Consumer Law & Policy Blog

New Book Describes the Creation of the CFPB

by Jeff Sovern

Here's the blurb I provided:

"Powerful interest groups seldom lose major battles in Congress, but that is exactly what happened when Congress created the Consumer Financial Protection Bureau in 2010. Larry Kirsch and Robert N. Mayer have produced, in Financial Justice: The People's Campaign to Stop Lender Abuse, an eminently readable and yet important account of the fight to establish the CFPB. For those who care about consumer protection, want to learn how laws get passed and new agencies created, or just enjoy a good real-life David-and-Goliath struggle, this book is a must-read."

Back in college I read Eric Redman's book, The Dance of Legislation, which described how Congress enacted a particular law and provided a sort of case study on the legislative process.  This book provides a similar case study--but it's about the Dodd-Frank Act and the CFPB, something likely to be of interest to readers of this blog.  I think this book will be of use for years to come to people interested in the enactment of consumer protection legislation. The book also contains a foreward by former House Financial Services Chair Barney Frank and an afterword by Hofstra professor Norman I. Silber based on his correspondence with Senator Elizabeth Warren  (Disclosure: the book mentions the effort by Norm Silber and me that resulted in numerous law professors joining a letter supporting passage of the Dodd-Frank Act).

Ben-Shahar Reviews Boilerplate

Omri Ben-Shahar of Chicago has written Regulation Through Boilerplate: An Apologia, forthcoming in the Michigan Law Review. Here's the abstract:

 

This essay reviews Margaret Jane Radin’s Boilerplate: The Fine Print, Vanishing Rights, And The Rule Of Law (Princeton Press, 2013). It responds to two of the book’s principal complaints against boilerplate consumer contracts: that they modify people’s rights without true agreement to, or even minimal knowledge of, their terms; and that the provisions they unilaterally enact are substantively intolerable. I argue, counter-intuitively, that contracts with long fine prints are no more complex and baffling to consumers than any alternative boilerplate-free templates of contracting. Therefore, there is no alternative universe in which consumers enter simpler contracts better informed of the legal terms. In addition, I argue that any policy that mandates consumer-friendlier arrangements (such as ones that eliminate boilerplate arbitration clauses, warranty disclaimers, or data collection) would hurt consumers in an unintended but potentially costly way.

A Journalist Writes About His Experiences as a Debt Collector

by Jeff Sovern

Back in 2008, Fred Williams, a reporter for the Buffalo News who had written stories about debt collectors, worked as a debt collector for an upstate New York debt collection firm.  Williams was not exactly undercover--he disclosed that he had written the stories--but it sounds as if he was treated as any other employee: he went through training and later had to prove himself to advance to a permanent position.  In 2011, Williams published a book about the experience.  Though the title of the book makes it sound like a primer for consumers being pursued by debt collectors--Fight Back Against Unfair Debt Collection Practices--and the book does include advice for consumers, what makes the book special is Williams's account of his experiences. I read the book to learn more about the industry for the debt collection materials to appear in the next edition of our casebook, and I thought I would say a bit about it here as well.

While some have portrayed debt collectors who cross legal lines as sadists who enjoy abusing others (see, e.g., the testimony of Richard Bell in the third edition of our casebook), Williams offers a different take.  Williams reports that he met few collectors who enjoyed threatening consumers but nevertheless describes numerous interactions in which collectors approached or stepped over the line demarcating improper behavior.  According to Williams, debt collectors face incentives to employ inappropriate tactics because of the need to collect enough debts to retain their jobs and earn the approval of other debt collectors. Williams argued that collectors employed illegal tactics because they work.  He also claimes that collectors are hardened by frequent interactions with dishonest consumers who leave the collectors jaded and cynical.

