Consumer Law & Policy Blog

Lea Krivinskas Shepard on Discrimination in Consumer Protection

Lea Krivinskas Shepard of Loyola Chicago has written Toward a Stronger Financial History Antidiscrimination Norm, 53 Boston College Law Review (2012).  Here's the abstract:

This Article examines a topic at the intersection of consumer protection and antidiscrimination law: the use by employers and licensing organizations of applicants’ credit reports and financial histories in the hiring and licensing processes. The Article begins with a broad normative assessment of the merits of the practice by examining applicable “logics of personhood,” categories of a framework of antidiscrimination analysis that assesses whether traditionally unprotected groups are entitled to formal antidiscrimination safeguards. Thus, the Article considers whether financial histories validly and reliably reflect personality traits relevant to job performance. It then examines to what extent the use of financial history in the employment and licensing settings is a necessary and helpful deterrent to debt default — long regarded as a socially undesirable practice. Next, the Article evaluates the practice’s impact on traditionally disadvantaged groups by assessing its relationship to racial equality and social mobility. Finally, in a novel application of behavioral economics to the area of credit reports and financial history, this Article suggests that, in spite of the difficult conceptual distinctions between consumer debtors and traditional Title VII categories like race, sex, and national origin, the findings of behavioral economists suggest that an adverse financial status is more immutable than neoclassical economists have been willing to concede. These observations lend critical normative support to legislative efforts to establish a stronger financial history antidiscrimination norm.

Should We Label Genetically Modified Foods?

In September, we blogged concerning the California electoral initiative that would require labeling of genetically modified foods. (We should know the answer on the initiative sometime tomorrow night or early Wednesday morning.) We followed up with this post about genetically modified food labeling requirements across the globe.

Now, Brad Plumer has posted this excellent piece on the fight in California and the arguments on both sides.

The CFPB's Proposed Mortgage Disclosures and the De-Emphasizing of the APR

by Jeff Sovern

One of the big changes in the CFPB's proposed mortgage disclosure forms is the de-emphasis of the APR.  The APR has historically been one of the most central Truth in Lending disclosures.  For example, for closed-end loans, it must be clear and conspicuous and appear in the "Federal Box" under 12 C.F.R. 1026.17 (formerly 226.17).  But the proposed forms relegate the APR disclosure to page three, behind dozens of other disclosures. This has drawn opposition from both conservatives and liberals.

Why did the Bureau propose this change?  Because the firm the Bureau engaged to perform consumer testing reported that

[Consumers] often do not grasp the basics of Annual Percentage Rate (APR). They often confused it with the loan’s interest rate. Across the rounds, we worked with various definitions, but found none worked as well as the simple statement of “This is not your interest rate.” Obviously, that statement did not tell consumers what the APR was, but it minimized the confusion with the interest rate.

 Kliemann, Know Before You Owe: Evolution of the Integrated TILA-RESPA Disclosures 303 (2012). 

So that leaves the Bureau in a quandry.  Does it make sense to take up valuable disclosure real estate with a disclosure that consumers don't understand?  It seems to me that the answer depends on whether consumers will use the disclosure to make borrowing decisions.  It is possible that consumers could use a disclosure that they don't fully understand (after all, many drivers don't understand the internal combustion engine but don't let that keep them from getting behind the wheel).  All consumers really need to know is that the lower the APR, the less they will pay in interest and fees. 

But my (only-partly informed) intuition is that consumers don't use the APR all that much.  Some of that can be laid to the feet of the industry; consider, for example the predatory lender (quoted in my Ohio State article) who told consumers "I told the consumer that the interest rate was what the consumer and I care about, that the APR is what the federal government cares about, and that the bank cares about the yield.  I told consumers that APR was just an estimate and that it is always higher than the interest rate." But I suspect there's more to it than that and that even if lenders had not undermined the APR disclosure, consumers might not use it much (though ideally, we would have more consumer testing to determine whether that is so).  If I am right about that, then the Bureau faces two choices: either try to educate the public about the APR or de-emphasize it (or both, which seems to be what the Bureau will try to do).  The Bureau has chosen to downplay it for now.  Maybe over time, if the Bureau can increase awareness of the APR's significance, it would make sense to change that, but for now, I can't argue with the Bureau's decision.  It is not in fact clear that consumer education will help on this one; Lauren Willis's work has raised questions about the efficacy of consumer education. 

