Consumer Law & Policy Blog

FTC Enforcing Advertising Guidelines Against "Pay-for-Praise"

The recent announcement of an FTC settlement with a company called AmeriFreight that was paying customers to write reviews, then trolling for new customers by pointing to its favorable online ratings, brings to mind the controversy a few years ago about the FTC's amendments of its advertising guidelines to apply to misleading use of online comments.  This strikes me as just the sort of enforcement that we want the FTC to be undertaking.

The program that has now been shut down did not expressly condition payment on the writing of favorable reviews; the company rewarded its customers with a $50 discount if they wrote an online review (or two reviews, the complaint uses this figure as well), then promised to consider them for an addition $100 reward given to the review selected as having the "most captivating subject line" and "best content."  Apparently, some of the online reviews disclosed the reward system, but the majority did not, and the company's touting of the reviews did not.

It remains to be seen whether the FTC pursues a "pay-to-praise" case without the subsequent advertising that touts the resulting praise.

Elizabeth Warren on student loans

In a recent interview on The Daily Show, the Senator explains how students and large financial institutions are treated differently when it comes to being able to get out of high interest rates -– and why she thinks the laws are the way they are (spoiler alert: it’s not because it’s a good idea). Watch it here.

FTC and CFPB settle charges against Green Tree Servicing

From the Federal Trade Commission's press release:

A national mortgage servicing company will pay $63 million to resolve Federal Trade Commission and Consumer Financial Protection Bureau charges that it harmed homeowners with illegal loan servicing and debt collection practices.

The FTC and CFPB allege that Green Tree Servicing LLC made illegal and abusive debt collection calls to consumers, misrepresented the amounts people owed, and failed to honor loan modification agreements between consumers and their prior servicers, among other charges.

Under the proposed settlement, Green Tree will pay $48 million to affected consumers and a $15 million civil penalty. The company also will stop its alleged illegal practices, create a home preservation plan for some distressed homeowners, and take rigorous steps to ensure that it collects the correct amounts from consumers.

The full FTC press release is here.

Senators introduce bill to regulate cosmetics

Senators Feinstein (D-CA) and Collins (R-ME) have introduced a bill entitled Personal Care Products Safety Act, which would gives the FDA significantly more authority over cosmetics and personal care products, including the authority to order recalls of dangerous products. The bill would require the FDA to review chemicals used in these products and to provide guidance on their safety.

In introducing the bill, Senator Feinstein noted that Europe has a robust system of cosmetics regulation, which includes consumer protections like product registration and ingredient reviews, but that the U.S. currently does not.

The bill is backed by both the cosmetics industry and by public-interest groups that support stronger regulation, such as the Environmental Working Group.

The Senators' press statement and a link to the bill are here.

A New York Times article about the bill is here.

Third Circuit refuses to extend ascertainability further; Judge Rendell would scale it back

In last week's decision Byrd v. Aaron's, Inc., a unanimous panel of the Third Circuit reversed a district court's decision to deny class certification on ascertainability grounds. (You'll recall that ascertainability is the court-developed notion that a class must show an administratively feasible means of identifying class members; the test is particularly strict and plaintiff-unfriendly in the Third Circuit, where reliance on affidavits of the class members themselves has been held to be insufficient. See our previous commentary here and here discussing the Third Circuit's leading case Carerra v. Bayer.)

The most recent case, Byrd, concerned allegations of some pretty disturbing conduct: a computer-leasing company installed on its computers spyware that surreptitiously observed its customers' screens, keystrokes, and even the customers themselves through the computer's camera. The district court held that the class was unascertainable for a host of reasons, including that the class definition was "underinclusive" and its inclusion of the "household members" of computer buyers or lessees was too vague. The Third Circuit wisely rejected these arguments and declined to expand ascertainability to preclude even more classes than it already does.

