Consumer Law & Policy Blog

Sen. Tim Johnson (D-Citibank) Wants to Roll Back Landmark Law on Predatory Lending to Military Servicemembers

by Ira Rheingold

While many in the consumer advocacy community are excited about the recent change to leadership in Congress, we need to recognize that oftentimes there is not a dime’s (make that a corporate millions) bit of difference between Democrats and Republicans when it comes to the issues we care about.  Just check out these quotes, about the great legislation on predatory lending to the military (the Talent-Nelson amendment) that was passed just this October, from a leading Democrat on the Senate Banking Committee in Wednesday’s American Banker:

Sen. Tim Johnson said in an interview that a top priority is the military lending measure, which caps at 36% the annual percentage rate, including fees, that can be charged to service members and their dependents. The South Dakota Democrat warned that the provision--intended to curb payday lending--may interfere with the credit system.

The measure "may have a lot of unintended consequences that will go far beyond just the payday industry," he said. "We are going to have to revisit that issue and make sure that the end result of this legislation isn't to deny military members and their families access to banking services that they've always assumed would be there."

Not So Cute Anymore

by Christopher Peterson

Gary Coleman endeared himself to Americans as a child actor staring in the 80's sitcom "Different Strokes". His cherubic face and affably excitable character reliably delivered punch lines, including especially his signature catchphrase "Whatchoo talkin' 'bout, Willis?"  When his television show ended, Coleman found that his parents and manager had mismanaged his multi-million dollar trust fund, eventually leaving him penniless.

I always felt sympathy for the actor, who suffers from a congenital kidney disease, as he tried to break out of his childhood typecasting and find a satisfying path in life. Still, it raised my eyebrows when I learned that Mr. Coleman had accepted a job as a spokesperson for Cash Call, Inc., a California based finance company that makes high-interest, unsecured loans to consumers in California, Idaho, Nevada, New Mexico, and Utah. In most other states Cash Call also acts as a solicitation agent for First Bank & Trust, Milbank, South Dakota.

This three-way relationship brought a couple of thoughts to mind:

First, lenders have a tendency to focus on economics when they talk about public policy. Discussions of usury law, disclosure law, and bankruptcy seem to inexorably turn to concepts like opportunity costs, Pareto optimal outcomes, and regulatory distortion. The intellectual contributions of behavioral economists are generally scorned or minimized. But lenders do seem to rely on psychology when they talk to their customers. Mr. Coleman is valuable to Cash Call and First Bank & Trust because of his notoriety. It is not as though loans from by a firm endorsed by Gary Coleman are better or cheaper loans. Rather they employ him because he is salient in the minds of millions of people who watched him on television back in the good-ole’ days. Mr. Coleman reminds us that things don’t always work out, and that even former TV super-stars do not need to feel bad about borrowing money from a shady company like Cash Call now and then. (Go to ripoffreport.com and search under "Cash Call" for a long list of upset customers, including this one or this one.) Mr. Coleman is an ideal spokesman for a company that wishes its customers to lower their guard. After all, who wouldn’t trust cuddly, little "Arnold" from TV?

A second point. In an essay forthcoming in the American Law Review, I question the wisdom of granting federal preemption to agents of chartered depository institutions. According to the Office of the Comptroller of the Currency and the Office of Thrift Supervision, independent agents of national banks and thrifts should be regarded as beyond the regulatory and legislative oversight of state governments. The FDIC is considering an attempt to grant similar powers to state banks, such as First Bank & Trust, Milbank, South Dakota. Federal regulators have explained that state governments should not be allowed to regulate national banks and thrifts simply because the financial institutions chose to deliver services through an agent. But as Cash Call’s relationship with First Bank & Trust demonstrates, non-depository agents will always tend to have less incentive to forego predatory behavior than a depository institution with closer oversight, greater capital requirements, and relatively greater investment in reputational capital. If First Bank & Trust wants to use Gary Coleman to peddle their high-interest loans, shouldn’t they be required to hire him directly, rather than hiding behind an agent?

