93 posts categorized "Consumer Contracts"

PayPal Joined the Party

posted by Amy Schmitz

Adam Levitin commented on the eBay's opt-out arbitration program on CreditSlips.org a few weeks ago, and there have been campaigns calling for consumers to opt out of eBay's program.  Public Citizen has provided instructions on its website for consumers "to protect their constitutional rights by opting out of a forced arbitration clause and ban on consumers joining together in class actions."  eBay is not alone in using this sort of opt-out arbitration program.  Many tech companies have joined, or plan to join, the "party" in requiring consumers to opt out or be subject to binding arbitration.

Opt-out programs also may be layered now that PayPal is joining the party.  It recently sent notices to its users of policy updates, effective November 1, 2012, stating:

"You will, with limited exception, be required to submit claims you have against PayPal to binding and final arbitration, unless you opt out of the Agreement to Arbitrate (Section 14.3) by December 1, 2012. Unless you opt out: (1) you will only be permitted to pursue claims against PayPal on an individual basis, not as a plaintiff or class member in any class or representative action or proceeding and (2) you will only be permitted to seek relief (including monetary, injunctive, and declaratory relief) on an individual basis."

Query whether campiagns will begin for consumers to opt out of this program?  It also will be interesting to see how these opt-outs work in tandem due to PayPal's prominence as the purchasing mechanism for sites like eBay?  

When Squeaky Wheels Get Rusty

posted by Amy Schmitz

Yesterday, I wrote about the "squeaky wheel system," or "SWS" for ease of reference, which I explored in my article, Access to Consumer Remedies in the Squeaky Wheel System.  The research shows that consumers who have and take the time and resources to complain (or “squeak”) often get what they want. For example, consumers with the time and patience to endure the labrynth of their phone company's customer assistance line and actually speak with a representative regarding an increase in their bill are much more likely to get "loyalty" and other such discounts.  

That said, I have noticed that companies are even becoming more stingy in providing assistance to proactive consumers. For example, a manufacturer recently insisted on charging me for shipping to send me a replacement for a blender that was under warranty.  Sure, the warranty covered replacement . . . but  not shipping (a la "fine print").  The warranty was therefore meaningless since the blender was worth about the same as the shipping cost, and it would be silly to expend resources to sue using UCC Article 2 or other warranty arguments.  Furthermore, I have been unable lately to catch many breaks on increased fees for phone and internet service, and had difficulty in obtaining any assistance from some credit card companies when trying to rectify the issues I faced when my purse and all my credit cards recently were stolen.

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Winners and Losers in the Squeaky Wheel System

posted by Amy Schmitz

First, I want to thank you for the invitation!  

Most have heard the adage: “The squeaky wheel gets the grease.” We have long known that the “squeaky wheels” who are proactive in pursuing their needs and complaints are most likely to get what they want. That is proper for the most part to the extent that it rewards those who expend the time and resources to pursue their interests. However, this “squeaky wheel system,” or “SWS” for ease of reference, allows businesses to bank on our inertia (laziness) in contracting and ration remedies to only those with the most resources and power. This also may allow businesses to control public information by quieting the squeaky wheel consumers. The SWS can effectively prevent economists’ proposed “informed minority” from policing fairness of contract terms and business practices by alerting the majority about purchase concerns and prompting companies to make contract changes.

This SWS has troubled me, leading to my recent article, Access to Consumer Remedies in the Squeaky Wheel System in volume 39 of the Pepperdine Law Review. This Article uncovers the salience of the SWS and explores its impacts on contract regulation and purchase practices in the consumer marketplace. It also provides a snapshot of empirical data from my own e-survey of Colorado consumers that is relevant to SWS dynamics. The article proposes proportional and efficient means for consumers to access purchase information and contract remedies using online and other low-cost remedy mechanisms. This proposal is by no means the “answer” and I invite other ideas for expanded and equalized remedy mechanisms to help diffuse the SWS,narrow the divide between the consumer “haves” and “have-nots,” and foster better fairness regulation of companies’ contract and claims assistance practices.

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Arbitration Agreements

posted by Adam Levitin

Brian Wolfman has an interesting post about e-Bay's new arbitration agreement with a class action opt-out.  Curiously, e-Bay's arbitration agreement isn't mandatory, but it is opt-out with a limited opt-out period.  Brian's take is that this opt-out is consumer choice window-dressing:  while there is formally a consumer choice involved, functionally it is meaningless. I agree. 

First, consumers aren't likely to pay attention to the opt-out notice in the first place in this age of information overload.  (That's one reason why I don't like the mandatory annual Gramm-Leach-Bliley Act privacy notice--it contributes to information overload by telling me nothing--basically there are no privacy rights--and lulling me into thinking that all fine-print disclosures by my bank don't matter.)  Second, even if they do pay attention, consumers are unlikely to place much value ex-ante on the right to sue in court or to proceed as part of a class; certainly not enough to bother opting out.  

The problem, it seems to me, with arbitration or class action waiver or forum selection clauses in contracts, even if explicit opt-out provisions are available, is that there's an inherent imbalance between businesses and consumers in the way valuations of the provision are going to work: businesses value arbitration clauses in the aggregate, while consumers value them based on individual transactions. For contract provisions with small value this means that businesses are more likely to value them than consumers, which therefore warps the nature of any sort of bargain. The business is bargaining in aggregate;the consumer is bargaining based on an individal valuation.

