Consumer Law & Policy Blog

Norm Silber and Joseph Sanderson in HuffPo Argue That Guns Should be Regulated as Consumer Products

Here. 

Bankers Were for Separating Safety and Soundness Regulation from Consumer Protection Before They Were Against It

Here's a quote from Elizabeth Warren's op-ed yesterday in Politico, referring to the 2006 filing from the American Bankers Association:

In 2006, the ABA claimed to act on principle as it railed against an interagency guidance designed to exercise some modest control over subprime mortgages. It criticized the proposal for “combin[ing] safety and soundness guidance with consumer protection guidance, creating confusion that is best addressed by separating them.”

The ABA went on to argue that the “marriage of inconvenience between supervision and consumer protection appears to blur long-established jurisdictional lines.” And then: “ABA recommends that the safety and soundness provisions relating to underwriting and portfolio management be separated from the consumer protection provisions.”

Read that again: The ABA in 2006 said that policymakers should separate safety-and-soundness and consumer protection — exactly the opposite of its position today.

Interesting Financial Services Committee Press Releases

The House Financial Services Committee, chaired by Barney Frank, issued two particularly interesting press releases yesterday.  The first, excerpted below, compares the work of the Democrats with the Fed in connection with consumer protection.  It emphasizes how the Fed failed to use its power to protect consumers.  The press release makes a strong case for creation of the Consumer Financial Protection Agency to insure that consumer interests are attended to by regulators.

Issue:   Democrats Act:   The Fed Responds:

Mortgages and In 1994 the Democratic Congress passed the Home Ownership & Equity Protection Act (HOEPA), which included a host of specific consumer mortgage protections and authorized the Federal Reserve to issue comprehensive rules ending abusive lending practices.	3/27/07: Committee action on mortgage reform begins with a Financial Institutions Subcommittee hearing and continues through 2007. 10/22/2007: H.R. 3915, legislation to regulate subprime mortgages, is introduced in House. 11/9/2007: H.R. 3915 passed by the Financial Services Committee. H. Rept. 110-441. 11/15/2007: H.R. 3915 passed by the House: 291-127 (Roll no. 1118). 5/7/2009: The House approves similar legislation, H.R. 1728, to regulate subprime mortgages.	The Fed’s action on predatory and subprime lending followed House action on the issue.  In June 2007, the Fed held hearingson changes to HOEPA. The Fed issues its first proposal for new rules in December 2007, after the House passed its bill.  The rules were made final in July 2008, and will take effect in October 2009.
Credit Card RulesSimilarly, like lending rules, the Federal Reserve has had the tools to restrict abusive and unfair industry practices under the Unfair and Deceptive Acts or Practices passed in the early 1970s.  Specifically, the Fed had UDAP authority pursuant to Section V of the Federal Trade Commission Act.	2/7/2008: H.R. 5244, the Credit Cardholders’ Bill of Rights Act, introduced in House 9/16/2008: H.R. 5244 is passed by the Financial Services Committee. H. Rept. 110-857. 9/23/2008: H.R. 5244 is passed by the House: 312-112 (Roll no. 623). Consideration of credit card reform resumed in 2009, and the bill was signed into law on 5/22/09.	The Fed’s action followed House action on H.R. 5244, the Credit Cardholders’ Bill of Rights Act. The Fed issued its first proposal for new rules in May 2008, after the bill was introduced in the House.  The rules were made final in December 2008 and take effect in January and July 2010.
Abusive Overdraft Protections Like subprime mortgages, the Federal Reserve has had the power for many years, in two different statutes, to regulate overdraft services that banks offer to consumers who overdraw their balance. These overdraft services, which are often considered to be loans, many times come with hefty fees and outrageous interest rates.	2/18/07: Congresswoman Carolyn Maloney initiates H.R. 946  to “extend the protections of the Truth in Lending Act to overdraft protection programs and services provided by depository institutions, to require customer consent before a depository institution may initiate overdraft protection services and fees, to enhance the information made available to consumers relating to overdraft protection services and fees, to prohibit systematic manipulation in the posting of checks and other debits to a depository account for the purpose of generating overdraft protection fees, and for other purposes.” 7/11/2007: The Financial Services Committee holds a hearing on overdraft protection and fair practices for consumers.	The Fed’s action followed House action on H.R. 946, the Consumer Overdraft Protection Fair Practices Act. 12/18/2008: The Fed proposes rules to protect consumers that use overdraft services offered by their bank.  The rule solicits public comment on proposed amendments to Regulation E (Electronic Fund Transfers) intended to provide consumers a choice regarding their institution's payment of overdrafts for automated teller machine withdrawals and one-time debit card transactions.  No further action was initiated by the Federal Reserve and the regulations have not been implemented.
Consumer Protection Pursuant to the Unfair and Deceptive Acts or Practices Act Because the Federal Reserve never issues regulations to protect consumers to comply with UDAP, the other banking regulators were unable to use their existing authorities to better protect consumers.	Chairman Frank in 2007 asks the Federal Reserve to act on UDAP Chairman Frank introduces legislation in 2007 calling on the Federal Reserve to implement the law. If the Fed did not want to use the UDAP authority, Congress would find federal regulators who would. 9/14/2007: H.R. 3526, to authority to issue UDAP rules to OCC and FDIC as well as FRB, OTS and NCUA, introduced in the House. 12/5/2007: H.R. 3526 is reported by the Committee on Financial Services. H. Rept. 110-472, Part I. 12/5/2007: H.R. 3526 is reported by the Committee on Energy and Commerce. H. Rept. 110-472, Part II. 12/5/2007: H.R. 3526 is passed by the House on motion to suspend the rules and pass the bill, as amended agreed to by voice vote.

