Consumer Law & Policy Blog

More on Judge Henry Hudson's Decision Finding the Health Care Mandate Unconstitutional

Even conservative legal academics who think the mandate is unconstitutional acknowledge that Judge Hudson's reasoning is flawed because it rendered the necessary-and-proper clause superfluous. See page 24 of the decision. Ht to Brendan McTaggart.

Federal Judge Holds Health Care Law's Insurance Mandate Unconstitutional

U.S. District Judge Henry Hudson has held the national health care law's insurance mandate unconstitutional on the ground that it exceeds Congress's authority under the Commerce Clause. Read about it here and here. The judge's ruling is here. Other courts have upheld the law, and the Supreme Court presumably will settle the issue in a year or two.

Lenders Starting to Extend Credit to Risky Borrowers Again

In the wake of the recession's massive nationwide credit default, banks largely stopped lending to relative risky consumers -- that is, to middle and lower income people who have trouble paying their bills as soon as they lose their jobs or are hit with unexpected large expenses (such as expenses associated with serious illness). Now, the New York Times reports, after a 3-year layoff, the banks are starting to issue credit cards to these consumers again.

Two things about the article stood out. First, reportedly because the new credit card reform law and regulations "limit the ability of lenders to change [a card's] terms after payments are missed," lenders are jacking up interest rates and annual fees at the front end. "Capital One, for example, is offering low-end cards that carry interest rates of 18 percent or higher and annual fees of up to $50." Second, "Citigroup is testing a credit card with training wheels, known as CitiMax, devised for customers whose credit was damaged by the recession. Borrowers are required to link their credit card account to a checking, savings or brokerage account so that Citi can withdraw money if a payment is missed." That's sorta like a combination credit/debit card.

CFPB Will Focus On Better Disclosures To Consumers

Elizabeth Warren is at the Treasury Department setting up the new Consumer Financial Protection Bureau. She sat down with the Washington Post's Michelle Singletary and explained that, at least at first, the CFPB's priority will be clearer and simpler disclosures to consumers and not telling lenders what products they can sell and at what interest rates. As Singletary explains:

But right now, Warren says her focus is on helping consumers understand how much they are paying for debt on everything from credit cards to mortgages. At a recent conference held by the Consumer Federation of America, Warren said the bureau's initial goal isn't to impose a series of "thou-shalt-not rules." Instead, she said that first on the agenda is providing consumers with better and shorter credit disclosures. Although this goal may sound so simple, it has the potential to greatly reduce the financial burden for people, because they don't fully comprehend how much their debt is really going to cost them. "There are a lot of financial institutions that make their money by keeping products confusing so the price isn't clear until it's way too late," Warren told me. "They make money by concealing risk, which means that people can't compare the products head to head."

Jenzabar Loses Attempt to Suppress Critical Web Site Through Abusive Trademark Claim

by Paul Alan Levy

In a ruling this week, a Massachusetts trial judge upheld the free speech rights of a documentary filmmaking company against an effort by a Massachusetts software company to use trademark litigation to punish the filmmakers for the portrayal of one of the student leaders in the Tiananmen square protests. 

Geithner's solution for Robosigning: Don't Fund Legal Aid for Homeowners

The Nation reports on a little-noted controversy between Ohio's Congressional delegation and Treasury Secretary Geithner, about whether states can use the Hardest Hit Fund (TARP money set aside for states clobbered by the crisis) to fund legal aid and counseling for homeowners in foreclosure.  Treasury apparently could not rely on its own legal staff to interpret the statute, and so called on a Wall Street law firm, Squires, Sanders & Dempsey.  The leader of that firm's financial services litigation team lists the following as a firm achievement:  "Representing an industry organization with regard to recent mortgage foreclosure issues and litigation in Ohio and at the national level."  Not surprisingly, SS&D advised Treasury that Hardest Hit Funds could not be used for legal aid for homeowners in foreclosure.  Senator Sherrod Brown's June 1 letter presenting the argument in favor of funding legal aid is here.  The statute itself is available here.

Can a seller be a FDCPA "consumer"?

The Fair Debt Collection Practices Act applies only to "debts," defined as:

        any obligation or alleged obligation of a consumer to pay money arising out of a transaction in which the money, property, insurance, or services which are the subject of the transaction are primarily for personal, family, or household purposes, whether or not such obligation has been reduced to judgment.

To satisfy this definition, there must be a consumer, who has an obligation to pay money, arising out of a transaction, primarily for personal, family, or household purposes. Obviously, a seller cannot meet these requirements--or can he?

In Oppenheim v. I.C. System, Inc., the Eleventh Circuit considered whether a individual who sold a laptop computer, paid for through PayPal, could met the requirements of the FDCPA. The court noted that the typical PayPal transaction is actuly two transaction--one between the buyer and the seller and one between the seller and PayPal. When PayPal attempted to reverse the transaction and recover the money it paid to the seller, the seller alleged violations of the FDCPA against the collection agency. The court reviewed the requirements of the Act, and concluded that the "seller," was in fact a consumer of PayPal's services. Although the transaction involved a sale, the sale was of a personal computer, the account was a PayPal "personal account," and the money received by the seller went into a personal bank account.