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Latest Visa Fraud

posted by Nathalie Martin

A heads up regarding the latest in Visa fraud. Royal Bank received this communication about the newest scam. This is hitting the midwest with a vengance and moving. The trick here is that they provide YOU with all the information, except the one piece they want. The callers do not ask for your card number; they already have it.  By understanding how the VISA & MasterCard telephone Credit Card Scam works, you can avoid this one.

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Reputational Sanctions in an Age of Internet Manipulation?

posted by Adam Levitin

A major argument against substantive regulation of industries (including consumer finance) is that the market self-regulates. Bad actors get bad reputations and lose business.  Therefore, there's no need for government to intervene.  

This type of argument involves a significant set of assumptions about how reputational sanctions work for any particular product and about the inability of bad actors to simply rename themselves. Often, these assumptions are unexamined or unwarranted--ideology trumps all--but the development of the Internet as a reputational reference complicates things. 

The Internet provides a tremendous aggregation of reputational feedback, with everything from formal reviews to "XYZsucks.com" sites, etc. But the typical Internet reputational search involves a google search or the like, and the search results are manipulable. Not only can they be manipulated, but there are whole businesses set up to do just that.

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Doggie DNA Tests: Waste of Money or Legitimate Tool?

posted by Nathalie Martin

Do mutt-lovers (with admittedly too much time and money on their hands) get anything in exchange for the $75-100 they pay to find out what kind of dog they have? It depends. My advice: before ordering a doggie DNA test over the net, do lots of research. Perhaps just have the vet do it.  If you do order a test over the internet, make sure you pick one that tests for the maximum number of breeds and that gets very high marks from consumers, and carefully read the fine print. Now they tell me, the more mixed your mutt is, the less likely you are to get any info at all from the test. I’ll let you decide if the test was worth my money. Here is the dog:Image1

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Consumer Scam Review: Lower Your Interest Rate, Lower Your Credit Card Balances, and Work at Home

posted by Nathalie Martin

I have been meaning to write on several consumer scams so here are a few to avoid.

“We Can Lower Your Home Loan Interest Rate” Scams. 

We’ve all gotten the calls at home. “We can lower your interest rate.” “The banks got their bail-out, now get yours.” But imagine what it feels like if you really need that kind of help. The false hope these scams create is criminal. One of my coworkers has been going through a Chapter 13 in which her mortgage payments are really high. She got this card in the mail asking her to call 800-936-4400 and saying that they could lower her mortgage payment (currently over $1,300) to $611.01. She was very hopeful.  She called the numbers, which directed her to RMA Legal Network in Holbrook, New York, and RMA turned out to stand for Michael Alarcon. She spoke with a Bruce Thomas, a case consultant manager, who asked her for tons of very personal information. She then hung up and did a google search, which turned up a great deal of negative information on this company, including that they want $1,400 up front to even start to do a deal for you.  Red flag!

“We Can Reduce Your Credit Card Balances”

Forget it, it doesn’t work. If I’m wrong, tell me how and where you can get this help legitimately. If you have the time, follow the directions they leave on your phone and report back here.

Work at Home Scams

A third cousin got involved with one of these, and when I say scam, I mean Scam. Again, selling

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Cramming Funny Fees Onto our Phone Bills: Not so Funny

posted by Nathalie Martin

Two weeks in a row, the Haggler column in the New York Times focused on cramming, one of the most damning and profitable scams in the consumer world.  Cramming is tacking unrequested services onto land line bills and now cell phone bills, such as celebrity gossip news, daily horoscopes, even dating services. Our AGs office claims that cramming is one of the practices about which they get the most complaints. After reading last week’s Haggler column, I vowed to look over my consolidated bill with Century Link and Verizon (cell phones, landline, internet service) but never quite got around to it. It seemed to me the bill had stayed pretty much the same over the months and years. Sure enough, today I found a cram and am trying to straighten it out.  This can be a full-time job, which is why it is so easy to scam us in this way. Haggler also notes that while cramming is done by third parties, not phone companies, phone companies supposedly get one –third to one –half of the billions in revenues generated by this fraudulent practice, which is why some may be slow to correct the problem. If Haggler is right about the profits, shouldn't I be able to reverse this with my phone company?

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Credit for Parenthood (in the Wall Street Journal)

posted by Melissa Jacoby

Wall Street Journal Reporter Jessica Silver-Greenberg casts a spotlight on the market for fertility treatment loans - including loans that enable the purchase of other women's eggs  - in the article "In Vitro a Fertile Niche for Lenders."  (subscription required). Perhaps this will prompt some coverage of the adoption loan market, which also has very interesting not-for-profit lending options; the direct financial price of the credit may be low but some complicated strings are attached. My earlier efforts to broadly evaluate the impact of loans in these markets are here and here

NACBA warns of student loan "debt bomb"

posted by Jean Braucher

At its annual Capitol Hill Day in Washington this week, the National Association of Consumer Bankruptcy Attorneys sounded an alarm about the growing student loan problem, calling it a “debt bomb.” NACBA released a survey of its members indicating that more potential clients these days have unmanageable educational loans and are facing aggressive collection efforts. See http://www.nacba.org/Legislative/StudentLoanDebt.aspx. It has become common for people to have two mortgage-size debts, one for a home and another for an education. The educational loan problem is looking something like the one a few years back with subprime mortgages.

