CL&P Blog

Kwikset v. Superior Court: Victory, Made in California

by Ted Mermin

  In a closely watched case, the California Supreme Court on Thursday issued a decision preserving the broad availability of the state’s principal consumer protection laws in cases involving mislabeled goods.

The question at issue in Kwikset v. Superior Court (Benson) was whether a consumer who has bought a product that was mislabeled -- a “union-made” shirt that was in fact manufactured in a sweatshop, “organic” produce that was grown with pesticides, or (as in this case) a “Made in the USA” lockset that had actually been partly manufactured in Taiwan and Mexico -- may bring suit under the Unfair Competition Law (UCL) and the False Advertising Law (FAL). 

Proposition 64, passed by referendum in 2004, inserted in both laws a requirement that a private plaintiff have “lost money or property.”  But what if the product the customer received was perfectly functional even if it wasn't what the customer had ordered?  Was there still a loss of money or property?  The Court of Appeal thought not: since the item received was of equal value, plaintiffs had not “lost money” and therefore could not bring a claim under the UCL or FAL.
 
  The California Supreme Court, however, disagreed. 
 
The Supreme Court held that neither the language nor the logic of Prop 64 precluded suits by consumers who did not get what they paid for. “Plaintiffs who can truthfully allege they were deceived by a product’s label into spending money to purchase the product, and would not have purchased it otherwise, have ‘lost money or property’ within the meaning of Proposition 64 and have standing to sue.”  It doesn't matter that to some other people, or by some objective measure, the mislabeled product is worth as much as the one the consumer expected.  What matters is the consumer’s subjective valuation.

Paper on the Relationship Between Payday Loan Size and Default Probability

Will Dobbie of Harvard and Paige Marta Skiba of Vanderbilt have written Information Asymmetries in Consumer Lending: Evidence from Two Payday Lending Firms.  Here's the abstract:

This paper tests for incentive and selection effects in a subprime consumer credit market using sharp discontinuities in loan eligibility rules. We find evidence of advantageous incentives and adverse selection. For a given borrower, we estimate that a $100 increase in loan size decreases the probability of default by 3.7 to 4.2 percentage points, a 20 to 23 percent decrease from the mean default rate. Borrowers who choose $100 larger loans are 6.9 to 8.0 percentage points more likely to default than borrowers who choose smaller loans.

Bank Walkaways

  The Woodstock Institute in Chicago has issued a report carefully documenting the ownership status of the vacant properties in Chicago.  About 15% are bank-owned homes after foreclosure, and another 10% are apparent walkaways, cases where a foreclosure was initiated but has not been pursued.  Nearly three quarters of these "red flag" properties are in African-American neighborhoods.  

The GAO report on bank walkaways concludes that the nationwide total is relatively small, fewer than 50,000 of the millions of homes in foreclosure, but recognized that walkaways are concentrated in certain cities that are especially hard hit.  While walkaways may be a small portion of foreclosed homes, they can be a large contributor to vacancy and abandonment, imposing significant external costs on cities that at present are not in the best position to absorb these costs.  Professor Kathleen Engel's paper suggests that cities may have legal standing to pursue lenders to recover these costs, and the City of Buffalo, at least, is pursuing a bevy of banks on that theory.

Financial Crisis Inquiry Commission Attributes Crisis in Part to Consumer Protection Failures

The Financial Crisis Inquiry Commission Report is now available.  I haven't had time to read it completely, but based on a quick look it seems to attribute the crisis in part to failures of consumer protection.  For example, here's a quote from page 101:

Regulators failed to rein in risky home mortgage lending. In particular, the Federal Reserve failed to meet its statutory obligation to establish and maintain prudent mortgage lending standards and to protect against predatory lending.

And from page 126:

Not only did the federal banking supervisors fail to rein in risky mortgage lending practices, but the Office of the Comptroller of the Currency and the Office of Thrift Supervision preempted the applicability of state laws and regulatory efforts to national banks and thrifts, thus preventing adequate protection for borrowers and weakening constraints on this segment of the mortgage market.

New Adjustable-Mortgage Disclosures To Go Into Effect Sunday

The new Interim Rules implement the Mortgage Disclosure Improvement Act and require disclosure of the maximum monthly the borrower may have to make in the first five years of the loan as well as during the life of the loan.  The Interim Rules appear here, and here's an article in the Times. 

