Consumer Law & Policy Blog

FTC and CFPB join forces to fight deceptive mortgage ads

In press releases yesterday, here and here, the Federal Trade Commission and the Consumer Financial Protection Bureau announced that they are teaming up to fight deceptive mortgage advertising. The FTC sent warning letters to 20 real estate agents, home builders, and lead generators, urging them to review their advertisements for compliance with the Mortgage Acts and Practices Advertising Rule and the FTC Act. The CFPB sent warning letters to 12 or so mortgage brokers and lenders. The agencies are also investigating other companies.

The FTC and CFPB now share jurisdiction over various aspects of consumer financial services, including deceptive practices in mortgage sales, payday lending, and debt collection. Last January, the FTC and CFPB entered into a Memorandum of Understanding to coordinate enforcement of consumer financial laws, avoid duplication of effort, and promote information sharing.

George Will Attacks the CFPB

by Jeff Sovern

Here.  It's the usual right-wing attack, most of which has been said before.  I refuted some of what he says in August of 2011 in a column in the Pittsburgh Post-Gazette. One other point: Will complains that the Bureau will write law through case-by-case enforcement and that this creates uncertainty.  Apparently Will doesn't know that plenty of other agencies make law through enforcement. Or that the courts make law by deciding cases. 

Naughty and Nice Policies for Consumers

Just in time for the holidays from Consumer Reports, which has surveyed corporate policies on consumer refunds, fees, etc., and described what it thinks are the 10 naughtiest and the 10 nicest.

Supreme Court ERISA Case Could Affect the Viability of Personal-Injury Suits

By Brian Wolfman

I'm writing about U.S. Airways v. McCutchen, an ERISA case set for argument in the U.S. Supreme Court on November 27. The case's outcome may affect the viability of some personal-injury suits.

When people are harmed by consumer products, doctors' negligence, or in car crashes, for instance, they often incur medical expenses. Sometimes those medical expenses are paid by the injured person's medical insurer. Injured people often make claims in court or otherwise to recover their losses. Medical insurance contracts usually provide that when an insured person settles or wins a judgment involving medical expenses, the insurer is entitled off the top to full reimbursement of what it paid in medical expenses.

So, let's say that Midge runs me over in her car. I incur $200,000 in medical expenses, which my medical insurer pays. I also suffer $300,000 in lost wages. So, I sue for $500,000. The suit was filed by a lawyer whom I hired on a 30% contingency. I settle for $250,000, which is the limit of Midge's car insurance policy. My medical insurer wants $200,000 off the top under the terms of its contract. So, if the medical insurer gets its way, my settlement is now worth only $50,000 to me. But wait! Remember, the lawyer gets 30%, and 30% of $250,000 is $75,000. And $75,000 (the lawyer's fee), plus $200,000 (what the medical insurer says it is entitled to), is $275,000. That's more than the settlement with Midge. So, as a reward for bringing a successful personal-injury suit, I've lost money!

In McCutchen, the result described above is the position advanced by U.S. Airways' health benefit plan. U.S. Airways says that its contract controls. Period. McCutchen -- who was seriously injured in a car crash -- disagrees. He says that the contract doesn't always control. Rather, because the case arises under ERISA section 502(a)(3), equitable principles control, and equity requires that U.S. Airways recover only a proportionate share of McCutchen's recovery. So, in the example above, because I suffered $500,000 in injuries, but recovered only half of the total ($250,000), my medical insurer should recover only half of what it paid out: $100,000. Put another way, because the medical expenses account for only 40% of my total damages, the plan may recover only 40% of my total recovery (again, that's $100,000).

