Commercial Law

Update on H.R. 3126 Consumer Financial Protection Agency Act of 2009

2009-11-03T16:09:00.002-05:00

The U.S. House of Representatives Financial Services Committee passed H.R. 3126, a bill for the creation of the Consumer Financial Protection Agency (CFPA), Oct. 22 in a 39-29 vote. The bill does not have a date scheduled for a full House vote, and the Senate does not have a companion bill proposed at this time.

In case you've not been following this, the CFPA would have the authority to write new consumer protection rules in the arenas of lending and credit, to monitor banks and other financial institutions for compliance with these rules, and to penalize institutions for any infractions. The CFPA would also have the ability to ban products, marketing tactics, and other business practices that it deems “unfair, deceptive, or abusive.”

The Financial Services Committee added several amendments which altered the Obama Administration’s original outline of the agency. An amendment added Oct. 21 exempts the insurance agency from CFPA oversight and prevents the agency from interfering with state insurance regulators’ oversight of insurance companies and products. An amendment offered by Rep. Maxine Waters (D-CA) adds five representatives from the fields of “consumer protection, fair lending and civil rights, representatives of depository institutions that primarily serve underserved communities, or representatives of communities that have been significantly impacted by higher-priced mortgages” to the CFPA Oversight Board. Another amendment phases out the Home Valuation Code of Conduct; the amendment would allow all originators, licensed or registered in accordance with the SAFE Mortgage Licensing Act, to order appraisals directly.

The bill is now over at the House Energy and Commerce Committee which appears to be amending the bill to replace the executive who was to run the agency with a five-member commission with staggered terms.

- RH (Reid Haataja, posted by JSM)

Harry Flechtner on the Scope of the CISG

2009-11-02T14:39:00.003-05:00

Those those CISG fans, Professor Harry Flechtner, University of Pittsburgh School of Law, has a new piece Selected Issues Relating to the CISG's Scope of Application. The abstract is as follows:

This paper addresses two issues concerning the scope of the United Nations Convention on Contracts for the International Sale of Goods (“CISG”), both of which have arisen in recent decisions applying the Convention: 1) whether requirements imposed by U.S. domestic sales law on attempts to disclaim implied warranties apply to attempts to derogate from the seller‘s obligations under Arts. 35(2)(a) & (b) CISG; and 2) whether burden of proof questions that are not expressly addressed in the CISG are governed by the general principles of the CISG. The paper defends the use of the distinction between substantive and procedural law in defining the scope of the CISG with respect to burden of proof issues, and in determining the whether the Convention provides for the recovery of damages for attorneys’ fees incurred to litigate a claim under the CISG. The paper concludes by arguing that defining the limits of the Convention‘s scope is critical to its success, and to the success of future attempts to create uniform international commercial law.

Happy reading.

- JSM

Consumers May Buy Less Halloween Candy

2009-10-29T14:42:00.004-04:00

A Time story this week reports that consumers will spend less on Halloween candy this year! Don't worry too much about this being a terribly large crisis driving little children into a frenzied panic comparable only to a bank run . . . the average spending is expected to be $56.31 per person, down from $66.54 last year. And, no worries, apparently the name brand candies will win out over store brand. As for our family, with three kids we've invested in our share to keep the economy going forward. Miniature Play Dough, chocolates and bubble gum eyeballs will be featured at our door on Saturday.

For the safety conscious, Consumer Reports has a nice piece on Halloween safety. Light the front walk, drive carefully, carry flashlights, practice fire safety with those pumpkins, etc.

Happy Halloween and have fun trick-or-treating!

- JSM

Baby Einstein May Not Make Your Kids Smarter!

2009-10-29T13:42:00.006-04:00

Meredith Miller over at the Contracts Blog reported on this little dispute that Disney has had with a consumer group over its Baby Einstein products. See, Miller, Important Consumer Alert. I have to admit that we own about fifty of these dvds that came in a set and my little guys loved them. Are they smarter as a result of Baby Einstein? Well, of course I think they are . . . I can say the kids like the classical music and I play them in Spanish so that they dvds reinforce the second language they are learning.

From Disney's website:

For the past several years, Baby Einstein has been under attack by propaganda groups taking extreme positions that try to dictate what parents should do, say and buy. Our philosophy has always been to focus on creating products that parents and babies love, and to not get sidetracked and pulled down into their street fight.

Unfortunately, with Susan Linn’s latest stunt, we cannot be silent any longer. Linn’s obvious dislike for Baby Einstein has now turned into a sensational, headline-grabbing publicity campaign that seeks to twist and spin a simple, customer satisfaction action into a false admission of guilt. This is clearly not the case.

