Confusion in Shopping for Student Loans

The Times had a pair of articles this weekend about how difficult it can be to compare the terms of student loans.  One of the articles, "At Debt's Door," listed loan offers to some students.  For example, one student received the following offers:  '13.25 percent from MyRichUncle ($5,900 only), plus $513 origination fee; 12.25 percent from Sallie Mae, plus 4 percent fee at disbursement and 3 percent at repayment; 7.25 percent from Citibank; 10.46 percent from Education Finance Partners, plus $200 fee."  So much for ease of comparison among quotes, one of the goals of TILA. The other article, "Lessons From the Loan Scandal," spoke more generally about the problem.  As I understand it, TILA applies to private student loans and a similar set of rules applies to government-issued and -sponsored loans.  Sounds like Congress should revisit how well TILA is accomplishing its goals.

Ronald Mann and Jim Hawkins on Payday Lending

In the article, Just Until Payday, 54 UCLA L. Rev. 855, 886, 905, 907 (2007) , Ronald J. Mann & Jim Hawkins offer a particularly interesting take on bans on payday lending.  They also suggest a different form of regulation.  Here's a quote:

* * * The core problem [with a ban] is that bans are unlikely to keep consumers from borrowing.  Rather, the evidence suggests that bans may well cause consumers to borrow from sources that provide products that are less beneficial—products that consumers are more likely to avoid in markets that tolerate payday lending.

* * *

The best solution, from our perspective, is to adopt a simple disclosure scheme, with which reputable lenders readily can comply.  We would require lenders to display in a prominent way the fee per $100 borrowed.  This disclosure requirement solves the problems identified [earlier in the paper]:  It (1) tracks with the survey data that customers use their actual cost to make decisions and not an interest percentage; (2) eliminates the confusion caused by different interest rates for different time periods; (3) ensures borrowers obtain the information up front at little cost; and (4) encourages compliance by allowing lenders to avoid stating misleadingly high APRs.

* * *

[The article also suggests that the industry would be improved if it were dominated by a few large institutions] The most obvious benefit of participation by large institutions is that they have much more to lose from noncompliance [with regulations].  It also is much easier to monitor a small number of large chains than to monitor thousands of separately operated providers.  In addition, large institutions that fail to develop policies that ensure compliance with regulations can be force to pay extremely large fines, in an amount adequate to deter misconduct.

Response to FTC Report on Relationship Between Credit Scores and Insurance Claims

We blogged yesterday on the FTC's report that found that (relatively low) consumer credit scores are predictors of auto insurance claims.  PIRG's consumer blog claims here, however, that the FTC study is flawed.  The PIRG post provides links to a major June 2007 National Consumer Law Center report on the topic and information on a congressional hearing to held tomorrow (Friday July 27).  The hearing is entitled "Credit-Based Insurance Scores: Are They Fair?"

Ninth Circuit Says Company Can't Change Contract Terms Without Notice

It may seem obvious to any first-year law student that one party to a contract can't change the terms of that contract without notifying the other. But the Ninth Circuit in Douglas v. US District Court ex rel Talk America, No. 06-75424 (9th Cir. July 18, 2007), had to remind the district court of this basic principle. In Douglas, Talk America had posted revised contract terms on its website, which included a mandatory arbitration clause for its customers. When Douglas, a Talk America customer, filed a class action lawsuit against the company, the company moved to compel arbitration based on the revised contract, and the district court granted the motion. Douglas petitioned the Ninth Circuit for mandamus. In granting the petition, the Ninth Circuit held that "[p]arties to a contract have no obligation to check the terms on a periodic basis to learn whether they have been changed by the other side." The district court's decision, according to the Ninth Circuit, "reflect[ed] fundamental misapplications of contract law."

An unfortunately large number of companies try to get around this principle of contract law by requiring their customers to agree in advance that they will periodically review their contracts on the company's website for possible changes. One example is the service agreement that Network Solutions requires customers to agree to before signing up for its domain-registration and web-hosting services. When pasted into Microsoft Word, the agreement is 102 pages of single-spaced legalese. On page 8 is this provision:

David Adam Friedman Article on Reinventing Consumer Protection

Here's the abstract:

Consumer fraud presents a continual puzzle. We have significant enforcement and education mechanisms, yet we continue to endure ever-evolving consumer fraud. I contend that the incidence of consumer fraud can be reduced through creative, efficient, non-traditional instruments of deterrence.

This article proposes a plan for re-approaching consumer protection through selection of a protected group and a concentrated reallocation of resources. Specifically, I argue that enhancing sanctions for a vulnerable, reluctant-to-report consumer group will shift fraud perpetrators toward targets that are better able to defend themselves. Additionally, fraud perpetrators will have to operate with extra caution in their schemes to ensure that they will not inadvertently ensnare a member of the protected class. This measure would accomplish further protection of the selected group and moderately increase deterrence throughout the rest of the economy.

However, I argue that this measure should be supplemented with another initiative. If we create a group consisting of randomly selected consumers and provide the members of that group with significant extra protection through higher sanctions and concentrated consumer education, fraud incidence will drop even more significantly. The concealed nature of the randomly protected consumer creates a general aura of deterrence. In this environment, fraud perpetrators never know whether a potential victim carries specially protected status - this elevates the risk of detection and the expected sanction for all consumers.

