Category: Consumer Protection Law

The Home Finance Arms Race

A growing consensus seems to be emerging that we can borrow and spend our way out of the current subprime mess. The “stimulus package,” the Fed’s interest rate cuts, and new moves to increase the limit on “jumbo loans” all seem based on this assumption. Given that the U.S. is already racked with debt, I can’t quite see the logic here. Moreover, as Harold Meyerson noted recently in Congressional testimony, there’s a much simpler explanation for the current housing woes:

The subprime mortgage crisis is fundamentally a crisis of the rising cost of housing while the income of many Americans has flat-lined. As home-building executive Michael Hill pointed out in a Washington Post op-ed column just this Monday, “forty years ago, the median national price of a house was about twice the median household income. In some parts of the country, this ratio was closer to 1 to 1. Twenty years ago, the median home price was about three times income. In the past 10 years, it jumped to four times income.” And in most thriving metropolitan areas, Hill adds, the ratio is far higher than that.

Conclusion: If median income in America had continued to increase as it did in the years from 1947 to 1973, when it doubled, we would not be facing the mortgage-market meltdown we are experiencing today. So, too, with credit cards, where default rates are also increasing sharply, reflecting the growing desperation of Americans struggling to pay their bills, and further destabilizing many of our already shaky financial institutions.

If economic policies focus solely on allowing the middle class to borrow more, they may well be setting us up for yet another arms race of housing finance that we can ill afford. Consider, for instance, the effects of inequality in New York City, a bellwether for trends likely to affect more of America:

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Are Debtors’ Prisons Next?

Ah, the perils of unintended consequences. The federal government in the 1990s made direct deposit a default method of paying Social Security and some other benefits. Now “Social Security recipients could now more easily pledge their future checks as collateral for small short-term loans.” And the “payday loan” industry has found a lucrative new niche–“volume has climbed to about $48 billion a year from about $13.8 billion in 1999.”

Responding to the manifest failures of under-regulated consumer finance markets, many are now claiming that predatory borrowing was a bigger problem than predatory lending. I wonder if they’d find predatory “Ms. [Jennifer] Rumph, whose medical problems include severe asthma and two hip replacements,” and who appears to support herself and her children with disability benefits:

After Ms. Rumph fell behind on her payments, Miracle Finance sued her in small-claims court in Abbeville, Ala. Although federal law says creditors can’t seize Social Security, disability and veteran’s benefits to pay a debt, enforcement of the law is scant, and many Social Security recipients are unaware of their legal rights. Lenders and their debt collectors routinely sue Social Security recipients who fall behind in their payments, and threaten them with criminal prosecution, senior advocates say.

Debtors must go to court to prove their case. Ms. Rumph says she didn’t know any of this and was afraid to go to court. Miracle Finance won a $1,500 default judgment in July, and four days later sought a court order requiring Ms. Rumph to appear in person to detail her income and assets.

I suppose some analogue to the “fugitive disentitlement” doctrine might leave hard-liners unmoved by Ms. Rumph’s plight. Nevertheless, the payday borrowing boom in general should lead to reconsideration of exactly what the purportedly narrowing “consumption gap” between rich and poor is actually based on.

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Kosher Food, Social Justice, and Shaming (Blumenthal Guest)

The last year or so has seen a fascinating movement in the kosher food world-the development of the “hekhsher tzedek” -variously translated as a “righteous seal” or “Justice certification.” Initiated largely by the Conservative Jewish movement, the certification is seen as a complement to the traditional kosher certification, which attests that the food in question has been prepared according to Jewish ritual law. According to the United Synagogue of Conservative Judaism, the seal would certify that “food and meat processors have met a set of standards that determine the social responsibility of kosher food producers, particularly in the area of workers’ rights.” Thus, kosher food could receive two certifications-one showing that it is ritually kosher, one showing that the workers in a particular plant were treated ethically, fairly, and legally. The USCJ was to consider a resolution establishing the certification at its December conference last week. It was expected to pass easily, though I have not seen follow-up reports.

