Consumer Law & Policy Blog

Joshua Wright: Federalism and the Rise of State Consumer Protection Laws

Former FTC Commissioner Joshua D. Wright of George Mason has written Federalism and the Rise of State Consumer Protection Law in the United States, in The Law and Economics of Federalism, Jonathan Klick, ed., Edward Elgar Publishing, Forthcoming. Here's the abstract:

Starting in the 1960s, individual states began to adopt and enforce Consumer Protection Acts (“CPAs”), the purpose of which was to supplement the FTC’s consumer protection authority to prohibit “unfair or deceptive acts or practices.” By 1981, each state had its own CPA. The proliferation of state CPAs provides a valuable opportunity to observe competitive federalism in action and to observe the potential effects of concurrent state and federal regulation. The purpose of this paper is to understand the role of state CPAs in the consumer protection landscape with an eye toward drawing lessons concerning whether state CPAs manifest the benefits of competitive federalism, embody a failure of this principle, or neither. After describing the dramatic rise and expansion of state CPAs, this paper focuses upon two empirical studies that cast significant doubt upon the failure of jurisdictional competition to constrain the adoption of state CPA features likely to result in net harm to consumers.

AARP, Center for Science in the Public Interest, and Consumer Attorneys of California file amicus briefs in Ninth Circuit Supple appeal

I recently discussed the Ninth Circuit appeal in Cabral v. Supple, a fascinating case about consumer fraud class actions, infomercials, snake oil, the placebo effect, and behavioral economics. Our opening brief was filed last week. Yesterday, three organizations filed amicus briefs supporting us: AARP focused on the effect of marketing techniques aimed at making false health-benefit claims to the elderly, Center for Science in the Public Interest focused on the underlying scientific evidence, and Consumer Attorneys of California focused on the importance of private enforcement and the objectivity of the "reasonable consumer" standard under California consumer-protection law.

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Report: Solutions to Help Consumers' Credit Histories Harmed by the Foreclosure Crisis and the Great Recession

The economic destruction of the foreclosure crisis and the Great Recession included not only the 4.5 million families who lost their homes and 8 million workers who lost their jobs, but the crippling aftereffect of poor credit histories that affected the ability of these consumers to obtain affordable credit, jobs, rental housing, and insurance.

 A new white paper by the National Consumer Law Center (NCLC) explores these aftereffects and proposes solutions to help afflicted consumers. Solving the Credit Conundrum: Helping Consumers' Credit Records Impaired by the Foreclosure Crisis and the Great Recession, by NCLC staff attorney Chi Chi Wu, reviews both the harm to individual consumers and the wider impact on economic recovery.  It also documents the credit reporting problems caused by errors and anomalies, and discusses the broader problem of relying on past credit history to judge future performance, arguing that such a broad-brush approach fails to distinguish between consumers who are simply unlucky and those who are truly irresponsible.  Finally, the paper makes policy recommendations to assist consumers whose credit reports were damaged by the foreclosure crisis and Great Recession.

Available at: http://www.nclc.org/images/pdf/credit_reports/report-credit-conundrum-2013.pdf

 

Would a Regulated Market in the Sale of Body Parts Promote Consumer Well-Being?

Yes, according to Richard Posner. Posner says that people needing a kidney have to wait about six months on average. Meanwhile, they are often on expensive dialysis, which greatly diminishes the quality of their ilves. Here are some exceprts from Posner's piece:

