Consumer Law & Policy Blog

Baltimore Fair Lending Suit Rejected

By Alan White

In an interesting application of the Iqbal/Twombley "I know it when I see it" plausibility standard, a second judge granted a motion to dismiss filed on essentially the same grounds as the motion that was denied by a different judge earlier in the case. 

Judge Motz's decision addresses many interesting questions of interest not only to consumer credit and civil rights specialists but also concerning the constitutional and prudential standing doctrines.  Among the facts whose plausibility the court determines under Rule 12 is whether the lender's reverse redlining and foreclosures caused home vacancies and resulting burdens on the City, or whether instead the City's distress was the result of "extensive unemployment, lack of educational opportunity and choice, irresponsible parenting, disrespect for the law, widespread drug use, and violence." 

The plaintiffs are not out of court, because the ruling permits Baltimore to file an amended complaint, alleging more specific harms flowing from the particular homes left vacant after Wells Fargo foreclosures, an invitiation plaintiffs will no doubt accept. 

I recently posted a paper on SSRN discussing some related issues, "Borrowing While Black: Applying Fair Lending Laws to Risk-Based Mortgage Pricing."

Cuomo Case Great News for State Attorneys General

by Christopher Peterson

The Supreme Court has issued an opinion striking down the federal banking regulatory preemption of state fair lending enforcement lawsuits. The Court confronted whether ambiguity in the National Bank Act left the Office of the Comptroller of the Currency free to preempt state fair lending litigation originally brought by former New York Attorney General Eliot Spitzer. In applying the administrative deference standard of Chevron U. S. A. Inc. v. Natural Resources Defense Council, Inc., the Court explained:

[T]he presence of some uncertainty does not expand Chevron deference to cover virtually any interpretation of the National Bank Act. We can discern the outer limits of the term “visitorial powers” even through the clouded lens of history. They do not include, as the Comptroller’s expansive regulation would provide, ordinary enforcement of the law. Evidence from the time of the statute’s enactment, a long line of our own cases, and application of normal principles of construction to the National Bank Act make that clear.

Cuomo v. Clearing House Association, LLC.,  No. 08-453, slip. op. at 3 (U.S. June 29, 2009).

The decision reverses the trend in recent years, discussed here and here, of giving free reign to federal banking regulators to squelch the consumer protection efforts of state attorneys general. While the long-term impact of the decision is yet to be clear, the opinion is likely to embolden some state AGs in litigation against national banks and their subsidiaries over the subprime mortgage debacle.

Comments in Times on Cuomo Case

by Jeff Sovern

Back on April 27, the Times published an editorial titled When Banks Discriminate about Cuomo v. The Clearinghouse Association, the pending Supreme Court case addressing whether state officials can investigate discriminatory lending by national banks, or whether such investigations are preempted by federal law (my co-blogger Deepak Gupta blogged about it here, and collected various links).  The Times argued against preemption. Earlier this week the Times posted my letter on the editorial:

Investigating Banks

Published: May 11, 2009

To the Editor:

Re “When Banks Discriminate” (editorial, April 28):

You argue that the Supreme Court should rule that states can investigate whether nationally chartered banks have discriminated in making loans because the states are more willing to enforce such laws than federal authorities.

To this may be added that it is difficult and expensive for wronged individuals to win on such claims, so that if the states cannot act and federal regulators refuse to, lending discrimination laws are not likely to be enforced at all.

Jeff Sovern
Jamaica, Queens, April 28, 2009

The writer is a professor at St. John’s University School of Law and a co-coordinator of the Consumer Law and Policy Blog.

I think that's the first reference to the Blog in the Times.

House Financial Services Committee Passes Credit Cardholders' Bill of Rights Act on to House

The House Financial Services Committee is reporting here that it has passed the Credit Cardholders' Bill of Rights Act and reported it to the full House.

UPDATE: Here's the Committee press release:

The House Financial Services Committee today approved legislation that would provide credit card customers crucial protections against unfair, deceptive, and anti-competitive credit card practices, which include double-cycle billing, due-date gimmicks, and retroactive interest rate hikes. The bill would also increase the advance notice of impending rate hikes and give consumers the information and rights they need to manage their credit responsibly.

The Credit Cardholders’ Bill of Rights (H.R. 627), sponsored by Rep. Carolyn B. Maloney (D-NY), was passed by a vote of 48 to 19.  The bill now moves to the House of Representatives for consideration. 

