Howell E. Jackson on the Trilateral Dilemma in Financial Regulation

Howell E. Jackson of Harvard has written The Trilateral Dilemma in Financial Regulation in IMPROVING THE EFFECTIVENESS OF FINANCIAL EDUCATION AND SAVINGS PROGRAM (Anna Maria Lusardi, ed., University of Chicago Press, 2008).  Here's the abstract:

In choosing financial products and services, consumers often rely on financial advisers to recommend products or services. With surprising frequency, these advisers receive side payments or other forms of compensation from the firms that provide the products or services the advisers recommend. Many times these payments are not clearly disclosed to consumers; often they are entirely secret. These practices, which I label the trilateral dilemma of financial regulation, raise concerns that advisers may be giving their customers biased advice. Side payments of this sort also have the potential to increase the cost of financial products and services. In this article, I describe how trilateral dilemmas have arisen in many different sectors of the financial services industry, including mortgage lending, retirement savings, investment management, insurance brokering, student loans, and banking services. I then review the many different regulatory strategies that Congress and regulatory agencies have employed to police trilateral dilemmas and assess the efficacy of these techniques in solving the problems that side payments of this sort pose. I also evaluate the possibility that side payments and other forms of indirect compensation may in fact be an efficient or at least innocuous means of financing the cost of distributing financial products and services. The article concludes with a brief discussion of how consumer education might address trilateral dilemmas.

Mini-Doc on Credit Card Legislation

Check out this great new Youtube mini-documentary about the ongoing fight over credit card legislation in Congress. It's by Harry Hanbury of the investigative video journalism group American News Project. Consumer advocates Ed Mierzwinski of U.S. PIRG and Travis Plunkett of Consumer Federation of America are featured prominently.

NACA Class Action Guidelines Published in Federal Rules Decisions

by Brian Wolfman

In 1997, the National Association of Consumer Advocates published its ground breaking "Standards and Guidelines for Litigating and Settling Class Actions." These guidelines, published at 176 F.R.D. 375 (1997), sought to support the proper use of class actions while curbing their abuse.The first edition was widely cited by litigants and courts.

In 2006, NACA issued a second edition to the guidelines, which revised and improved the prior version and addied eight entirely new guidelines. At the time, class action expert Charles Delbaum wrote an excellent CLP post about the new guidelines.

Now, Federal Rules Decisions has published the second edition at 255 F.R.D. 215 (2009) (with a very brief foreword by me). Advocates and judges will now be able to easily find and cite the second edition as they were with the first.

Blind Readers in Fight with Amazon and Kindle Over Right to "Books on Tape"

Read this terrific post over at U.S. PIRG's consumer blog, chock full of great links. Here's the first paragraph:

Last week, on a chilly day, over 350 advocates for the blind and others with print disabilities held a protest in front of the Author's Guild in New York City over the authors' demand that speech software on the Kindle 2 e-book reader be turned off to preserve authors' rights to royalties from selling "books on tape" products that they read themselves. Amazon, the Kindle's maker/seller, has capitulated to the authors. The authors want the blind to submit to a special registration process where they would pay a fee and would be granted a license to turn the robotic reader software back on. They claim the Kindle 2 otherwise violates copyright laws. Fair use experts say "not true." We agree with advocates for the blind and others with reading disabilities that the authors are wrong on the law and wrong to pick this fight and that Amazon took the wrong side. 

Where Are the Consumer Protection Columnists?

by Jeff Sovern

Consumer protection has been much in the news these days, but based on a quick look, there don't seem to be a lot of columnists who specialize in consumer protection.  Take the New York Times, for example.  The closest it has to a consumer protection columnist is Ron Lieber, who writes the "Your Money" column on Saturdays, which sometimes explores consumer issues. But not always: today's column, for example, is about the temptation to cheat on taxes.  In contrast, the Times Business section alone includes two weekly columns on economics, and weekly columns on each of finance, the media, deals, technology, and columns called "Talking Business," "Fair Game," and "Everybody's Business"--and I've probably left some out.  All valuable, but given that everyone is a consumer, and only some people are involved with finance, for example, you'd think a regular column on consumer issues would also serve a purpose.  The Washington Post's Michelle Singletary's personal finance column "The Color of Money" covers consumer issues (here, for example, is a piece on foreclosure scams), but she also devotes attention to non-consumer matters, as in this recent column about--you guessed it--cheating on taxes.  So I'm wondering: are there columnists that specialize in consumer protection issues?  If you know of one, please mention him or her in the comments (no need to mention Consumer Reports magazine).  I don't see this as purely an academic issue: the more columnists that focus on consumer issues, the greater the likelihood that consumer issues will receive attention in other venues, like legislatures, and so the greater the likelihood that we'll see fair consumer laws.

BankofAmerica signs on to Home Affordable

Bank of America announced this week that it has begun refinancing mortgages at up to 105% of home values under the Fannie/Freddie Home Affordable program, part of the Administration's foreclosure relief plan.  There are two main components to Home Affordable, the refinancing of existing mortgages that are not behind and modification of mortgages that are.  Refinancing doesn't really solve the excess debt problem, but it does slow down the foreclosure machine a bit.

 BofA also announced that it will begin offering the new and improved mortgage modifications consistent with Home Affordable guidelines in the next two weeks, and is extending its moratorium on foreclosures until April 30.  The press release mentions that homeowners needing modifications will first be placed on "trial modifications", i.e. short-term payment agreements that must be converted to permanent modifications after 3 to 6 months.  Treasury's guidelines for modifications released in March contemplated that servicers could begin offering compliant modifications on a trial basis, pending full development of the program.  The contracts between Treasury and servicers for incentive payments and data reporting on mortgage modification and foreclosures have not been rolled out yet, but are due out by the end of April.