Absent “undue hardship,” very hard to establish, student debt can be a life sentence because these loans are not dischargeable in bankruptcy. NACBA supports making private students loans dischargeable again (as they were before the 2005 law). Beyond that, it favors going back to the pre-1990 approach of allowing discharge of any student debt after five years. If the education isn’t paying off enough to make the loan repayable after that much time, something has to give so that people can get on with their lives--and some day buy a home, start a family, and save for their kids’ education and their own retirement.

As a participant in the Capitol Hill Day, I found congressional staff reacted very sympathetically. They are mostly young people carrying big student loans or with friends who have them. They know how hard it is to manage this debt even when you have a decent job. They easily recognize what a big problem this is for their generation and even more so for the next one. This issue isn’t going away.

Should the Government or the Market Set Mortgage Down Payments? A New Study

posted by Melissa Jacoby

UNC's Center for Community Capital has posted a new analysis of 19.5 million mortgage loans originated between 2000 and 2008 finding that mandatory down payments of 10% would lock out nearly 40% of all creditworthy borrowers while a 20% down payment would exclude 60%. The study finds a significantly higher exclusion rate for African American and Latino borrowers. The authors (Roberto Quercia of UNC, Lei Ding of Wayne State University, & Carolina Reid from the Center for Responsible Lending) do find valuable default-reduction benefits of other forms of strong underwriting as the Dodd-Frank Act already requires (through the "QM" and "QRM" classifications), but signal caution about the significant access costs of government-mandated down payment levels that government regulators may be currently considering.

Consumers Beware of Gas Well Leases, Especially Around the Holidays

posted by Nathalie Martin

For those contracts professors who teach Peevyhouse v. Garland Coal & Mining Co., 382 P.2d 109 (Okla. 1962), there is a modern version this 1962 case going on right now in the gas drilling context. In the venerable Peevyhouse case, Willie and Lucille Peevyhouse owned a farm that contained coal deposits, and entered into a contract with Garland Coal & Mining Co. allowing Garland to strip mine the coal, in return for a royalty. In the contract, Garland promise that the land would be restored once they were done. The court refused to enforce the clean-up provision, however, finding it incidental to the main purpose of the contract. The land was left a hot mess.

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Consumers, Cast Your Vote

posted by Katie Porter

The Consumer Financial Protection Bureau has launched the first project in its "Know Before You Owe" initiative with the release of proposed mortgage disclosures. While the CFPB did its homework in designing these forms, including getting feedback from a wide variety of sources, it is taking field-testing to a new level by asking American consumers to review two proposed forms. Consumers can then vote for the form that they think best conveys the key information needed to understand a home mortgage loan. The choices, named "Azalea" and "Camellia" for the fictional banks on the sample disclosures, are available here. (Simply click to view them as a PDF and then vote for your favorite.)

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My Final Post: A Recipe for More Effective Consumer Protection in Insurance Regulation

posted by Daniel Schwarcz

Many thanks to Credit Slips for providing me with the opportunity to discuss some of the key consumer protection issues in insurance regulation.  As I hope I have shown over my short stint here, there is much that needs to be done in this important area, which often receives less attention from academics and the press than consumer protection in credit. 

I thought I would close by offering a simple set of recommendations for dramatically improving consumer protection in property/casualty insurance markets.  Here is my basic recipe, which would need to be separately implemented for each line of coverage:

(1) Promulgate a single policy that serves as a minimum baseline of coverage. 

(2) Develop "nutritional labels" geared towards providing consumers with a basic sense of the degree to which a carrier's policy provides greater coverage than the minimum baseline.

(3) Require prominent disclosure on the nutritional labels of several measures of claims paying quality, such as the percentage of claims denied, the average time within which claims are paid, and the frequency of non-renewal or cancellation within a year of a claim being submitted.

(4) Require full online disclosure of insurance policies, variables relating to claims payment, and data regarding the availability of coverage.  

(5) Carefully consider the need to regulate risk classifications that have a disparate impact on underserved communities.   

(6) Abandon all price regulation designed to suppress insurance rates, so long as a reasonable number of carriers exist in the marketplace.

(7) Promote the importance of independent insurance agents, but prohibit these agents from receiving different amounts of compensation based on the carrier with which they place consumers.

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Homeowners Insurance Claims and the Foreclosure Crisis

posted by Daniel Schwarcz

Prompted by several comments to one of my earlier posts, I've been thinking about situations where a homeowner files an insurance claim for property damage to her home while she is in default on her mortgage.  The general practice, as I understand it, is for insurers to write claim settlement checks out to the mortgagee, rather than the policyholder, in such situations.   This practice is based on a clause in most homeowners policies that "If a mortgagee is named in this policy, any loss payable under Coverage A or B will be paid to the mortgagee and you, as interests appear." 

All of this makes sense.  But, it seems to me that the mortgagee ought to have an obligation to promptly use any insurance proceeds it receives in this manner to fix the underlying property damage.  Failing to do so, and holding on to the insurance proceeds as cash collateral, seems to me to potentially constitute a violation of the mortgagee's obligation of good faith.  Yet according to the commentators referenced above, this is apparently a common practice (though I would be curious about other readers' experiences).  