“This landmark legislation helps level the playing field between cardholders and card companies. For too long the relationship has been one-sided; but markets function best when all sides know what they're getting into -- and these deceptive practices need to be stopped. The Credit Cardholders' Bill of Rights brings more transparency to the contractual relationship and give consumers the tools they need to responsibly manage their own credit," Rep. Maloney said.

“The substantial reforms in this bill are needed now more than ever, as working Americans have increasingly turned to credit cards to help pay medical bills, buy groceries, and make ends meet in this troubled economy," Rep. Maloney added.

Report on FTC Proposed Revisions to Endorsement Guidelines and Discrimination in Housing Sales in Chicago in the Fifties

One of the many nice things about teaching is that your students help you learn about your subject.  One of my students, William Schleifer, brought to my attention this article in the Financial Times about the FTC's proposed revisions to its guidelines on endorsements and testimonials. According to the article, the proposed guidelines,

would hold companies liable for untruthful statements made by bloggers and users of social networking sites who receive samples of their products.

The guidelines would also hold bloggers liable for the statements they make about products.

If a blogger received a free sample of skin lotion and then incorrectly claimed the product cured eczema, the FTC could sue the company for making false or unsubstantiated statements. The blogger could be sued for making false representations.

So I guess we have to be careful with the blog!  Another student, Alison Hendele, gave me this link to an interview Rutgers history professor Beryl Slatter did with Leonard Lopate's show on WNYC radio on her book, Family Properties, about the role of her father, lawyer Mark Satter in exposing a scheme in which African-Americans were sold overpriced homes in Chicago with high interest rate loans fifty years ago.

Does the Subprime Crisis Rebut Claims of Lending Discrimination?

by Jeff Sovern

The extent of discrimination in lending has long been a hotly-debated subject.  The famous Boston Fed Study, publicized in 1992 and later published as Alica H. Munnell, Geoffrey M.B. Tootell, Lynn E. Browne & James McEneaney, Mortgage Lending in Boston: Interpreting HMDA Data, 86 American Econ. Rev. 25, 26 (1996), reported that "white applicants with the same property and personal characteristics as minorities would have experienced a rejection rate of 20 percent rather than the minority rate of 28 percent."  That study led to considerable discussion: Some argued that the study was flawed and that in fact discrimination does not occur, while others claimed that discrimination occurred.  A book-length study of the issue and points raised by many of the commentators is Stephen Ross & Ross Yinger, The Color of Credit (2002). 

That brings us to subprime lending. Studies have found that subprime borrowers are more likely to be people of color, female, elderly, low-income, or some combination of the foregoing. So if lending discrimination was occuring, we might expect to see less subprime lending.  For many years, of course, subprime borrowers did find it more difficult to obtain loans, but starting in the nineties, subprime lending took off, with the results that we all know about.

In his book Economic Facts and Fallacies, Thomas Sowell suggests that the enormous amount of money lost on subprime loans implies that people of color were not in fact discriminated against by lenders.  The argument (I'm putting it in my own words here and updating it a bit because the book was published in December 2007, before the subprime criss fully unfolded) goes like this: If lenders had discriminated against borrowers of color, they would have charged higher rates than the risk of lending justified.  But because they charged rates that were lower than the risks justified, they lost money on those loans, and in fact many subprime lenders went out of business.  Accordingly, they could not have been discriminating against minority borrowers.

This is an interesting argument, and it may prove to be borne out by the facts. But I think we need to know more to know whether it is correct.  Obviously lenders underestimated the risks of lending, but a big risk that lenders underestimated was the risk that housing prices would fall, thereby preventing borrowers from refinancing, That has nothing to do with race.  Indeed, it may turn out that some subprime borrowers defaulted because of high interest rates and unaffordable monthly payments, which could be the product of charging higher rates to people of color, say, than the borrowers might have qualified for.  Or borrowers could have defaulted because of their inability to refinance, even though lenders would have charged them lower rates all along had they been white.  I'm not saying that happened; all I'm saying is that lenders could have underestimated the risks of lending while still engaging in discrimination.  I'm afraid that the foreclosure fiasco has not put an end to arguments about whether lending discrimination occurs but rather only added more to argue about.

Phony Consumer Protection Watch: Is § 1681s-2(a) of the Fair Credit Reporting Act an Example of Phony Consumer Protection?

by Jeff Sovern

We blogged here about phony consumer protection statutes, statutes that are designed to create the illusion of consumer protection, perhaps so legislators can claim to consumer-constituents that they are attending to a problem, but without the reality, maybe so legislators can satisfy business interests and obtain political contributions.  At least one section of the Fair Credit Reporting Act seems like a plausible example of such phony consumer protection for several reasons:  § 1681s-2(a), dealing with the obligation of furnishers of information to credit bureaus (typically, lenders) to furnish accurate information. 