 

Paper on the Role of Securitization in Mortgage Renegotiation

Sumit Agarwal and Gene Amromin of the Fed, Itzhak Ben-David of the Ohio State University - Finance Department, Fisher College of Business, Souphala Chomsisengphet of the OCC, and Douglas D. Evanoff, also of the Fed, have written The Role of Securitization in Mortgage Renegotiation.  Here's the abstract:

We study the effects of securitization on post-default renegotiation of residential mortgages over the current financial crisis. Unlike prior studies, we employ unique data that directly observes lender renegotiation actions and covers more than 60% of US mortgage market. Exploiting within-servicer variation in this data, we find that bank-held loans are 26% to 36% more likely to be renegotiated than comparable securitized mortgages (4.2 to 5.7% in absolute terms). Also, modifications of bank-held loans are more efficient: conditional on a modification, bank-held loans have lower post-modification default rate by 9% (3.5% in absolute terms). Our findings support the view that frictions introduced by securitization create a significant challenge to effective renegotiation of residential loans.

President Obama, Batman, and The Role of the Consumer Attorney

by Steve Berk

President Obama recently announced a government-wide review of federal regulations. The project’s aim is two-fold:

• Cut back on redundant, undue, over expensive regulation; and
• Ensure that dangerous products are kept off of consumer shelves by redoubling efforts         where needed.

As I read about what I thought was just another example of the President “turning to the right” and currying favor with big business (which may not be bad politics), I was comforted by my memories of  Batman. Yes, Batman. The protector of the common man.

As a kid, my favorite television show, without doubt, was “Batman." The old Batman. The “POW” “SMACK” days of Adam West, Burgess Meredith, and Frank Gorshen. As I grew up, so did “Batman.”  Its newest iteration, a bunch darker, but skillfully pulled off by Christian Bale (as Batman) and Michael Caine (as Alfred) turns the comic strip legends toward a new and interesting direction. Our hero is needed to clean up Gotham, but hardly beloved by those he serves.  (Hmmmm....  sounds like some folks who may read this blog). He is largely misunderstood, often vilified and must work at the fringes, in the alleys at night so as not to be in the spotlight where the glare of public opinion will surely be unfavorable and potentially compromise his work.

This new Batman is a lot like a plaintiff’s attorney. (I hear the groans and chuckles from coast to coast.  No really.  Just hear me out).  The plaintiffs’ bar is part of the regulatory system in this country no less than the State Attorney Generals or bureaucrats in Washington.  But state and federal regulators wield their regulatory sword with the help of subpoena power, statutory fines and in some instances even the threat of criminal prosecution.  The plaintiff’s bar proceeds with far fewer tools in their tool box and sadly a tarnished sword.  Tarnished by the powerful corporation’s they regulate and a concerted campaign they have funded to discredit their work.  And yes some blame falls back on the plaintiffs’ ATTORNEYS for excesses and show boating that even our hero Batman is guilty of from time to time (remember that bat mobile speeding well above posted limits on its way back to the bat cave). 

Does Comcast's Takeover of NBC Harm Consumers?

Michael Hiltzik of the LA Times says that "[w]ith his proposed conditions on the deal, FCC Chairman Julius Genachowski is trying to sugarcoat a terrible regulatory decision that underscores the derelict condition of government regulation in our age." Read the whole article here.

Times Editorial: Debit Card Predators

Here.  They argue that instead of the Fed's opt-in rules, under which the Times claims banks have used deceptive practices to persuade consumers to opt in, the Fed (or CFPB, when it takes over) should adopt the FDIC rules obliging banks to explain overdraft costs clearly and should consider using a Credit CARD Act-like approach of limiting banks to reasonable and proportional charges for overdrafts.

The Good Old Days, When the Big Consumer Protection Problems Were Things Like Spam

Before the subprime meltdown, and its associated consumer protection problems (foreclosures, robosigners, predatory lending, etc.), one of the consumer protection issues that generated the most media attention was spam.  Congress enacted the CAN-SPAM Act to deal with it, but sadly, spam is still very much with us.  Depending on your perspective, CAN-SPAM could either be a lesson in the limits of consumer protection laws at dealing with some problems, or a lesson in poor statutory drafting.