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Are You Really in Good Hands? How Do You Know If Your Insurer Will Pay a Large Claim?

posted by Daniel Schwarcz

Not surprisingly, one of the core consumer protection issues in insurance is ensuring that carriers pay claims fairly and expeditiously.  Unlike many contracts, insurance policies are sequential and contingent: whereas the policyholder performs routinely by paying premiums, the insurer performs by paying a claim if, and only if, a loss occurs.  This dynamic creates special risks of unfair business practices.  These risks are enhanced by the fact that many insurance policies (outside of the life insurance context) necessarily rely on abstract language to describe insurers’ coverage obligations.  For these reasons, much of insurance law – including the availability of bad faith lawsuits and state prohibitions on “unfair claims practices” – is devoted to ensuring carriers’ fair payment of claims.

Despite the centrality of claim-handling to consumer protection in insurance, regulators do essentially nothing to promote transparency in insurance markets with respect to this issue.  The reason is not that it would be particularly difficult to measure this variable:  useful metrics might include how often claims are paid within specified time periods, how often claims are denied, how often policies are non-renewed after a claim is filed, and how often policyholders sue for coverage.  In fact, state regulators already collect some of this data for their own use in policing the market place.   But none of this data is systematically made publicly available to consumers.  Rather, this information is generally treated as confidential on the basis that it could reveal proprietary company information or mislead insurance consumers.    

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Purchasing Insurance as a Game of Chance: What Does Your Homeowners Policy Cover?

posted by Daniel Schwarcz

The core product that insurance consumers buy is a standard form contract.  Unlike virtually any other market, though, it is virtually impossible for purchasers of personal lines coverage (i.e. homeowners, renters, and auto insurance) to scrutinize this product before they purchase it.  Insurers only provide consumers with an actual insurance contract several weeks after they purchase coverage.  They generally do not make sample contracts available to consumers on the Internet or through insurance agents.  Marketing materials and other secondary literature from regulators and consumer organizations provide virtually no guidance about how different carriers’ policies differ.  And most states have essentially zero laws requiring insurers to provide any types of pre-sale disclosure to consumers regarding the scope of their coverage. 

How can this possibly be?  

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Consumer Protection Strategies in Credit and Insurance: Why the Disconnect?

posted by Daniel Schwarcz

Many thanks to Credit Slips for inviting me to guest blog over the next week or so.  My hope during this time is to explore what I view as an important puzzle in consumer protection regulation: why it is that consumer protection strategies in insurance and credit are so different in the United States.  

From a consumer protection perspective, credit and insurance are intimately related.  At its core, consumer protection regulation in both domains is motivated by the fact that consumers routinely engage in complex financial transactions that they may not fully understand or appreciate.  And in both domains, firms or market intermediaries can exploit this fact to make additional profits in the short term, though such a strategy creates long-term legal and reputation risks.  Despite these similarities, consumer protection regulation in credit is predominantly concerned with disclosure and transparency whereas consumer protection regulation in insurance almost entirely ignores these tools in favor of more prescriptive regulatory approaches. 

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Phoney Contest Scams get More Realistic

posted by Nathalie Martin

Uh oh, look what my dad got!   Prize notification_Page_1

Our attorney general’s office reports getting dozens upon dozens of claims about these every year.  I guess it is obvious that it is a scam, but I am not sure the average person would know it.  The check looks incredibly real and even has an ink mark.

  What should you do if you see one of the these?  If it comes from Canada, you should call the Canadian Anti-Fraude Centre at

Toll Free: 1-888-495-8501
Toll Free Fax: 1-888-654-9426
Email: info@antifraudcentre.ca
Website: http://www.antifraudcentre-

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Meaningfully Shopping for Insurance is Next to Impossible

posted by Nathalie Martin

Anybody who cares about consumer rights should take a look at this recent article by Professor Dan Schwarcz, a law professor and insurance expert from the University of Minnesota Law School. This guy actually gets his jollies reading insurance policies, and what he has learned can help you. Well, sort of….. In reality, what he has learned can educate you, anger you, and hopefully motivate you to help solve a tricky problem, namely that consumers don’t generally get to see their policies until they’ve signed on. Policy terms also vary a lot, but no one seems to know this. It is a classic case of consumers shopping solely on the basis of price, when other things like coverage matter more. According to Professor Schwarcz, consumers have access to virtually no information about the things that matter most in an insurance policy. 

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The Most Important Consumer Product

posted by Stephen Lubben

Going to stray out of my comfort zone for a moment to comment on and clarify a recent post I saw over at Felix Salmon's place. In short, Felix notes how confusing most retirement investment documents are, and hopes for action by the new Consumer Financial Protection Bureau.

If only. CFPB can do debt and payment systems (checking accounts), but can't do investments or insurance--where arguably the need is even greater. Congress saw to that with §1027 of Dodd-Frank. See, e.g., subparts (f), (i), and (g).

Memo to Elizabeth Warren: How to Do Things With Documents

posted by Annelise Riles

Elizabeth Warren has proposed, as one of her first initiatives, that banks should simplify their standardized credit card contracts with customers to insure that customers understand what they are signing.This proposal has generated lots of enthusiasm among centrists as a modest, relatively non-political initiative, something that hardly anyone could be against, but that holds out the possibility of reducing fraud and confusion in the credit markets by at least ensuring that consumers know what they are getting into.