First, it's a difficult statute to decipher.  If consumers can easily understand a statute. it's a poor candidate for phony consumer protection, because it won't deceive anyone.  But complex statutes can more readily conceal defects.  Just how hard is the FCRA in general, and § 1681s-2(a) in particular?  On Wednesday we covered § 1681s-2(a) in class,  Our casebook walks students through it in text.  It also poses a problem on the provision, both to highlight the section and in the hope that students will come into class having worked it out for themselves.  Nevertheless, my students. many of whom appear to be quite smart and who have been able to understand other consumer protection statutes without much difficulty, really struggled with this one.  We had to go over it several times.  If second and third year law students find it hard to understand with the statute in front of them, the issue flagged for them by a problem, an explanation in a text, and my oral explanations, how likely is it that consumers will figure it out?  (I prefer not to think that I was the cause of my students' confusion).

Second, many FCRA provisions, including § 1681s-2(a), cannot be enforced by private claims. In fact, just in case someone didn't figure that out the first time Congress said it, they said twice that there's no private claim to enforce § 1681s-2(a), in both § 1681s-2(c) and (d).  So if a lender violates § 1681s-2(a), the lender need fear only enforcement by governmental agencies.  Given funding for governmental consumer protection agencies, that doesn't seem likely to happen as often as violations of the provision.

The third reason has to do with the content of § 1681s-2(a).  Subsection (a)(1)(a) provides "A person shall not furnish any information relating to a consumer to any consumer reporting agency [i.e., a credit bureau] if the person knows or has reasonable cause to believe that the information is inaccurate."  That seems clear enough.  Subsection (a)(1)(D) even offers a definition: "The term 'reasonable cause to believe that the information is inaccurate' means having specific knowledge, other than solely allegations by the consumer, that would cause a reasonable person to have substantial doubts about the accuracy of the information."  So if an identity thief fills out an application for credit and puts down the wrong address, say, the creditor should not report that as the consumer's transaction unless the creditor does some checking.  I happen to think the standard for accuracy imposed on creditors should be higher than that, but if you disagree with me, well, at least we have a standard that imposes some obligations on creditors. 

But now we get to the part that threw my students. Subsection (a)(1)(C) says the standard I just described doesn't apply to furnishers of information who clearly and conspicuously specify to consumers an address for inaccurate information.  Then the standard becomes that once the creditor is told of an inaccuracy, it can't supply inaccurate information.  In other words,as long as lenders give consumers an address to report inaccurate information, they don't violate the statute even if they give a credit bureau information that a reasonable person would have substantial doubts about, unless someone has told them outright that the information is inaccurate.  And of course, even if they violate this provision by supplying inaccurate information once they've been notified of the inaccuracy, there's still no private claim.

Now there may be creditors that don't supply consumers with an address for inaccuracies.  I don't know of any, but I certainly haven't canvassed the lenders of America.  Somehow, though, I suspect all credit card statements, for example, include customer service contact information for problems. 

So notice what happened with this provision.  It gives legislators who voted for it the ability to tell their constituents that they got through a statute that bars lenders from reporting information that a reasonable person would have substantial doubts about, but it gives lenders an out against having that provision applied against them.  And if something goes wrong, there's no private claim anyway. 

Is this an example of phony consumer protection?  I don't honestly know, because I don't know what Congress's goals were in enacting it, or what was in their minds.  But I sure wonder.  If Congress just wanted lenders to supply an address for problems, all they had to do was require that.  They didn't have to impose an accuracy requirement that lenders could ignore.  So why impose it?  § 1681s-2(e) does provide for regulators to fill in the accuracy standard a bit in regulations, but again, Congress could have enacted that subsection without also enacting a subsection that could easily be gotten around.  Does anybody know a reason for passing 1681s-2(a) other than to give legislators the ability to say they've struck a blow against inaccuracies by creditors?  But here's one thing we do know: as we blogged about here, identity theft is up.  One cost of phony consumer protection is that the problem doesn't get solved.

