Sergio Pareja on FTC Regulation of Pyramid Marketing Schemes

Sergio Pareja of New Mexico has written Sales Gone Wild: Will the FTC's Business Opportunity Rule Put an End to Pyramid Marketing Schemes? 39 McGeorge Law Review.  Here's the abstract:

This article analyzes the anticipated effect of the FTC's Business Opportunity Rule on pyramid marketing schemes. Pyramid marketing schemes consistently rank in the top ten lists of consumer complaints received by the FTC and state consumer protection divisions, victimizing 1.5 million Americans a year. One recent class action settlement demonstrated that the victims, who are often relatively poor and uneducated, had an average loss of approximately $8,000 each. The FTC has promulgated a new Business Opportunity Rule in an effort to end these abuses. Promotors of business opportunities will be required to comply with the new rule beginning on July 1, 2008. This article carefully analyzes the rule and concludes that it will not be effective at stopping these schemes. The article suggests several key changes to the rule and recommends congressional legislation to stop the abuses.

Chrysler's Bankruptcy and Product Liability Suits

Fellow consumer law professor Norman Silber of Hofstra is quoted in a TV news report here about how Chrysler's bankruptcy will bar future product liability plaintiffs from obtaining compensation from Chrysler.

A Bit More About Steering

Yesterday I posted excerpts from an affidavit claiming that Wells Fargo steered lenders who could have had prime loans to more expensive subprime loans.  In markets that work properly, steering wouldn't be effective.  If, for example, you walked into a grocery store and they offered milk at $30 a quart--but said you should buy at that price because they saved you some paperwork--you'd buy elsewhere.  But obviously in the home loan market, many consumers did not go elsewhere.  Why is that?  There are a number of reasons.  Among them are that home loans are far more complicated than shopping for groceries, so that many consumers can't easily tell that they're being charged more than they should be.  Home loans have numerous price variables (monthly payments, length of term, points and fees, adjustable rates, and so forth) and prices vary according to how credit-worthy borrowers are, so that many borrowers undoubtedly did not realize that they could have saved thousands of dollars (and perhaps their homes if they later ended up in foreclosure because the payments were higher) by obtaining prime loans.  The very fact that steering occurred adds additional force to the argument that the home loan market does not work properly, that existing regulation has failed for many consumers, and to arguments that regulation is needed to fix that market.

Wells Fargo and Steering

Commentators have complained for some time that some lenders steered borrowers who could have qualified for prime loans to more expensive subprime loans. Unsophisticated borrowers who don't shop around for loans or don't realize what their loans actually cost them can end up paying far more than they need to, and in some cases, the higher payments may even have proved unaffordable, thus triggering defaults.  But are the commentators right?  On Sunday, the Times ran an article, Bank Accused of Pushing Mortgage Deals on Blacks, about affidavits in Baltimore's suit against Wells Fargo claiming that Wells Fargo engaged in steering.  So I asked my research assistant, Cameron Fee, to see if he could come up with the affidavits.  Here, as one example, is some of what former Wells Fargo loan officer and sales manager Elizabeth M. Jacobson stated in her affidavit:

8. The commission and referral system at Wells Fargo was set up in a way that made it more profitable for a loan officer to refer a prime customer for a subprime loan than make the prime loan directly to the customer.  The commission and fee structure gave the A rep a financial incentive to refer the loan to a subprime loan officer.  Initially, subprime loan officers had to give 40% of the commission to the A rep who made the referral; later on A reps received 50 basis points of the available commission,  Because commissions were higher on the more expensive subprime loans, in most situations the A rep made more money if he or she referred or steered the loan to a successful subprime loan officer like me.  A reps knew about my success in qualifying customers for subprime loans; as a result, I received hundreds of referrals.

* * *

 Because I worked on the subprime side of the business, once I got the referral the only loan products that I could offer the customer were subprime loans.  My pay was based on the volume of loans I completed.  It was in my financial interest to figure out how to qualify referrals for subprime loans.  Moreover, in order to keep my job, I had to make a set number of subprime loans per month.