In the end perhaps Mr. Coleman still deserves our empathy. I suspect he is being used yet again.

Metro Ride to Capitol Hill: $1.35. Full-Page Ad in the Times: $250,000. Mass-Market Documentary on Credit Card Industry Abuses: Priceless.

by Deepak Gupta

One of the highlights of the Miami conference was an advance screening of Maxed Out, a new documentary on the credit card, credit reporting, and debt collection industries that hits theaters across the country next year.  The movie artfully combines heartbreaking stories of real consumers; segments with industry lobbyists, journalists, academics, and consumer advocates; shockingly honest interviews with a pair of frat boys who started a collection agency and a pawn shop owner who is himself in debt; Congressional testimony; politicians' speeches; and stock footage--all to create a fast-paced narrative that's equal parts humor and outrage, sometimes at the same time.  Members of the consumer law community such as Professor Elizabeth Warren, Bud Hibbs, David Szwack, and Ed Mierzwinski make appearances, as do President Bush, a Comptroller of the Currency official, and the stand-up comedian Louis C.K. (the creator of the hit HBO sitcom Luckie Louie).   

The film is made in the same vein as the fast food documentary Super Size Me--an entertaining and engaging documentary that sheds light on an important public policy problem.  In fact, in a panel discussion following the movie, director James Sculock revealed that he was planning to make a film about obesity in America until he found himself waiting in vain to see Super Size Me at the Sundance Film Festival; he realized immediately that it would be a big hit, and decided to switch gears.  He next planned to make a mostly comedic film about debt in America until his research revealed the gravity of the problem and the nefariousness of the industry's practices and convinced him to shift gears once again.  The result is a sober and responsible documentary that has the potential to shape the law for the better.   Given the change in Congress and the political mood of the nation, it couldn't come at a better time.

A single documentary film can't cover everything that's wrong with the financial services industry in America, of course, and decisions had to be made about what to include and what to leave out.  I could have done without the film's shallow and unexplained analogy between the growing national debt and the crisis of personal debt and might have at least mentioned student loans--but these are relatively minor criticisms.  Maxed Out manages to cover plenty, including the tactics of unscrupulous debt collectors, described in their own damning words; the complete indifference of credit reporting agencies to the overwhelming amount of false data in their reports; and the aggresive hawking of credit cards on university campuses, with kickbacks to university administrators.

The topic of campus credit card solicitation had perhaps the most emotional impact of anything in the film.  The movie profiles two mothers whose children committed suicide because they were so deep into credit card debt that they thought they had no way out--an alarmingly common occurrence.  One of the mothers featured in the film participated in the panel discussion in Miami, lending a very personal perspective on the issue.  (For more on this important topic, including stories of suicides and the complicity of college officials, see Creola Johnson's law review article, Maxed Out College Students: A Call to Limit Credit Card Solicitations on College Campuses, 8 N.Y.U Journal of Law and Public Policy 191 (2005).)

Suffice it to say, every consumer law professor should be screening this film in their classes and every legislator in America should see it.   The new coalition campaign on predatory lending issues, Americans for Fairness in Lending, plans to help roll out the film with selected screenings around the country, including a special Washington, DC, screening for members of Congress.  You may also want to visit AFFIL's website to see a sampling of their brilliant new advertisements on predatory lending issues. 

To read reviews, watch clips, learn more about the film and its director, and find out about screenings in your area, you can visit the film's website, maxedoutmovie.com.   The website even includes a blog by the film's director.    And there's also a fan website, www.maxedoutbuzz.com. We'll be sure bring you more news about Maxed Out as it comes to our attention.

Excessive Hold Times for Checks Challenged by Consumer Groups

Worth checking out:  U.S. PIRG's Consumer Blog has this interesting and informative post on the excessive amount of time banks are allowed to hold checks that consumers deposit to their own accounts, and what some consumer groups, including U.S. PIRG, Consumers Union, and the Consumer Federation of American, are trying to do about it.