Linn’s moves are carefully crafted to prey on parental guilt and uncertainty. This time, she began by asking the Federal Trade Commission (FTC) to go after Baby Einstein because, she said, we claimed that Baby Einstein was educational. But we do not make any such claim – and the FTC brought no action.

Not content to rely on the judgment of the federal government, her attacks continued and escalated despite the fact that her assertions have no merit.

That’s where we are today. However, we took a very different approach. We strongly believe that, unlike Linn, our consumers find value in our product, and rather than continue to fight with her, we decided to leave it up to those consumers. That is why we extended a refund policy that was already in place. Although she would like to claim otherwise, there is nothing extraordinary about a company’s willingness to stand behind its product. To the contrary, it is the strongest possible show of confidence in it.

Baby Einstein announced this offer in a press release issued on September 4, 2009, which was largely ignored by the media. Linn’s latest public relations blitz simply distorts the facts and misleads the public. In the end, this smear campaign has everything to do with Linn trying to generate ink and funding for her cause, and not about the value that consumers find in our product.

Thank you for letting us set the record straight.

Sincerely,

Susan McLain
General Manager, The Baby Einstein Company

Not being a big fan of television for kids, we actually found the Baby Einstein dvds had some positive, if not wholly education components. But, clearly there is a difference of opinion. It is difficult to make this really a good case of a breached warranty. It would have to be an express warranty (affirmation of fact) under UCC 2-313. The case that the dvds did not make your kids smarter would seem to have problems on the arguments of opinion, puffery and the like. Disney has put a stop to any claims by just offerring the refund.

In case you want your refund, see babyeinstein.com.

- JSM

Credit Card Rates Up 20%

2009-10-29T01:18:00.003-04:00

This Today Show piece discusses a study about increasing credit card rates which finds a 20% across the board rate increase. On of the consumers interviewed is actually a banker complaining of a 20% increase by Chase on his card.

Visit msnbc.com for Breaking News, World News, and News about the Economy

- JSM

Dodd Seeks to Freeze Credit Card Rates

2009-10-27T13:57:00.003-04:00

In a new move against the credit card interest rates, Senator Christopher Dodd introduced new legislation attempting to freeze credit card rates. It seems that many card companies are attempting to increase rates before the Credit Card Accountability, Responsibility, and Disclosure (CARD) Act goes into effect (see Dodd Bill and Dodd Pushes). The banks argue that the freeze would require them to cut back on lending.

Consumers are justifiably mad about the rate hikes (See Debtors Revolt). The Debtor's Revolt has a new youtube video where she calls Chase Bank for raising her interest rate to 21% and closes the account. While I applaud her "revolt" response to bank's raising rates without good cause to do so, consumers need to be cognizant about the effect that closing accounts has on their credit scores. This is particularly true when it is a longer held account (in the Debtor's Revolt Chase incident, it appears to be a newer account as she mentions an introductory rate). Having received one of these rate increases in the mail myself recently, it reminds us all to read these stock letters from the card companies. While paying off credit card debt has historically been a good thing, the changing strategies of banks raising rates, closing accounts and reducing credit lines may force consumers to be more cautious than ever with card companies (See Suzi Orman, Change in Credit Card Strategy). Let's see if Dodd can plug this hole.

See here for the video:

- JSM

Toys R Us to Feature FAO Schwarz

2009-10-27T13:39:00.004-04:00

Something to expect this holiday season, Toys R Us will now feature FAO Schwarz boutiques. See Toys R Us to Feature. When FAO went out of business, Toys R Us bought the rights to the name and now intends to use it in about 600 of its stores. Not only will there be in-store purchasing, but there is a website (fao.com) and a holiday catalogue coming. The concept, of course, is to offer different toys that aren't otherwise available. Yes, the prices may be higher in a year that consumers might be looking to cut back a bit. Toys R Us has bought up a number of other brands of late (eToys.com, babyuni- verse.com and the resource site ePregnancy.com). Always on the lookout for fun toys for my own kiddos, I found a set of World of Eric Carl Bath Squirty Toys that my boys will love. And, priced at just $7.99, very reasonable.

Happy shopping!

- JSM

Banks Impose Fees on Those Who Pay Off Credit Cards

2009-10-26T13:20:00.003-04:00

Yep, had to know this one was coming. As I watched the Today show this morning, a piece came on about credit card fees (see also MSNBC, USA Today). Not only has the financial crisis resulted in consumers being squeezed by rate hikes (see Consumer Revolt), but banks face new disclosure and other requirements under the Credit Card Holders Bill of Rights Act (see Obama Signs). Banks are also scrambling to head off new debit card rules that will surely curtail fees generated by overdraft charges (see Big Banks Alter and Back to Work on Debit). Citibank and Bank of America are the banks imposing these new fees, for consumers who pay off the balance every month, who don't carry a high enough balance or who keep open lines of credit in the event of emergency. Of course, consumers have to be careful in cutting up cards to avoid these fees as it can negatively affect their credit scores. Although consumers can shop around for banks that are not imposing these fees, one must wonder how quickly other banks will follow suit. While credit unions and smaller banks might still provide low cost cards, those options might not be available to many consumers who've been hit hard by the financial crisis. As always, be careful with your cards and reexamine which ones you really want to keep.