11. Wells Fargo, like any other mortgage company, had written underwriting guidelines and pricing rules for prime and subprime loans.  There was, however, more than enough discretion to allow A reps to steerprime loan customers to subprime loan officers like me.  Likewise, the guidelines gave me enough discretion to figure out how to qualify most of the referrals for a subprime loan once I received the referral.

12. In many cases A reps used their discretion to steer prime loan customers to subprime loan officers by telling the customer, for example, that this was the only way for the loan to be processed quickly; that there would be less paperwork or documentation requirements; or that they would not have to put any money down.  Customers were not told about the added costs, or advised about what was in their best interest.

13. Once I received a referral from an A rep, I had discretion to decide which subprime loan products to offer the applicant.  Most of the subprime loans I made were 2/28s.  * * * These loans typically included a prepayment penalty for two or three years which ultimately made it more difficult for the borrower to refinance later out of the loan.  * * * I know that some loan officers encouraged customers to apply for these loans by telling them that they should not worry about the pre-payment penalty because it could be waived.  This was not true--the pre-payment penalty could not be waived.

14. According to company policy, we were not supposed to solicit 2/28 customers for re-finance loans for two years after we made a 2/28 subprime loan. Wells Fargo reneged on that promise; my area manager told his subprime loan officers to ignore this rule and go ahead and solicit 2/28 customers within the two year period, even though this violated our agreement with secondary market investors.  The result was that Wells Fargo was able to cash in on the pre-payment penalty by convincing the subprime customer to refinance . . . .

18. I also know that there were some loan officers who did more than just use the discretion that the system allowed to get customers into subprime loans.  Some A reps actually falsified the loan applications in order to steer prime borrowers to subprime loan officers.  * * *

Some states have statutes barring steering.  See, e.g., Cal. Fin. Code § 4973(l)(1).  I have a feeling that we're going to see more states enacting such statutes soon.  Even if Maryland lacks such a statute, some of the conduct described above sounds fraudulent or likely to violate a UDAP statute.  I wonder what the OCC thinks about all this.  Here's a statement from an OCC statement we quoted back in 2008:

Almost everyone who has paid attention to the subprime lending crisis has concluded that OCC-regulated national banks were not the problem.  Instead, the worst abuses came from loans originated by state-licensed mortgage brokers and lenders that are exclusively the responsibility of state regulators

The full affidavit, by the way, also describes how Wells Fargo targeted African-American communities; hence, the Times headline.

William McGeveran on Social Marketing

William McGeveran of Minnesota has written Disclosure, Endorsement, and Identity in Social Marketing, University of Illinois Law Review (2009).  Here's the abstract

"Social marketing" is among the newest advertising trends now emerging on the internet. Using online social networks such as Facebook or MySpace, marketers can send personalized promotional messages featuring an ordinary customer to that customer's friends. Because they reveal a customer's browsing and buying patterns, and because they feature implied endorsements, the messages raise significant concerns about disclosure of personal matters, information quality, and individuals' ability to control the commercial exploitation of their identity. Yet social marketing falls through the cracks between several different legal paradigms that might allow its regulation-spanning from privacy to trademark and unfair competition to consumer protection to the appropriation tort and rights of publicity. This Article examines potential concerns with social marketing and the various legal responses available. It demonstrates that none of the existing legal paradigms, which all evolved in response to particular problems, addresses the unique new challenges posed by social marketing. Even though policymakers ultimately may choose not to regulate social marketing at all, that decision cannot be made intelligently without first contemplating possible problems and solutions. The Article concludes by suggesting a legal response that draws from existing law and requires only small changes. In doing so, it provides an example for adapting existing law to new technology, and it argues that law should play a more active role in establishing best practices for emerging online trends.

