Consumer Law & Policy Blog

David Friedman Explains Bait and Switch Regulation

David Adam Friedman of Willamette has written Explaining 'Bait-and-Switch' Regulation.  Here's the abstract:

'Bait and switch' can describe a range of commercial behaviors common in the everyday marketplace, but virtually ignored in the academic literature. The traditional definition of unlawful bait and switch applies to insincere offers to sell one item in order to induce the buyer to purchase another. Certain sellers have historically employed bait-and-switch tactics, including urban retailers, aluminum siding companies, and supermarkets.

Colloquially, this definition can also cover lawful or other borderline sales tactics, including the use of teaser rates or low introductory pricing, or even 'free offers.' Even common lawful tactics, like the deliberate routing of customers past other retail displays on their way to purchase high-volume or featured items, could be described as involving 'bait' to induce other purchases.

Why are some of these behaviors lawful and others unlawful? In this Article, I examine several different flavors of bait-and-switch tactics, exploring the underlying behaviors behind the tactics and the welfare implications of regulating them. Looking to the literature on commercial custom and norms, I find a pattern showing that bait-and-switch practices that align with custom and norms tend to be lawful, and those that do not, tend to be unlawful. Welfare advancement seemingly plays a distant secondary role in explaining bait-and-switch regulation.

My finding should compel regulators to consider whether the goal of elevating the market atmosphere by banning offensive behavior should trump welfare concerns. Further, my conclusion can also help advocates shape more effective arguments for adjusting trade practice regulation.

Jeff Gelles Explains the CFPB's Case Against Cap One

Here.  Minnesota consumer law professor Prentiss Cox comes in for some praise.

The Hill: GOP mocks agency's 1,000-page plan to simplify loan forms

by Jeff Sovern

Here. Oh my goodness. That's their complaint--that the rule is long.  Is a thousand pages too much for members of Congress to read?  How do they feel about the subprime borrowing that brought the economy down?  Is that worth a thousand pages to avoid?  It's like the scene in Amadeas when the Emperor complains that Mozart's composition contains "too many notes."

The critics complain that compliance officers will have to read it too, though much of the rule is taken up with things that have nothing to do with compliance, like cost-benefit analysis and, ironically, a Paperwork Reduction Analysis, as required by law.

More on the Macey WSJ Op-Ed on the CFPB's Proposed Mortgage Rules

by Jeff Sovern

Brian blogged earlier about Yale professor Jonathan Macey's op-ed in the Wall Street Journal last week on the CFPB's proposed mortgage rules.  I wanted to add my own comments (my take on the new forms can be found in the New York Times).

The Bureau actually proposed two rules at the same time.  One proposal would change the mortgage disclosure forms. The other proposal is largely confined to high-cost mortgage loans.  Part of the Macey op-ed failed to distinguish between these two different proposals.  That could well be a function of the severe space constraints op-eds are subject to; it's very hard to include everything you want to say within those constraints, and nuance often gets lost.  Still, it may confuse people into thinking the high cost rules apply to all mortgages.

For example, the limit on late fees that the op-ed notes (and Brian quoted in his post) appear in the high-cost rule, not the disclosure rule, though I don't see how you could tell that from the op-ed, which does not refer to the high cost loans until two paragraphs later.  Why does that matter? Well first, that means it applies to many fewer borrowers.  Historically, very few mortgage loans have in fact met the thresholds for qualifying as high-cost mortgage loans (or HOEPA loans, as they're known, after the statute that they're reglated under)--less than 1% of the market, and sometimes much less.  HOEPA works on a trigger principle, in that its application is triggered for loans charging more than a certain interest rate or certain points and fees. Lenders don't want to be subject to HOEPA, because it imposes a lot of limits, and so they have largely avoided its application by staying under the triggers. The proposed HOEPA rule does expand the eligibility rules for HOEPA, so conceivably the HOEPA slice of the mortgage market could increase.  Still, the CFPB's HOEPA proposal, at page 12, predicts that HOEPA "will continue to constitute a small percentage of the mortgage lending market."  No doubt lenders will continue trying to avoid triggering HOEPA, but that will become more difficult under the new rule. 

But even so, Macey is concerned about restricting consumer choice, and even if the new rules restrict the choice of very few consumers, they're still restricting it.  Here's my response: HOEPA loans tend to be among the most predatory, and so we're restricting the choice of those who may not be able to make very good borrowing choices.  And yes, that's paternalistic, but it's also to protect the rest of us.  The bad loans that consumers and lenders entered into brought down the economy and millions are still unemployed or unemployed because of them.  Personally, I'm willing to support paternalistic interventions in the name of economic self-defense, especially when very few consumers have their choices restricted; Macey evidently is not.

Macey also says the problem with what he calls "dodgy mortgage practices" "was not the government's then-required disclosure forms, but the chicanery of the lenders who filled them in."  I agree that lenders engaged in chicanery, but sadly, the forms also had serious problems, as I have written about elsewhere. 

Dazzling NY Times Consumer Protection Op-Ed

Here.

J.W. Verret in Forbes: About The Dodd-Frank Act, George Washington Would Be Turning Over In His Grave

by Jeff Sovern

That's a pretty provocative title, right?  Verret turns out to be an assistant professor at George Mason and a Senior Scholar at the Mercatus Center Working Group on Financial Markets.  He has several complaints about the CFPB.  Thus:

The CFPB Director is indeed the czar of czars. He or she may only be removed for neglect or malfeasance in office. That is not true of most other financial regulatory agencies, where the President can replace the Chairman at will by designating another Commissioner as Chairman.