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Am I Paying for My House or the Brooklyn Bridge?

posted by Ethan Cohen-Cole

The foreclosure mess has raised new tough questions. We once again seem back to distributional issues. If a foreclosure is in question for a homeowner that has not been paying and a bank that has no good proof of its ownership, what should happen to the house?

1. The bank should get it because a homeowner that fails to pay should forfeit his/her collateral. Morally, why should this deadbeat get an asset for free? Particularly if the whole thing was stirred up by a lawyer. (See the WSJ article on this).

2. We should work through the mess in the courts to determine the validity of the individual case. No one should lose their home based on falsified documents. Careful determination ownership is important.

I have a new suggestion:

3. Any payments that the homeowner made to the bank, the one with no evidence of ownership, should be placed into a third party escrow account. 

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Consumer Law

posted by Katie Porter

Credit Slips is a self-proclaimed blog about "credit, finance, and bankruptcy." Much of our discussion here focuses on consumer credit, which also makes up a large amount of what gets taught in law school courses on "consumer law." Jeff Sovern at St. Johns did a survey on the subject. And to understate things, the economy has provided significant fodder for discussions on consumer credit, including credit cards and mortgage lending, in the last decade, and so consumer law courses may increasingly be expanding coverage of credit or being replaced by seminars on predatory lending, the democratization of credit, the mortgage foreclosure crisis, etc.

I remain committed to "consumer law" as a broad field. While consumer credit is part of that, I believe there is a pedagogical value to teaching students about a wide variety of consumer-business transactions in a single course, and I believe there is theoretical coherence in consumer law as a field. An article in the New York Times, Airline Fees Test Travelers' Limits, nicely illustrates my thinking. The pattern of fee hikes, hard-to-discern terms, and complex pricing that the article documents in the airline industry is a pretty close parallel to the credit card industry in the last decade. The problems are fundamental to businessess--sophisticated repeat players aided by technology and expertise--selling things to consumers--relatively unsophisticated one-off players without technology or expert advice. For me, the most interesting question is trying to identify consumer-business transactions that don't exhibit the problems of these disparities. Those markets hold important lessons for the regulation of consumer credit that seems likely to occur in the next few years.

Financial Risks Follow to the Grave

posted by Katie Porter

The New York Times broke the story yesterday about how the VA may be mishandling the death-benefit accounts for life insurance beneficiaries of military personnel. Apparently many of the VA life insurance companies, including Met Life and Prudential, do not give beneficiaries a check when the policy is payable as a lump sum. Instead, grieving family are mailed a checkbook and told that the payout was ready for use in an "convenient interest-bearing account." But here are the catches: 1) The money is not in an FDIC-0insured account, meaning these beneficiaries' money could disappear if the insurers went under. This fact would be hard for consumers to discern given that the checks themselves bear the names of large banks like JPMorgan Chase. The money actually resides in the insurers' general corporate account, earning investment income. 2) The VA was under the impression that the insurers were patriotic volunteers, earning no profit on the checkbook option. In fact, the insurers earned about a 5 percent return, while the beneficiaries received 1 percent interest. When the NY Times explained this, the VA spokesperson said "Maybe I didn't ask enough questions." My former colleague at UNLV's William S. Boyd School of Law, Jeff Stempel, put a finer point on it. "[T]his is a scheme to defraud by inducing the policyholder's beneficiary to let the life insurance company retain assets they are not entitled to. It's turning death claims into a profit center."

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The Beginning of a Return to Consumer Protection?

posted by Henry Sommer

Many years ago, in the mid 1970's, when I began my career as a legal services lawyer practicing consumer law, it seemed that we were on a roll. Congress and state legislatures were passing a bevy of laws to protect consumers (including the Bankruptcy Reform Act of 1978.)  The FTC was passing regulations and taking action against consumer scams. Innovative lawyers, often in legal services programs, were bringing class actions against a wide variety of illegal and unfair practices. These cases were received sympathetically by courts that, from a common sense perspective, could see that those practices took advantage of consumer ignorance or confusion.  Little did we know that we were at the peak of the consumer protection movement and it would be almost all downhill from there.

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The Database You've Been Waiting For

posted by Angie Littwin

I'm sure I'm one of about five people who are excited that the Federal Reserve's credit card agreement database is now up and running, but as a bankruptcy professor, you've got to get your kicks where you can. I have no illusions that it will help many consumers understand their agreements. The database will take the state of credit card contracts from laughable to slightly less laughable. Nobody can read these agreements, and that's the point. To top it off, the Fed has managed to organize the database in a way that makes it largely unusable for the ordinary consumer. When you search by credit card issuer, it gives you all the agreements that company uses. If it's a large issuer, that's more than a dozen agreements. And the listings don't distinguish between the cards by card name (i.e., "Double Platinum Rewards," etc.), so the consumer has no good way to tell which one is hers without opening every one. Worse still, an issuer may have more than one entry to search under. For example, CitiBank is listed under both "Citibank N.A." and "Citibank (South Dakota) N.A." How many people know which one holds their credit card?

Why then, you may ask, is it worth having this database at all? There are at least three good reasons.