Experian-Based FICO Scores to be Unavailable to Consumers

by Jeff Sovern

Fair Isaac has reported that Experian has terminated their agreement under which FICO credit scores based on Experian's credit data can be made available to consumers, though consumers can still obtain their FICO scores based on TransUnion and Equifax data.  Because Experian also has its own credit score system, VantageScore (a joint venture with Experian's other competitors, Equifax and TransUnion), it competes with Fair Issac, and that may have contributed to the decision; Fair Isaac has also sued Experian in connection with VantageScore.  Coverage in the Times is here.  The Times article states: "Experian itself will continue to sell FICO scores based on its data to lenders, so some banks may make credit decisions, at least in part, on a score that consumers can no longer see." 

This may pose a problem for consumers contemplating borrowing who would like to know their credit score in advance.  Maybe it won't be a big deal because they will still be able to obtain the other credit scores, and the Experian credit report from which the Experian-based FICO score will be drawn is still available.  But to the extent that the Experian-based FICO score is based on factors in the Experian report that are not obvoius to consumers (which could happen; FICO scores are based on a proprietary algorithm which has not been publicly disclosed), consumers could be surprised by rejections from lenders using the Experian-based FICO score.  That seems inconsistent with the trend towards greater transparency of credit information reflected in the 2003 FACTA Act, which mandated that credit bureaus provide consumers with their credit reports without charge at least once a year upon request, though it did not require the credit bureaus to provide credit scores for free.  Congress has a lot on its agenda, but maybe it will turn its attention to this issue at some point. 

NCLC Report on Credit Report Dispute System

by Jeff Sovern

The National Consumer Law Center released a report authored by Chi Chi Wu last week, Automated Injustice: How a Mechanized Dispute System Frustrates Consumers Seeking to Fix Errors in Their Credit Reports, that charges that Equifax, Experian, and TransUnion handle credit reporting disputes "in an automated and perfunctory manner." Here's an excerpt from the accompanying press release:

* * * The report details how credit bureaus: translate detailed disputes painstakingly written by desperate consumers into two or three digit codes; Fail to send documents submitted by consumers, such as cancelled checks or payoff statements, to creditors and other information providers involved in the dispute; [and]  Limit the role of their employees who handle disputes, or of the foreign workers employed by their offshore vendors, to little more than selecting these two or three digit codes. Workers do not examine documents, contact consumers by phone or email, or exercise any form of human discretion in resolving a dispute.

The New York Times coverage of the report is here.  I'm inserting below two excerpts from the Times' story: first the industry response, which personally I found unpersuasive, and a paragraph on planned federal rules:

Stuart K. Pratt, the president of the Consumer Data Industry Association, said consumers were partly to blame for the lack of detail about their discrepancies. He acknowledged that the credit bureaus “do have the opportunity to add some granularity to the coded dispute that goes off to the lender.” But 55 to 60 percent of consumer disputes contained no supporting documentation, he said.

And most consumers who supply documentation, Mr. Pratt added, include only standardized forms offered on a credit bureau’s Web site, rather than extensive documentation of their own.

“Most consumers don’t want to work too hard to have it taken care of,” he said.

* * *

The Obama administration is expected to announce new rules later this year that would allow consumers who find mistakes in their reports to contact the creditors directly. The creditors would be required to respond to the consumers. “That way,” [assistant director of the Federal Trade Commission’s division of privacy and identity protection] Ms. Kuehn said, “we won’t be cutting out the most important line of information — from the consumer to the company that’s providing the information in the first place.”

Given the at least theoretical independence of the FTC from the Obama administration, it seems odd to characterize the proposed rules' source as the Obama administration, but they sound like an improvement over the current situation.  For what it's worth, my own view is that credit bureaus should be strictly liable for reporting errors, to give them an incentive to improve accuracy, as stated in The Jewel of Their Souls: Preventing Identity Theft Through Loss Alloaccation Rules, 64 University of Pittsburgh Law Review 343 (2003).

[Sorry about the formatting; as you can see, I'm having some trouble getting the post to appear correctly.]

Supreme Court Takes Bank Preemption Case

On Friday the Court took Cuomo v. Clearing House Association, 08-453.  After then-Attorney General Eliot Spitzer had sought information from national banks in connection with an inquiry into racial discrimination by the banks, the OCC sued the Attorney General's Office to block the inquiry, arguing that the inquiry was preempted by federal law.  The Second Circuit, over a dissent, agreed with the OCC.  The other 49 states had also filed a brief supporting Cuomo's position.  The SCOTUS Blog report is here and the Times's story is here.  I wonder if the Court will feel some pressure to rule for the states in light of what we now know about the inadequacy of federal regulation.  I also wonder how broad the Court's ruling will be and what it will tell us about the applicability of other state laws to federal institutions.