Here's the Today show piece:

- JSM

Bernanke Speaks on "After the Fall"

2009-10-24T23:27:00.004-04:00

This week Ben Bernanke spoke in Chatham, Massachusetts on the role of the Federal Reserve after the crisis (See Bernanke Speech). Bernanke took the opportunity to observe the difference that a year makes in world finances, but urged (again) that with the crisis "abating" Congress must still act to prevent a future crisis of this severity.

We have seen numerous instances when weaknesses and gaps in the regulatory structure itself contributed to the crisis, many of which can only be addressed by statutory change. Notably, to promote financial stability and to address the extremely serious problem posed by firms perceived as "too big to fail," legislative action is needed to create new mechanisms for oversight of the financial system as a whole; to ensure that all systemically important financial firms are subject to effective consolidated supervision; and to establish procedures for winding down a failing, systemically critical institution without seriously damaging the financial system and the economy.

Bernanke went on to comment on a number of actions the Federal Reserve has taken and also to to take up the issue of consumer protection. Bernanke observed that "effective consumer protection promotes healthy competition in the financial marketplace, supports sound lending practices, and increases confidence in the financial system as a whole." Bernanke commented on the Fed's efforts using consumer testing to help determine when consumers understand financial products and communications from financial institutions. The Fed has used consumer testing in the debate involving debit cards, for instance. While no final regulations are yet in place for debit cards, the consumer testing tool may turn out to help the Fed tackle issues surrounding clarity of disclosures.

Bernanke has been hammering on the topic of needed regulatory changes for some time now. Let's hope that Congress is listening.

- JSM

Back to Work on Debit Card Rules

2009-10-20T13:35:00.004-04:00

We've been discussing for some time on the issue of debit card overdrafts (See Big Banks Alter Debit Overcharge Rules , New York Times Takes on Overdraft and How Your $4 Cup of Coffee Can Cost $34 or More), with no success on the rulemaking front. The Federal Reserve has announced, though, that rules are close to completion and will be in the form of an opt-in option for consumers (See WSJ, Fed is Near New Fee Rules). Governor Tarullo of the Fed testified last week before the Senate Subcommittee on Financial Institutions, Committee on Banking, Housing, and Urban Affairs that the rules are near completion.

Although the Fed seems poised to finally move on debit cards, Congress appears to lack faith in the ability of the Fed to get this one done. While the Fed has lingered in its rulemaking, the Center for Responsible Lending reports that overdraft fees have increased 35% in the last two years alone. Senator Chris Dodd is leading the charge for Congressional intervention on debit cards. While rulemaking has been long coming, the pressure by Congress seems to also draw attention to the Fed's inability at times to protect consumer interests as part of its core mission. The situation of debit cards is but another example of why the Consumer Financial Protection Agency is a good idea (See Debate Heating Up). This may well be enough to spur the Fed to finishing up the debit card rules. Here's a piece on the proposed legislation.

-JSM

Comsumer Financial Protection Debate Heating Up

2009-10-12T13:30:00.005-04:00

This weekend's New York Times had a piece by Joe Nocera titled Have Banks No Shame? in favor of the Consumer Financial Protection Agency (CFPA). Nocera hits it plainly remarking the CFPA's "sole goal would be to try to keep bank — and nonbank — customers from being gouged, deceived or otherwise taken advantage of." It seems like a simple proposition. How could anyone be opposed to this? Of course, there are detractors. The American Banker's Association's (ABA) website has as one of two "urgent action alerts" the opposition of the CPFA. The ABA explains "a separate consumer regulator is not necessary and is in direct contradiction with the existing approach which recognizes that consumer protection and safety and soundness are inextricably bound and should not be separated." Not necessary is a translation of business as usual. A recent editorial at the Wall Street Journal argues that the CFPA will unleash Fifty Eliot Spitzers on the banks for the purpose of harassment. Both represent a call to defeat the CPFA. This piece simply sounds in scare tactics.