 The second press release announced that Representatives Frank and Maloney, who chairs the Joint Economic Committee, will propose a bill today "regarding the effective date of the recently enacted Credit Card Accountability, Responsibility, and Disclosure (CARD) Act."  Presumably that will move the effective date up.

CPSC and NHTSA Recalls for July 2009

The July 2009 Consumer Product Safety Commission product recalls are here. The July 2009 National Highway Traffic Safety Administration vehicle recalls are here.

Chrysler's Bankruptcy and Product Liability Suits

Fellow consumer law professor Norman Silber of Hofstra is quoted in a TV news report here about how Chrysler's bankruptcy will bar future product liability plaintiffs from obtaining compensation from Chrysler.

President Obama To Nominate New CPSC Commission Chair and Fill Another Commission Slot; Announces Intention to Increase Commission Size and Seek Greater Funding

This article explains that President Obama will nominate Inez Moore Tenenbaum as the new Chair of the Consumer Product Safety Commission. If confirmed, Ms. Tenenbaum would replace Acting Chair Nancy Nord. Ms. Tenenbaum served two terms as South Carolina's Superintendent of Education. The President also announced that he will name long-time consumer advocate and University of North Carolina professor Robert Adler to fill an empty seat on the 3-member Commission. Finally, the President announced that the number of CPSC commissioners will increase from 3 to 5 and that he is seeking a 71% budget increase over the agency's FY 2007 budget. (Even with the increase the agency's budget would be only $107 million.)

For an overview of key CPSC personnel and to learn more about the agency's mission and structure, go  here.

Studies Explore Whether Consumers Read Contracts

Two recent studies explore whether consumers read contracts.  One, by Shmuel I. Becher and Esther Unger-Aviram, is titled Myth and Reality in Consumer Contracting Behavior.  Here's the abstract: 

Most legal scholars regard consumer contracts with distrust, calling on courts and legislators to intervene to protect consumers from biased contract terms. Other scholars opine that in competitive markets there is basically no need to intervene, since some consumers do read their contracts and thus discipline sellers. Surprisingly, very few legal writings rely on data gathered from surveys and field or laboratory settings when discussing consumers' contracting behavior.

This essay attempts a first step toward narrowing this gap by examining intended consumer behavior in different contracting contexts. We discuss and analyze the answers to two questionnaires. The first focuses on the intent of consumers to read form contracts ex ante and ex post in four different scenarios. The second examines the extent to which prevalent rational-economic factors influence potential consumers in their intent to read form contracts ex ante and ex post.

Our findings support some of the common assumptions found in the literature and contradict others. The findings from the first questionnaire support the assumption that most consumers do not read most of the contracts in their entirety at the time of contracting. But they do not support the assumption found in some literature that a substantial minority of consumers read their contracts and thus might discipline sellers. The results also show that many more consumers indicate a tendency to read contracts after the fact. The findings of the second questionnaire show that at the time of contracting, the most prevalent rational-economic reasons for reading the contact are cost, length of contract and the prospects of influencing or changing contract terms. Cost and the chance to influence or change contract terms are also detrimental factors in consumers' intention to read form contracts after the fact, as is the opportunity to learn new things about their rights and obligations under the contract. Surprisingly, however, legal jargon, print density and font size are not key factors in consumers' decisions on whether to read their contracts. 

The other is A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities, NYU Journal of Law & Business, by Debra Pogrund Stark of John Marshall and Jessica M. Choplin of DePaul. Their abstract follows:

Are consumers "foolish" or "negligent" when they trust what salespersons falsely tell them rather than read all of the terms of the contracts they sign? Should consumers be barred from bringing a fraud action on the ground that they have not "reasonably relied" upon such false statements or deceptive conduct when the form contract they sign states that they have not so relied? Currently seven states' courts have interpreted their consumer fraud statutes to require "reasonable reliance," and three-quarters of the states' courts impose this requirement for a common law action for fraud. Some courts have also ruled that the presence of a "no reliance" type clause bars a consumer from being able to raise the alleged false statement or deceptive conduct.

