CPSC Recalls for June 2009

Check out the Consumer Product Safety Commission's product safety recalls for June 2009.

Peanut Butter and the Proposed Consumer Financial Protection Agency

by Jeff Sovern

Once upon a time, in a not-so-distant country, peanut butter sales were regulated in a distinctive way.  Grocery stores that sold peanut butter were regulated by one agency; supermarkets by another agency; and convenience stores that sold peanut butter by a third agency.  Stores that were chartered by the federal government had one set of regulators while those chartered by states had a different set.  These agencies had many different responsibilities, including some that conflicted at times.  They were charged with insuring that the peanut butter was appropriate, but also that the stores they regulated used their resources wisely.  Peanut butter sellers could choose which agency would regulate them by deciding whether they were a supermarket, grocery store, or convenience store or whether they would be chartered by the federal government or a state.  And because some peanut butter regulators received their revenue from fess paid by the peanut butter sellers they regulated, the regulators had an incentive to attract and keep peanut butter sellers to regulate.  The more peanut butter sellers you regulated, the more revenue you had.  That meant they had an incentive to regulate lightly and protect peanut butter sellers.

One day, one of the sellers came up with a new kind of peanut butter which combined some old and some new ingredients and was cheaper at first than the old peanut butter.  It began selling this new peanut butter to people who could not formerly afford peanut butter.  Lots of people bought the new kind of peanut butter and soon other peanut butter sellers began selling it too.  They made lots of money for a while.  Regulators weren’t worried about the new type of peanut butter because the ingredients were all listed on the jar.  In fact, some thought it was great that some people who formerly couldn’t afford peanut butter could now buy it.  Besides, if they intervened to prevent sale of the peanut butter, the peanut butter sellers they regulated would just change what kind of business they were and get a different regulator, and that would cost the regulators revenue—and wouldn’t keep the sellers from selling the new kind of peanut butter.  Some also believed that too much peanut butter regulation would make peanut butter too expensive and choke off innovation in peanut butter.  When some state peanut butter regulators tried to prevent sale of the new peanut butter, federal regulators went to court to stop them.

But the consumers who bought the new kind of peanut butter weren’t able to figure out from the list of ingredients what effect the peanut butter would have on them over the long term.  The list of ingredients was long and confusing, and the consumers lacked the experience needed to make sense of it.  After a while, a lot of the consumers started getting sick from the peanut butter.  They stopped doing things that they had formerly been able to do, and that hurt even people who hadn’t bought the new peanut butter.  Some of them stopped paying for their peanut butter, and that hurt the peanut butter sellers.  Some of the sellers started losing money, so much money that some of them went out of business.  The government became concerned that peanut butter would no longer be available, and so it gave lots of money to some of the biggest peanut butter sellers to keep them in business. 

Then some people said that a new agency was needed to protect consumers from peanut butter that was bad for them.  This said that protecting people from bad peanut butter was so important that the agency should have that as its sole mission instead of having it as one of several goals that might sometimes conflict with protecting people from bad peanut butter.   They pointed out that other products, like jelly were regulated in such a way and that jelly regulators just thought about whether the jelly was safe and sound, rather than thinking about whether the jelly sellers were safe and sound.  They said that having the ingredients listed on the jar wasn’t always enough and that this agency should have the power to ban peanut butter that contained ingredients that were harmful.  They said that the agency should have the power to regulate all peanut butter sellers whether they were a grocery store, convenience store, or supermarket.  They said that the new agency should have the power to make stores sell plain peanut butter and that if stores wanted to sell peanut butter with special ingredients, they should have to do more to explain to consumers what was special about it.

But the peanut butter makers thought this was a bad idea.  They argued that the new agency would impose a new set of regulations.  They pointed out that most peanut butter sellers had not sold the bad peanut butter but would have to pay for complying with the new regulations.  They wondered how the new agency would be paid for.  They were concerned about how the new agency would decide what plain peanut butter was and feared that the agency would stifle innovation.  Because the peanut butter sellers were rich and gave lots of money to politicians, could afford to hire very good advocates to make clever arguments, and knew things about the peanut butter business that no one else knew, they were listened to carefully.  Of course, the peanut butter sellers were not thinking about the fact that the new agency would not have to compete with other agencies to attract sellers to regulate and so would not tailor its regulations to attract such sellers. They were solely concerned with the public good.

And consumers put peanut butter and jelly on sandwiches even though the two were subject to different regulators and rules.

Reg Z Amendments Change Timing of Mortgage Disclosures

by Jeff Sovern

Critics of Truth in Lending have long complained about the timing of disclosures in mortgage loans: typically, lenders were not required to provide the final loan disclosures until the closing. That meant that if the interest rate, say, changed, as it often does, from the original good faith estimate, provided within three days after the consumer applied for the loan, consumers might not learn about the change until the closing, when they are unlikely to walk away from the deal.  But last month the Fed adopted new amendments to Regulation Z which change the timing rules and implement the Mortgage Disclosure Improvement Act of 2008.  See 74 Fed. Reg. 23,289 (May 19, 2009).  Under the new version of 226.19(a)(2)(ii), if the disclosures change materially from the estimated disclosures, the lender must provide corrected disclosures to be received by the consumer at least three days before consummation.  The new rules become effective July 30. 