Todd Zywicki of George Mason has argued one of the more reasoned oppositions that I've seen. His basic argument seems to be that the CFPA will not increase market competition and goes beyond historical restraints on lending. Zywicki believes that credit card debit is simply in substitution for other debt that consumers have always had, the CFPA will increase the cost of credit and that most consumers understand the products (See, Zywicki Testimony). I disagree with Zywicki on a number of points, particularly with respect to complexity of and transparency in marketing of financial products and basic fairness. I don't believe that consumers understand the terms offerred on financial products or even that lenders and banks actually disclose all relevant terms (c.f., FDIC Study on Bank Overdrafts). Moreover, without a regulator whose mission it is to take up consumer issues, there are impediments to regulatory intervention in products that are not as much on the Federal Reserve's top list, such as debit card overdraft fees. Nocera pretty much sums it up well: "The sooner we can pass the thing, the better."

Here's an interview that Zywicki arguing against the CFPA:

- JSM

Obama Speech on Consumer Protection Agency

2009-10-09T23:02:00.008-04:00

Sure, President Obama won the Nobel Peace Prize today, but he also spoke in support of the proposed Consumer Financial Protection Agency (CFPA). Interestingly, President Obama took up issues not only of mortgages, but of loans in general, even payday loans. He even mentioned one of my favorite gripes, bank overdraft fees. Moreover, he took aim at those opposed to the CFPA. From the transcript:

This agency will have the power to make certain that consumers get information that is clear and concise -- in plain language -- so they can compare products and know exactly what they're getting themselves into. It will ensure that banks and other firms can't hide behind these ridiculously confusing contracts -- pages and pages of fine print that nobody can figure out. It will have the ability to enforce and build on the credit card reforms we passed earlier this year, so that consumers aren't hit with unfair rate hikes and penalties, or hidden charges. It will require brokers to look out for the interests of families if they give advice about mortgages. And it will ensure transparency and fair dealing for other financial products, like bank overdraft services and payday loans.

Here's the video:

- JSM

Adam Levitin on the Consumer Financial Protection Agency

2009-10-09T13:17:00.004-04:00

Georgetown's Adam Levitin recently wrote The Consumer Financial Protection Agency, a Pew Financial Reform Project briefing paper. Adam's work is important to this initiative to create the CFPA (See Communication From Academic Faculty). Here's the abstract:

The Obama administration has proposed restructuring financial services regulation by transferring all consumer protection functions from existing agencies to a new Consumer Financial Protection Agency (CFPA). The goal of the CFPA legislation is to address the flaws in the regulatory architecture that have inhibited effective responses to the substantive problems, rather than mandate specific new substantive consumer protection laws.

The current consumer financial protection is based on disclosure regime and is policed through supervisory feedback, enforcement actions, and occasionally prohibitions on terms, products, and practices that are deemed inherently unfair and deceptive. On the federal level, consumer protection in financial services is divided among a number of agencies: the OCC, OTS, NCUA, Federal Reserve Board, FDIC, FHFA, HUD, VA, FTC and DOJ. Some of these agencies have the ability to promulgate regulations, some also exercise supervisory authority over financial institutions, and some may only enforce existing regulations. Sometimes authority is over a class of institutions, and sometimes it is over a particular type of product.

There are four main structural criticisms of the current regulatory structure: that consumer protection is a so-called 'orphan' mission; that consumer protection conflicts with, and is subordinated to, safety-and-soundness concerns; that no agency has developed an expertise in consumer protection in financial services, and; that regulatory arbitrage of the current system fuels a regulatory race-to-the-bottom.

Consolidation of consumer financial services protection authority could: place all financial services companies, regardless of the form of their charter, under a single regulator, thus ending its orphan status; separate consumer protection from safety-and-soundness regulation, thus ending subordination; encourage the development of a deep bench of regulatory expertise and knowledge, and; end the opportunity for regulatory arbitrage and any potential race to the bottom.

There are several potential concerns about a CFPA: conflicts with prudential regulators; ambiguity with respect to Consumer Reinvestment Act authority, and; potential overregulation resulting in higher costs of financial products, less product availability, and discouragement of innovation. Still, there are compelling reasons to believe that the present regulatory architecture cannot produce the optimal consumer protection regime and will continue to fail in its task, resulting in unfair treatment of consumers and a potentially significant source of systemic risk. To this extent, consideration of a CFPA should strive to distinguish between the basic thrust of the legislation - a consolidation of the regulatory authority of - and the proposed new substantive powers granted to the agency.

-JSM

Mark Roark on Fixtures

2009-10-09T12:59:00.003-04:00

Commercial Law's Mark Roark (LaVerne) has written Defining Fixtures in Law and Policy in the UCC, which will appear in the Cincinnati Law Review. It always warms my heart to see great law review placements on UCC papers! Here's the abstract:

This article offers both a concession and a critique. The article concedes that the law of fixtures under the Uniform Commercial Code is helplessly tied to the various state laws dictating real estate. The natural impact of explicitly tying a UCC doctrine to multiple state law variation is the automatic loss of uniformity. At the center of the fixtures discussion in the UCC is a definition that does not define, and more importantly, does not limit doctrinal extension. Because the UCC offers a non-defining definition, this article considers the function of the fixtures definition. Specifically, the article looks to the original drafters comments about what the purpose of the fixtures definition was intended to accomplish.