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Of Cyborgs and Repo Men

posted by Angie Littwin

The New York Times may have thought it had the scoop on the repo man of the future, but the new movie Repo Men has it beat by several hundred years. Jude Law and Forrest Whitaker star as space-age repossession agents who track down debtors and retake their collateral. The twist is that the collateral in question is transplanted body parts. So if, for example, you fall behind on the payments for your new kidney, Law and Whitaker will hunt you down and take it off your hands. Early in the preview – the movie opens later this week – we see the two scalpel-toting contract enforcers taking the Article 9 “breach of the peace” standard to whole new levels and saying over beers that a job is just a job. But, not surprisingly, Law has change of heart, one that appears to be spurred by a literal change of heart, and suddenly . . . the repo man becomes the debtor. (That’s credit-speak for “the hunter becomes the hunted.”)

Judging from the preview, Repo Men looks like your typical sci-fi dystopia flick where good-looking people fight a seemingly losing battle against a behemoth government or corporation that controls every aspect of human life. What’s interesting is that the credit industry has a starring role as the Big Brother. The movie takes two of the worst miseries of the current credit system – overwhelming medical debt and rampant foreclosure – and twists them into one debt nightmare. I never thought the line, "We could come up with a plan that fits your [budget]" could sound so menacing. Does a movie like this mean that there’s enough anger at lenders to, say, get us a Consumer Financial Protection Agency with teeth? I don’t know. But it does suggest that this is our big chance. We may never get an action-movie moment again.

Thank you to UT student Jennifer Carter for the tip!

Show Me the Original Note and I Will Show You the Money

posted by O. Max Gardner III

As mortgage delinquencies rise each month, and as the number of foreclosures increase each quarter, the “new mantra” of many pro-se and represented consumers is to demand that the mortgage servicer “prove up the original note.” Is this just some new and creative gimmick that has been sold to the desperate homeowners and to a few lawyers who have attended “progressive” seminars or is there really something to it? I submit that there is really something to it.

In my last Credit Slips post, I wrote about what I call the “Alphabet Problem.” Succinctly stated, this problem arises out of the necessity for a true sale of the mortgage note and mortgage from the originator to the sponsor for the securitized trust; then from the sponsor to the depositor for the securitized trust; and finally from the depositor to the owner Trustee for the trust. These multiple “true sales” are necessary in order to make the original asset (the note and mortgage) bankruptcy-remote and FDIC-remote frin the originator in the event the originator files for bankruptcy or is taken over by the FDIC.

Continue reading "Show Me the Original Note and I Will Show You the Money" »

The Alphabet Problem and the Pooling and Servicing Agreements

posted by O. Max Gardner III

The securitization of residential mortgage notes has created a maze of complex issues and problems for the bankruptcy and foreclosure courts. One fundamental issue is who is the actual holder and owner of the mortgage note. In order to answer this question, it is necessary to dig deep into the contracts, warranties and representations that were executed in the formation of the securitized trust.

The Pooling and Servicing Agreement (PSA) is the document that actually creates a residential mortgage backed securitized trust and establishes the obligations and authority of the Master Servicer and the Primary Servicer. The PSA also establishes some mandatory rules and procedures for the sales and transfers of the mortgages and mortgage notes from the originators to the trust. It is this unbroken chain of assignments and negotiations that creates what I have called “The Alphabet Problem.”

Continue reading "The Alphabet Problem and the Pooling and Servicing Agreements" »

What Does RESPA Have to do with Consumer Bankruptcy Cases?

posted by O. Max Gardner III

I have trained over 350 attorneys at my Bankruptcy Boot Camps and to my surprise less than 10 percent know what I mean when I refer to a "QWR." This is shocking in that a reasonable QWR can provide the attorney for the Chapter 13 debtor with some of the very best discovery outside of a contested case or Adversary Proceeding. The QWR can be used to find out how the servicer for the securitized trust is applying the debtor's money and the disbursements on the arrearage claim from the Chapter 13 Trustee. It can also be used to identify all of the "ancillary fees" and "collateral charges" that mortgage servicers are so fond of unilaterally adding to the debtor’s mortgage account, without any notice or the right to a hearing.

The provisions of RESPA which deal with mortgage servicing are generally found in either 12 U.S.C. § 2605 or § 2609. Section 2605, known as the "Servicer Act," requires servicers to respond to borrower requests for information and correction of account errors. The "Servicer Act" provisions are where you find the authority for a Qualified Written Request. The Servicer Act provisions in § 2605 are significant because borrowers are given the right to sue for violations based on the express private right of action found in § 2605(f).

Continue reading "What Does RESPA Have to do with Consumer Bankruptcy Cases?" »

In Favor of the Consumer Financial Protection Agency (CFPA)

posted by John Pottow

Adam's earlier post started the ball rolling on the CFPA discussion, and I wanted to weigh in (favorably) having now waded through the 153 pages of proposed legislation.  I take the case to be made for sheer regulatory consolidation as surely correct: the crazy quilt of overlapping agencies would make even Sir Humphrey cringe.  But the case in favor rests on much more than that, and of shrewd appeal to both typical bailywicks of the left and right.

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Bullshit--Professionally Speaking

posted by Elizabeth Warren

I don't get to post very often right now, but sometimes I can put on my academic robes and talk about a new piece of scholarship. And what better thing to talk about when wearing academic robes than bullshit?

