Consumer Law & Policy Blog

Times Articles on Mortgage Crisis and Preemption of Drug Product Liability Suits

Consumer law issues have frequently appeared on the front pages of the Times in recent weeks, and today's edition has two such articles.  In "Drug Makers Near Old Goal: A New Legal Shield," the Times reports on the Supreme Court case to be argued next term in which drug manufacturers argue that once the FDA has approved a drug, state product liability claims involving the drug are preempted.  Some excerpts:

For years, Johnson & Johnson obscured evidence that its popular Ortho Evra birth control patch delivered much more estrogen than standard birth control pills, potentially increasing the risk of blood clots and strokes, according to internal company documents.

But because the Food and Drug Administration approved the patch, the company is arguing in court that it cannot be sued by women who claim that they were injured by the product — even though its old label inaccurately described the amount of estrogen it released.

* * *

Documents and e-mail messages from Johnson & Johnson, made public as part of the lawsuits against the company, show that even before the drug agency approved the product in 2001, the company’s own researchers found that the patch delivered far more estrogen each day than low-dose pills. When it reported the results publicly, the company reduced the numbers by 40 percent.

The F.D.A. did not warn the public of the potential risks until November 2005 — six years after the company’s own study showed the high estrogen releases. * * *

A series of independent assessments have concluded that the agency is poorly organized, scientifically deficient and short of money. In February, its commissioner, Andrew C. von Eschenbach, acknowledged that the agency faces a crisis and may not be “adequate to regulate the food and drugs of the 21st century.”

The entire article is worth reading, though it may make you swear off prescription drugs. 

The other front-page article today, "The Tricky Task of Offering Aid to Homeowners," discusses the congressional goal of helping homeowners facing foreclosure without bailing out speculators or irresponsible lenders, all while minimizing the impact on the treasury.  The piece explains the Democratic plan, as well as other proposals.  A sidebar tracks through an example of how the Democratic proposal would work.

Some of the most interesting reporting on the mortgage crisis appears in the Business section.  Gretchen Morgenson has a column, "A Road Not Taken by Lenders" about how lenders failed to verify borrowers' incomes with the IRS, even though at least 90% of the borrowers gave lenders permission to do so.  The IRS charges $20 per form and takes a day or less to supply the information, but lenders said doing so was too costly or time-consuming.  An excerpt:

Can investors stuck with losses on these loans sue to recover their investments based on this due-diligence failure? After all, mortgage originators made representations and warranties to investors that the quality of these loans was good when it clearly was not. And they made these representations knowing that they had not bothered to conduct quick and easy borrower-income checks.

“Investors hoping to put back the loans for deficient underwriting under reps and warranties would end up going back to the originators,” said Josh Rosner, an analyst at Graham Fisher & Company and an authority on mortgage-backed securities. “Given that many of these lenders are out of business, ultimately this could come back to the bank or investment bank.”

“The general view is this should not be talked about out loud,” Mr. Rosner added.

Wall Street will certainly battle forcefully against such lawsuits, if investors bring them. But its role as one of the great enablers in this mortgage debacle is something that even Wall Street can’t deny.

And here is a graphic that shows for various regions the percentage of mortgages that are subprime and the percentage of subprime mortgages that are in foreclosure.

It's Time for Another National Commission on Consumer Finance

Back in 1968, Congress created a bipartisan National Commission on Consumer Finance.  See Pub. L. No. 90-321. The Commission reported and went out of business.  It's probably fair to say that the Consumer Credit Protection Act would be a very different statute had the Commission not existed, though of course it's impossible to know. 

We need such a commission now.  The truth is there's a lot we don't understand about the subprime meltdown specifically and the consumer credit system generally.  We need to know more about what caused borrowers to take out these loans, and what caused lenders to make them.  We need to know more about whether disclosures can prevent this type of crisis, and if so, what kind of disclosures, and if not, what alternatives we have.  Plenty of solutions to the problem have been suggested, and we might solve the problem by happenstance, but then again, we might not.  A long careful look at the problem would be more likely to prevent recurrences than a rush to action in the heat of the moment.

It's clear that the marketplace, existing laws, and existing regulatory structures were not up to preventing the crisis.  In that light, it seems unwise to depend solely on the marketplace or existing regulatory structure to prevent the crisis from happening again. 

Of course appointing a commission is sometimes a substitute for taking action.  I'm not suggesting a commission should be used to create the illusion of action: the members of the commission should be chosen to represent all the various constituencies and should be committed to working hard on the business of the commission.  The commission should also have subpoena power and enough financing to conduct a serious investigation.  We need a body that can cut across jurisdictional lines while giving us an overview of what happened and what to do.

Such a commission should not confine its acts to investigating the subprime crisis.  It should also take a long look at other ills affecting the consumer credit system.  Can more be done about identity theft?  What about predatory credit cards?  Is our structure for regulating consumer credit transactions the best we can do?  I'm sure readers of this blog can come up with plenty of other things for the commission to explore.

We face probably the worst consumer credit crisis in decades. It's been forty years since we stepped back to see how we could do better.  Now it's time to do it again.