Conceding that the definition in the UCC does not define, the article then critiques the definition by asking what role the definition plays in the game of seeking uniformity. Specifically, the article argues that the fixtures definition in UCC Section 9-102(a)(41) performs a function just as important as defining - it narrates. The article argues that the drafters in deciding on a definition of fixtures isolated themes of commonality and described those themes in a concise, but useful description of the fixture. Those themes include the joining of goods to realty, the concept of relation, and the emphasis on interests as a governing factor in the fixtures analysis. The article argues that the narration accomplished by the UCC allows for uniformity, not by mandatory uniformity, but by synchronic dialogue - allowing the themes to create images and the images to compel instinctive beliefs. The article argues, however, that the description provided by the drafters should be reunited with the substantive provisions relating to fixtures since each are tied to the other’s understanding.

-JSM

Consumer Revolts Over Increased Credit Card Fees

2009-10-08T17:01:00.005-04:00

I liked this story about a woman who took on Bank of America after they increased her credit card rate to 30% after she was late on one payment in 2008 and a second in 2009. After she launched a widely distributed youtube video, Bank of America agreed to reduce her rate to 12.99%. It is a shame that consumers have to go to such lengths to get a favorable bank response. Here are the videos before and after the renegotiation:

- JSM

Lenders Modifying Home Mortgages

2009-10-08T15:52:00.007-04:00

Today's news included a Treasury report that lenders have modified 500,000 home loans to keep home owners in the homes under a trial loan modification program. I applaud the government for encouraging such modifications which would hopefully increase the value to both the mortgage holders and homeowners alike by protecting the asset and obtaining payment on the loan. Yet, I am reluctant to find joy in the number of loans so modified or the ease for consumers seeking loan modifications.

The Making Home Affordable modification program originally advertised that it would help 4 million homeowners retain their homes. (See, Foreclosures, New York Times). Mortgage foreclosures during the second quarter of 2009 were up 16%, reflecting falling housing values and rising unemployment. New Treasury plans include incentives for "short sales," which allow homes to be sold at less than loan value (i.e. market value) to head off foreclosures that are coming in the future (Short Sales Plan).

Two of the biggest impediments to modifications or short sales seems to be time and difficulty. While keeping homes out of foreclosure appears a good idea, lenders are likely earning default fees on the loan. Lenders may also be reluctant to modify loans too early, hoping owners will bring the loans current. Yet, waiting too long can allow the home to slip into foreclosure. Buyers interested in a short sale may also bolt if the bank takes too long or does not approve the home price, which is likely to be substantially below the loan value on the property. The difficulty of obtaining loan modifications and conflicting information received from lenders discourages eligible modifications under the federal plan.

While our home thankfully is not in foreclosure, I can report on our in process home refinancing that probably represents much of the frustrations that home owners face. For instance, in shopping for rates and costs, we found that some of the lending representatives did not return calls. Others had voice-mail boxes that were full so that messages could not be left. One Citi Mortgage representative gave us refinancing numbers, but then later we were never able to reach her. A second Citi Mortgage representative told us the initial numbers were actually wrong. Hardly inspiring. In the end, Wells Fargo actually negotiated rates that beat the competitors, so we are now working on reviewing paperwork with them. We're not done, but at least the refinance is locked in at a favorable rate. Yet, I can see from our own experience for an uncomplicated refi the frustrations that homeowners are reporting, particularly when the situation is complicated by a delinquency or foreclosure.

So, is the 500,000 milestone a reason to celebrate? Probably. But my enthusiasm is lessened by the amount of transactions that remain.

-JSM

Are Card Companies Reverse Robin Hoods?

2009-10-06T14:20:00.004-04:00

The New York Times is running a series on various forms of payment cards, and a re-occurring theme appears to be whether card companies effectively rob the poor to reward the rich. Are they Reverse Robin Hoods. Last Friday, Floyd Norris's High & Low Finance column claimed that low income consumers actually pay more than the affluent. He reached this conclusion by reasoning that merchants charge everyone the same price, but that those who carry reward credit and debit cards get a rebate from their card companies. The less affluent who pay in cash thus effectively pay more. I have argued elsewhere that Norris's analysis is too simple and may well be wrong. On today's front page, however, Times reporter Andrew Martin has a story entitled "Prepaid, but Not Prepared for Debit Car Fees" that shows that the situation for the poor may be even worse. This piece argues that pre-paid debit cards -- used by many low income people who lack bank accounts -- charge outrageous fees. These cards are a relatively new product not addressed in the recent credit card legislation or bills addressing traditional debit cards linked to checking accounts. One has to wonder why a pre-paid product should trigger high fees given that the issuer is bearing no credit risk or the administrative costs of billing the cardholder.