 

 

Foreclosure Deed may be Voided by Mortgage Transfer or Servicing Problems

A Federal District Court, in a December 7 order, has denied a motion to dismiss a homeowner's lawsuit to set aside the nonjudicial Missouri foreclosure sale based on a deed of trust, based on allegations that 1) the homeowner was not in default and 2) the nonjudicial sale was baed on an invalid transfer of the mortgage and note.  This decision illustrates the potentially broad ramifications that defective mortgage transfers and wrongful foreclosures will have for any house titles derived from foreclosure sales in nonjudicial foreclosure states.

More specifically, the homeowner alleges that she made all payments when due, until instructed by the servicer to stop making payments in order to qualify for a modification.  She also submitted the mortgage transfer documents that showed a significant break in the chain of ownership.  In a deed of trust state, instead of a mortgage the loan originator typically files a deed of trust, which transfers a power of sale from the homeowner to a trustee, usually a local lawyer, on behalf of the trust deed beneficiary, who is the lender or investor.  In order to transfer the mortgage, there needs to be a transfer of the note and a change in the beneficiary of the trust deed.  This is routinely done by filing a substitution of trustee with the local recorder of deeds.  The substitution of trustee names a new trustee with a power of sale, and a new beneficial owner of the mortgage/deed of trust.  In this case the substitution of trustee form listed a grantor of the transfer, i.e. the prior owner of the loan, that did not match the identified beneficial owner of the original deed of trust.  This break in the chain, according to the court and basic logic, would render the subsequent trustee deed invalid.

A second, independent basis for setting aside the foreclosure deed was the alleged absence of a default.  In a nonjudicial foreclosure, there is no court judgment establishing that the homeonwer defaulted on the loan.  For that reason, a completed foreclosure sale can later be set aside if there was in fact no default.  The homeowner's allegation in this case was that she was current in payments until the servicer instructed her to stop paying so that it could modify her loan.  This type of servicer-induced payment interruption can be characterized as either nondefault based on a modification of the contract, a waiver of the payment obligation by the servicer as agent for the mortgagee, or perhaps a repudiation by the servicer.  In any case, this scenario is sufficiently common to raise serious questions about large numbers of property titles in nonjudicial foreclosure states.

Supreme Court to Hear Credit Card Case Tomorrow Morning

Tomorrow morning, the Supreme Court will hear Chase Bank USA v. James A. McCoy, a case involving the interpretation of consumer notice requirements imposed on banks under the federal Truth-in-Lending Act. Public Citizen attorney Greg Beck will argue on behalf of California resident James McCoy and others who were surprised to find their credit card interest rates increased without warning despite paying their credit card bills on time.

The case is about Chase Bank’s prior practice of increasing its credit card holders’ annual percentage rate (APR) without giving notice to customers. Chase erroneously claimed that notice was not required because its consumer credit card agreements stipulated that Chase “may” increase the initial rate “up to” a specified maximum rate if its monthly customer credit review showed that a cardholder was late in making payments - to anyone.

Chase argues that a single late payment on an electricity or phone bill, for example, authorized Chase to increase the cardholder’s interest rate, even if payments to Chase were all on time. When he was hit with the increased APR, McCoy had already cancelled his credit card with Chase. He was paying off the balance on his closed account - on time - when he defaulted on a payment to a different creditor. 
 
The Chase contract was both unfair and prohibited by the terms of the Truth-in-Lending Act of 1968, Beck will tell the court. “The problem with the bank’s argument is that it is in direct conflict with the purposes of TILA, which is to require disclosure of the specific interest rate that applies to their accounts,” Beck said. “To allow banks to change the disclosed rate without notice would mean that many consumers would not know the rate at which they are accumulating debt.”
 
The act was strengthened last year when Congress passed the Credit Card Accountability, Responsibility and Disclosure Act (CARD) Act. In circumstances like McCoy’s, the new law requires the bank to provide 45 days’ notice of an APR increase. The CARD Act further bolsters truth in lending by improving the transparency of credit card agreements so that consumers are better informed about the details of their contracts before they sign on the dotted line.  

Letter to the Times on Consumer Class Actions

The Times recently published my letter to the editor.

Class-Action Lawsuits

To the Editor:

Re "The Arbitration War" (editorial, Nov. 27):

The legal issues before the Supreme Court in AT&T v. Concepcion may seem complex, but what's really at stake is the ability of people to band together and challenge fraud, discrimination and other wrongful practices.

AT&T wants the court to allow corporations to ban class actions through their contracts with consumers and employees. As your editorial correctly explains, AT&T is asking the court to second-guess state contract law, which protects the state's residents from such overreaching.

Although not without abuses, class actions have become an essential tool for resolving the common legal grievances of large groups of people. Brown v. Board of Education was a class action. The fate of class actions should be decided by our elected representatives, not by private legislation tucked into the fine print of take-it-or-leave-it contracts.

Deepak Gupta

Washington, Nov. 29, 2010

The writer, a lawyer with the advocacy group Public Citizen, recently argued on behalf of the consumers before the Supreme Court in AT&T v. Concepcion.