McCutchen has a back-up argument as well. He argues that U.S. Airways should, under a rule of equity known as the common fund doctrine, at least have to share proportionately in the legal fees. Otherwise, U.S. Airways would "free ride" on McCutchen's lawyer's work, and, if not for that work, U.S. Airways would have recovered nothing at all. So, in my example, my lawyer created the fund. If my medical insurer gets 80% of the settlement ($200,000 of the $250,000 settlement), it should have to pay 80% of the $75,000 attorney's fee ($60,000). That would mean I would owe only $15,000 of the fee, at least leaving me something: $35,000 ($50,000 less $15,000). That's not great, but it's better than being in the hole.

I submitted an amicus brief on the common fund doctrine on behalf of Consumer Watchdog. Two students in my Georgetown Law clinic -- Karin Herzfeld and Kirk Goza -- played majors roles in researching and writing the brief.

Does the Federal Government's $4.5 BIllion Settlement of Criminal Charges Against BP Do Enough to Deter and Punish?

Does BP's settlement of criminal charges with the federal government do enough to deter and punish? Law professors talk about that question in this video, with one calling it "a drop in the bucket" given BP's deep pockets, the extent of the wrong doing, and the death and destruction caused by the BP spill in the Gulf. Public Citizen puts it this way:

We’re stunned. This settlement is pathetic. The $4 billion penalty is equivalent to just a fifth of the company’s 2011 profits. The point of the criminal justice system is twofold: to punish and to deter. This does neither. It is a weak-tea punishment that provides zero deterrence to BP or other companies. Consider that after the 2005 Texas refinery explosion that killed 15 people, BP pleaded guilty to a criminal charge and paid a fine. Now, after a 2010 event that killed 11 people, BP is again pleading guilty and paying a fine. Zero deterrence. Although the government is right to pursue manslaughter charges against two individuals BP employees, the settlement is inadequate to address BP’s repeated criminal conduct. The government must impose more meaningful sanctions. Nothing in this settlement stops BP from continuing to get federal contracts and leases. BP will earn more in annual federal contracts than it will pay in penalties as a result of this. That’s appalling.

BP still faces civil penalties under the Clean Water Act.

The State of Federal Arbitration Law and Waiver By Litigation Conduct

As many of our readers are aware, the Federal Arbitration Act (FAA) makes it difficult for consumers to enforce their rights in court when the standard form contracts that govern their employment relationships or their consumer purchases contain arbitration clauses.

The Supreme Court has interpreted the FAA broadly. Does the FAA apply in state courts as well as federal courts? The Supreme Court says yes (even though when the Act speaks of court enforcement it refers to federal courts). Does the Act apply to disputes over employment contracts? Yes (despite section 1 of the Act, which seems to exclude them). Does the Act override a state-law contract doctrine that would render unconscionable (and, thus, unenforceable) some contract provisions that ban class actions? You guessed it: Yes, in some circumstances (and so long as the class-action ban is laundered through an arbitration clause, even though FAA section 2 says that the Act does not override generally applicable contract principles).

You get the picture. Little guys have trouble getting into court when take-it-or-leave-it contracts include arbitration clauses. Maybe it's time for Congress to step in with something like the Arbitration Fairness Act.

Congress has already overridden the FAA in some areas (such as for disputes over consumer mortgages, which were effectively excluded from the FAA in the Dodd-Frank law). (See also this piece by the National Consumer Law Center.) There are still some defenses to enforcement of consumer arbitration clauses. 

The Third Circuit just reminded us in In re Pharmacy Benefit Managers Litigation about one of those defenses: A party that participates in substantial litigation on the merits has "waived" its right to invoke an otherwise valid arbitration clause. The Third Circuit's decision is worth reading.

What does the identity theft report really tell us?

A recent post by Jeff Sovern discusses a Department of Justice Report indicating that identity theft is on the rise, and the amount of loss suffered as a result of identity theft is increasing. These are alarming statistics. But a few points should be mentioned before we begin to discuss how to reduce the incidence of this crime, or whether existing laws are working.