These articles, of course, raise more questions than they answer. Is it really true that merchants could lower their prices if they stopped accepting credit cards? If so, why don't we see more merchants doing it. Wouldn't the lower prices they could charge give them a competitive advantage? If not, what is it about the payment card market that seems immune to many forms of competition? For example, why would low income consumers waste money on a pre-paid debit card when they could open a bank account with lower fees? Banks seem to be responding to threatened debit card legislation, and American Express has taken a competitive stance on gift card fees, apparently spurred by recent credit card legislation. Shouldn't market pressures produce competition without actual or threatened legislation? In future posts, I'll try to explore some of these questions and consider ways in which the law might help advance consumer interests.

Confusing a Butt with a Face

2009-09-30T14:15:00.006-04:00

Take a look at this funny story about a St. Louis teen in hot water for starting his own line of clothing in competition with North Face Apparel. The teen, Jimmy Winkelman, has marketed clothing under the name of "South Butt," making a whopping $4900 in annual revenue his first year. Despite the meager earnings of this 18 year old's company, North Face Apparel has threatened to sue. Albert Watkins, attorney for Winkelman, commented: “North Face has indicated as a matter of record that the public will somehow be confused by the South Butt product,” Watkins said. “There appears to be little recognition, if any, that the savvy of consumers precludes anyone from confusing a face with a butt.”

Jimmy and his friends even have a web site and a marketing video:

While I have no idea how the intellectual property issues will play out, I have utmost respect for the budding entrepreneur. You go Jimmy!

- JSM

Commercial Law Welcomes Brian McCall!

2009-09-29T14:11:00.003-04:00

Commercial Law is pleased to announce that Professor Brian McCall from University of Oklahoma will be guest blogging with us. Brian's most recent papers The Achitechture of Law: Building Law on a Solid Foundation The Eternal and Natural Laws and Its Just Secured Credit: The Natural Case Law in Defense of Some Forms of Secured Credit (Indiana Law Review), Learning From Our History: Evaluating the Modern Housing Finance Market in Light of Ancient Principles of Justice (South Carolina Law Review) all employ a historical look at the law and finance.

We look forward to having Brian's historical viewpoint.

Communication From Academic Faculty Who Teach Courses Related to Consumer Law and Banking Law

2009-09-29T13:21:00.005-04:00

Seventy-three professors issued a joint letter supporting the creation of a Consumer Financial Protection Agency at the federal level. We are strong supporters of the importance of this legislation in that consumer transactions lack the transparency that is necessary for honest and fair financial products, including, a wide variety of debt instruments (i.e., mortgages, credit cards), payment devices such as debit cards, and banking fees in general. The letter supports the passage of H.R. 3126, introduced by Rep. Barney Frank (D), creating the oversight agency. Some of the impediments to governmental oversight have included the dispersion of regulatory authority over a number of federal agencies none of whom has consumer issues as the primary mission, emerging financial products and technology that raise new regulatory issues, and industry opposition. We will certainly follow the progress of this legislation (and related legislation such as the Consumer Overdraft Fair Practices Act) and the industry response (see, Big Banks Alter Debit Overcharge Rules).

The press release:

FOR RELEASE ON SEPT. 29, 2009 AT 10:00 AM:
Consumer and Banking Scholars Show Support for the Consumer Financial Protection Act
Hempstead and Jamaica, NY – On September 30, 2009, the House Financial Services Committee, chaired by Representative Barney Frank, will hold hearings on H. 3126, titled “the Consumer Financial Protection Act” which would create an independent Consumer Financial Protection Agency. Today more than seventy law scholars who teach in fields related to consumer law and banking law have signed a detailed Statement of Support demonstrating their strong views about the importance of this legislation.

The faculty endorsing the Statement of Support include leading scholars who teach in fields related to consumer law and banking law who teach at many of the nation’s leading American law schools—in states including Alabama, Arizona, California, Connecticut, Florida, Georgia, Illinois, Indiana, Iowa, Maryland, Massachusetts, Minnesota, Missouri, Nebraska, New Jersey, New York, Nevada, North Carolina, Ohio, Oregon, Pennsylvania, South Carolina, Tennessee, Texas, Utah, Washington, Wisconsin, and Wyoming as well as Washington, D.C. The signatories have no economic stake in the passage of this legislation.