Curtis Bridgeman and Karen Sandrik have written a new piece called Bullshit Promises. The piece focuses on contract language that is designed to make someone believe that something has been promised (e.g., a promise of a fixed interest rate highlighted in the contract) while buried somewhere else is another provision that takes away that right (e.g., reservation to change terms at any time).  The result is a "bullshit promise," something that will mislead--all within the bounds of current contract and tort law.  

Continue reading "Bullshit--Professionally Speaking" »

Colonel Ken

posted by Elizabeth Warren

Colonel Ken Allard is no whiner.  He's military tough, a firm believer in personal responsibility.  But he has been so badly treated by Bank of America that he decided to go public, here and here.  Along the way, he picked up stories from other folks about their treatment at the hands of B of A.

I like the colonel.  He has the sort of "I'll fix it myself" view of injustice that makes me root for him. But I read his story and I wonder:  how many people will be cheated, scammed, tricked, ignored and generally infuriated before someone says it is time to put some basic supervision in place.

Continue reading "Colonel Ken" »

Reading Redux

posted by Angie Littwin

Last year around this time, I wrote a Credit Slips post about a law-professor friend whose realtor expressed shock and dismay when she and her husband insisted on reading every document she gave them to sign regarding the house they were purchasing.  In the post, I somewhat sanctimoniously referred to myself as someone who always reads her contracts.  This year, it was my turn, and I have to admit that I did not pass my own test.

I faithfully read every home-purchasing form contract my realtor and lender sent me from the day I made the offer until the day before closing.  I even actually managed to do something productive for all my trouble; I switched inspectors because the first one insisted on a rights-waiving contract.  But partway through the closing itself, faced with two inches of papers to sign, my resolve wavered.  I was tired and hungry, and my mind kept circling around to all the moving-related errands I needed to do in Austin before the end of business hours and my flight out of town the next day.  (A word to the wise:  Never go to a closing on an empty stomach.)  So I took a few shortcuts.

Continue reading "Reading Redux" »

Why Is This Legal?

posted by Elizabeth Warren

Are there some deals that are so bad that they shouldn't occur?  Or it is enough to say that people have choices, and if they make bad choices, tough?

I had lunch with a bankruptcy lawyer, who followed up with an email story:

Continue reading "Why Is This Legal?" »

Should We Not Disclose Credit Card Information?

posted by Mechele Dickerson

The paper Professor Richard Wiener (Univ. of Nebraska), a psychology professor, discussed presents findings that are completely contrary to economic predictions. Standard economic theory would predict that if consumers are given complete information, they will act rationally and not overspend where the costs of spending outweigh the benefits of consuming. However, the preliminary conclusions he and his co-authors reach in Limits of Enhanced Disclosure suggest that giving consumers additional credit card disclosures does not reduce consumer spending and, in some instances, may make consumers spend even more.

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What Do Phone Sex & Mortgage Servicing Have in Common?

posted by Katie Porter

Question: What do phone sex and mortgage servicing have in common?

Answer: They both cost $9.99 a minute.

This isn't a joke. It's a real-life example of the difficulties that consumers sometimes face in working with their mortgage servicers. As part of a study of mortgage claims that I'm conducting, I came across an objection to a mortgage claim where the debtor asked for the court's help to avoid paying $9.99 a minute to talk with his mortgage servicer. The mortgage company had filed SIX duplicate claims, each for an identical amount. These claims were not marked as amended claims, so the debtor wanted to ensure that he only was on the hook for his mortgage debt one time. Since these claims were obviously mistakes, the question is why didn't the debtor just contact the creditor and tell them--"Hey, stop spitting out these claims and withdraw the extras and let's just get on with this bankruptcy." In fact, the debtor's attorney and the Chapter 13 trustee both tried to do just that. They called up the creditor at the listed phone number, but were directed to call another number if they needed actual assistance. The hitch--that other number required them to pay $9.99 A MINUTE. Frustrated, the debtor's attorney went the formal route and filed a claims objection, which I've put below the jump.(Click on it to see it big enough to read clearly; you may need to adjust to 50% in the picture viewer to see the bottom). 

Continue reading "What Do Phone Sex & Mortgage Servicing Have in Common?" »

Bad Hippo

posted by Angie Littwin

The New York Times has a double dose of consumer credit pieces today. If you haven't seen them yet, the first is an editorial about the intersection of bankruptcy law and the rise in home foreclosures.  Interestingly, the editorial's primary concern is not with the changes from 2005, but about a 30-year-old provision prohibiting the modification of repayment terms on primary residence mortgages in Chapter 13. The editorial argues that this provision may have been sensible when most mortgages were straight-forward, low-risk loans, but that with the rise of riskier, more complicated mortgage products, courts need more discretion to protect homeowners.