Comparing Predictions to Outcomes

by Jeff Sovern

Proposals for changes in consumer laws often elicit predictions about the effect of the proposals. An interesting pastime is to compare the predictions with what actually happens after the proposal is adopted. Here are two examples drawn from the Thomson/West casebook on consumer law that I'm currently working on with John Spanogle, Ralph Rohner, and Dee Pridgen:

First, before the Federal Reserve Board adopted regulations lowering the APR trigger for coverage under the Home Owners Equity Protection Act (HOPEA), see Regulation Z, 12 C.F.R. § 226.32(a)(1)(i), a banking industry association predicted that the regulation would drive legitimate lenders from the subprime market. See Sandra Fleishman, Fed Favors Tougher Loan Rules; Abuses in Subprime Lending Are Targeted, Wash. Post., Dec. 14, 2000 at E01. In fact, subprime lending appears to have increased substantially after the regulations went into effect, though it is impossible to know whether the increase would have been greater still in their absence. See, e.g., Subprime Lenders Shatter Records in ’03 and Get Set for More in ’04, Inside B&C Lending, Feb. 9, 2004 at 1.

FTC Proposes to Ban Most Prerecorded Telemarketing Messages

    By Brian Wolfman

    In an October 4, 2006, Federal Register notice, 71 Fed. Reg. 58,176, the Federal Trade Commission has proposed to prohibit all prerecorded telemarketing messages to consumers except where the seller has obtained the consumer's written consent to receive such prerecorded calls. 

Interestingly, the FTC's proposed rule was issued in response to a petition (which the agency denied) from the Voice Mail Broadcasting Corp. (VMBC) urging the FTC to permit all prerecorded messages to consumers with whom the seller had an "established business relationship."  According to the FTC, about 13,600 consumers responded to the petition, with over 13,000 opposing VMBC's position.  The FTC cited the overwhelming consumer opposition to VMBC's petition as one reason for the proposed rule.  Comments on the proposed rule are due by November 6, 2006.  An FTC synopsis of the proposal appears here.

New GAO Study: Credit Card Late Fees Up, Disclosure Down

An extensive new study by the Government Accountability Office, the investigative arm of Congress, shows that late fees for credit-card payments have jumped, but card issuers have done a poor job of explaining their policies on fees and penalties to consumers. The report examined:

(1) How card fees and other practices have evolved and how cardholders have been affected, (2) how effectively these pricing practices are disclosed to cardholders, (3) the extent to which penalty charges contribute to cardholder bankruptcies, and (4) card issuers' revenues and profitability. Among other things, GAO analyzed disclosures from popular cards; obtained data on rates and fees paid on cardholder accounts from 6 large issuers; employed a usability consultant to analyze and test disclosures; interviewed a sample of consumers selected to represent a range of education and income levels; and analyzed academic and regulatory studies on bankruptcy and card issuer revenues.

The GAO report describes the fees, interest rates and disclosure practices of 28 popular credit cards. It found that late fees averaged $34, up from $13 in 1995, while some credit-card issuers impose penalty interest rates of more than 30 percent on consumers who pay late or exceed the credit limit.

Caveat Proletarius: The ALEC Model Consumer Protection Law

by Ira Rheingold

It's recently been announced in the press that the American Legislative Exchange Council or ALEC, an organization of "conservative state lawmakers" has created a "model state consumer protection law" that will be introduced in statehouses across the nation in 2007.  (CL&P has previously mentioned this development here and here; the proposal's full text can be found in an appendix to this law review article.)

As an organization that claims to be interested in the "Jeffersonian principles of free market, limited government, federalism and individual liberty," one might expect that their model law would promote a marketplace that rewards honest behavior, promotes fair competition, and supports a private incentive-driven regulatory scheme that would offset the need for more heavy-handed government regulation.  Unfortunately, those expectations would be very wrong.

