Consumer Law & Policy Blog

California Supreme Court Grants Review In Important Consumer Protection Cases

    By Brian Wolfman

    CL&P readers may recall that, back on September 15, I blogged about recent California appellate decisions holding that Proposition 64 -- which imposes tighter standing requirements for private litigation under California's consumer protection statutes -- requires plaintiffs to show reliance on a defendant's unfair or deceptive act or practice.  I noted that Public Citizen and the Center for Auto Safety had filed an amicus letter asking the California Supreme Court to review these cases.  That letter explained that a reliance requirement would be antithetical to one of the basic purposes of modern consumer protection statutes: to override the obstacles to proving common-law fraud, one element of which is reliance.

    I'm happy to report that today the California Supreme Court granted review.   We plan to file an amicus brief on the merits.  I will keep you posted.

"Predatory Structured Finance": Is it time for a new label within the lexicon of predatory lending?

by Christopher Peterson

Over the past five years commentators in the debate over subprime home mortgage lending have ironed out a standard list of practices and contract terms that serve as warning signs of "predatory lending." These terms and practices include high interest rates, high fees and closing costs, balloon payments, negative amortization, inflated appraisals, insurance packing, mandatory arbitration, unaffordable loans based on the value of collateral, rushed closings, multiple refinancing, abusive collection, prepayment penalties, and misleading or fraudulent disclosure. This list is both necessary and useful.

However, in a new article entitled "Predatory Structured Finance" (forthcoming in the Cardozo Law Review) I suggest that the concept of predatory lending has nevertheless been cast too narrowly.  In today’s subprime mortgage market, originators and brokers quickly assign home loans through a complex and opaque series of transactions involving as many as a dozen different strategically organized companies.  Loans are typically transferred into large pools, and then income from those loans is "structured" to appeal to different types of investors. 

The article includes a useful illustration (pictured above) of a typical subprime home mortgage securitization structure.  This process, usually referred to as securitization, can lower the cost of funds for lenders, allowing them to offer better prices.  But, it can also capitalize fly-by-night companies that specialize in fraud, deceptive practices, abusive collections, and other predatory behavior.  Some of the institutions that sponsor and administer securitization of mortgage backed securities are complicit in predatory lending.  By encouraging, facilitating, and profiting from predatory loans, these financiers have themselves slipped into predation. In addition to transferring liability to the secondary market through assignment based rules (such as the Federal Trade Commission’s holder-notice rule or the Home Ownership and Equity Protection Act’s assignee liability provisions), courts and policy makers should explore common law imputed liability theories such as civil conspiracy, aiding and abetting, and joint venture.  Unlike assignee liability rules, these older common law theories can reach architects of predatory structured finance that never actually own predatory loans themselves.

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.

CL&P Roundup

by Deepak Gupta

• "Tort Deform": That’s the snappy and provocative title of a new blog on civil justice issues produced by the Drum Major Institute for Public Policy, a progressive think tank in New York. They’ve already assembled an impressive and interesting lineup of contributors (including CL&P co-bloggers Paul Bland and Brian Wolfman). Here’s their mission statement. Highlights so far include a piece on preemption by Alan Morrison; an item by Linda Andros on the junk food bill (on which Steve Gardner also posted here last week); and a discussion by the blog’s coordinator, Cyrus Dugger, on the book Distorting the Law.

• Victor Schwartz's Common Sense: Philosophers warn us to be wary of appeals to 'common sense'. In a recent Kansas Law Review article, Victor Schwartz presents his case for “Common-Sense Construction of Consumer Protection Acts.” Although he assures the reader that he's not advocating the complete “elimination of private rights of action,” Schwartz's proposal would come as close to that goal as might be thought politically feasible; the article bristles with hostlity to modern statutory consumer protection law and urges a return to common law principles. Schwartz advocates model legislation that would require proof of objectively reasonable reliance and actual injury, strict limitations on treble damages and awards of attorneys’ fees, a complete prohibition on class actions wherever statutory damages are available, modifications to statutes of limitations, and extreme restrictions on the circumstances under which class certification could be granted. As we discussed earlier in this post, Schwartz's article isn't mere theory; it's the blueprint for legislation that will soon be introduced in state legislatures across the country.