As for the rules imposed on collectors by the federal Fair Debt Collection Practices Act, Williams's experiences are not always consistent.  The agency where he worked seemingly followed some of the FDCPA's strictures faithfully; for example, collectors were not permitted to call consumers more than once a day. But other rules seemed to go by the wayside.  Collectors largely omit the so-called "Miranda warning of FDCPA § 1692e(11). Alternatively, he reports that some collectors leaving messages for consumers hang up in the middle of the Miranda warning: “I am legally required to inform you that this is an attempt [click]” and then claim that the call was cut off. Some collectors claim that they are calling from the fraud department, a false statement which violates § 1692e.  Still another collector creates the impression that a collection matter will end up in litigation by asking for the consumer's lawyer's phone number. If the consumer denies having a lawyer, the collector replies "Don't you think you're going to need one.?" Though the agency had a compliance department, Williams reports that collectors are told when Compliance is monitoring their calls so they know when to avoid violating the FDCPA.  The result, according to Williams, was that the compliance department was a sham.  So why are some rules followed slavishly and others ignored?  My speculation is that excessive calling can be proved by obtaining phone records while the proving the contents of unrecorded phone conversations devolves into a credibility contest.

Williams's book reads fast and is entertaining.  For those who want a better understanding of the debt collection industry, it is a must-read. 

 

Neil Barofsky's Bailout

by Jeff Sovern

I just finished the audio version of Neil Barofsky's book Bailout: An Inside Account of How Washington Abandoned Main Street While Rescuing Wall Street.  It is a far more interesting account of the aspects of the bank and auto bailouts it discusses than most such books.  Barofsky was the Special Inspector General of the TARP program and frequently locked horns with the Bush and Obama Treasury Departments (and to a lesser extent, the Obama White House) during his tenure.  Though you can't be certain without hearing the other side, he makes a powerful case that the Geithner Treasury Department is thoroughly captured by the banks.  Indeed, Barofsky argues that Geithner saw the HAMP program as intended to benefit not consumers but the banks.  If you are interested in learning more about the politics behind that program, or about how the Treasury Department views banks, or about regulatory capture, this would be a great book to choose.

Suskind's The Confidence Men

by Jeff Sovern

I just finished listening to the audio version of Ron Suskind's Confidence Men: Wall Street, Washington, and the Education of a President. It purports to be a you-are-there Woodward-style account of the first two years of economic-policymaking in the Obama administration. You never know how much of this stuff to believe, given that the audio version, at least, generally does not indicate sources. Still,with that caveat, readers of the blog may be interested in at least a few items from the book:

• Treasury Secretary Timothy Geitner promised bankers while the Dodd-Frank Act was working its way through Congress that Elizabeth Warren would never become the director of the Consumer Financial Protection Bureau.
• Economic policy in the Obama administration was made very slowly in what appeared to be a failure of process. Strong personalities like Larry Summers frequently sought to "relitigate" matters on which the president had decided against them, with the result that the same issues were reviewed over and over. Summers even commented that they were 'home alone" without a grown up in charge. That may help explain why the administration moved so slowly to name leaders for the OCC and the CFPB.
• The book also describes how Goldman Sachs learned a couple of years before the subprime crisis exploded that there was a problem with some of the subprime mortgage originators (or maybe it was underwriters evaluating loans; books sometimes go a little fast when you're driving while listening to them) from which it was buying loans. Specifically, some originators sold Goldman loan pools in which a whopping 10% of the borrowers were not even making their first payments. Nevertheless, Goldman continued buying from them and selling to others. It has been reported elsewhere, of course, that Goldman went short on subprime loans for its own account. In other words, Goldman bet against subprime loans while continuing to sell them to others when it knew there were problems with them.

"How to Beat the Bank," a Mini-Documentary on Overdraft Fees

Filmmaker Karney Hatch, annoyed with overdraft charges on his bank statements, took Wells Fargo to small claims court and got the charges reversed. In an interview for Hatch's film, Ralph Nader speculates that if a million consumers did what Hatch did, the banks would fold. Watch the video here.

Busted, the Book

by Jeff Sovern
I've been listening to the audio version of New York Times reporter Edmund Andrews' memoir, Busted: Life Inside the Great Mortgage Meltdown (a portion of the book was published in the Sunday Times magazine under the title My Personal Credit Crisis; we blogged about it here).

