Consumer Law & Policy Blog

Jim Hawkins Article: Exploiting Advertising

Jim Hawkins of Houston has written Exploiting Advertising, Law and Contemporary Problems, Forthcoming.  Here's the abstract:

Advertising’s goal, we all know, is to cause people to spend more money. Often, it exploits bad decision-making to accomplish it. This Article hopes to turn the tables and offer a way for policymakers to exploit the information presented in advertisements to produce better regulations.

It makes the novel suggestion that legal researchers and policymakers should use advertising to diagnose behavioral market failures. I argue that advertisements reflect companies’ beliefs about how consumers make purchasing decisions. If advertising supplies information that a rational actor would value, then there is good evidence that the market is not experiencing a behavioral market failure. If, on the other hand, advertising only serves to exploit the systematic mistakes that consumers make persists in the market, then it is likely that the market is not functioning efficiently.

I use the reverse mortgage market as a case study to apply my approach. Drawing on recent empirical studies of reverse mortgage advertising, I show how rational choice theory cannot explain some features of the advertising. By exploiting the advertisements for reverse mortgages, policymakers can detect places reverse mortgage customers are likely making systematically poor decisions

CFPB sues credit repair company for misleading consumers and charging illegal fees

The Consumer Financial Protection Bureau on Friday sued the credit repair company Prime Marketing Holdings, LLC, which the CFPB alleges charged consumers a series of illegal advance fees and misrepresented the cost and effectiveness of its services. The CFPB is seeking to halt the company’s harmful conduct and to obtain relief for consumers, including refunds of fees paid to the company.

The CFPB's press release is here.

The CFPB also posted on its blog advice on "How to avoid credit repair service scams." That advice is available here.

FTC actions last week

The Federal Trade Commission issued a few press releases last Thursday and Friday that may be of interest:

FTC Wins Summary Judgment against Marketers of Supplement That Claimed To Prevent or Reverse Gray Hair (Sept. 23)

FTC Action: Court Bans Mortgage Relief Scammers from Debt Relief Business (Sept. 22)

FTC Charges Fake Prize Scheme Operators With Fraud (Sept. 22)

Debate Moderators: Don't Forget About Consumer Protection

by Jeff Sovern

The country faces many issues which merit attention during the debates. Among them is consumer protection.  Failures of consumer law contributed to 2008's Great Recession.  Consumer protection is regularly in the headlines (just ask Wells Fargo or Volkswagen).  The choice of the next president is likely to have a huge impact on consumer protection.  One party generally supports the CFPB, its proposed arbitration rule, and a variety of other consumer protections; the other party wants to limit regulation in general and the CFPB in particular.  I very much hope one or more moderators asks about consumer protection.  If a moderator wanted to ask about the candidates' views of regulation, the moderator could make the question more concrete by asking whether the CFPB has been a positive force by, for example, fining Wells Fargo and returning billions to consumers, or if it should be limited or restrained, and how.

Kentucky Supreme Court Embraces Dendrite Standard

by Paul Alan Levy

In Doe v. Coleman, a decision issued yesterday, the Kentucky Supreme Court overruled a decision of the state court of appeals which, considering the validity of a subpoena to identify defendants who had been sued for defamation based on comments about a local official, had held that the plaintiff officials’ conclusory affidavits attesting to the falsity of the anonymous comments were sufficient to meet the standards for enforcing such subpoenas set by Doe v. Cahill, the Delaware Supreme Court decision that the Court of Appeals had endorsed in a 2014 decision in the same case.  Instead, the Supreme Court held that Kentucky courts are to follow the full standard adopted by the New Jersey Superior Court Appellate Division in Dendrite International v. Doe, which includes a balancing stage that weighs the relative interests of the plaintiff in securing redress and of the defendant in retaining his or her First Amendment right of speaking anonymously, given such considerations as the nature of the speech at issue and any special dangers to the defendant from being identified. 

By my count, there are now seven states whose appellate courts follow the full Dendrite approach, four that follow the Cahill approach requiring evidence but not balancing, and one (Washington) that requires evidence but has reserved judgment on whether to adopt a balancing stage.  The Supreme Courts in Michigan (where the preferred approaches of two separate court of appeals panels are in conflict) and Maine will be hearing oral argument on the issue this fall.

What I Learned From Listening to Wells Fargo's CEO Stumpf Testify (and to Senator Warren's and Brown's Questions)

by Jeff Sovern

As we noted yesterday, on Tuesday, Wells Fargo CEO John G. Stumpf testified before the Senate Banking Committee about the Wells Fargo Customer Fraud Fiasco.  Video is available here and Senator Elizabeth Warren's two rounds of questioning, by themselves, here. I have now listened to Mr. Stumpf's testimony, and I learned that Wells engaged in cross-selling to "deepen" its relationships with its customers.  I am somewhat embarrassed to acknowledge that I don't know what a deep relationship means to a bank (If you will forgive a personal note, I have banked at the same institution for nearly forty years, and I currently have four accounts there--and yet I don't know if our relationship counts as deep or not.  I would be surprised, though, if anyone at the bank knows my name, or could recognize me).  But I got a different perspective on why Wells pursued cross-selling so aggressively from Senator Warren's interrogation, during which she observed that in quarterly phone calls with stock analysts, Mr. Stumpf had repeatedly touted the number of accounts its average customer had, a number that increased over time.  Wells apparently led other banks in that number.  Senator Warren also reported that Wells' stock price increased during that same period, yielding Mr. Stumpf personally a profit in the hundreds of millions, if I understood correctly (though presumably the stock price also rose because of other activities as well).

