How Do We Know Consumers Don't Read Small Print?

Everybody "knows" consumers don't read fine print.  But the empirical evidence I've found to support this claim is surprisingly sparse.  Here's what I've come across:  From my article, "Towards a New Model of Consumer Protection: The Problem of Inflated Transaction Costs, 47 Wm. & Mary L. Rev. 1635, 1659-60 (2006):

When PC Pitstop, a marketer of anti-spyware services, surveyed 7260 computer users with Gator or GAIN (Gator Advertising Information Network) applications installed on their computers, it found that 74.2% did not recall installing Gator or a GAIN application; 14.9% had not read the license agreement; 8.5% had read the license agreement for no more than five minutes; and fewer than 3% had spent more than five minutes reading the license agreement, a document that PC Pitstop estimated would take the average reader at least twenty minutes to read

Footnote 84 cites  PC Pitstop, Survey Says: Gator Users Didn’t Know, http://www.pcpitstop.com/gator/Survey.asp.

That's better than nothing, but I'm not sure how reliable it is, since it's based on memory, and applies to end user license agreements, rather than fine print in a written contract.

Years ago, I ran across an account of an experiment which I later referred to in a letter published in the New York Times on July 17, 1997 in the following words (but not the formatting, which on my computer looks like blank verse for some reason--the closest I'll ever come to writing poetry): "

    Some years ago a bank mailed its depositors a brochure explaining their
    obligations in electronic transfers. Included in 100 of the brochures
    was a statement that the bank would pay $10 to depositors who sent in
    their name and address on a piece of paper with the word ''regulation.''
    Not one person did.

I can't remember anything about the source of that report except that it appeared in a commercial transactions casebook.  But again, it's not dispositive, because depositors may not have believed the statement or may have felt it wasn't worth it to write in to collect $10 (just as consumers often don't bother to collect rebates). 

Then there's evidence from which one can infer that consumers haven't read fine print when they had the opportunity, like Chris Hoofnagle's and Jennifer King's paper, "What Californians Understand About Privacy Online,"  which indicates that many Californians don't know the contents of privacy policies.  The problem is that that ignorance could be because the survey respondents didn't read the policies, didn't understand them, didn't retain the information, or for some other reason.

Anybody know of any other empirical evidence to show that consumers do or don't read fine print?

A Tale of Two UDRP's

by Paul Alan Levy

I have recently had some involvement with two proceedings under the Uniform Dispute Resolution Policy ("UDRP"),  a procedure for deciding trademark disputes about domain names.  The International Corporation for Assigned Names and Numbers ("ICANN"), which controls the system of assigning domain names, requires all domain name registrars to force domain name registrants to submit themselves to the UDRP as a condition of registering a domain name.  These two proceedings help illustrate the bias of the UDRP against those who register domain names to criticize trademark holders, and the resulting lack of utility of the procedure to resolve cases in which the “griper” is determined to defend himself.

The Fannie Freddie Fable

At last night's debate, Senator McCain trotted out the discredited fiction that Fannie Mae and Freddie Mac were the root cause of the foreclosure crisis, and that they started the practice of making reckless loans to homeowners who couldn't repay them. Senator Obama correctly shifted the emphasis to deregulation, but did not set Senator McCain straight on the facts, seeming hesitant to defend Fannie and Freddie.

The fact is that subprime lending caused the crisis, and subprime loans were, by definition, loans that Fannie and Freddie (the GSEs) would NOT purchase. Let's say that again. A subprime loan was a loan that was not eligible for purchase by the GSEs, also known as a "nonconforming" loan. A mortgage was ineligible for GSE purchase for one of two reasons: either the amount exceeded the GSE ceiling of about $350,000, or the underwriting was too lax to meet GSE standards. Subprime loans were sold to investors through so-called private label securitizations, which means a securitization that was NOT sponsored by Fannie or Freddie. So, for example, Aurora Loan Services, an unregulated nondepository lender, made no-doc loans interest-only loans and sold them to investors through a Lehman Brothers securitization. The subprime lending and securitization machine was pumping out toxic mortgages for years before Freddie, and to a lesser extent Fannie, started purchasing the subprime securities to boost their profits. At worse, the GSEs, along with every bank, insurance company and institutional investor in the world, acted as enablers for the subprime lending boom to continue, and were victims, not catalysts of the crisis.

Aggressive Mortgage Mods Work

By Alan M. White

A distressed homeowner’s chances of being offered a meaningful loan restructuring, as opposed to demands for increased payments to make up past defaults, depends a lot on which mortgage servicing company they happen to be dealing with. As my own research and a recent Credit Suisse report have shown, there is absolutely no consistency in the approach servicers are taking to either the number or the kind of loan modifications they offer. In fact, only two servicers are doing significant numbers of principal reduction mods. This means, among other things, that most servicers could be doing much more.

The Credit Suisse report issued last week, based on extensive data from LoanPerformance, confirms the intuition that an aggressive loan rewrite, involving reductions in principal and making the monthly payment more affordable, is much more likely to result in on-time repayment than the other kind. The other kind of modification involves adding unpaid payments to the principal, reamortizing the loan, and sticking the homeowner with a larger balance and a higher monthly payment. Not surprisingly, these don’t do as well. In fact, after eight months, 80% of the principal reduction modifications are being paid on time, compared with 50% to 60% of the more traditional modifications.