            First, traditionally, identity theft has been distinguished from simple credit card fraud. Identity theft is a complex scheme whereby a thief steals personal information, adopts the identity of the victim and applies for credit in the name of the victim. Identity theft takes time, and requires the thief to actually assume the identity of the victim. Credit card fraud, on the other hand, is a simple crime whereby a thief makes a charge to an exiting account. The Department of Justice report mixes and matches these crimes through its use of the term “Identity theft.” According to the report, “Identity theft is defined as the unauthorized use or attempted misuse of an existing credit card or other existing account, the misuse of personal information to open a new account or for another fraudulent purpose, or a combination of these types of misuse.” Thus any unauthorized use of a credit card constitutes identity theft, and is included within the report, as is any “attempted misuse,” which is often resolve with no inconvenience or financial loss.

            According to the report, the incidence of true identity theft, the misuse of personal information, has been declining substantially, about 30% from 2005 to 2010. I assume this is due primarily to one simple act by creditors—whenever a major change, such as an address change, is made to an existing account notice is sent to the prior address to confirm the change.  This usually alerts the consumer to the beginning of an identity theft scam, which can be prevented before any problems arise. This act, coupled with consumer awareness of the importance of reviewing one's credit report, should continue to reduce true identity theft.

            The report also seems to indicate that loss allocation is not working to solve the problem of unauthorized credit card use.  Notwithstanding the fact that maximum liability for the unauthorized use of a credit card is capped by federal law at $50, the mean loss reported is $1,260. To me, this indicates that either credit card issuers are completely ignoring the law, or, the  “misuse” was actually authorized. (A third alternative is that the consumer was unaware of the law and simply paid the full amount.).

            More surprising to me was the actual loss suffered as a result of true identity theft. My identity was stolen, and while the process of repairing my financial records was tedious, I did not lose any money. Once I was able to reach the right person, it was relatively easy to establish that I was not in fact the borrower. The Report, however, indicates that in 2010, the mean direct financial loss suffered by the misuse of personal information, (true identity theft) was $13,160. I can’t imagine how a loss of this much happens.

            I don’t want to suggest that identity theft, in the broadest sense of the word, is not a serious problem that imposes a large cost on consumers and the marketplace. I do, however, suggest that we read the report carefully before we consider how to resolve the problem.

Op-ed on Making Sure Consumers Will Use Consumer Protection Rules Before Adopting Them

Here.

The Federal Housing Adminstration May Need a Bailout

As the LA Times explains, "the Federal Housing Administration, which has played a crucial role in stabilizing the housing market, said it ended September with $16.3 billion in projected losses -- a possible prelude to a taxpayer bailout. The precarious financial situation could force the FHA, which has been self-funded through mortgage insurance premiums since it was created during the Great Depression, to tap the U.S. Treasury to stay afloat. The agency said a determination on whether it needs a bailout won't come until next year. * * * The FHA does not lend money, but guarantees loans made by banks in exchange for insurance premiums. The agency's role has expanded since the crash of the subprime mortgage market, and it now insures about $1.1 trillion in loans, according to Inside Mortgage Finance.

How Common is Identity Theft?

by Jeff Sovern

Very common.  In 2010, according to one study, seven percent of American households were victimized by identity thieves, costing them a total of about $13.3 billion, or, for those who experienced losses of at least one dollar caused by the misuse of personal information, an average loss of $13,160. See Lynn Langton, Identity Theft Reported by Households, 2005-2010 1, 5 (2011).  Another study reported that identity fraud increased by 13% in 2011, harming more than 11.6 million adults.  See Javelin Strategy & Research, “Identity Fraud Survey Report,” (2012)   More consumers complain to the Federal Trade Commission about identity theft than any other consumer problem, something that has been true for each of the last dozen years.  And how many people in the US commit identity theft?  Well, this American Banker headline offers a hint: The 10,000 Identity Fraud Rings in U.S. Defy Stereotypes.

Surely it is past time to revisit the Fair Credit Reporting Act, and the FACTA amendments of 2003, and reconsider what can be done to reduce the incidence of identity theft. Some suggestions can be found here.