Second is Erik Eckholm’s article, "Enticing Ad, Little Cash and Then a Lot of Regret" about the new wave of mail-order-financed computer companies, such as BlueHippo, Circuit Micro, and Financing Alternatives, where customers make small installment payments through bank-account deductions in exchange for computers that (ideally) arrive by mail. I had heard BlueHippo’s radio ads and wondered about the service. I have my own variation on the motto, "if it seems too good to be true, it probably is," which is that, "if it's a new, heavily advertised financing option aimed at low-income people that seems reasonable at first, it's probably not." So I'd assumed there was something fishy about the service, but I hadn't had a chance to look into it. Fortunately, the New York Times did the investigation for me.  It turns out that Better Business Bureaus across the country have been flooded with complaints about these services. Financing Alternatives is currently the Norfolk, Virginia office's number one subject of complaints. The Orange County office has had a similar relationship with Circuit Micro. And attorneys general in Maryland, Illinois, and West Virginia have taken action against BlueHippo.

In theory, a service that enables low-income consumers to buy computers using small payments over time is a good idea. These days, computer competence is a basic prerequisite of upward-mobility. Most higher educational institutions assume (or require) that their students have computers. Obtaining the skills to compete with their middle-class, My Space-entrenched peers is crucial for the younger generation of low-income people. For low-income parents who want their children to do well, finding them a computer is a pressing concern. There are two major problems with these computer sellers, however. 

Continue reading "Bad Hippo" »

Behavioral Biases and Consumer Credit Markets

posted by Oren Bar-Gill

Bob promised that I will talk about "behavioral biases that affect consumer credit markets."  Since I don't want to disappoint anyone, let me say a few words about this subject.  You don't have to be a psychologist (I am not a psychologist) to recognize that consumers are subject to biases and that biases affect markets, specifically credit markets.  Myopic consumers underestimate how much they will borrow on their credit card.  Optimistic consumers underestimate the likelihood of suffering financial hardship that will make it difficult to repay mortgage debt, credit card debt or any other type of debt.  Etc'.  Biases, and mistakes more generally, reduce consumer welfare.  No surprise so far. 

What is more interesting to me is the interaction between consumer mistakes and market forces (perhaps this is because I am an economist).  How do markets respond to consumer mistakes?  How do sophisticated sellers and lenders on the supply side of the market respond to biases and mistakes on the demand side of the market?  Such responses are common.  Rebate pricing responds to consumer overestimation of the likelihood of rebate redemption.  Low printer prices and high ink prices respond to underestimation of printer and ink use.  And credit card teaser rates respond to consumers' underestimation of the likelihood that they will stick around long enough to pay the high post-introductory rates.  (I should emphasize that these pricing schemes can also be explained within a no-mistake, rational choice framework; but, as I argue elsewhere, these alternative explanations are only partially successful.)

Market reactions to consumer mistakes are interesting in their own right.  But my interest in them is mainly functional.  First, market reactions to consumer mistakes often exacerbate the welfare costs of mistakes.  Second, market reactions provide evidence for the persistence of consumer mistakes.  This merits some elaboration.  That consumers make mistakes is self-evident.  But the persistence of these mistakes in any given market is far from evident.  Consumers learn from their mistakes and sellers often have powerful incentives to correct consumer mistakes.  Accordingly, an important question is whether the mistake persists, since only a persistent mistake can justify legal intervention.  And since mistakes are often difficult to observe and measure directly, looking at market reactions to these mistakes provides an indirect way to identify the mistakes.  In a sense, this is an example of the researcher delegating a research task to the market.  If I can't tell whether a mistake is robust and persistent in a given market context, I'll simply ask the market.  Sellers will only respond to mistakes that are sufficiently robust and persistent.  And seller responses, specifically pricing strategies, are generally much more readily observable than the underlying mistake.

Paying for the Privilege to Pay

posted by Katie Porter

During the lead-up to BAPCPA, consumer advocates complained that the law's new credit counseling requirement was going to require consumers to participate in an industry that had some serious unsavory segments. While many credit counseling agencies are truly consumer-oriented, offering sound, free advice, others have been attacked for pushing debt management plans, which are credit-industry funded programs. The basic idea is that a consumer makes one payment to a DMP, which distributes the money to the person's numerous creditors. Someone recently asked me to look over the deal that an entity that she described as a "credit counselor" had put together for her to deal with a credit card obligation. Take a peek.

Continue reading "Paying for the Privilege to Pay" »

Commercial Law Beats Out Crim for Excitement (Who Knew?)

posted by Angie Littwin

My colleague, Carissa Byrne Hessick, was a guest blogger on PrawfsBlog last week.  Although she wrote several interesting posts in her field of criminal law, she was disappointed that she received by far the most comments on her “non-academic” post about buying a house

Far from being non-academic, the post and comments comprise a nice mini-debate on the virtues and pitfalls of reading contracts before you sign them.  Carissa’s post is about her realtor’s shock when she and her husband (also a law professor) actually read the various agreements she gave them to sign.  The reader responses give several accounts of the reasons why people don’t read consumer contracts.  The common issue of not understanding them anyway is undoubtedly less relevant for people who read legal blogs than for your average consumer, but even this legally sophisticated crowd had faced obstacles when attempting to read consumer contracts before signing.  It’s socially awkward.  Because so few people read these contracts, time for reading is rarely built into the process, and you usually have to read while the realtor or sales person sits impatiently and watches you.  One person compared those of us who read our contracts to people who cannot order restaurant meals without making a million changes and substitutions.  (I *wish* I could make a million changes and substitutions when I read a contract of adhesion.)

Continue reading "Commercial Law Beats Out Crim for Excitement (Who Knew?)" »


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