UPDATE:  I am told that few if any employees at BofA's servicing operation know about Home Affordable modifications (designed to reduce borrower's mortgage payment to 31% of income.)  With persistence, however, it is possible to find someone who has heard of the new program.  Homeowner advocates should try calling 1-877-776-5842, and wait for the message.

Meanwhile according to a report on BankruptcyProfBlog the Bankruptcy legislation to permit modification of mortgages to actually reduce debt to align with property values appears to be dying a slow death in the Senate.

More nonsense from defenders of marketplace deception

Yesterday (April 9), the Wall Street Journal ran an excellent article by Nathan Koppel on the changes to food companies' practices brought about by litigation, or the threat thereof. And by "excellent," I mean that it fairly and completely gave both sides of the issue.

This is, of course, not the kind of excellence that food companies, or the lawyers who profit from their predations, like to see. So the Journal also posted a blog entry that talked about Koppel's article. The blog entry is itself sufficiently fair and balanced, but it allowed for comments from the blinkered defenders of all things corporate.

Comments like:

• "Consumers never wanted to know the exact health risks from smoking." (This makes me think of Jack Nicholson screaming "You can't handle the truth!")
• "If its citizens want to know, then the free market provide the information, and at a cost much lower than any government mandate." (This is the kind of thinking that loosed people like Bernie Madoff on our pocketbooks.)
• And this gem, from a PepsiCo lawyer, who opines that "food litigation is part of a larger 'paternalization of society,' adding that such litigation 'in effect, says the masses aren’t intelligent enough to understand what they are buying.'"

No sir, it's not a matter of intelligence, it's ignorance, and not the blissful kind. Exactly what the food companies (many of which really can't handle the truth) are counting on, and indeed fostering.

However, sometimes the efforts of food marketers to blinker the public do not succeed, so that they are forced to respond to consumer demand, when consumers learn the truth about their products.

Products such as Snapple, which called itself "natural" and "made from the best stuff on Earth," while using the very unnatural high-fructose corn syrup instead of sugar. Responding to informed consumer demand, Snapple has begun the change to sugar, now saying that "The Best Stuff on Earth Just Got Better." Congrats to Snapple for having found the true Aristotelian Ideal, something that surpasses "best"--the adjectival progression is now, "good, better, best, Snappliester."

I am struck over and over by the food companies’ (and their defenders’) knee-jerk use of words like “paternalism” and “consumer choice,” when the simple fact is that companies are hiding from consumers the precise information necessary for consumers to make informed choices. Our economic system is based on the free flow of information, but that flow has to be two-way. For companies to hide from consumers facts, knowing that consumers would make different choices if they knew the truth, is contra to the principles on which our system is based.

When companies try to cheat their way around the truth, it hurts consumers and it hurts honest competitors.

This isn’t paternalism; it’s capitalism.

Eleventh Circuit Upholds FCRA's Statutory Damages Provision Against Constitutional Challenge

Today, in Harris, et al. v. Mexican Speciality Foods, et al., No. 08-13510 (11th Cir. Apr. 9, 2009), the Eleventh Circuit rejected a facial vagueness and excessiveness/due process challenge to the statutory damages provision of the Fair Credit Reporting Act. The district court had held the provision facially unconstitutional on both grounds. CL&P blogger Deepak Gupta briefed and argued this case for the victorious plaintiffs.

February and March Foreclosure Trends

By Alan White

The numbers are not good for foreclosure trends in February and March.  HOPE NOW's February data release shows a 12 % increase in foreclosure starts over January.  Declines in October and November in new foreclosure filings were followed by big increases in December, January and February, reflecting perhaps some temporary moratorium activity.  Similarly, completed foreclosure sales were up 25% from January to February, and back to their levels of last summer after a notable dip in November and December.  My own tabulations of subprime and alt-A investor reports (download here) confirm that the delinquent mortgage and foreclosure inventories continue to grow. 

Modification numbers were up in February (but down in March) as servicers continue to increase efforts to salvage delinquent mortgages.  Principal and interest forgiveness is being used a bit more frequently, up from 10% in November to 15% in March.  Modifications with payment reductions (as opposed to payment increase or no change) inched up from 50% to 55% between November and March.  Meanwhile, the loss severities on completed foreclosures continue to worsen, climbing form 56% to 64% in the same period.  In contrast, loans that were modified with some amount written off averaged a write-off of about 13% of the balance.

Bill on Spam Text Messages

by Jeff Sovern

PC World reports here on a bill aimed at spam sent as text messages to cell phones.  The article quotes from sponsoring Senator Olympia Snowe's press release: "Mobile users in the U.S received about 1.1 million spam text messages in 2007, up 38 percent from 2006, Snowe said in a news release."  Personally, I'm not sure that changing the law will do much to prevent text message spam; existing law already prohibits the use of autodialers to send texts, see Joffe v. Acacia Mortg. Corp., 211 Ariz. 325, 121 P.3d 831 (Ariz. App. 2005), interpreting 47 U.S.C. § 227(b)(1)(A)(iii), and sending texts is a pretty slow process if you're not using an autodialer.  See also 47 C.F.R. § 64.3100 (barring the sending of most unwanted mobile service commercial messages to cell phones with internet domain name on FCC's list of wireless domain names).  So there's a good chance that the spam texts already violate the law.  But maybe there's some exception I'm not aware of, or maybe the bill would enhance enforcement, particularly since the article observes that the bill would "strengthen the [FCC's and FTC's] powers" to stop spam texts.  (Hat tip to my co-author, Dee Pridgen)