If kidneys were salable, the waiting time for a transplant would drop precipitately, probably to zero (which is why it’s unnecessary to guarantee a donor that he’ll go to the head of the queue if his
remaining kidney fails—there will be no queue), because demand is fixed at the number of people who have advanced kidney disease, while the supply would be highly elastic since many of the world’s poor, who are in the billions, would regard giving up a “spare” kidney as a low-cost way of earning some badly needed money. The market would be worldwide because the cost of shipping kidneys long distances is negligible. * * * I imagine that the equilibrium price of a kidney would be low, and the overall cost of treating kidney disease lower than today because there be so much less dialysis. Hence moving to a market would not increase overall U.S. health costs, and would in fact reduce them. Moreover, there would be attractive income-redistributive effects. The market solution would cause a modest shift of income from physicians and other personnel of dialysis centers to poor people, assuming realistically that the poor would be the principal sellers of kidneys. * * * [T]here is an important distinction between the fallacy (associated particularly with Alan Greenspan) that markets are self-regulating and a general skepticism about the efficiency of markets. Markets are self-regulating only in the Darwinian sense; competition weeds out losers, but the winners may be imposing heavy costs on society that they do not bear (pollution, for example, or the kind of macroeconomic damage that the highly competitive financial sector has caused because of its competition-driven risk taking). A market in kidneys would have to be regulated, but the regulatory challenge would be slight, given all the experience we have in the regulation of physicians, hospitals, drugs, medical devices, and surgical and other medical procedures.

State & Local Reforms Urgently Needed for Tax Lien Laws

The National Consumer Law Center has a new report: The Other Foreclosure Crisis: Property Tax Lien Sales by NCLC attorney John Rao.

Advocates are urged to work with state and local governments to reform property tax lien laws to safeguard homeowners while still bringing in needed tax revenue to address this growing problem.

A tax lien sale may be started over nonpayment of a tax bill of only a few hundred dollars. A $200,000 home may be sold at a tax lien sale for $1,200 and then quickly resold for a huge profit. Homeowners may lose not only a homestead but also hundreds of thousands of dollars in equity, representing their sole savings and security for retirement.

• Populations most at risk: Low-income older and disabled homeowners who have fallen into default because they are incapable of managing their financial affairs, such as individuals suffering from Alzheimer's, dementia, or other cognitive disorders.
•  Most states and local governments need improvement but those known to be at high risk: States: Florida, Illinois, Iowa, Mississippi, New Jersey, New York, and Texas
  Cities: Baltimore, MD; Louisville, KY; and Washington, DC

Key State Recommendations

1. Make redemption costs affordable by keeping investor profits reasonable. State laws should be reformed to limit the maximum interest or penalty rate on redemption amounts to reflect current economic conditions. The interest rate should seek to discourage speculation and promote redemption.
2. Place reasonable limitations on additional fees and costs. States should not permit investors to pad their profits by charging homeowners unreasonable fees to redeem after the foreclosure process has been initiated. State law should establish a maximum fee schedule based on reasonable, market rates for title searches, attorneys' fees, and other fees.
3. Establish a tax sale procedure, with court supervision. States should limit the initial tax sale to the sale of a tax lien certificate, rather than granting an entire interest in the property to a purchaser. If a homeowner fails to redeem the property, state law should require the purchaser to seek a court order authorizing final sale of the property. The court should confirm the final sale results and ensure that the sale price is fair and that any surplus funds are promptly paid to the homeowner.

Key Local Recommendations

1. Implement redemption payment programs. Local tax offices should collect redemption payments to eliminate the possibility that an unscrupulous purchaser may thwart the owner's attempt to redeem. The local tax office should accept partial and installment payments.
2. Adequate notice should be given at every stage of the tax sale process. Notifications should be used as a tool to avoid loss of homeownership Comprehensive notices should use plain language; include information about tax exemptions, abatements, and repayment plans; and note the consequences of each stage of the tax sale process.
3. Provide detailed notice of redemption rights. The notice should give all of the essential details on how the redemption right can be exercised, including the name and address to which the homeowner can remit payment; itemized costs; and the deadline for the redemption payment.

All state and local recommendations may be found in the full report.

