Ethics in Consumer Law: Reverse Logrolling

Ron Burdge, an excellent consumer lawyer in Ohio, recently posted a blog piece about the ethical issue of what to do when defense counsel tries to get you to agree (usually unethically) to lay off his weasel client in the future. It's a good piece, but I have to say that, since he mostly used an article I'd written on the issue. Ron's blog entry is here if you want to check it out.

You should also take a gander at the other posts Ron has put out, prior to this one. They are uniformly thoughtful and fine--pretty much like Ron himself.

And now I can tell Public Citizen that I've fulfilled my quota of posts to this blog for March (okay, okay, March of 2007, but I'm working on it).

Paper on Predatory Mortgage Lending

Philip Bond, David K. Musto, and Bilge Yilmaz, all of Penn's Finance Department, have written Predatory Mortgage Lending.  Here's the abstract: 

Regulators express growing concern over predatory loans, which the authors take to mean loans that borrowers should decline. Using a model of consumer credit in which such lending is possible, they identify the circumstances in which it arises both with and without competition. The authors find that predatory lending is associated with highly collateralized loans, inefficient refinancing of subprime loans, lending without due regard to ability to pay, prepayment penalties, balloon payments, and poorly informed borrowers. Under most circumstances competition among lenders attenuates predatory lending. They use their model to analyze the effects of legislative interventions.

Amy Schmitz on Consumer Warranty Arbitration

Amy Schmitz of Colorado has written Curing Consumer Warranty Woes Through Regulated Arbitration, 23 Ohio State Journal of Dispute Resolution.  Here's the abstract: 

This article proposes legislative procedural reforms accounting for the realities of consumer arbitration that have threatened and denied consumers' access to remedies for companies' violations of public, or statutory, warranty remedies under the Magnuson-Moss Warranty Act (MMWA). Furthermore, the Article proposes to clarify and expand the MMWA's current dispute resolution template in order to resolve judicial disagreement regarding the template's application and foster beneficial use of finding arbitration. Accordingly, this is not a call to ban all pre-dispute arbitration clauses in consumer contracts, but is instead an invitation for more politically palatable reforms that preserve both companies' savings and consumers' access to warranty remedies through arbitration. The time is ripe for legislative reforms that account for the importance of procedural justice and temper contractors' and courts' deference to consumer form contracts.

Website Collects Medical Data and Uses That Data for Drug Company Solicitations

by Jeff Sovern

Today's Times includes Online Age Quiz is a Window for Drug Makers, about a web site, RealAge, which tells you your "biological age" if you answer some 150 questions and offers suggestions for reducing that age.  Sounds great. But, the article explains, the information collected is then used to identify patients who might be candidates for medications, and the company sends these patients emails sponsored by drug companies that sell the medications.  Some excerpts:

“Our primary product is an e-mail newsletter series focused on the undiagnosed at-risk patient, so we know the risk factors if someone is prehypertensive, or for osteoarthritis,” said Andy Mikulak, the vice president for marketing at RealAge. “At the end of the day, if you want to reach males over 60 that are high blood pressure sufferers in northwest Buffalo with under $50,000 household income that also have a high risk of diabetes, you could,” he said.

RealAge’s privacy policy does not specifically address the firm’s relationship with drug companies, but does state, in part, “we will share your personal data with third parties to fulfill the services that you have asked us to provide to you,” and it adds test results to its database only when respondents become RealAge members. Some critics, however, charge that consumers do not have enough information when they join.

“Literally millions of people have unknowingly signed up,” said Peter Lurie, the deputy director of the Health Research Group at Public Citizen, a public interest group in Washington. The company, he said, “can create a group of people, and hit them up and create anxiety even though the person does not have a diagnosis.”