The Statement concludes that on balance, the existing regulatory structure places “a higher value on protecting the interest of financial product vendors who promote complex debt instruments using aggressive sales practices, than on protecting the interests of consumers in transparent, safe, and fair financial products.” The body of the Statement is 8 pages long, single-spaced. It refers specifically to dozens of scholarly articles and studies demonstrating that at critical moments of consumer confusion and vulnerability,” the existing regulators “have been unwilling to expend resources to develop appropriate rules and guidelines and to police mortgage and credit instruments.” The Statement urges passage of H. 3126 because “consolidated authority and a dedicated consumer-oriented mission would be likely to improve public confidence in the safety and efficiency of the vast consumer financial products marketplace.” It further provides an analysis of desirable aspects of the legislation and points to extensive scholarship supporting the need for a new approach to handling consumer financial regulation.

For further information please contact the signatories of the Statement at their home institutions or:

Norman I. Silber
Professor of Law
Hofstra Law School
516-463-5866
norman.i.silber@hofstra.edu
law.hofstra.edu

Jeff Sovern
Professor of Law
St. John's University School of Law
718-990-6429
sovernj@stjohns.edu
law.stjohns.edu

- JSM

- JJK

Big Banks Alter Debit Overcharge Rules

2009-09-23T18:33:00.003-04:00

Presumably trying to get out in front of proposed legislation that would require banks to ask their customers if they want to "opt in" to debit card overdraft protection, JP Morgan Chase and Bank of American recently announced that they would be altering their overdraft policies. Both banks will stop charging overdraft fees for very small amounts (less than $5 for Chase and $10 for BofA) and will soon provide their customers with the option to opt out of overdraft protection so that a purchase would not be authorized if it would put the cardholder into an overdraft position. Both banks also plan to limit the number of overdraft charges that may be imposed in a single day, and Chase will also drop a controversial method of calculating overdrafts.
According to the N.Y. Times, both banks described their actions as responsive to their customers. “We made the decision that we had to help customers now and help those most stretched by the economy,” said Brian T. Moynihan, president of Bank of America’s consumer and small-business banking operations. “They found themselves getting hit by too many fees, and they said, ‘Help us out.’ ” There is little doubt, however, that threatened legislation has played a role. According to Michael Moebs, an economic advisor for many banks and credit unions, the banks understandably oppose this legislation because many of them collect more in overdraft fees than they earn in profits. Moebs argues that many banks would not be able to replace the revenue soon enough to stay in business.
So, have Chase and BofA, done enough to forestall legislation? While the changes they plan to implement are certainly a step in the right direction, they hardly eliminate many concerns.
For example, the exception for small overdrafts may only protect the cardholder if they deposit sufficient funds to cover the overdraft before making additional charges. But if the cardholder is not notified of the overdraft situation, how often will that happen?
The limits on the number of overdraft fees also hardly eliminate the seeming unconsciounability of the arrangement. As an initial matter, they will apply only to purchase at stores, not ATM withdrawals. Second, the amount of fees will continue to bear no reasonable relationship to amount of the overdraft. Bank of America is limiting its cards to no more than four overdraft fees per day. But the fee remains $35 per overcharge, regardless of the amount. So, a customer that makes four purchases over the limit that total just $11 or $12 dollars would pay $140 in fees. The result at Chase is only marginally better. It will impose a limit of three fees per day, but they would total $89 on three overcharges that could amount to as little as $5.01. As Brad Tuttle wrote on the Time website, "[s]o the poor saps who are dumb enough to spend more than they have in their accounts—and who do so more than three or four times a day—are thrown a bone." I would add, a very small bone at that.
I have not seen any justification for these fee levels. Surely, a bank providing overdraft protection should be entitled to a reasonable return on the money it effectively lends to its customer as well as a reimbursement for the incremental administrative fees it incurs because a charge results in an overdraft. These fees appear to exceed the bounds of reason by several orders of magnitude. And surely, the banks would produce the data necessary to justify them if it existed.
Even the proposed new opt out provisions are less than they seem. They will require the customer to forgo overdraft protection for check writing as well as debit card use, a risky proposition given that many vendors charge their own penalty fees for bounced checks.
One doubts that these steps will satisfy the concerns of those in Congress who have proposed legislation to limit overdraft fees.

PayPal Account Hacked!

2009-09-23T14:48:00.008-04:00

While working in my office this week I received an email "receipt" from Paypal reporting a $10.00 payment to Skype (an online phone service). I've not used my Paypal account in some time, so my first thought was that this was a fake Paypal email. After all, it is commonly known that Paypal is regularly fighting the fake emails that are sent out hoping that the recipient will click on the embedded links. See, How Do I Report Paypal Fraud or a Paypal Scam. Nevertheless, I logged into my Paypal account to make sure (opening a new browser and entering the web address manually). There it was, a $10 payment to Skype on my Paypal account. The email I received was not a fake one from Paypal. It really was a receipt for a $10.00 charge.