Huge Upswing in Credit Card Borrowing

by Christopher Peterson

New fed numbers are out showing Americans sucked down 6.9 billion dollars in new credit card debt, increasing outstanding consumer credit to $2.52 trillion during the month of January. This increase was double the $3.7 billion increase in the previous month of December--despite holiday sales.

This seems like a very ominous development to me. One suspects that this increase in borrowing is causally related to credit tightening in mortgage and home equity lending, and also that consumers facing foreclosure are turning to credit cards to stave off financial collapes. Distressed debtors that are shifting their living expenses into credit card borrowing are going to face high default interest rates and could be setting themselves up for a harder fall.

I hope the credit card lenders have their models figured out. As financial refugees from the mortgage market flee into the waiting arms of credit card lenders, it seems like there is the potential for subprime securitization problems to echo into credit card receivables. January's increase in credit card borrowing makes me wonder if the normally sophisticated credit card lenders' underwriting may finally come up short. Just a tip to all those Norwegian villagers, hedge fund managers, and investment bankers hoping to not look like Bear Sterns: Post-bubble vintage credit card recievable backed securities are a sucker bet.

Check out Patrick Deneen's interesting blog post for more thoughts.

We Need a Single Agency to Regulate Consumer Credit Transactions

by Jeff Sovern

Today's edition of the Pittsburgh Post-Gazette has an essay I wrote which they gave the headline "The Private Sector: U.S. Needs Agency to Watch Consumer Credit."  It appears below.  In the version below, I reinserted, in brackets, a sentence that the paper deleted (which may be more meaningful to readers of this Blog than the general public anyway).

As proposals proliferate to address the subprime mortgage crisis, and as the crisis itself spreads beyond subprime loans, it may help to step back and ask a fundamental question: What government agency is responsible for regulating consumer credit transactions?

The answer, unfortunately, is almost as complicated as the mortgage crisis itself -- and that in turn has contributed to the problem.

At the head of the list is the Federal Reserve Board, which has the power to bar some predatory lending practices and also fashions rules governing what lenders have to tell borrowers about loan terms. The theory is that these disclosures will enable consumers to avoid unwise borrowing (worked well, didn't they?).

These disclosure rules are enforced by the Office of the Comptroller of the Currency (OCC), the Fed itself, the Federal Deposit Insurance Corp. (FDIC), the Office of Thrift Supervision (OTS), the National Credit Union Administration Board (NCUA) and the Federal Trade Commission (FTC), among others. The OCC also claims the power to prohibit some lenders from engaging in predatory lending. The FDIC originated the Bush administration plan to freeze so-called "teaser rates," while the Treasury Department shepherded the plan through.

Confused yet? It gets worse. When states attempted to prohibit predatory lending, the OCC, OTS and NCUA all ruled that the state laws did not apply to federal lenders. Federal courts have upheld this position, while state lenders, which preferred to be free of the state laws, surrendered their state charters and became federal lenders, immunizing them from state law. [Georgia, not to be outdone, provided that its own state predatory lending statute was preempted as to Georgia lenders as well.]

Supercapitalism

by Jeff Sovern

I recently finished Robert B. Reich's fascinating book Supercapitalism.  Reich, who served in the Clinton cabinet, pulls together a number of themes into a coherent, and depressing, whole.  He argues that the marketplace is far more competitive than it once was, as a result of which corporations constantly try to offer the best product they can at the lowest possible price--to attract consumers--and to pay the highest possible return on investments--to attract investors.  So far, so good.  But the need to compete forces corporations to ignore all other values other than making profits, so that they can't, for example, as they once did, attend to the needs of other stakeholders, such as employees, the communities (or countries) in which they are located, or goals of consumers other than those that will cause consumers to buy their products.  The result is outsourcing, loss of jobs, and numerous other ills.  Reich argues that to the extent corporations do focus on other goals, they will increase their costs--thus driving consumers to other products--and reduce their profits--thus causing investors to put their money elsewhere.  That happens in part because other corporations which attend only to the bottom line will step in to steal the sales of corporations with more generous hearts, but higher costs.  Reich points out that as consumers and investors, people benefit from this, but as employees and citizens, they suffer.

Reich's view is that corporations are entitled to do all this as long as they follow the rules, and that government should act as a check on inappropriate behavior.  Corporations, he believes, cannot and should not be expected to assume government's responsibilty to pursue public goals.  Their job is to make money for shareholders.  But, he goes on to say, businesses affect the rules under which they operate by making campaign contributions, lobbying, etc.  Legislators competing for contributions can't afford to alienate these contributors, and so write the rules in ways that aid business.  To create the illusion that they are cracking down on improper corporate behavior, legislators hold hearings and scold corporate malefactors--but don't enact, or even introduce, legislation that would change the rules in such a way as to cause businesses to behave differently. 

Reich gives numerous examples of this behavior and traces its historical development.  He also offers policy prescriptions for dealing with it.  It's a terrific book, and one that sheds considerable light on many of the problems with the marketplace and society today.  And at the end of the day, it raises an important question: do voters want changes that will cause consumers to pay more and investors to accept less in pursuit of other goals or would we rather have things as they are?