All this reflects an underlying problem in consumer protection. Too often, in my view, consumer protection efforts assume that consumers will use protections (chiefly, though not only disclosures) that they may not in fact use.  Before we create and perpetuate consumer protections, it would be preferable to verify, to the extent possible, that consumers will actually take advantage of the protections. Otherwise, much energy may be devoted to creating unhelpful protections and the problem they are intended to correct will continue.

But I should emphasize (and this is wishy-washy, but that's an academic for you), it is not crystal clear (to me, anyway), that consumers don't/won't use the APR on mortgages, and so the argument that the APR should be de-emphasized is not a slam-dunk.  Another argument for maintaining it front and center is that some consumers may use it, even if others do not, and such consumers may suffer if it is moved to page three.  But (another speculation) the consumers who use it are likely to be sufficiently careful that they can find it on page three.

Two Speeches by CFPB Director Richard Cordray

Consumer Financial Protection Bureau Richard Cordray gave two speeches last week in Seattle that shed light on the new agency's activities. In the first -- remarks at a public hearing -- Cordray talked about the agency's joint efforts with the FTC in regulating debt collection, principally under the Fair Debt Collection Practices Act. He noted, among other things, that, currently, 30 million Americans are being pursued by debt collectors for alleged debts averaging $1,500 each.

Then, Cordray spoke at the National Consumer Law Center conference. (NCLC is a national organization of consumer lawyers and other consumer advocates.) His speech provided an overview of the CFPB's activities. Here's how he started:

I am especially glad to have the opportunity to be here with you today. At the Consumer Financial Protection Bureau, we know how hard you fight for consumers. You have been strong in supporting and defending us, without sacrificing any of your fierce candor about your views. Speaking both for me personally, and for the Bureau, we respect you for that. You are advocates in the truest sense of the word. We all have witnessed how much consumers have suffered in the financial marketplace over the past five years. The extreme financial crisis of 2007-2008, and the deep recession that followed in its wake, delivered a devastating blow to American households. Household wealth shrank by trillions of dollars and many millions of people saw their credit standing deteriorate even as credit standards were tightened. We are still digging out from the crisis, as evidenced by many facts and figures and many personal stories. Fully 46 million Americans were living in poverty in 2011. The marketplace can be a hostile place for those who are struggling to stay afloat, who may often pay higher prices for consumer goods, including financial products and services. The cycle of debt makes it difficult for families who find themselves in trouble to get back on track. So today, I would like to talk to you about the efforts we are making at the new Consumer Bureau to improve the daily lives and financial opportunities for consumers.

The Obama Administration's Pay-As-You-Earn Student Loan Repayment Plan Gets Rolling

Today, the Obama Administration issued final regulations for its new Pay As You Earn student loan repayment program.  77 Fed. Reg. 66088. The program enhances graduates’ (including law graduates') ability to repay their student loans, and it nudges graduates toward public service work.

With minor exceptions, the program will apply to higher-education graduates who graduated beginning last May. Graduates who not do public service work need repay only about 7% of their income toward their federally guaranteed or federally-issued student loans for 20 years. After 20 years, all remaining principal and interest is forgiven. Graduates who do 120 months of public service work (at least 30 hours a week for any federal, state, or local government, or any 501(c)(3) organization) receive forgiveness after 10 years instead of 20 years.

This is an entitlement program, established under authority granted by Congress in 1993, 2007, and 2010 but not exercised until now. No appropriations are necessary.

Judge Debevoise on the Wackiness of the Fair Credit Reporting Act

by Jeff Sovern

Burrell v. DFS Services, LLC, 753 F.Supp.2d 438 (D.N.J. 2010) is a couple years old now but we haven't blogged about it before and the problem it describes has not been fixed so it still merits atttention.  Burrell was victimized by an identity thief and complained about it to the creditors rather than, at first, the credit bureaus.  Burrell sued the creditors for, among other things, violating the Fair Credit Reporting Act by reporting incorrect information about him to credit bureaus and failing to investigate when Burrell told them about the problem.  The creditors moved to dismiss.  Judge Debevoise wrote:

Though the Court is loath to reward their effort to hide behind the esoteric strictures of the FCRA to defeat claims by a layperson like Mr. Burrell—who could not possibly have been expected to comply with the procedural requirements of that statute and who attempted to address the theft of his identity in a manner that most similarly-situated consumers would consider reasonable—Defendants' arguments relating to Mr. Burrell's FCRA claims are legally, if not morally, correct.