Lots of books have been written about the foreclosure fiasco from the perspective of the economy as a whole or the lenders who made the loans, but this is the first book I've seen written from the perspective of a borrower.  Despite his expertise as an economics reporter, Andrews accumulated excessive debt and ended up defaulting on his mortgage.  For those of us who do not deal regularly with consumers snared in the subprime meltdown, this book helps explain how even sophisticated people became trapped, though I suppose it can be dangerous to generalize too much from the account of a single person, espcially one who may not be typical of such borrowers.  Andrews weaves his personal story  together with a look at what was going on in the broader economy. 

The book has been criticized for not disclosing that Andrews' wife had previously filed for bankruptcy, and perhaps we can infer from that that Andrews may not have disclosed other information that would put at least his wife in a bad light.  Nevertheless, I'm finding the book useful in gaining a real world perspective on the travails of consumers who borrowed more than they could repay. 

One note relevant to the proposal to transfer the Fed's jurisdiction over consumer protection matters to the proposed new Consumer Financial Protection Agency: Andrews observes that the Fed Governors consider the Fed's consumer affairs committee "a backwater."  Andrews doesn't cite a source for that proposition, but if it is true, it underlines again why the Fed is not the right agency to protect consumers, and perhaps why the Fed waited so long to use its HOEPA authority to prohibit bad mortgage practices.

Neuroscience and Consumer Protection

by Jeff Sovern

I've been listening to the audio version of Jonah Lehrer's How We Decide, which brings neuroscience to bear on the human decision-making process, and while I'm not done with it yet, I wanted to blog about some of what I've already heard.  

Lehrer offers a number of comments on credit card and subprime lending.  He reports that experiments have shown that when consumers charge items on credit cards, the loss section of brain is not activated.  If I understand correctly, the prospect of paying cash for something seems like incurring a loss--the reduction in cash--and so consumers feel the cost of paying for something in cash more keenly than when putting something on plastic.  In other words, consumers feel less restraint when charging something than when pulling money out of their pockets.  Lehrer discusses an experiment in which some consumers were permitted to bid for an item and pay via credit card while others were obliged to pay cash: those using credit were willing to pay much more for the item.  Lehrer also claims that using credit cards takes advantage of the tendency of the brain to overvalue current consumption and de-emphasize future costs. Initial low teaser rates exacerbate the problem.   And, he argues, subprime loans, such as 2/28 mortgages (lower payments for the first two years), exploit the same tendencies.

Interesting, but what does it have to do with consumer law?  Well, this is the second recent book I've come across that explores how neuroscience can affect consumer decision-making (we blogged about the other, Buyolgy, here).  Much of consumer law is concerned with giving consumers the tools to resist manipulation by businesses.  For example, the Federal Trade Commission Act bars unfair and deceptive practices, and the Truth in Lending Act obliges lenders to make certain disclosures to increase the likelihood that consumers will be able to make informed decisions.  But now businesses have developed the capacity to engage in different types of manipulation, based not on dishonest behavior, but rather on irrationalities in the human brain that impair human decision-making.  It would be a huge step to, say, prohibit conduct based on such irrationalities--to bar truthful representations, or even teaser rates, because of their appeal to these irrationalities--but how do you justify prohibiting some manipulation without also barring others?  Ideally, we would find some way to simulate the same feelings about paying with plastic as we would with cash, so that consumers would feel the same restraint about purchases no matter what form they used to pay for the item.  I wonder if future interdisciplinary law review writing in consumer law will bring in the insights of neuroscience.

Stephen Baker's The Numerati

by Jeff Sovern

I've been listening to the audio version of Stephen Baker's fascinating book The Numerati, and while I'm not done with it, I thought I would blog about some of what I've encountered in it thus far, as well as some thoughts it's prompted.  Baker's thesis is that data miners are attempting to construct mathematical models of individuals which will enable them to predict how those individuals will respond to particular stimuli.  Though Baker ranges across politics (how to get people to vote the way you want) and the workplace, I'm going to focus on consumer matters, as befits our Blog. 

Suppose a grocer wants to persuade consumers to buy a particular item, say Advil.  One option is to offer coupons, but those will reach many shoppers (or even non-shoppers) who won't respond to them.  Thus, the grocer will waste money advertising to people who aren't interested, while also burdening shoppers who read the ad but are not interested in Advil.  Inefficient.  But now suppose the grocer offers frequent shopper cards that enable it to identify consumers who have used such coupons in the past.  If the grocer can target such consumers with coupons, it can reach those likely to be influenced by the coupons without wasting money on (and wasting the time of) those who would not be interested in the coupons. So far, it sounds like a winning proposition all around.