Judge Rendell would have gone further. In a concurrence, she suggested that ascertainability has become an unreasonable barrier to class certification and thwarts the central purpose of the class action device:

The policy concerns animating our ascertainability doctrine boil down to ensuring that there is a surefire way to get damages into the hands of only those individuals who we can be 100% certain have suffered injury, and out of the hands of those who may not have. However, by disabling plaintiffs from bringing small-value claims as a class, we have ensured that other policy goals of class actions—compensation of at least some of the injured and deterrence of wrongdoing, for example—have been lost. In small-claims class actions like Carrera, the real choice for courts is between compensating a few of the injured, on the one hand, versus compensating none while allowing corporate malfeasance to go unchecked, on the other. As such, where there are small-value claims, class actions offer the only means for achieving individual redress. As the Supreme Court stated in Eisen, when individual damages are so low, “[e]conomic reality dictates that petitioner's suit proceed as a class action or not at all.” The concern that we are defeating what is at the “core” of what the class action was designed to accomplish is very real. (citation omitted)

You can read the whole decision here.

 

Who benefits from a tuition tax credit?

…is the question analysis by this thoughtful piece in Vox (with an embedded clip from The West Wing, for those of you feeling nostalgic for a more harmonious time in government, however fictional).

The occasion for the discussion is Sen. Rand Paul’s proposal to make college completely tax deductible.

See whom that would help most, here.

John Oliver on the snowball effects of fines for minor infractions

John Oliver has this marvelously clear and detailed report on modern-day debtors’ prisons and how the combination of poor public policy, municipalities’ reliance on fines for their budgets, and private probation companies yields a legal system in which a minor infraction can ruin your life if you don’t have the money to pay the fine. Watch it here.

Hadeed Carpet Cleaning’s Quest to Identify Anonymous Yelp Reviewers Is Stymied – at Least for Now

by Paul Alan Levy

I have blogged several times (for example here and here) about the efforts of Hadeed Carpet Cleaning to compel Yelp to comply with a Virginia subpoena to identify seven consumers who posted critical reviews on Yelp.  Our principal concern about the subpoenas was Hadeed did not claim that the gist of anything the reviewers had said about it was false — for example, it did not claim that it always honors the low-price coupons that, for this DC resident, are the most common marketing ploy used by Hadeed.  Indeed, it would have been difficult for Hadeed to have presented evidence of falsity in that way, because the negative reviews over which it was suing made much the same point as many other reviews not only on Yelp but on such other forums as Angie’s List, and were consistent with the mediocre ratings Hadeed was getting at the Better Business Bureau and Washington Consumer Checkbook. Instead, Hadeed’s theory of the case was that it had reviewed its database of the thirty thousand customers whom its serves each year, but could not identify which of its customers had posted each review.  Therefore, Hadeed argued, it had a valid basis for claiming that the seven reviewers were not customers and that, perforce, everything they had said about Hadeed was false because, however shifty Hadeed might be in dealing with other customers who try to redeem its low-price coupons, these individuals had not suffered from the claimed bait-and-switch tactics or poor service.  

Our concern was that this argument is tantamount to arguing that, merely because the reviewers have succeeded in hiding their identities, Hadeed was entitled to know who they were.  Both the Alexandria trial court and the Virginia Court of Appeals ruled that this sort of argument is enough to overcome the First Amendment right to speak anonymously, and as we argued to the Virginia Supreme Court, if just making that argument is enough, then there really is no right to speak anonymously in Virginia.

Barney Frank's Autobiography and "Gotcha" Remarks

by Jeff Sovern

I just finished listening to the audio version of Barney Frank's autobiography, Frank: A Life in Politics from the Great Society to Same-Sex Marriage, which Frank reads himself. I listened to it to learn more about consumer law--Frank was so involved in creating the CFPB that the statute doing so carries his name--but the book doesn't actually add much to what I have encountered elsewhere on the subject (though it adds a little, as noted below).  Nevertheless, the book is well worth listening to. Frank is an entertaining and informative writer and I loved his volume.  Regular readers of the blog will probably care about many of the issues Frank discusses and will likely enjoy learning more about Frank's insights into Congress and the electoral process. 

