Consumer Law & Policy Blog

Times Evaluations of the TILA/RESPA Disclosure Rules and the QRM-QM Proposal

The Times today published an editorial,What You Don’t Know About Mortgages, about the CFPB's new mortgage TILA/RESPA disclosures.  Though the editorial praised some aspects of the disclosure rules, it also called them disappointing, stating

[T]he forms fall short in the crucial task of helping consumers assess and compare the total cost of various loans. Without that information, it is difficult for borrowers to know whether they are getting the best deal.       

What’s needed, as the National Consumer Law Center has pointed out, is prominent display of the loan’s full annual percentage rate, a single measure of the cost of credit that incorporates the interest rate, closing costs and other fees. On the new forms, that number is not reported until Page 3. Worse, it is calculated in a way that understates the loan’s cost, because it omits the cost of title insurance and some other closing charges.

Yesterday, Floyd Norris had a column, Mortgages Without Risk, at Least for the Banks, on qualified residential mortgages, qualified mortgages, and other mortgages, how the rules governing them were intended to avoid a repeat of the subprime meltdown, and the take of Barney Frank and others on the pending proposal. Unless you already are well acquainted with the issues, the column is definitely worth reading.

Todd Zywicki's Remarks at the NARCA Debt Collection Symposium

by Jeff Sovern

I've just been listening to the National Associate of Retail Collection Attorneys' (NARCA) symposium on debt collection held at GW on October 15 (the recordings are available here).  I was particularly struck by Todd Zywicki's remarks in the third panel; the panel was titled "Legal Collections - The Essential Link to a Successful Credit-Based Economy."  (Regular readers may recall a previous blog post on Zywicki's receipt of financial support from the credit industry in an article in The Nation headlined "Scholars Who Shill for Wall Street.").  Zywicki stated that his presentation was based on a chapter he authored in a forthcoming book about credit regulation; the chapter promises to be interesting reading. 

Zywicki's presentation could almost have come from an alternate universe from many of the academic presentations I hear.  While many of us embrace behavioral law and economics, Zywicki dismissed it as voodoo based on just-so stories and lacking much empirical support (my own view is that some of its findings, such as the endowment effect and the tendency of consumers to be overly optimistic, are indeed empirically supported, and I cite some of the relevant literature here and here. I gather that the people who award the Nobel prize for economics have been similarly impressed by the quality of the research).  I look forward to seeing the chapter in part because I'm curious if it will provide more support for Zywicki's claims than he supplied in his talk. 

Zywicki repeated the industry claim that consumer credit regulation--in particular, restricting remedies for defaults--increases the cost of credit and reduces its availability.  He mentioned a recent study by the Philadelphia Fed that found that the Credit CARD Act had reduced the availability of credit.  He didn't mention other studies finding that it reduced the cost of credit (see here and here) but perhaps he hadn't had a chance to learn of those studies as they were issued shortly before he spoke. As for reducing the availability of credit, the Credit CARD Act was intended to reduce access to credit by borrowers who were not capable of handling the demands of credit cards (think of the college students who borrowed too much and then tragically committed suicide). 

My favorite statement by Zywicki was when he observed that the legal regime of debtor's prisons was probably too harsh (only probably?).  If even Zywicki thinks that, then it is indeed unfortunate that we seem to have resurrected that regime, as Lea Shepard has written about. 

Third Circuit orders defendants to file response to the plaintiff's request for rehearing in the Carrera class-certification appeal

Here is the text of the Third Circuit's order:

ORDER at the direction of the merits panel, it is hereby ordered that the Appellants are directed to file on or before December 30, 2013 an answer to the petition for panel rehearing submitted by the Appellee and the documents submitted by proposed amici in support of the petition. Appellants' answer shall not exceed 30 pages in length.

Note that the order refers only to the petition for panel rehearing, not to the petition for rehearing en banc. Here is the text of one of our many earlier emails on the Carrera decision that provides links to key documents in the case:

As we've explained in a series of recent posts, in Carrera v. Bayer, the Third Circuit reversed a grant of class certification on the ground that the class wasn't "ascertainable." Among other things, the panel said that the class of purchasers of an over-the-counter weight-loss product had not shown that it would be able to screen out "fraudulent or inaccurate claims"--claims that would not have been made until after judgment or settlement. Until the Carrera decision, plainitiffs have not been required to make that kind of showing at the class-certification stage. We previously told you about the plaintiff's petition for en banc hearing and Public Citizen's amicus brief in support of rehearing. Last Friday, three more amicus briefs were filed, one from a group of law professors, another from Public Justice, and another from Angeion Group. The latter brief is particularly interesting. Angeion Group is a class-action administration company, and its brief says that the panel's decision misunderstood the ability of courts and claims administrators to root out fraud and inacurracy in class actions.