The attached article, "A License to Deceive: Enforcing Contractual Myths Despite Consumer Psychological Realities," provides an interdisciplinary analysis of this important aspect of consumer fraud law. The article proposes law reforms based upon the results of our fraud simulation study, reading contracts survey, and an analysis of the cognitive and social psychological reasons why consumers trust what salespersons tell them rather than read all of the contract terms.

In our survey of consumers, we found that on average 67% of the consumers reported that they failed to read all of the terms of the contracts they signed among the six different categories of consumer transactions surveyed (agreements relating to computer software, rolling contracts, car rentals, apartment leases, home purchase and home loans). As detailed in the article, the primary reasons why consumers rely upon what the salesperson tells them and fail to carefully read and understand all of the terms of the contracts they sign are due to cognitive barriers such as: (i) visual and comprehension challenges based upon the manner in which many form contracts are drafted, (ii) analytic deficiencies based upon schema deficits, (iii) positive confirmation biases, (iv) inability to imagine possible negative outcomes (i.e. the availability heuristic), (v) default assumptions, and (v) sunk cost effects. The article also explores some of the social psychological reasons why consumers fail to read the contracts they sign including: (i) misplaced trust in the defrauders due to a variety of factors which creates a strong motivation to trust which is exacerbated when the consumer is of a lower socio-economic status, (ii) social norms not to read contracts in certain contexts and a concomitant social value to trust, and (iii) a perceived (and often real) inability to negotiate the terms of the contract.

In light of these cognitive and social psychological barriers to reading and understanding all of the terms of the form contracts that consumers sign, we contend that courts are enforcing a contractual myth and creating a license to deceive when they enforce no reliance type clauses in contracts when in fact many consumers do in fact rely upon such statements in making the decision to purchase the product or service. Ninety percent of the public we surveyed reported that they expect that the terms of the contracts they sign will be consistent with the salesperson's statements and eighty percent reported that if there is an inconsistency they think the company should honor the statements made by the salespeople when the consumer has not read the terms of the agreement.

While promoting certainty of contractual obligations is a legitimate goal, and the enforceability of "no reliance" type clauses through the reasonable reliance requirement is sensible under certain conditions in transactions between sophisticated companies, this article contends that based upon our empirical data it is not sound policy to make it a bar to a consumer bringing a common law fraud action or a statutory fraud action (the consumer would of course still have the burden to prove that the parol false statement or deceptive conduct took place).

This article comprehensively addresses an important aspect of consumer fraud among the fifty states and provides very important data relative to the issue of consumer protection in general and consumer fraud in particular.

Marotta-Wurgler Study finds Rolling Software License Agreements Are No More One-Sided Than Others

Florencia Marotta-Wurgler of NYU has written Are 'Pay Now, Terms Later' Contracts Worse for Buyers? Evidence from Software License Agreements, 38 J. Legal Studies -- (2009).  Here's the abstract:

The rise of commerce over the Internet and telephone has led to widespread use of "pay now, terms later" or "rolling" standard form contracts, in which buyers are not able to read the standard terms until after they have purchased the product. While some scholars and judges argue that rolling contracts do not merit special attention, others, including consumer advocates, are concerned that sellers take advantage of delayed disclosure by hiding especially unfavorable terms. I find no evidence for this view. In a large sample of software license agreements, I find that software publishers that use rolling contracts for their online sales offer do not offer more one-sided terms than those who make their licenses available prior to purchase. The results suggest that to the extent there are inefficiencies associated with standard form contracts, they are not made worse by delayed disclosure.

Scientists at FDA's Medical Device Center Claim Agency is Mismanaged and Bends to Manufacturers' Demands

CNN is reporting that nine scientists at the Food and Drug Administration's Center for Devices and Radiological Health (CDRH) have written a six-page letter to President-elect Barack Obama and his transition team, alleging gross mismanagement at the agency that has "placed the American public at risk." Among the charges are that scientists have been threatened and told, on occasion, to ignore FDA regulations, that FDA managers have ignored serious safety and effectiveness concerns, and that FDA experts have been excluded from product meetings because manufacturers felt that they were "biased." An AP story provides additional details.

UPDATE: We have not located a copy of the letter to the President-elect, but it is believed to be a somewhat more detailed version of a letter CDRH scientists sent to Rep. John Dingell last October.

NHTSA Recalls for December 2008

The National Highway Traffic Safety Administration issued these recalls in December 2008.