Table of Contents for Summer 2009 Issue of Journal of Consumer Affairs: Special Issue on Consumer's Health Literacy

Here is the table of contents for the Journal of Consumer Affairs, Summer 2009, Volume 43, Number 2 Special Issue on Consumer’s Health Literacy:

Editorial Prelude: On Break-up Clichés Guiding Health Literacy’s Future by Paula Fitzgerald Bone, Karen Russo France and Kathryn J. Aikin

Health Literacy for Improved Health Outcomes: Effective Capital in the Marketplace by Natalie Ross Adkins and Canan Corus

Health Insurance Literacy of Older Adults by Lauren McCormack, Carla Bann, Jennifer Uhrig, Nancy Berkman, and Rima Rudd

The Roles of Gender and Motivation as Moderators of the Effects of Calorie and Nutrient Information Provisions on Away-from-Home-Foods by Kenneth Bates, Scot Burton, Elizabeth Howlett, and Kyle Huggins

Using the Thrifty Food Plan to Assess the Cost of a Nutritious Diet by Parke Wilde and Joseph Llobrera

Misguided Optimism Among College Student Smokers: Leveraging Their Quit Smoking Strategies for Smoking Cessation Campaigns by Joyce M. Wolburg

Bits, Briefs and Applications:
The Effectiveness of Cigarette Warning Label Threats on Non-Smoking Adolescents by Lalla Ilhame Sabbane, Tina M. Lowrey, and Jean-Charles Chebat

Complex Sample Design Effects and Health Insurance Variance Estimation by  Robert B. Nielsen, Michael Davern, Arthur Jones Jr. and John L. Boies

Notes and Observations:
The Impact of Consumers' Health Literacy on Public Health by Marian Levy and Marla B. Royne

Editorial Postlude
Health Information Consumers Can't or Don't Want to Use by Herbert Jack Rotfeld

Reminder from China about the importance of Section 230 immunity

Discussion on a panel about the role of the Internet in social change in China, held at Computers Freedom and Privacy 2009 today, which is the 20th anniversary of the Tiananmen massacre, provided a stark reminder today of the crucial role played by section 230 of the Communications Decency Act  in our own system of free Internet speech.  Panelists discussed China’s multi-layer system of Internet censorship — at the national level, at the provincial level, at the Internet host level, and at the individual level.  Several blogging sites have shut themselves down entirely for “maintenance” or “upgrades,” with a promise to reopen on the morning of June 6.  They have had to do this because so many people were posting material for which they might be held responsible that they could not keep up with the necessary self-censorship.  It is, I might suggest, only a robust immunity for web hosts here in the United States that allows vigorous online debate.

The panelists have movingly discussed the role of the Internet in encouraging free expression in China, in the face of powerful censorship forces, and the creativity of Chinese bloggers in using code words and analogies — or words that mean one thing with one set of tones, and something very different when the tones are different.  Reminded me of Russian dissident literature in the 1960's and 1970's.

You can follow the rest of the program (as well as watching sessions already held) by live streaming video, or on Twitter. The next panel will address online activism elsewhere around the world.

More on Marketing Credit Cards to People Under 21

by Brian Wolfman

I blogged here about the new credit card law's provisions aimed at curbing the credit card industry's aggressive marketing practices toward college students and people under age 21. In today's Washington Post, Michelle Singeltary has this column on the topic.

What Will Happen to the December 2008 Amendments to Regulation Z?

by Jeff Sovern

Last December, various federal regulators adopted new credit card regulations (we blogged about them here, among other places).  Some aspects of the new Credit CARD Act (discussed here. as well as other places in the blog), such as the enhanced consumer disclosures in Title II, seemingly conflict with the disclosure requirements of the December regulations.  So what happens to the December amendments?  The December amendments for the most part aren't scheduled to take effect until next summer while most of the provisions in the Credit CARD Act take effect next February, though some provisions become effective in August. If anyone hears anything relevant, please post it in the comments below. 

More on the Proposed Financial Product Safety Commission

On Wednesday, the US PIRG Consumer Blog had this post linking to a USA Today editorial supporting a Financial Product Safety Commission. It also links to an opposing point of view from the American Bankers Association.