NYT on payday lending to servicemembers

As the Times' Dealbook section reports:

Nearly seven years since the Military Lending Act came into effect, government authorities say the law has gaps that threaten to leave hundreds of thousands of service members across the country vulnerable to potentially predatory loans — from credit pitched by retailers to pay for electronics or furniture, to auto-title loans to payday-style loans. The law, the authorities say, has not kept pace with high-interest lenders that focus on servicemen and women, both online and near bases.

Beware of those car-rental company add-ons

Car-rental companies make a ton of money selling you add-ons, such as various types of insurance you may already have and high-priced "deals" for gas. It's easy to nearly double the cost of your rental on stuff that may be worthless. So, just in time for the holidays, Jim Webster has this funny article about how to resist the add-on-related sales tactics at the rental-car counter.

FDA goes after DNA testing outfit

Paying a private company to test your DNA so you can learn about your health status? This article by Brady Dennis suggests you may want to think twice. Here's an excerpt:

The Food and Drug Administration has ordered the maker of a popular genetic-testing kit to halt sales of its heavily marketed product, saying the mail-order tests haven’t been proven effective and could dangerously mislead people about their health. The move came in a sharply worded letter to 23andMe, a California start-up backed by Google. The company says that its Personal Genome Service can detect more than 240 genetic conditions and traits, flagging a person’s vulnerability to heart disease, breast cancer and other illnesses. The privately held company, founded in 2006, is headed by biologist and businesswoman Anne Wojcicki, who is separated from Google co-founder Sergey Brin. The FDA said the company repeatedly has failed to provide the scientific data necessary to prove that its test works as advertised.

Utah couple seeks relief after credit ruined over "non-disparagement" clause in a website's fine-print

Five years ago, John Palmer ordered Christmas gifts online from a web merchant called KlearGear.com. When the gifts didn’t come and John’s attempts to contact KlearGear were unsuccessful, his wife Jen posted a negative review on RipoffReport.com. In 2012, the Palmers received a demand from KlearGear for $3500. According to KlearGear, the Palmers violated a “non-disparagement clause” in the site’s Terms of Use that prohibited users from taking any action that negatively impacts KlearGear.com or its reputation, on pain of a $3500 fine. But this prohibition didn’t appear in the Terms when John Palmer used KlearGear's website back in 2008, and even if it had, businesses aren’t allowed to enforce outlandish terms like this one in their fine print.

When the Palmers wouldn’t pay, KlearGear reported the supposed “debt” to the credit agencies, and has refused to remove it. More than a year later – after the Palmers have been turned down for credit, had their car loan delayed, and worst of all went without heat in their home for three cold weeks this fall after their furnace broke and the Palmers couldn’t get a loan to pay for a new one – this phony debt still mars John Palmer’s credit. Now they are hoping to move, but this debt is a continuing obstacle to selling their home and buying a new one.

Public Citizen is representing Jen and John Palmer in seeking redress from KlearGear. Today, we sent this demand letter seeking three actions from KlearGear: first, clearing up John's credit; second, paying $75,000 in compensation for the Palmers' ordeal, which has lasted more than a year; and third, agreeing to stop using this non-disparagement clause to extort money from their customers.

KlearGear's conduct is part of a troubling trend of businesses trying to deter negative reviews by muzzling their customers. Another example is Public Citizen's case against a New York dentist who tried to make her patients agree, as a condition of treatment, that they would not criticize her. And TechDirt has reported about the use of such a clause in vacation rental agreements.

As our letter explains, KlearGear's actions violate state tort law and the federal Fair Credit Reporting Act. If KlearGear refuses to comply, we'll file suit to enforce the Palmers' rights and send a message to unscrupulous corporations that they cannot muzzle their customers, extort money from them when they post critical reviews, or ruin their credit when they refuse outragous demands for payment.

Theresa Amato: Wrap Contracts Are Like Asbestos

On the Contracts Prof Blog, as part of a symposium on Nancy Kim's Wrap Contracts: Foundations and Ramifications (Oxford UP 2013). An excerpt:

Like asbestos in its heyday, manufacturers and service providers use “wrap contracts” everywhere.  They have properties that facilitate commerce but that does not mean that they are not toxic and dangerous for those exposed to them. 

Moreover, like asbestos, some of the dangers will not necessarily emerge for decades when content thieves and data aggregators use consumer information to the detriment of the consumers.