Class Action Fairness Act: More on the New FJC Data

    by Brian Wolfman

    I am surprised that, as noted in Deepak Gupta's recent post, Tom Willging is surprised that The Federal Judicial Center (FJC) preliminary data on the Class Action Fairness Act (CAFA) show that CAFA had its intended effect of moving class actions of the kind previously litigated in state court to federal court (either via original filing or removal).  That result seemed inevitable because, under CAFA, in most substantial consumer class actions where there’s a diverse defendant, there’s nothing a plaintiff can do to keep the case out of federal court.  So, I wouldn't have expected it to take much time for the law to kick in; one would expect to see its effect almost immediately.  The more important question, I think, is whether the law will affect case outcomes (class certification, settlements, other legal rulings). On that question, it’s too early to tell, and the empirical evidence will be tougher to collect and evaluate.  It seems like difficult research, among other reasons, because seemingly there will be no significant group of similar post-CAFA state court cases to which the post-CAFA federal cases can be compared.  I look forward to seeing what Tom and his colleagues at the FJC produce in that regard.

CL&P Roundup

by Deepak Gupta

• Congress to Limit Predatory Lending to the Military:  The groundbreaking Talent-Nelson amendment--which imposes limits on predatory lending to the military--is now part of the must-pass defense authorization bill.   Paul Bland and Elizabeth Warren make similar observations about different aspects of this legislation.  Paul, discussing the bill's precedent-setting ban on arbitration clauses, asks:

"If Congress recognizes that binding mandatory arbitration provisions are unfair as applied to all members of the military who deal with lenders, how does that jibe with the assertion often made that binding arbitration is fairer, cheaper, and better for other consumers who deal with lenders?" 

And Professor Warren, discussing the bill's 36% usury cap for interest rates on loans to servicemembers, asks:

"Soon it will be OK to roll an elderly person with a 400% interest rate, or a Hispanic worker, or a college student, but not someone in the military.  How long will that last?"

• Most Identity Thieves Are Unknown:  The other day, Jeff Sovern observed that Judge Posner, in his discussion of identity theft, seemed to operate on the mistaken belief that "much, maybe most" identity theft is the work of "friends or relatives" and is easily prevented by potential victims.  Similar claims have been made repeatedly in the media in recent weeks, particularly by industry representatives.  Now privacy expert Chris Hoofnagle of Berkeley has demonstrated, using FTC data, the problem with those claims.  He even includes a colorful pie-chart.  (via Ed Mierzwinski)

• More on Consumer Cases in the Supreme Court:  Over at the Credit Slips blog, Katie Porter of Iowa has some thoughts on the recently-granted Fair Credit Reporting Act cases and so-called "off-label" uses of credit reports; we discussed the cases here on Tuesday.   And Bob Lawless speculates about the practical implications of Watters v. Wachovia, the OCC preemption case.  We'll surely have a lot to say about the Watters case here in the coming months, including its administrative law implications.  (Disclosure:  Public Citizen joined an amicus brief in Watters and we'll be providing assistance to petitioner's counsel.  We're counsel for the respondents in the FCRA cases.)

• Emerging Issues in Class Actions:  The UCLA Law Review has published an interesting batch of papers from its symposium on emerging issues in class actions.  The papers include an empirical study on incentive awards to class action plaintiffs by Theodore Eisenberg and Geoffrey Miller; an article on Backdoor Federalization by Samuel Issacharoff and Catherine Sharkey; an article considering various proposals to enhance fairness hearings by William Rubenstein; and a piece by Richard Nagareda discussing the implications of Eisenberg & Miller's empirical research.

• An Ideological Flip-Flop?:  It used to be the case, back in the 1960's, that the conservatives were the ones who supported tort law and the liberals/progressives were the ones that thought it needed to be "reformed" (with statutory consumer protection regimes).  Now it's just the opposite, and the reasons are complex and worth pondering.  So says Stephen Sugarman of Berkeley in a draft paper posted at SSRN, Ideological Flip-Flop: American Liberals are Now the Primary Supporters of Tort Law.  (via Point of Law)