Now, I do have a Skype account that I used when travelling abroad (worked great in Moscow), but it is not active at this time with any on-going subscriptions. Moreover, I never used Paypal to pay Skype in any event. I logged into the Skype account to verify nothing was active, which was still the case. Apparently, there have been some complaints that consumers are unable to cancel Skype once they open an account (see Skype forum).

Since the problem did not appear to be with Skype, I called Paypal. Although it took two customer service reps to get to the bottom of the problem, it turns out someone had logged into my Paypal account four times that day and authorized the transaction to Skype. Kudos to Paypal for agreeing to reverse the charge quickly and sent me an email within 24 hours "resolving" the case in my favor and saying that the charge will be reversed within five days on my American Express card.

Luckily for me, I do not have my bank account connected through Paypal. Paypal does, though, encourage users to connect bank accounts. As a payments professor I can easily imagine the havoc a Paypal hacker can create by draining a user's checking account, leaving the user waiting as long as ten days for a provisional recredit (Federal Reserve Consumer Handbook to Credit Protection Laws: Electronic Funds Transfers). So, consumers should exercise caution with all payment devices that are connected to their checking accounts in case of fraud, including both debit cards and services like Paypal.

A final interesting question is why did the thief choose $10 and why Skype? The $10 amount is not as likely to get noticed or to encourage authorities to make the chase. Skype is a European company which also might make catching thieves more tricky. But, since it deals in phone services, the thief probably either used the $10 asset before being caught or resold it to someone else. All of which contribute to the success of the hacker in these instances. What else can be done in these cases? It seems that the best solution is preventing the hacking in the first place through better security. Not sure how the hacker managed to get into my Paypal account, but there appear to be web sites that claim they can instruct you how to do it. Just another wild day in modern payment systems.

-JSM

Securities Regulation and the Global Economic Crisis: What Does the Future Hold?

2009-09-21T12:02:00.002-04:00

For those in the NY area, Seton Hall has an upcoming symposium entitled "Securities Regulation and the Global Economic Crisis: What Does the Future Hold?", and will take place on Friday, October 30, 2009, at Seton Hall University School of Law in Newark, NJ. The event is free and open to all. Plus Seton Hall is offering six (6) New York CLE credits for full-day attendance. Further information about the Symposium, a list of presenters, and a link to register can be found at http://law.shu.edu/lawreviewsymposium.

- JSM

From the World of Law Reviews: Game Theory and Law Review Submissions

2009-09-16T17:59:00.001-04:00

As the height of the law review submission season is coming to a close, I thought I would observe an interesting approach by a law review editorial board and some other general observations.

Law Reviews Gaming it Up. The editors at the University of Cincinnati Law Review, who will ultimately publish my piece on fixtures Groping Along between Things Real and things personal, engaged in a nice piece of behavioral prediction in making the offer to publish. In the offer letter the editors offered two choices: (1) I could expedite with anyone over the next two days; or (2) I could expedite with only the top 30 law reviews over the next 10 days. This strategy is genius from the law review editor standpoint. First, its highly likely that the reviews most likely to take the piece out from under Cincinnati are those ranked between 31 and 51. The strategy by Cincinnati reduces to almost near absurdity the time frame for journals to respond. On the

other hand, if they are likely to lose an article to a top 30 journal, then 10 days will likely not be needed for that decision to reveal itself. This is the kind of law review gamesmanship that I like and support! Has anyone else seen an offer like this before?

Lex Opus is a good secondary alternative to Bepress's Expresso. In some ways, the system operates just a smoothly. Another feature that I liked was Lex Opus allows law reviews to view the work sua sponte and make the author an offer -- I received one offer that was not unattractive. That seems to me to be a pretty good idea and, though I imagine that such offers are rarely accepted, it is still a nice feature. But the best feature is its cost -- its free.
Peer Review of General Law Review Articles. Brian Leiter this morning posted a link to PRSM -- A consortium of law reviews engaging peer review processes. Journals that have signed on to the consortium include The South Carolina Law Review, The Mississippi Law Journal, Stanford Law Review, and the Wake Forest Law Review. It will be curious to see if this is successful.

Marc (MLR)

Bernanke Believes Recession "Over"

2009-09-15T15:04:00.001-04:00

Happily, Bernanke stated today at the Brookings Institute that he believes that the growth we are seeing in the economy suggests that the recession is technically over. Unfortunately, the unemployment rate, currently around 9.7%, will be slow to come down. This will leave many still struggling with the pace of a slower recovery. This is good news, for sure. Since last fall we were bracing for another "Great Depression," pehaps we can be contented with simply riding out slow economic growth. And, of course, Bernanke emphasized yet again the need for regulatory overhaul of some type. Perhaps the more times we hear this, the more likely it might be that action will follow. Let's hope.

- JSM