Times Reports on Postal Savings Banks and Countrywide Settlement

Today's Times has an interesting op-ed piece, "Mailing Our Way to Solvency," about the use of postal savings bank, which existed in this country until 1966 and still exist in some other countries.  The author suggests that postal savings banks could help address four problems: "the almost 10 percent of Americans without a bank account; the concerns of all Americans about the security of their savings; the growing indebtedness of the country to foreign governments and financial institutions; and underinvestment in public assets like sewer systems and bridges."

In other consumer news in today's issue, the Times reports "Countrywide to Set Aside $8.4 Billion in Loan Aid."  The money will be used to modify home loans and is part of a settlement agreement with eleven states that have sued Countrywide.  The aid will affect about 400,000 borrowers and Countrywide will also waive some fees and provide additional funds "to help people in foreclosure and relocating." 

An Off-Topic Comment

While I generally confine my remarks on this Blog to consumer law issues, every once in a while I write about something which is at best tangentially related to consumer law.  This is one of those comments.  If that bothers you, don't read it.

We all encounter areas of life from time to time where we have a history of exercising poor judgment.  My own approach to such issues (which I freely admit I don't always follow), is not to rely on my judgment in such circumstances. 

What brings this to mind is the presidential election.  The last time a president had an approval rating as low as President Bush's was in 1952.  People argue about whether he is the worst president of all time.  Republicans running for office this year do not exactly seem eager to be associated with him.  It appears that many of the people who voted for President Bush now regret having done so.  If that's so, perhaps they should recognize that they don't do a very good job of selecting presidents and sit this election out.

Of course, everyone has a right to vote, and people can learn from past errors.  But the country might be better off if those who have cast the wrong vote in recent years recognized that fact and deferred to the judgment of others. 

Indeed, both presidential campaigns seem to agree with the idea that past misjudgments are disqualifying.  Thus, Senator McCain's campaign argues that Senator Obama is not qualified to serve as president because he opposed the surge in Iraq.  Senator Obama's campaign claims that Senator McCain's support for the Iraq war means that he is not qualified.

And now, back to consumer law and policy. 

Debt Collector Uses Consumer's Debit Card Information for Spending Spree

The Buffalo News reports here about a debt collector who persuaded a consumer to provide him with her debit card information and then ran up nearly $2,000 of charges on her account.  He later asked the debt collection agency for his pay check!  With issues involving identity theft, debt collection, fraud, payments, and possibly credit reporting, the story would make a good exam question (hat tip to Gina Calabrese).

Times Reports on Causes of Mortgage Crisis, FDA Problems, and More

Robert Frank has a terrific column in today's Times, "Pursuit of an Edge, In Steroids or Stocks," explaining why fund managers were willing to invest in subprime mortgage-backed securities.  The entire piece is worth reading, but here are some excerpts:

If one fund posts higher earnings than others, money immediately flows into it. And because managers’ pay depends primarily on how much money a fund oversees, managers want to post relatively high returns at every moment.

One way to bolster a fund’s return is to invest in slightly riskier assets. (Such investments generally pay higher returns because risk-averse investors would otherwise be unwilling to hold them.) Before the current crisis, once some fund managers started offering higher-paying mortgage-backed securities, others felt growing pressure to follow suit, lest their customers desert them.

* * *

* * * Many money managers knew that these securities were risky. As long as housing prices kept rising, however, they also knew that portfolios with high concentrations of the riskier assets would post higher returns, enabling them to attract additional investors. More important, they assumed that if things went wrong, there would be safety in numbers.

The bailout suggests that last assumption is correct, because if the crisis were not pervasive, we probably would not have had a bailout.

And here is an editorial in today's paper, with the alarming title, "A Tale of Taint." about how the FDA hired a public relations firm (isn't that a wonderful use of taxpayer dollars at an underfunded agency?). The FDA was able to dispense with competitive bidding because it hired a minority contractor.  But the contractor then turned around and subcontracted the work to a "preferred Washington firm." 

The Times reported on Wednesday that "Many Foods Will Soon Be Labeled by Country of Origin."  Or at least meats, produce, and some nuts will be. 

On Sunday September 21, economist Robert J. Shiller had a column, "The Mortgages of the Future."  He argues for the creation of "continuous-workout mortgage" under which payments could be restructured routinely to respond to the changing ability of the borrower to make payments.

A Bit More on Blaiming the CRA

A couple of weeks ago Alan had a thoughtful post here about  the ridiculous claims that the subprime crisis was caused by the Community Reinvestment Act.  I've been meaning to pile on.  One of the arguments critics of the CRA made before the meltdown occurred was that the CRA was unnecessary because lenders are eager to lend to CRA-eligible borrowers.  See Jeffery W. Gunther, Kelly Klemme and Kenneth J. Robinson, Redlining or Red Herring, Southwest Econ., May/June 1999.  So the CRA is unnecessary because lenders would want to lend to subprime borrowers even in its absence, but the CRA caused the crisis because without it, lenders wouldn't have made the loans that got into trouble! 

Consumer Interests Annual Available

The Proceedings of the 54th Annual Conference of the American Council on Consumer Interests, also known as the Consumer Interests Annual, is now available here.  Most of the contributors are consumer academics, though not of the law school variety; the variety of topics covered makes it worth a look.  Earlier editions can be found here.