Group protection enables enforcement to achieve deterrence without having to provide incremental, expensive protection to the entire population. Understanding how the perpetrators and consumers make decisions about engaging in transactions is the key to unlocking efficient methods, like those described, for achieving the objective of efficiently reducing incidence of consumer fraud.

The article is scheduled to appear in the Fall 2007 of the DePaul Law Review. Professor Friedman is on the faculty at Willamette University College of Law.  You can download the article at http://ssrn.com/abstract=984082.

FTC Releases Report on Effects of Credit-Based Insurance Scores

The FTC put out a news release yesterday on credit scores and auto insurance:

The Federal Trade Commission today released a report presenting the results of a study concerning credit-based insurance scores and automobile insurance. The study found that these scores are effective predictors of the claims that consumers will file.

Visit the FTC's website to read the remainder of the release.

Consumers Win 1.6% of Arbitrations

The Christian Science Monitor analyzed a year of data from the top ten biggest arbitrators and found that they decided in favor of the consumer only 1.6% of the time. Smaller arbitrators decided for the consumer 38% of the time.

[via Consumerist]

Children and Identity Theft

Saturday's Times had an article "Never Too Young to Have Your Identity Stolen," about the theft of children's identities.  Because children rarely apply for loans, it can take years for the theft of the identity to be discovered--which also means that we don't know the full extent of this problem. 

New York's Attorney Advertising Rules Held Unconstitutional

The Northern District of New York ruled today that New York's amended rules against attorney advertising are unconstitutional and permanently enjoined enforcement of most of the challenged provisions. The court agreed with Public Citizen's argument that the state had not shown that the rules were necessary to help consumers and were not narrowly tailored to the state's asserted purpose. In fact, the rules restricted truthful advertising that would benefit consumers.

Meanwhile, more state bars are moving toward enhanced restrictions on advertising that are patently unconstitutional. Louisiana and Indiana are both considering new rules that in many ways resemble the rules held unconstitutional in New York. Florida is also considering expanding its already draconian rules to cover websites. And the New Jersey Supreme Court is considering whether the state may constitutionally prohibit attorneys from calling themselves "Super Lawyers." In all these cases, the Federal Trade Commission has opposed the restrictions on speech in the interest of consumers. In the New Jersey case  the FTC filed an excellent amicus brief that I think clearly explains how unnecessary advertising restrictions accomplish little other than squelching competition and leading to higher prices.

Consumer lists are not so innocent if you can't opt out

Last Friday, the Christian Science Monitor published the following op-ed piece I wrote:

Protection of personal information has drawn increasing attention because of problems such as identity theft, the Hewlett-Packard pretexting scandal, and data losses by major corporations and government agencies. Congress and the states have responded by enacting numerous statutes to protect consumers. But one type of information that has received less attention is the sale of consumer lists.

While most consumers probably understand that mailing and similar lists exist, many may be surprised by the type of information available. Want a list of Jewish donors broken down by age and the presence of children? Check the Web. One broker offers lists of the members of more than 40 ethnic groups. Or maybe you would like one of the dozens of lists of users of particular medications. Lists can be broken down by income, geography, marital status, age, and gender.

The sale of such lists raises several issues. One issue is simply privacy. To be sure, some list creators offer consumers an opportunity to opt out of the sale of information about them. But federal law imposes no obligation to offer an opt-out, and even compilers who offer an opt-out may not explain that the failure to opt out may land consumers on a list organized by ethnicity or other private information. Of course, list sellers have little incentive to tell consumers things that may cause them to opt out because lengthier lists are more valuable.

The availability of lists also permits marketers to engage in discrimination. Federal law bars discriminating on the basis of national origin, for example, in lending, but it does not prevent a seller of products from sending mailings only to members of a favored group. Sellers can also fine-tune their solicitations and make different offers to different groups.

Finally, while it seems unlikely that a person wishing to commit hate crimes would purchase a list of members of a particular ethnic group to commit improper acts, the fact that such lists are available is nevertheless cause for concern.

Rather than enacting comprehensive privacy regulation, the US has proceeded ad hoc, passing legislation in response to particular privacy invasions. For example, Congress answered last year's Hewlett-Packard pretexting scandal by enacting a pretexting statute. As a result, privacy laws are a jumble of irreconcilable rules.

If you buy a Harry Potter book and video, federal law bars the seller from disclosing that you bought the video, but nothing prevents the seller from selling information about your book purchases. That is because Congress was outraged in 1987 when a newspaper published the video rentals of then-Supreme Court nominee Robert Bork. But no one published a list of his book purchases.

Congress has also regulated the sale of consumer financial data, credit reports, and health information, in part because they involve particularly sensitive matters. But the types of information on consumer lists may be just as sensitive. Congress should protect consumer privacy by establishing rules to govern the collection and sale of consumer information. At a minimum, it should require list compilers to disclose to consumers the types of lists they could appear on and allow them to opt out. This way the rights of those who wish to protect their privacy are respected.