Posner on Car Title Loans, Predatory Lending, and the Commerce Clause

by Deepak Gupta

Yesterday, Judge Posner issued an opinion that may be of some interest to those following the great debate over predatory lending and behavioral economics. As with many Posner opinions, its significance is of course enhanced by the author's identity. Although it doesn't actually take sides, the opinion devotes an unusual amount of space (for a judicial opinion) to citing and summarizing the leading research on predatory lending, including work by scholars such as Elizabeth Warren and Ronald Mann and consumer advocates such as Jean Ann Fox and Kathleen Keest, as well as their opponents on the right (e.g. Todd Zywicki). The opinion even takes note of the pending legislation to create a Consumer Financial Protection Agency, citing opinions pro and con, again without taking a position. But as we've noted here before, Posner has already taken a position on the legislation in his extrajudicial writings: He doesn't like it, and doesn't feel contrained by his judicial role from saying so.

The case concerns the constitutionality of an Indiana statute regulating car title loans (also known as car title pawns) -- loans with interest rates in the neigborhood of 300%, secured by cash-strapped consumers' vehicle titles, in which a lender advances a fraction of the vehicle's value to the consumer, who forks over a set of car keys to facilitate easy reposession in the event of default.  Indiana strictly regulates such loans through licensing requirements and interest-rate caps. But in neighboring Illinois, thanks to industry influence on state politics, it's a free-for-all. Concerned that Illinois-based lenders were evading the Indiana law by advertising directly to Hoosiers and entering into transactions on Indiana-titled vehicles, Indiana added a "territorial application" provision extending coverage to lenders that advertise to Hoosiers and then enter into transactions with them out of state.

Yesterday's decision strikes down that provision. It acknowledges that there's no economic protectionism or outright discrimination against interstate commerce at work here. Nevertheless, the court relies on a series of decisions forbidding extraterritorial regulation, including the Supreme Court's decision in Healy v. Beer Institute, 491 U.S. 324 (1989). The opinion concedes that Indiana isn't interfering with transactions with residents of another state, as in Healy, but focuses instead on the extraterritorial effect of interference with a commercial activity taking place in another state: "The contract was, in short, made and executed in Illinois, and that is enough to show that the territorial-application provision violates the commerce clause." 

The opinion makes some characteristically Posnerian analogies to illustrate that point, likening the law to an attempt by Indiana to ban its citizens from gambling in Las Vegas. "Of course the loan proceeds were probably spent in Indiana, but the same would be true of the winnings of a Hoosier at a Nevada casino. The consequences of a commercial transaction can be felt anywhere. But that does not permit New York City to forbid New Yorkers to eat in cities in states that do not ban trans fats from their restaurants."

So much for Indiana's attempt to protect its own consumers from one of the worst forms of predatory lending. But I wonder if Indiana can still get at the problem another way. The opinion notes that the loan company notifies the Indiana DMV of the loan as soon as it was made, so that the lender's security interest is protected against subsequent creditors, and that the repossessions occur in Indiana and the cars are auctioned off in Indiana. Surely Indiana would be well within its rights to regulate such conduct--particularly the use of its own DMV to prioritize the security interest--all of which occurs through the machinery of its own state government or within its own borders.

The case is Midwest Title Loans, Inc. v. Mills.  (Disclosure: Public Citizen, along with several other consumer groups, joined an amicus brief in this case authored by the Center for Responsible Lending.)

Posner v. Thaler on Behavioral Economics and the CFPA

by Deepak Gupta

Although his views on economic regulation and the conservative movement seem to have evolved over the years, and aren't always easy to pin down, Richard Posner is at bottom a proponent of old-style neoclassical economics premised on rational choice theory.  

So perhaps it's no surprise that Judge Posner has come out strongly against the proposed Consumer Financial Protection Agency, and that he takes particular exception to the behavioral-economics insights on which the proposal is based.  Still, check out this zinger of a closing line from Posner's recent Wall Street Journal op-ed on the CFPA:

"Behavioral economists are right to point to the limitations of human cognition. But if they have the same cognitive limitations as consumers, should they be designing systems of consumer protection?"