Baker reports that existing technology permits that. Some stores use "smart carts," shopping carts that can flash to shoppers specials, etc., that are likely to be of interest to the particular shopper.  The smart cart reads the chip embedded in the frequent shopper card to figure out what is likely to matter to the owner of the card.  OK--but what if the item is something that the consumer might not want to have flashed on a screen, like an ad for savings on condoms or laxatives?  Probably grocers would figure out not to use the technology on such items.  Even so, some consumers might be troubled by the invasion of privacy this technology implies, but they could always not use the frequent shopper card, if they know what use of that card permits retailers to do.  But that's something that probably few consumers are aware of.  For what it's worth, I wrote about whether collecting and using information about consumers without informing them of that fact violates the FTC Act and UDAP statutes in an article, Protecting Privacy with Deceptive Trade Practices Legislation, 69 Fordham Law Review 1305 (2001). 

The book also has implications for consumer discrimination law.  Baker describes how the technology can be used to drive away undesirable shoppers, the so-called "barnacles" who buy only a few items, and those on sale.  Barnacles may cost grocers money by buying loss-leaders (items priced at below cost to attract consumers in the hope that the consumers, once in the store, will also buy more profitable items) and not buying anything else.  Smart carts could flash barnacles specials on caviar and other expensive items rather than the items that more conventional shoppers might see, in an attempt to cause the barnacles to go elsewhere.  Put that way, it's kind of funny, but what if the grocer uses the smart card to show different specials to consumers of different races or genders--something that the technology would not only be able to do, but because of its ability to target consumers who are interested in different products, seems like a real possibility, if it turns out that people of different races or genders respond differently to the same offers.  Could we end up with price discrimination based on such classifications, with some groups getting access to specials that others never learn about?

Baker writes about how when one cell phone company charged an extra fee for a particular service, it received numerous complaints from consumers almost all of whom shared certain characteristics.  Suppose, he goes on, the company had offered that service for free to consumers with those characteristics, but charged consumers who were less likely to complain?  Again, we have price discrimination.  Is that troubling?  Suppose those of a particular race or gender generally end up paying more for that service.  I think most people would find that troubling.  I know I do.  How would we even know? 

Anyway, it's a thought-provoking book and I'm looking forward to the rest of it.

Attack on Behavioral Law and Economics

I just finished listening to the audio version of economist Tim Harford's book The Logic of Life during my commutes.  The thesis of the book is that people are rational and so respond to incentives.  This clashes to some extent with the arguments of behavioral law and economics ("BLE") consumer law scholars, in which group I number myself, who claim that people sometimes act irrationally in systematic ways and that businesses take advantage of consumer irrationalities. Those of us who take this position generally argue for rules that provide consumers greater protection than current law supplies.  BLE scholars rely on laboratory experiments, in the main, to prove their point. One of the chapters in Harford's book, by contrast, focuses on a number of experiments that seem to rebut the existence of the endowment effect; that is, the idea that once consumers have possessed something for even a brief period, it seems more valuable to them and they are reluctant to give it up for something that they would have valued equally before they possessed the item (hence the eagerness of some sellers to get consumers to try goods under a money-back guarantee that few consumers will take advantage of).  The difference is that the experiments he discusses took place outside of the lab and in more realistic transactions; they demonstrate that while neophytes are subject to the endowment effect, more experienced traders tend to be immune to it.  I'm afraid I can't yet cite to the papers on which the experiments are based; it's hard to take notes while you're driving and I haven't yet obtained a copy of the print version.  Though I still very much believe that BLE has valuable lessons for consumer protection, the chapter raises questions about some of the work on which we depend and is worth a read (or a listen) if you use BLE.  Harford, I should note, does not take on most of the systematic irrationalities on which much BLE work is based.  I found the remaining chapters quite interesting as well, even the ones that range far beyond consumer protection.