• Ban on Consumer Class Actions Held Unconscionable: Wading into the growing battle over the enforceability of class action bans in arbitration agreements, a California appellate court this week said DirecTV could not require its customers to give up their right to class actions and held that a waiver buried in a “bill stuffer” was both procedurally and substantively unconscionable. California's 2d District was not persuaded by DirecTV's argument that the possible amount of recovery could be as high as $1,000. While "$1,000 is not an insignificant sum, many consumers of services such as those offered by DirecTV may not view that amount as sufficient to warrant individual litigation.” The court explained that “the class action device remains, in our view, the only practicable way for consumers of services such as DirecTV's to deter and redress [such] wrongdoing.” The ruling builds on the California Supreme Court's landmark Discover Bank decision last year.

• Debt Collectors and Bankruptcy Filings: Elizabeth Warren suggests that last year’s bankruptcy legislation may have emboldened debt collectors to intimidate consumers out of filing for bankruptcy.

CL&P Roundup

by Deepak Gupta

• Industry Takes Aim at UDAP Statutes: If you care about the future of the American consumer class action, this article in the National Law Journal is a must-read. According to the article, industry lobbyists plan to introduce amendments to state consumer protection statutes as early as December in jurisdictions such as Massachusetts, Illinois, and the District of Columbia, and eventually in all 50 states. Based on model legislation championed by the American Tort Reform Association in this alarming report, the amendments would require a plaintiff to demonstrate individual "reliance upon an act or practice declared unlawful"--a requirement that is patently designed to defeat class certification. We'll explore this issue in depth in the coming weeks.

• Mann on Payday Lending: Over at the excellent Credit Slips blog, professor Ronald Mann of the University of Texas offers some thoughts on payday lending to military personnel, a hot topic on which co-blogger Chris Peterson testifed to Congress and posted about here last week. Among other things, Mann says "Congress should view the military as an illustration of a general problem, not as a special case of activity that in other settings is benign."

• FTC on Mortgage Lending, Identity Theft: The Federal Trade Commission today filed these comments on mortgage lending abuses with the Federal Reserve Board and announced the interim recommendations of its Identity Theft Task Force.

Dear California Supreme Court: Did Prop 64 Impose A Reliance Requirement?

by Brian Wolfman

Public Citizen and the Center for Auto Safety, with the able representation of California consumer lawyer Jeff Fazio, filed an amicus request for review in the California Supreme Court today in a case concerning the scope of California’s consumer protection laws.

As many of you are aware, in 2004, California voters approved (by roughly a 60-40 margin) Proposition 64, which amended California’s Unfair Competition Law and a related provision regarding unfair advertising (collectively referred to here as the “UCL”).  Prior to Prop 64, the UCL, as conceived by the California Legislature and construed by the California courts, had been regarded as one of the nation’s most plaintiff-favorable, consumer-friendly consumer protection statutes.  Prop 64 does a number of things generally aimed at making it more difficult for individual plaintiffs to enforce the UCL’s substantive provisions.

The Hidden Perils of the "Cheeseburger Bill"

by Stephen Gardner

Consumers, consumer advocates, and anyone else interested in a fair marketplace should pay attention to a bill making its way through the Senate that is a clear attempt to give a get-out-of-jail-free card to Big Food for deception and fraud involving food products. The bill is S.908, and it is promoted as a way to stop baseless obesity lawsuits—i.e, alleging that a particular food (say, McDonald’s Big Mac) caused the plaintiff’s obesity.

If that were all the bill actually did, or tries to do, S.908 would only be an excessive response to a non-existent problem, since the total number of suits of this nature can be counted on one hand, with at least three fingers left over and possibly the thumb as well.

Pretexting and Phone Records

by Jeff Sovern

The brouhaha over the use of pretexting to obtain the phone records of Hewlett-Packard's directors has drawn new attention to the practice of pretexting.  For example, The New York Times has articles here and here.  Pretexting refers to the practice of impersonating someone, usually a customer, to obtain information (typically, information involving the customer--such as their phone records).  Pretexters can be found liable for the practice; for example, in Remsburg v. Docusearch, 149 N.H. 148, 816 A.2d 1001 (2003), the court concluded that an action for the intrusion into seclusion invasion of privacy tort would lie against the pretexter for obtaining a person's Social Security number if the intrusion would have been offensive to a person of ordinary sensibilities.  The court also found that the investigator had a duty to exercise reasonable care before disclosing a third person's infromation to a client and that the pretexting call violated the state UDAP statute.  On the other hand, the court rebuffed the plaintiff's argument that there had been a violation of the appropriation privacy tort or that obtaining the consumer's work address violated the consumer's privacy.  Telephone companies and the FTC have also filed suits against pretexters while phone companies have responded to the practice by beefing up their security practices.  All of this may seem rather dry until you learn that in Remsburg, the pretexting service provided the information to a stalker, who then drove to the victim's workplace and killed her.