Is it just me, or is this a phenomenally dumb argument?  There are so many faulty unstated assumptions here that it hardly seems worth cataloguing them.  But perhaps Posner, who is anything but dumb, does not really mean this as a serious argument so much as a bald ad hominem.  Just before the quoted passage, he singles out behavioral economist and fellow Chicagoan Richard Thaler and suggests that Thaler's past advocacy for all-stock investment portfolios disqualifies him -- and by extension, anyone who values research on actual consumer economic behavior -- from shaping rules to protect consumers in credit markets.

Thaler has now come back with a restrained and thoughtful response to Posner's jab.  After pointing out how Posner's op-ed badly mischaracterizes the CFPA proposal itself, Thaler makes his case for regulation based on actual human behavior rather than false ideals of perfect rationality:

What Happens When Disclosures Contradict What Consumers Believe?

by Jeff Sovern

I recently came across a study by Macro International conducted for the Federal Reserve Board in 2008 titled Consumer Testing of Mortgage Broker Disclosures that sheds some light on that question. Macro had consumers read disclosures stating that mortgage brokers had an incentive to arrange for loans with higher interest rates, because that would increase broker compensation. Macro’s report of its finding stated:

Nearly all participants were surprised to read about the brokers’ conflict. . . . Shortly after reading the disclosure, about half of the participants made statements that directly contradicted what they had read in the agreement about broker incentives. Several, for example, stated late in their interviews that they would expect the broker to show them the loans with the best terms available. However, the disclosure they had just read specifically pointed out that brokers would in fact have incentives not to do so.

So Macro disclosed the conflict more explicitly. The following paragraph describes the result:

As in [the earlier round], most participants understood upon their first reading of the agreement that the broker would have a financial incentive to provide them with higher-interest rate loans. Again, however, participants’ preconceived belief that brokers were working in the best interest of borrowers made this conflict difficult to accept. As a result, many became confused or reverted to their prior assumptions. * * *

And, Macro found, the revised disclosures led to other misconceptions. In short, even under perfect conditions, when no one is attempting to distract consumers from focusing on disclosures, deceive them, or rush them into a particular transaction, disclosures may not be useful to consumers when they create cognitive dissonance.

Default Rules and the Arbitration Fairness Debate

by Deepak Gupta

Jeff Sovern and Paul Bland have contributed thoughtful posts on a proposal being pitched as a "compromise" in the debate over arbitration fairness.  It goes something like this: Instead of passing a law like the Arbitration Fairness Act that would make arbitration voluntary, let's just allow consumers to "opt out" of mandatory arbitration clauses, presumably by means of fine-print notices that nobody will actually read, let alone respond to. Professor Sovern rightly describes this as illusory consumer protection and, as Paul Bland notes, it's a technique that many corporations are already employing to try to defeat unconscionability arguments.

The proposal strikes me as a great illustration of the importance of default rules in choice architecture, a subject explored in the literature of law and behavioral economics and discussed in Cass Sunstein and Richard Thaler's recent book, Nudge.  Their argument revolves around a pretty simple empirical premise: “[I]f, for a given choice, there is a default option—an option that will obtain if the chooser does nothing—then we can expect a large number of people to end up with that option, whether or not it is good for them.”  Corporations take advantage of this insight all the time in consumer transactions. Thaler and Sunstein give the example of offers for magazine subscriptions that consumers continue to receive unless they take affirmative steps to cancel them; Sunstein says he himself has been paying for subscriptions for years because he hasn't gotten around to canceling them. Another example is employer retirement plans; research shows that participation is greatly increased by making it the default instead of requiring employees to opt in.

So I wonder whether proponents of the "compromise" proposal on arbitration fairness would continue to support it if the opt-out mechanism stayed the same, but the default rule were switched: Instead of opting out of mandatory arbitration, consumers would have to read a notice and affirmatively opt in.  I suspect enthusiasm for the proposal would vanish--demonstrating that a truly voluntary system is not the true objective.

Judge Richard Posner Questions the Free Market and Calls for More Financial Regulation

Check this out.