This sounds like a real improvement over the old rules.  Consumers who have not monitored their loan terms regularly are less likely to be surprised at the closing.  In addition, consumers are more likely to pay attention to the disclosures if they arrive by themselves three days before the closing than if they are provided in a mountain of paper at the closing.  But will it facilitate comparison-shopping?  Are consumers more likely to walk away if they discover that the terms are not to their liking three days before the closing than at the closing?  I don't know.  I keep thinking of the testimony of "Jim Dough," the pseudonymous predatory lender: "I can get around any figure on any loan sheet. . . . The customers believe what I tell them."  Hearing before the Senate Special Committee on Aging on March 16, 1998, “Equity Predators: Stripping, Flipping and Packing Their Way to Profits.”  Will predatory lenders provide enough other paper at the same time to obscure the TILA disclosures?  Or come up with some other strategy to cause consumers to ignore the forms?  Still, it's better than  the existing rules.  And regulators can provide only so much notice without risking delaying closings unduly.  Some will recall that the original version of RESPA barred loan closings until 45 days after filing of the loan application, which outraged consumers eager to move into their new homes.  Angry fans at a Green Bay Packer football game surrounded Wisconsin Senator Proxmire and chanted "Down with RESPA." 

More on the Proposal for the Consumer Financial Protection Agency

by Jeff Sovern

The White House proposal can be found here.  Ed Mierzwinski has collected many valuable links on the proposal over at the U.S. PIRG Consumer Blog.

A couple of random comments: the only statute referred to by name in the brief CFPA White House proposal is the Community Reinvestment Act, which some, of course, have blamed for the subprime crisis--in my view, unfairly. The proposal states that the new agency will "strongly enforce" the CRA. 

The proposal contains a lot of language about disclosures and requiring lenders to offer "plain vanilla" loans. That sounds like something out of Cass Sunstein and Richard Thaler's Nudge: let consumers have choice but change the "choice architecture" to help them make decisions.  But the proposal also would give the agency the power to ban unfair terms, so that goes further.  In the context of mortgage lending, the proposal calls for giving the agency the power to ban yield-spread-premiums and prepayment penalties, provisions that many consumers seem to lack the savvy to protect themselves from.  So I wonder if the goal is to preserve consumer choice in areas where consumers are likely to be competent to make decisions, perhaps with a nudge, but bar terms that consumers are less well equipped to deal with.  That would be great.

The proposal also calls for giving the agency the power to impose "heightened duties of care on financial intermediaries that reflect reasonable consumer expectations." I wonder if that means a fiduciary duty or suitability standard, as some have urged.  The proposal gives mortgage lending as an example, and states the agency would have authority to "[r]equire mortgage brokers to owe a duty of best execution among available mortgage loans to avoid conflicts of interest between themselves and the homeowners, as well as a duty to determine the mortgages they sell are affordable to borrowers."

What I like best about this proposal is that unlike many of the agencies that already have some role to play in consumer lending, this agency's mandate would be to focus on consumer protection.  Its primary role would not be to insure the safety and soundness of financial institutions or to keep the economy running.  I wrote an op-ed in the Pittsburgh Post- Gazette in March of last year calling for an agency to oversee consumer credit transactions that would not be tasked with other asignments as well.  I elaborated on this in a blog post on March 19, 2008 about Alan Greenspan's memoir, The Age of Turbulence, after noting that the book largely ignored the many consumer credit regulations the Fed oversees:

[I]sn't something wrong when the memoir of the person at the head of what is probably the agency with the greatest power over the rules governing consumer credit transactions gives those rules such short shrift?  Not that I blame Greenspan.  He was appointed to the job because of his mastery of macroeconomics.  But again, shouldn't someone who has mastered the law of consumer credit run the principal agency devoted to that subject?  In other words, at the risk of beating a dead horse, is the Fed the best agency to administer consumer credit laws?

FTC Seeking Public Comments for Studies on Consumer Susceptibility to Fraud

Here's an excerpt from one announcement:

The FTC intends to conduct two exploratory studies on consumer susceptibility to fraudulent and deceptive marketing. This research will be conducted to further the FTC’s mission of protecting consumers from unfair and deceptive marketing. Before gathering this information, the FTC is seeking public comments on its proposed research. This notice seeks comments on the Fraud Susceptibility Experiment Study, one of the two studies. * * * Comments must be submitted on or before August 10, 2009.

The other announcement, also seeking comments by August 10, seeks comments on the Fraud Susceptibility Internet Panel Study.  (HT to Chris Hoofnagle of Berkeley).