The article explains that the company does not provide the drug companies personally identifiable information.  But this business model strikes me as meriting FTC review.  I don't think the privacy policy is clear enough about what the company is doing with the information, especially given the sensitivity of medical information.  See Weld v. CVS Pharmacy, Inc., 1999 WL 494114 (Mass. Super. Ct. 1999) (noting that consumers "arguably possess a greater expectation of privacy as to the use of their names in connection with their prescriptions and medical information . . . ."). And then there's the widely-held suspicion that few consumers even read privacy policies, and many misinterpret them.  For example, one survey found that 75% of American adult users of the internet believe that the fact that a web site has a privacy policy means that the site won't reveal their information to others.  See Joseph Turow, Lauren Feldman, and Kimberly Meltzer, Open to Exploitation: American Shoppers Online and Offline 3 (2005).  If you can give RealAge your information without actually reading their privacy policy, as is common on web sites, which usually permit you to read the privacy policy only if you click on it, RealAge can probably tell how many of its members actually go to its privacy policy page, and if it's not very many, and the company knows that, it raises questions about whether this conduct is unfair within the meaning of the FTC Act.  On top of that, their privacy policy goes on forever, raising questions about how many people who set out to read it make it through the whole thing.  RealAge also reserves the right to change its privacy policy.  My own opinion is that before seeking private medical information, the company should make clear even to those who don't click on the privacy policy what it will do with that information.  But then, I've taken the view, which thus far the FTC has not embraced, that collecting and selling consumer information without the consumer's knowledge or consent violates the FTC Act and UDAP statutes.  See Jeff Sovern, Protecting Privacy with Deceptive Trade Practices Legislation, 69 Fordham L. Rev. 1305 (2001).  

Does the Subprime Crisis Rebut Claims of Lending Discrimination?

by Jeff Sovern

The extent of discrimination in lending has long been a hotly-debated subject.  The famous Boston Fed Study, publicized in 1992 and later published as Alica H. Munnell, Geoffrey M.B. Tootell, Lynn E. Browne & James McEneaney, Mortgage Lending in Boston: Interpreting HMDA Data, 86 American Econ. Rev. 25, 26 (1996), reported that "white applicants with the same property and personal characteristics as minorities would have experienced a rejection rate of 20 percent rather than the minority rate of 28 percent."  That study led to considerable discussion: Some argued that the study was flawed and that in fact discrimination does not occur, while others claimed that discrimination occurred.  A book-length study of the issue and points raised by many of the commentators is Stephen Ross & Ross Yinger, The Color of Credit (2002). 

That brings us to subprime lending. Studies have found that subprime borrowers are more likely to be people of color, female, elderly, low-income, or some combination of the foregoing. So if lending discrimination was occuring, we might expect to see less subprime lending.  For many years, of course, subprime borrowers did find it more difficult to obtain loans, but starting in the nineties, subprime lending took off, with the results that we all know about.

In his book Economic Facts and Fallacies, Thomas Sowell suggests that the enormous amount of money lost on subprime loans implies that people of color were not in fact discriminated against by lenders.  The argument (I'm putting it in my own words here and updating it a bit because the book was published in December 2007, before the subprime criss fully unfolded) goes like this: If lenders had discriminated against borrowers of color, they would have charged higher rates than the risk of lending justified.  But because they charged rates that were lower than the risks justified, they lost money on those loans, and in fact many subprime lenders went out of business.  Accordingly, they could not have been discriminating against minority borrowers.

This is an interesting argument, and it may prove to be borne out by the facts. But I think we need to know more to know whether it is correct.  Obviously lenders underestimated the risks of lending, but a big risk that lenders underestimated was the risk that housing prices would fall, thereby preventing borrowers from refinancing, That has nothing to do with race.  Indeed, it may turn out that some subprime borrowers defaulted because of high interest rates and unaffordable monthly payments, which could be the product of charging higher rates to people of color, say, than the borrowers might have qualified for.  Or borrowers could have defaulted because of their inability to refinance, even though lenders would have charged them lower rates all along had they been white.  I'm not saying that happened; all I'm saying is that lenders could have underestimated the risks of lending while still engaging in discrimination.  I'm afraid that the foreclosure fiasco has not put an end to arguments about whether lending discrimination occurs but rather only added more to argue about.

New FTC Chair Testifies Before House on Consumer Credit Issues

by Deepak Gupta 

The House Committee on Energy and Commerce, Subcommitee on Commerce, Trade, and Consumer Protection is holding a hearing this morning on "Consumer Credit and Debt: The Role of the Federal Trade Commission in Protecting the Public." Among other things, the hearing is exploring an issue I noted earlier this month: Whether the FTC's authority is too constrained to make it effective in fighting increasingly sophisticated and constantly evolving unfair and deceptive practices in the marketplace. Public Citizen's statement to the subcommittee discusses the agency's history of consumer credit regulation, existing authority for future regulation, and our proposed changes to FTC's authority. The witnesses include Jon Leibowitz, the new FTC chairman, James Tierney, Director of the National State Attorneys General Program at Columbia Law School, co-bloggers Christopher Peterson (Utah Law) and Ira Rheingold (NACA), and Republican witness Bill Himpler, a lobbyist for the American Financial Services Association. You can watch the FTC chairman, who is testifying now, on CSPAN.