New HUD Mortgage Disclosure Rule Out

HUD published its long-awaited RESPA mortgage disclosure rule in today's Federal Register. The proposed rule includes new model forms to be provided to consumers buying or refinancing a home. This proposal, in the works for years, aims to provide mortgage shoppers with more accurate and understandable disclosures about the terms of the mortgage for which they are applying. It overlaps, to a considerable degree, the Federal Reserve's proposal to amend TILA disclosure rules for mortgages. Hopefully, HUD and the Fed can coordinate their efforts and come closer to the ideal of an early, free, binding, clear and comprehensive price offer for mortgages.

Times Articles on Subprime Crisis, Debt Collection, the CPSC Bills, Reverse Mortgages, and Online Privacy

I've accumulated a huge backlog of recent Times articles on consumer law issues, so here goes an attempt to reduce the backlog.

Many of the articles involve the mortgage crisis and plans to do something about it.  For example, the lead article in today's Times is headlined "White House Offers Plan to Ward Off Credit Crisis."  Here's an excerpt:

The plan, which relies primarily on state regulators and private industry to tighten their oversight of financial markets, calls on states to issue nationwide licensing standards for mortgage brokers.

The plan would also require lenders to make more complete disclosures about payment terms to home buyers. And it would curtail possible conflicts of interest at companies that assign levels of risk to packages of mortgages that are sold to investors.

* * *

But in many ways, the plan relies on the same market participants — from mortgage brokers to credit-rating agencies and Wall Street firms — that government officials and other experts blame for the current crisis.

Senate Passes Consumer Product Safety Bill

This Washington Post article reports that S. 2663, The CPSC Reform Act, was passed by the U.S. Senate  by an overwhelming 79 to 13 margin. The beginning of the Post article provides a synopsis:

The Senate yesterday approved the most far-reaching changes to the nation's product safety system in a generation, responding to recalls of millions of lead-laced toys that rattled consumers last year.

Lawmakers still have to resolve key differences between the Senate bill and a similar measure that passed the House in December. While the Senate version is considered by consumer advocates to be tougher, both contain provisions that would require retailers and manufacturers to be more vigilant about product safety.

Our most recent post on the legislation -- here -- contains links to lots of relevant information.

Consumer Product Safety Commission Legislation Moves Toward Senate Vote

Over at U.S. PIRG's consumer blog, there's a running description of the progress of a consumer product safety bill pending before the Senate. That bill -- S. 2663, the CPSC Reform Act -- would, among many other things, provide more funding for the Consumer Product Safety Commission and create a public database of product safety complaints, both things that the House bill does not do. PIRG explains that last night the Senate defeated, by a vote of 57 to 39, an amendment that would have substituted the House bill. To get all the information on the legislation, including the differences between the House and Senate bills, see PIRG's posts here, here, and here. The Senate will continue to debate the bill and various amendments today, and a vote on the Senate bill is expected tonight or Thursday.

Last Friday, in an item cross-posted from the Watchdog Blog, David Arkush and Graham Steele provided a detailed description of industry efforts to weaken the Senate bill.

Times Reports on Federal Bailout for Mortgage Crisis, the Riegel v. Medtronic Medical Device Case, and CPSC

The lead story in today's Times reports that "the Bush administration and Congress are considering costly new proposals for the government to rescue hundreds of thousands of homeowners whose mortgages are higher than the value of their houses."  According to the article, "nearly 8.8 million homeowners, or 10.3 percent of the total, are underwater."  Among the ideas being considered are "a federal mortgage guarantee for troubled borrowers . . . [and us[ing] government funds to purchase and refinance billions of dollars in mortgages now in danger of default."`  Meanwhile, on Monday the Times ran a story, "No Lull in Mortgage Pitches," about just that.  The article mentions advertising by Countrywide and the Bank of America, which is in the process of acquiring Countrywide, while today's piece notes that the Bank of America has proposed that a federal agency buy delinquent mortgages at a "deep discount."  Bank of America knows how to make a strong argument.

The Times has devoted a lot of space to the Supreme Court's Riegel v. Medtronic decision on medical devices and preemption.  An editorial in today's paper, "No Recourse for the Injured," criticizes the decision.  Here is an article about the effect of the decision on pending law suits.  Yesterday's issue had a news analysis, "Justices Add Legal Complications to Debate on F.D.A.'s Competence."  An excerpt:

The Institute of Medicine, the Government Accountability Office and the F.D.A.’s own science board have all issued reports concluding that poor management and scientific inadequacies have made the agency incapable of protecting the country against unsafe drugs, medical devices and food.

A result, said David Vladeck, a professor at Georgetown University Law Center, is that the public is facing the worst of both worlds: a government health agency that cannot protect them and rules that block them from winning compensation when injured.

Wednesday's paper included "Sears Case Cited by Critics of Safety Panel," which reported on criticism of the CPSC by Public Citizen.