wall of China wearing one of their jackets.  Apparently, the company spotted a photo showing him in its garment, bought the rights to the photo, and is now using the photo to sell its jacket by showing that Obama is one of the fashionable people who wear it.  As in the Michele Obama case, the White House complained, but everybody seems to agree that Obama won’t sue, not just because presidents don’t trifle with such litigation, but because Obama has no legal leg to stand on.   He is a public figure and the ad is truthful — Obama did, in fact, wear its jacket standing near the Great Wall (nor could China sue, despite what the Mexican Government might think).  (Ht colleague Greg Beck for pointing to this earlier example of a marketing campaign using Bill Clinton’s image with a milk mustache.

Carfax Class-Action Settlement Rejected

by Deepak Gupta

Way back in May 2007, we posted here about objections by Public Citizen and the Center for Auto Safety to a nationwide-class action settlement involving Carfax. The underlying suit alleged that Carfax deceived customers by concealing the limits of the information contained in its popular vehicle history reports. Under the proposed settlement, Carfax would get a complete release of all claims, the plaintiffs' lawyers would get fees, and consumers nationwide would get the option to receive coupons for more free Carfax reports. The case was a poster-child for a bad coupon settlement. Nevertheless, a state trial court in Ohio approved the settlement over our objections.

In September 2009, I flew out to Ohio to argue the case before the state appeals court. We had three straightforward arguments for why the settlement was defective: (1) Carfax did not even attempt notice to the vast majority of the class, (2) the trial court approved the settlement without considering information concerning the actual value of the coupons to the class (as revealed by the number of claims made) and (3) the trial court inexplicably denied a request that Carfax turn over the relevant claims information. Although the state court does not get many class actions, let alone nationwide class-action settlement objections, the judges seemed surprisingly well prepared and had pointed questions for the settling parties' lawyers.

I'm pleased to report that the Ohio Court of Appeals handed us a victory over the holidays, ruling in our favor on all three grounds. Beyond the importance of this ruling for consumers in the vehicle history context, it's significant for several reasons. Ohio has a remarkably sparse class-action-fairness jurisprudence, and we're hopeful that this case will set some minimum standards, including an individual-notice requrement as a constitutional floor for notice. In addition, the insistence on the discovery of coupon-redemption information is also quite significant in its own right. When that kind information is revealed -- for example, when people find out that far less than 1% of the class is likely to claim the coupons -- it becomes really hard to defend a bad coupon settlement. 

Good coverage of our Carfax victory appeared this week in the New York Times, the Cleveland Plain Dealer and Consumer Affairs.

In related vehicle-history-information news, the National Motor Vehicle Title Information System -- a long-overdue public alternative to Carfax that was launched in response to our successful lawsuit against the Justice Department -- continues to proceed toward full implementation. Here's an update on some of the latest.

Rethinking the Foreclosure Plan

By Alan White

This story in the New York Times paints a grim picture of the Obama/Geithner foreclosure crisis response.  The main theme is correct:  without reducing principal balances, no plan will keep homeowners in their homes.  A kind of standoff has resulted from the banks' insistence that principal reduction be paid for by taxpayers, and the understandable reluctance of the Administration and Congress to pay for losses banks would otherwise bear anyway if they just continue foreclosing. 

In the twelve years before the crisis, total mortgage debt in the US tripled, from about 3.5 trillion to more than 10 trillion, reaching its peak of 10.5 trillion at the end of 2007.  The good news is that it is now going down.  The bad news is that it is still at 10.3 trillion as of the third quarter of 2009.  The economy cannot recover until we realign this debt hanging over American families with lower, sustainable home values.

This central issue of the crisis calls for leadership.  It calls for the President and the Treasury Secretary to end the impasse between banks and bailout opponents, to craft a reasonable plan that maximizes debt reduction through modification rather than foreclosure, with the minimum necessary taxpayer subsidy.  In my view, the plan will require considerably more stick, and perhaps only a tad bit more carrot.  Enacting bankruptcy stripdown of mortgages to property values wouldn't hurt either.