Judge Burrell also opined:

[The FCRA's] stated purpose is to “require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information.” 15 U.S.C. § 1681(b). Yet cases like this one lead the Court to wonder how Congress could have possibly believed that the FCRA would carry out those functions. It is of little value to ordinary consumers, in part due to the fact that it is hopelessly complex—the statute is drafted in hyper-technical language and includes a sufficient number of internal cross-references to make even the most dedicated legal practitioner consider a change in career. But the FCRA's substance is even more troubling than its complex form. The statute includes numerous provisions that limit consumers' ability to enforce its mandates either by explicitly barring private actions or by imposing such burdensome procedural requirements that no layperson could possibly be expected to comply.

I'm omitting much of what the judge had to say about the FCRA, but here is another part of his complaint:

[T]he FCRA generally requires creditors to make sure the information they send to credit rating agencies about a consumer's behavior is correct, but allows the creditors to delegate that duty to consumers by posting an address to which they can complain. It then allows the creditors to ignore consumer complaints by prohibiting them from bringing suit. In order to effectively keep a creditor from distributing inaccurate information, consumers must submit disputes not to the credit card companies and other creditors with which they regularly interact, but to credit reporting agencies—obscure third parties with which they are unlikely to be familiar. Those requirements have the practical effect of insulating creditors, such as Defendants, from liability even in cases where they fail to take basic measures to protect their customers. Instead, the FCRA places the burden of ensuring the efficient functioning of the credit reporting system on the consumers themselves—laypeople who are, in most cases, in no position to carry out that task by jumping over the technical hurdles created by the statute. Such a scheme is troubling, to say the least.

The court also determined that Burrell's state law claims were preempted by the FCRA.  In so doing, Judge Debevoise discussed the conflict between two of the FCRA's preemption provisions, in sections 1681h(e) and 1681t.  In my view, those provisions cannot be reconciled. Yet courts faced with figuring out which one governs have to reconcile them anyway.  Courts have created at least four different approaches for doing that, one of which is on view in Burrell.  So that's two big problems with the FCRA (not that there aren't others).  Anyone know why Congress wrote the two preemption provisions the way they did or section 1681s-2 so as to trigger the creditor's obligation to conduct an investigation upon the credit bureau's complaint rather than the consumer's?  Was it simple sloppiness?

(HT: Dee Pridgen)

The CFPB Issues Supervisory Report

Yesterday, the Consumer Financial Protection Bureau issued its Fall 2012 Supervisory Report discussing the degree to which financial institutions and service providers it regulates are complying with federal consumer financial laws. Part III of the report surveys significant legal violations detected by the CFPB and what the agency is doing to remedy those violatons and deter future violations. The agency's press release accompanying the report highlighted these problems:

• Credit Cards: Bureau examiners found instances where the credit limit of a consumer who was under 21, but whose account was associated with a consumer 21 or older, was raised without consent of the co-applicant. The Bureau found that these violations typically occurred when an institution did not have proper procedures in place to ensure that credit line increase requests are sent to the co-applicant for approval.
• Reporting to Credit Bureaus: The Bureau found that not all relevant employees at supervised institutions had sufficient training to comply with fair credit reporting requirements, which sometimes resulted in inaccurate information about consumer’s accounts being reported to credit bureaus. Inaccurate information in a consumer’s credit record may cause a consumer to pay more for credit than would otherwise be the case or be unjustifiably denied credit altogether.
• Mortgages: The CFPB found violations of federal consumer financial law by financial institutions. These violations include failure to provide borrowers with clear and timely disclosures regarding the nature and costs of the real estate settlement process, such as through inaccurate Good Faith Estimates or HUD-1 forms. Violations also included failure to provide accurate disclosures of interest rates, payment amounts, and payment schedules.

Jenna Greene at the National Law Journal has penned this article on the CFPB's report.

David Lazarus on the Perils of On-Line Payday Loans

Here.