 

That's very cleverly put.  Notice the phrase "other financial regulatory agencies."  Put that broadly, the comparison is to agencies like the SEC, CFTC, etc. The problem is that those agencies are not agencies that regulate consumer financial transactions, and so are really a different animal.  Why didn't Verret confine himself to agencies that regulate consumer financial transactions?  Could it be because those agencies don't have the structure Verret describes?  The agencies that regulate consumer financial transactions tend to have structures like the CFPB's.  For example, the Comptroller of the Currency, the head of the Federal Reserve, and the head of the FDIC all have fixed terms and can't simply be removed at the president's will (I suppose the Federal Trade Commission, whose chairman the president can replace with another commissioner--though the former chairman retains the position of commissioner--might be an exception, except that it has little power over financial institutions). 

Here's Verret's lead: "In his farewell Presidential address, George Washington noted the 'love of power and proneness to abuse it which predominates in the human heart' and he suggested the 'necessity of reciprocal checks of political power...'" He uses that to suggest that the power exercised by the CFPB director would offend Washington.  I wonder why Verret doesn't mention the other financial regulators that exercise similar power, like the OCC?  Could it be because the OCC tends to be a darling of the financial industry, rather than an agency that restrains it?  I certainly don't know enough about Washington to know what his views were about consumer protection agencies, but I wonder how Washington would feel about the power exercised by financial institutions today. They are probably our most powerful lobby and bestow enormous sums on legislators (and who knows how much they are spending on campaigns after Citizens United).  Would Washington have approved of the LIBOR rate-fixing scandal, robo-signing, or the subprime crisis?  Given Washington's desire for checks on power, would he perhaps have liked an agency that would check the power of financial institutions?

Another quote from Verret: "The CFPB Director has authority to determine, for example, that credit card frequent flier miles are “abusive practices” that will be prohibited…and a federal judge would have limited ability to stop him." This is a classic lawyer's technique for arguing: you pick a crazy example that no one would ever want, and then you say that it could happen (remember the imaginary law that says you have to eat broccoli in the context of the Affordable Care Act--so-called Obamacare).  But this time, I'm not sure that it's even true that the crazy example is within the CFPB's power. The CFPB can only outlaw terms that satisfy a statutory test for being abusive. Here's the statutory text:

Abusive- The Bureau shall have no authority under this section to declare an act or practice abusive in connection with the provision of a consumer financial product or service, unless the act or practice—

(1) materially interferes with the ability of a consumer to understand a term or condition of a consumer financial product or service; or

(2) takes unreasonable advantage of--

(A) a lack of understanding on the part of the consumer of the material risks, costs, or conditions of the product or service;

(B) the inability of the consumer to protect the interests of the consumer in selecting or using a consumer financial product or service; or

(C) the reasonable reliance by the consumer on a covered person to act in the interests of the consumer

Personally, I don't see how frequent flyer miles take unreasonable advantage of people in the way described or materially interfere with the ability of a consumer to understand them,  but we already know Verret is more imaginative than I am. 

I'm disappointed.

Commonweal: Holding All the Cards

Here.  A comment on arbitration, among other consumer issues.

Media Reports on CFPB's Proposed Mortgage Rules

The Times article is here.  Some excerpts:

For the most part, both consumer advocacy and industry groups broadly supported the proposed rules.

“We do think that these forms are better, in part, because there is a more prominent disclosure on prepayment penalties,” said Kathleen Day, a spokeswoman for the Center for Responsible Lending, a nonprofit group that works to end abusive financial practices.

However, Diane Thompson, a lawyer with the National Consumer Law Center, said that while she welcomed greater transparency in pricing for homeowners, she thought that the forms should emphasize clearly on the first page what the total cost of the loan would be, including interest, closing costs and principal.

The Mortgage Bankers Association, an industry group, said that lenders understood that faulty disclosures might have led homeowners to shoulder loans that they could not afford.

But David Stevens, the group’s president and chief executive, said that he worried that the 120-day public comment period could limit consumer advocates and mortgage lenders from conducting a thorough review, especially because the proposal was more than 1,000 pages long.

And from the Wall Street Journal:

Banks and other lenders, while supportive of the bureau's overall goals, have some reservations. The changes the consumer bureau envisions are "going to be incredibly, extremely difficult to implement," said David Stevens, chief executive of the Mortgage Bankers Association, citing the length of the proposal. "It is likely to add a whole new set of layers of significant complexity in a very difficult environment for lenders and consumers."

CFPB Proposes New Mortgage Disclosure Rules

The Dodd-Frank Act requires the CFPB to propose new disclosure rules for mortgages that combine the current disclosures mandated by Truth in Lending and RESPA.  The Bureau's proposed new forms appear here.  The proposal amends Regulations X and Z.  The web page also links to the Federal Register notice, a report on the testing the proposal underwent, a proposed new rule for HOEPA loans, and other materials.  Comments on some of the proposed amendments are due September 7, and for others on November 6.

Times Pieces

by Jeff Sovern

Yesterday the Times ran a piece, New Agency Plans to Make Over Mortgage Market, about some things going on at the CFPB as it approaches its first anniversary.  Last Sunday, the Times printed a letter repeating the usual right-wing canard that government regulation, including the Community Reinvestment Act, contributed to the subprime crisis.  My reply in the Times appears here, but Alan White provided a more complete refutation here.