Jonathan Zinman on What Borrowers Do When States Limit Payday Loans

Jonathan Zinman of Dartmouth has written Restricting Consumer Credit Access: Household Survey Evidence on Effects Around the Oregon Rate Cap.  Here's the abstract: 

Many policymakers and some behavioral models hold that restricting access to expensive credit helps consumers by preventing overborrowing. I examine some short-run effects of restricting access, using household panel survey data on payday loan users collected around the imposition of binding restrictions on payday loan terms in Oregon. The results suggest that borrowing fell in Oregon relative to Washington, with former payday loan users shifting partially into plausibly inferior substitutes. Additional evidence suggests that restricting access caused deterioration in the overall financial condition of the Oregon households. The results suggest that restricting access to expensive credit harms consumers on average.

Obama Reported to Want New Consumer Financial Protection Agency

Bloomberg News is reporting that tomorrow President Obama will propose creation of the Consumer Financial Protection Agency "to protect consumers of financial products with the power to punish offending firms and stripping the Federal Reserve of some of its powers."

Supreme Court Takes Arbitration Case

The Supreme Court yesterday granted cert in Stolt-Nielsen S.A. v. AnimalFeeds International, which raises the question, according to SCOTUSblog, of "when two companies agree to send their disputes to arbitration, may a court order that process to go forward as a class action, if the contract says nothing on that issue."  Because consumer arbitration clauses never provide for class actions, the case might have consequences for consumer contracts which provide for arbitration, but do not expressly bar class actions. Here is the question presented, as framed in the cert petition:

In Green Tree Financial Corp. v. Bazzle,  539 U.S. 444 (2003), this Court granted certiorari to decide a question that had divided the lower courts: whether the Federal Arbitration Act permits the imposition of class arbitration when the parties’ agreement is silent regarding class arbitration. The Court was unable to reach that question, however, because a plurality concluded that the arbitrator first needed to address whether the agreement there was in fact "silent." That threshold obstacle is not present in this case, and the question presented here--which continues to divide the lower courts--is the same one presented in Bazzle:

Whether imposing class arbitration on parties whose arbitration clauses are silent on that issue is consistent with the Federal Arbitration Act, 9 U.S.C. §§ 1 et seq.

Has the FDIC Kept Savers' Returns Down?

On Saturday, Ron Lieber's "Your Money" column in the Times, headlined F.D.I.C.is Watching as a Bank Sets Rates, raised interesting consumer law issues.  Ally Bank is an online bank owned by GMAC Financial, a recipient of federal bailout funds.  Ally markets itself as a "better kind of bank" with "No minimum deposits,  No monthly fees.  No minimum balance.  No sneaky disclaimers."  Its web site asks what your bank is trying to sneak by you.  Its web site also promises that its rates "will always be among the top."  If that's true, it sounds like a pretty good bank.  But not, apparently, to other bankers.  According to the article, Ed Yingling of the American Bankers Association wrote to the FDIC complaining that Ally's high interest rates on CDs posed a danger to the industry and the FDIC. The claimed fear is that for Ally to make enough money to make good on the CDs, Ally will invest its money (or maybe that should read "the government's money") unwisely or make risky loans and end up not being able to meet its obligations on the CDs.   In any event, the article reported that Ally had lowered its rates twice in the preceding six days, though Ally refuses to say whether that's because of conversations it's had with the FDIC. Leiber, noting that the FDIC's last letter to GMAC expressed concern about its rates, complains that the FDIC's actions "seem a bit arbitrary," apparently because he believes the FDIC hasn't acted against other banks offering high rates. 

It seems strange that the FDIC should intervene to cause a bank to offer worse terms to consumers.  But I suppose that's the "safety and soundness" mission: that is, regulators want to insure that bank actions keep the banks safe and sound so the FDIC doesn't have to pay out on its promise to keep bank depositors whole.  But has the FDIC now forced Ally into false advertising?  It doesn't sound like Ally's rates are among the top any more.  Does that preserve Ally's safety and soundness?

Obama Administration Takes Position in Fair Credit Reporting Act Preemption Case Before Supreme Court

U.S. PIRG's Consumer Blog has this excellent post on a petition pending before the U.S. Supreme Court. The petition in American Bankers Association v. Brown, No. 08-730, asks whether a California financial privacy law is preempted by the federal Fair Credit Report Act to the extent that the California law prohibits the sharing of consumer information among affiliated financial institutions. The U.S. Court of Appeals for the Ninth Circuit held that, in significant part, the California law is not preempted. The Obama Administration has now told the Supreme Court that the Ninth Circuit's no-preemption ruling was wrong. But it has also told the Court that it should not take the case because (i) no other appellate courts have weighed in on the preemption issue (which would generally only happen if other states passed similar legislation that was challenged in the courts), and (ii) the Ninth Circuit's decision may have little practical effect. Check out the Supreme Court's electronic docket sheet on the case. An order on whether the Court will take the case is expected on Monday, June 29.