Update: The Huffington Post has a recap of the hearing here.

FDIC Chair Speaks Out Against Federal Preemption of Consumer Laws

by Deepak Gupta

 FDIC chairman Sheila Bair says that, to protect consumers from aggressive lending practices, Congress should consider "curtailing" the powers of federal banking regulators to preempt state consumer protection laws.  In testimony submitted to the Senate Banking Committee last week, Bair said federal preemption had previously been seen as a way to improve efficiencies for federally chartered banks and lower costs for consumers. "While that may have been true in the short run, it has now become clear that abrogating sound state laws, particularly consumer protection laws, created an opportunity for regulatory arbitrage that frankly resulted in a 'race-to-the-bottom' mentality," she said. The Comptroller of the Currency and Office of Thrift Supervision routinely preempted state predatory lending laws during the subprime lending boom. (For an overview, see these articles by co-blogger Chris Peterson.) The FDIC chairman said setting a "floor" for consumer protection, based on state and federal laws, would be better than current system of establishing a "ceiling" at the federal level. She suggested that Congress could use a newly proposed financial products safety commission to establish the appropriate floor for consumer protection.  It's refreshing to see at least one federal banking regulator talking sense about this issue.

Study Finds Data Breach Laws Have Only Marginal Effect on Identity Theft

Sasha Romanosky, Rahul Telang, and Alessandro Acquisti, all of Carnegie Mellon, have co-authored Do Data Breach Disclosure Laws Reduce Identity Theft?  Here's the abstract:

Identity theft resulted in corporate and consumer losses of $56 billion dollars in 2005, with about 30% of known identity thefts caused by corporate data breaches. Many US states have responded by adopting data breach disclosure laws that require firms to notify consumers if their personal information has been lost or stolen. While the laws are expected to reduce identity theft, their full effects have yet to be empirically measured. We use panel from the US Federal Trade Commission with state and time fixed effects regression to estimate the impact of data breach disclosure laws on identity theft from 2002 to 2007. We find that adoption of data breach disclosure laws have a marginal effect on the incidences of identity thefts and reduce the rate by just under 2%, on average. While this effect is marginal, reducing identity theft is only one means by which these laws can be evaluated: we appreciate that they may have other benefits such as reducing the average victim's losses or improving a firm's security and operational practices.

Writing With Libel in Mind

Public Citizen has released a guide for bloggers and non-profit organizations about writing with libel considerations in mind.  Nothing can more disable a critic of misconduct by companies or political figures than getting embroiled in a libel suit.  Absent a strong anti-SLAPP statute, one who makes trenchant criticisms is never safe from such litigation, but it is important to know how to write — and check — such criticisms in a way that will avoid litigation or, at least, give the best chance of early exit from litigation with finances intact.

The guide discusses the elementary principles of libel law and explains how to prepare for and conduct a pre-publication libel review.  We emphasize the importance of having a third party, who was not otherwise involved in the preparation of a report or blog post that criticizes individuals or organizations, compare all possibly-defamatory statements with the sources for those statements.  A good libel review is best done by a lawyer familiar with libel litigation, but the guide explains why some review is better than none, even for those who cannot afford a libel expert.

Skiba and Tobacman on Whether Payday Loans Cause Bankruptcy

Paige Marta Skiba of Vanderbilt and Jeremy Tobacman of Penn have co-authored Do Payday Loans Cause Bankruptcy?.  Here's the abstract:

An estimated ten million American households borrow on payday loans each year. Despite the prevalence of these loans, little is known about the effects of access to this form of short-term, high-cost credit. We match individual-level administrative records on payday borrowing to public records on personal bankruptcy, and we exploit a regression discontinuity to estimate the causal impact of access to payday loans on bankruptcy filings. Though the size of the typical payday loan is only $300, we find that loan approval for first-time applicants increases the two-year Chapter 13 bankruptcy filing rate by 2.48 percentage points. There appear to be two components driving this large effect. First, consumers are already financially stressed when they begin borrowing on payday loans. Second, approved applicants borrow repeatedly on payday loans and pawn loans, which carry very high interest rates. For the subsample that identifies our estimates, the cumulative interest burden from payday and pawn loans amounts to roughly 11% of the total liquid debt interest burden at the time of bankruptcy filing.