Despite what I just wrote, the book has a few interesting items on consumer protection issues.  Critics of the Dodd-Frank Act and other consumer protection laws often charge that government regulation led to the Great Recession in that lenders were forced to make unwise loans by laws supported by Democrats (see below).  This, of course, is hard to reconcile with the fact that at the time the Great Recession hit, we had had a Republican president for nearly eight years, and Congress had been in Republican control for much of that time. Yet somehow, the minority party ruled banking.  In fact, as Frank points out, Republicans opposed efforts to restrain subprime lending.  Here are a couple of memorable quotes Frank includes in an appendix:

In 2007, Jeb Hensarling, now chair of the House Committee on Financial Services, said the following during a Committee hearing to consider a bill to limit subprime lending:

We still have to remember that millions of people have homeownership opportunities due to a subprime market. I am very leery of any legislation that could under cut that market.

And from the Wall Street Journal, a November 6, 2007 editorial about the same bill, titled A Sarbox for Housing: 

Throughout the 1980s and '90s, Congress prodded, even strong-armed, banks into making more mortgage loans to low-income and minority families. Washington enacted anti-discrimination and community lending laws with penalties against lenders for failing to issue riskier mortgages to homebuyers living in poor neighborhoods or with low downpayments and subpar credit ratings. And so it was that the modern subprime mortgage market was born.

* * *

But for all the demonizing [of subprime lenders], about 80% of even subprime loans are being repaid on time and another 10% are only 30 days behind. Most of these new homeowners are low-income families, often minorities, who would otherwise not have qualified for a mortgage. In the name of consumer protection, Mr. Frank's legislation will ensure that far fewer of these loans are issued in the future.

In other words, even though bad government regulation created the subprime market, that market is so wonderful that we shouldn't regulate it. Of course, we all know what happened because that market was insufficiently regulated.  Oh, and just to make clear, I don't agree that bad regulation created the subprime market. 

 

Johnston Paper Questions Whether Product Bans Help Consumers

Jason Scott Johnston of Virginia has written Do Product Bans Help Consumers? Questioning the Economic Foundations of Dodd-Frank Mortgage Regulation. Here is the abstract:

The system of residential mortgage contact regulation enacted by the 2010 Dodd Frank Wall Street Reform and Consumer Protection Act of 2010 has been justified as necessary to prevent lenders from exploiting consumer misperception and impatience through the sale of complex mortgage contracts with back-loaded or postponed charges, fees and penalties. Among other things, Dodd Frank creates a regulatory regime under which complex mortgages are penalized, amounting to de facto regulatory restrictions on such contracts. While behavioral law and economics scholars and regulatory practitioners have criticized complex mortgages as exploiting consumer misperception and impatience, such scholars and practitioners have neither advocated nor rigorously analyzed the costs of Dodd Frank style contract restrictions. Drawing on a large body of both theoretical and empirical work in neoclassical (rather than behavioral) financial economics, this article argues that while some consumers undoubtedly did fail to understand such complex mortgages, the terms of those mortgages had a solid economic rationale and made welfare-increasing mortgage credit available to consumers when it otherwise would not have been available.  By severely discouraging complex mortgages from being written, Dodd Frank and regulations promulgated thereunder by the Consumer Financial Protection Bureau have priced out of the mortgage market entire groups of potential homeowners – including younger people, minorities and the self-employed.  Welfare losses to such people from restricting contractual freedom are very real, and must be balanced against the benefits to those consumers who are arguably protected against ex ante undesirable mortgage contracts and to others in society arguably harmed when mortgages default.  A policy of minimizing such harms by speeding and lowering the cost of recovery from mortgage contract failure is argued to be superior to policies, such as Dodd Frank’s mortgage contract restrictions, designed to prevent such failures by mandating or manipulating private contractual choice.