James Cooper on the Meaning of Unfairness in the FTC Act

James C. Cooper of George Mason has written The Perils of Excessive Discretion: The Elusive Meaning of Unfairness in Section 5 of the FTC Act.  Here's the abstract:

Section 5 of the Federal Trade Commission (FTC) Act gives the FTC an undefined mandate to prosecute "unfair methods of competition." For nearly 100 years, the Commission has searched tirelessly for the meaning of this amorphous concept. Since 1992, the FTC has continued to define Section 5 through a series of consent decrees. Absent any external constraint, the FTC appears to have broad discretion to define the reach of Section 5 beyond the Sherman Act. This discretion causes uncertainty, which is likely to deter beneficial conduct. It also creates incentives to divert resources from productive to redistributional purposes. The recent FTC investigation of Google illustrates the FTC’s discretion to define the reach of Section 5. This paper suggests that the FTC issue a binding statement making Section 5 coterminous with the Sherman Act or limiting Section 5 to conduct that clearly harms consumers through adverse effects on competition, and that would not otherwise fall under the antitrust laws. 

 

Alex Kozinski and Marcy Tiffany file no-nonsense objection to class-action settlement

by Brian Wolfman

Ninth Circuit chief judge Alex Kozinski and his wife, Marcy Tiffany, own a Nissan Leaf, an all-electric car. Kozinski and Tiffany are absent class members in a federal class action in California in which the plaintiffs allege that the Leaf's battery is defective. (Kozinski and Tiffany seem to agree, saying that their battery does not perform as promised.)

A proposed settlement is now pending before the district court for approval. It would provide an extended warranty, attorney's fees for the plaintiffs' counsel, and $5,000 for each of the two named plaintiffs.

Kozinski and Tiffany objected on many grounds, saying, among other things, that the extended warranty is worthless, that the plaintiffs' lawyers took no discovery (and, thus, failed to live up to their duties to the clients to unearth Nissan's wrongdoing), and that the $5,000 payments distorted the named plaintiffs' incentives.

This article by Debra Weiss discusses the "scathing" Kozinski-Tffany objection in further detail.

Readers may be interested in taking a look at Kozinski and Tiffany's hard-hitting opposition to final approval of the settlement. It covers a wide range of topics and includes snappy headings like "the proffered valuation of the settlement is bogus." I found two arguments particularly interesting.

First, settling class counsel argued that a factor favoring approval was the low number of objectors. In small-claims consumer class actions that argument is invariably silly, yet class counsel invariably make it. Here's what Kozinski and Tiffany had to say:

Plaintiffs’ Counsel makes much of the small percentage of class members who objected or opted out. Motion for Final Approval 25–26. But a low number of objections and opt-outs isn’t unusual. People seldom object; doing so is a complicated process that requires understanding complex technical and legal issues and investing significant time and effort. Most class members have no idea of the legal consequences of opting out and fear losing a valuable benefit. The Class Notice helped bolster this fear by falsely advising class members that they would lose the benefit of the warranty if they opted out. Class Notice 1. Given the obfuscation and deception the parties have engaged in, the 134 class members who opted out or objected actually represent a tidal wave of opposition to the settlement. It is very likely that many more people would have objected, had they had the knowledge and legal wherewithal to evaluate the settlement, as do Objectors [that is, Kozinski and Tiffany].

Second, on the $5,000 payments to the named plaintiffs:

The only two people in this lawsuit who could possibly be in a position to make an objective judgment about the value of the proposed settlement, [named plaintiffs] Humberto Klee and David Wallak, have little incentive to do so because they get to walk away with the new warranty plus $5,000 to boot. That’s a materially different deal from every other class member, and it strips Klee and Wallak of any ability to judge the fairness of the settlement as to rank-and-file class members. If the Court wants to know what Klee and Wallak really think of the value of the so-called extended warranty, it should deny them the $5,000 (which they did nothing to earn) and ask them if they still think the settlement is such a swell deal. An objective Named Plaintiff, one who didn’t get a $5,000 sweetener, could easily recognize that the settlement provides no meaningful benefit to the class. Nissan has consistently told LEAF owners that the Li-Ion battery would retain 70% capacity after ten years. It’s what Nissan Senior Vice President Carla Bailo said publicly as recently as September 2012, just weeks before Plaintiffs’ Counsel sat down to negotiate with Nissan: “LEAF batteries will generally have 80 percent of their capacity under normal use after 5 years and 70 percent after 10 years.” Lurie Decl. in Support of Motion for Final Approval Ex. A; see also Ex. A 3.