Mr. Stumpf, to his credit, took responsibility for the fiasco and also promised to make things right.  But he said little about what making things right means. For example, when senators asked about Wells customers who might have had their credit scores reduced because of the phony accounts (e.g., if Wells employees requested credit reports as part of the process of opening a credit card account a consumer had not requested) which might have resulted in consumers paying higher interest rates on mortgages they later applied for, say, Mr. Stumpf was unable to say more about what would be done in such cases beyond making it right.   I would have expected that Wells would be prepared to say what would make things right by now.  After all, this matter became public in 2013, when the Los Angeles Times reported on it, and the CFPB, OCC, and Los Angeles City Attorney have been investigating for some time, an investigation that culminated in the largest penalty in CFPB history.  But Mr. Stumpf didn't know the answer to that question.

Regular readers will recall that I hoped that a senator would ask whether Wells will waive its arbitration clauses in defending civil law suits arising from the matter.  In fact, Senator Sherrod Brown asked just that--but all I learned from the answer is that Mr. Stumpf is not an attorney. He didn't know the answer to that question either. But maybe the answer has come from the cross-selling cases already brought in which Wells did not waive its arbitration clause. Sigh.

HuffPo: Here’s Why Republicans Are Suddenly Demanding Tougher Bank Regulation

Here.  Excerpt:

Republicans don’t like the Consumer Financial Protection Bureau. They opposed the very idea of the watchdog when Elizabeth Warren first proposed its creation, and they have been trying to defang and defund it ever since Congress made her vision into a reality.

* * *

But CFPB is still facing heat from Republicans ― ironically, this time, for not regulating Wells Fargo hard enough.

* * *

“Why did it take an LA Times reporter to uncover what should have been uncovered by Wells Fargo’s regulators? If there were ever a textbook case where consumers needed protection, this was it,” [Senate Banking Committee Chair and] senator [Richard Shelby] added. “How many millions of unauthorized accounts does it take before the CFPB notices?”

* * *

[CFPB Director Richard] Cordray said Tuesday, however, that the CFPB knew about the abuses before the Los Angeles Times, first learning about them from whistleblowers in mid-2013.

 

Report on FTC Workshop on Testing to Make Disclosures More Effective

A continuing issue in consumer protection is that disclosures may convey the required information, but consumers may ignore them, so they have no impact.  The FTC held a workshop last week to look at how to test disclosures to make them more effective.  Ad Law Access has posted a report on the Workshop, Beyond “Clear and Conspicuous”: FTC Workshop Highlights Issues Related to Testing of Consumer Disclosures.   Excerpt:

In opening the workshop, [FTC ]Chairwoman [Edith] Ramirez identified three primary goals of disclosures: (1) ensure that consumers see or hear the disclosure; (2) convey information in a manner that promotes consumer understanding of the disclosure’s content; and (3) facilitate consumer’s use of the information to make informed choices.  * * * 

* * *

Some speakers noted that even disclosures that comply with the FTC’s clear and conspicuous standard may still be ineffective at communicating necessary information to consumers.  Chairwoman Ramirez suggested that use of disclosures in certain areas may be inappropriate altogether, although she declined to specify those areas.  Other speakers emphasized the ways that effective disclosures can benefit consumers by preventing advertisements from being deceptive, communicating privacy policies, and providing consent mechanisms.  Private research also suggests that there may be additional benefits to businesses from effective disclosures through improved market differentiation and customer satisfaction.  Some disclosures, however, may have adverse consequences like increasing complexity, producing consumer confusion, and creating unintended biases.

"Senators heap criticism on Wells Fargo CEO, who apologizes"

The Washington Post had this report on yesterday's congressional hearing:

The CEO of Wells Fargo faced accusations of fraud and calls for his resignation Tuesday from harshly critical senators at a hearing over allegations that bank employees opened millions of accounts customers didn’t know about to meet sales quotas.

Members of the Senate Banking Committee showed bipartisan outrage over the long-running conduct, unsatisfied by Chief Executive John Stumpf’s show of contrition.

Stumpf said he was “deeply sorry” that the bank failed to meet its responsibility to customers and didn’t act sooner to stem “this unacceptable activity.” He promised to assist affected customers. Sen. Elizabeth Warren flatly told Stumpf he should step down. “You squeezed your employees to the breaking point so they would cheat customers,” she said. “You should resign. You should give back the money you took while the scam was going on.”

The Massachusetts Democrat, one of the fiercest critics of Wall Street, also advocated for a criminal investigation by the Justice Department and a civil probe by securities regulators.

The full article is here.

Did Arbitration Clauses Help Wells Fargo Get Away With Account Opening Frauds for Years?

That's a point made in an op-ed in The Hill, Why Wells Fargo Got Away with It So Long by Public Citizen's Robert Weissman and AFR's Lisa Donner.  The whole piece is worth reading, but here's an excerpt:

[M]ore than three years ago, a Wells Fargo customer named David Douglas sued in California, contending that the bank's employees and branch managers "routinely use the account information, date of birth, and Social Security and taxpayer identification numbers ... and existing bank customers' money to open additional accounts." Douglas alleged that branch managers opened at least eight accounts in his name and created fake business accounts under his name without his knowledge.

This case should have gone to court but was blocked by a ripoff clause. Douglas's lawyers argued that an arbitration provision in a legitimate account agreement should not bar him from suing over a sham account he never agreed to open. However, citing recent 5-4 U.S. Supreme Court decisions, the judge held that the ripoff clause in the original agreement blocked him from suing Wells Fargo.

In 2015, another Wells Fargo customer, Shahriar Jabbari, tried to file a class action against the bank, claiming that employees hid fees, refused to close accounts on request, and forged signatures and addresses. Wells Fargo publicly denied these allegations. Again, the judge ruled that the ripoff clause in the original account agreement forced any unresolved disagreement into arbitration, and Jabbari's class action was kicked out of court.