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Products Liability for Credit Cards?

posted by Bob Lawless

Someone once observed that "the argument for reregulation of consumer lending is a lot like the argument for regulating any other useful but potentially dangerous product." That someone was fellow Credit Slips blogger Elizabeth Warren in her book (with Amelia Warren Tyagi), The Two-Income Trap: Why Middle Class Mothers & Fathers Are Going Broke (Basic Books 2003). Warren & Tyagi continue, "Predatory loans may not set houses on fire the way a faulty toaster might, but they steal people's homes all the same." Just like we regulate toasters for consumer safety, an argument can be made that we should do the same for consumer lending.

In a similar vein, a student note in the most recent issue of the University of Illinois Law Review explores the doctrinal underpinnings for potential products liability claims against credit card issuers. The cite is Adam Goldstein, Note, Why "It Pays" to "Leave Home Without It": Examining the Legal Culpability of Credit Card Issuers Under Tort Principles of Products Liability, 2006 U. Ill. L. Rev. 827. Is products liabilty a viable theory against the credit card industry? Even if there seems to be only a remote chance that a court would actually order a credit card company to pay damages, will we see credit card companies begin to take ameliorative steps like fast-food and alcoholic beverage companies did in response to similarly remote threats of liability?


Although I do not have the benefit of the cited note, I just don't see this happening on a credit card. In the predatory lending arena (home mortgages) I have asserted the lender's gross negligence in approving credit as a bar to the equitable relief sought through foreclosure. In those cases, however, the lender blindly approved whatever a mortgage broker threw at it - grossly inflated, if not flat fraudulent, appraisal; broker-falsified income documents; grossly unsophisticated lenders, i.e. actual illiteracy, actual mental retardation, etc.

I do not, however, see the same type issues arising from credit card lending. There is already TILA regulation requiring certain disclosures.

It would be helpful if you stated the products liability theory in full. Are you limiting it to credit card debt or all consumer lending?

A products liability theory for credit cards would need to be premised on a clear test for when a credit card is "defective." But my sense is that the major problems in many markets for credit cards actually have little to do with credit cards being defective in the sense that their impact on consumers deviates from that intended or contemplated by the "manufacturer" of the card. Credit card companies know exactly what they are doing when they require small monthly minimum payments and teaser rates that inflate dramatically after a few months -- they are purposefully try to take advantage of consumers' cognitive biases (over-optimism primary among them). To the extent this is a problem (and I think it is), my guess is that the answer is probably better found in ex ante regulation than in a products liability theory for credit cards. The reason is that the risks associated with credit cards are apparent from the face of credit card agreements, and so not much is gained by trying to deal with it on a case-by-case ex post basis, which is costly and tends to be a less effective way to change behavior than direct regulation.

The idea of using products liability as a legal theory to sue credit card issuers reminds me of two other causes of action that some have considered applying in the consumer credit context.

Patricia McCoy and Kathleen Engel published an article (80 Texas Law Review 1255 (2002)) suggesting that predatory lenders should be liable if they offer homebuyers a mortgage product that is inappropriate. They proposed modeling this law on the securities action of "suitability" that restricts brokers and financial agents.

Similarly, maybe it's time 5o speculate more formally about the idea of lender liability in the consumer contest. Elizabeth Warren and Jay Westbrook have a brief discussion of this idea in a prior version of the Teacher's Manual that accompanies their bankruptcy text. Lender liability may no longer be a hot topic, but at its height KMC v. Irving Trust and other cases establishing a cause of action for lender liability sparked banks to reassess their credit practices, particularly the hidden, discretionary type of credit practices that litigation discovery threatened to reveal--how much credit to extend, when to pull the plug on a debtor's line of credit, etc?

Doubtless readers will be enthralled to read my forthcoming piece on the possibility of establishing a tort for reckless lending in the consumer credit context. And no, I do not concede that "ex post" tort liability is necessarily less efficient than "ex ante" regulation by a hypothetically well funded government enforcement agency (nor do I exlcude the possibility that parallel approaches can work together like speed limits (ex ante regulation) and automotive negligence (ex post tort) in combatting a social ill). Because the idea is a tentative one, however, I jointly present a lesser version of the tort, which would be an affirmative defense to recovery in a contract action -- which sounds like the sorts of equitable arguments that have already been tried in the mortgage realm! The piece will come out in the Illinois Law Review with all the other ones that were part of Prof. Charles Tabb's excellent symposium on the new bankruptcy bill.

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