The idea is controversial, for a number of reasons legal and otherwise. One is motive-some see the move as motivated by antipathy toward one of the larger kosher facilities, AgriProcessors, in Iowa, where worker mistreatment and unsafe conditions were alleged in the spring of 2006.

Another set of issues concerns the proper purviews of government, religious, and lay groups: objections have been raised that responding to such worker treatment is the role of government agencies and the justice system. There are interesting echoes here of the kosher fraud statute cases of the last several years, in which constitutional challenges to state definitions of “kosher” were upheld. These cases essentially led to more informal, social regulation of kosher food sellers, reflecting the sort of “shaming” and social norms issued often discussed here at CO. See Shayna M. Sigman, Kosher Without Law: The Role of Nonlegal Sanctions in Overcoming Fraud Within the Kosher Food Industry, 31 FLA. ST. U. L. REV. 509 (2004). (My own opinion is that those cases may be wrong, and the statutes not unconstitutional, but that’s another discussion.)

But other questions have been raised, too-for instance, what effect, if any, would such certification have on the value of the ritual certification (i.e., would the religious aspect of it be devalued)? Is there potential liability for a certifying group if there is an accident or mistreatment at a plant that has been certified? What standards would the certifying group use?

All of these notions, I think, raise good issues for legal scholars (and students looking for note topics!).

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Predatory Lending: Meet Jonathan Swift

plalogo.gifAt the new website of the Predatory Lending Association, aspiring lenders can find concentrations of “working poor” customers in their neighborhood, calculate effectively usurious loans, not blacklist crusaders against payday lending, including Liz Warren, and learn all the arguments that goo-goos will make against high-interest borrowing. One Q&A in particular should be familiar to contracts professors (or maybe just those, like me, who use Randy Barnett’s Perspectives book):

Myth: Payday lending is comparable to selling yourself into slavery.

Reality: Although there is a market need for slavery, people do not choose to sell themselves into slavery. Free choice is the difference between payday lending and slavery.

(There is even a neat chart to make the connection more clear.) On the discussion boards, you can share your thoughts with other predatory lenders. Sure, it all seems a little too cute, but it’s worth checking out anyway.

Food Fraud & the First Amendment

The Pennsylvania Dep’t of Agriculture has decided to keep consumers from knowing whether the milk they buy is free of certain hormones:

Dennis Wolff, Pennsylvania’s agriculture secretary [has] announced a crackdown on “absence labeling” on milk, meaning labels that tell consumers what isn’t in a product rather than what is. He argues that “hormone free” labels are misleading because cows produce hormones naturally. Even labels that are more carefully worded, such as “contains no artificial hormones” will soon be verboten in Pennsylvania because Mr. Wolff said that there were no scientific tests to prove the truth of such a claim.

On first glance, this might seem like a classic case for First Amendment intervention. A reporter asks ” as long as the claim is accurate, isn’t the point of labels to differentiate one product from another?” He warns that “using Mr. Wolff’s reasoning, you could argue that organic labels on milk are unfair because they suggest that non-organic food is inferior. The same goes for labels for “natural,” “from grass-fed cows” and “locally produced.””

However, Rebecca Tushnet counsels caution, especially given consumers’ limited opportunities to process information. Commenting on controversy over “genetically modified organism” labeling, she writes:

Establishing that some consumers wish to avoid GMO foods on non-safety grounds does nothing to refute either of the FDA’s major premises: GMO foods are safe, and labeling will mislead some significant number of consumers about safety.

Tushnet’s position makes sense to me, but I am afraid that captured regulators may provoke courts to impose sweeping First Amendment limits on advertising regulation. Instead of picking on consumers with preferences for less chemical cow enhancement, why aren’t they taking on real “food frauds?” For example, here’s the CSPI on Smucker’s:

All varieties of Smucker’s Simply Fruit contain more fruit syrup than actual fruit. And the syrup doesn’t even come from the fruit in the products’ names, but from (cheaper) apple, pineapple, or pear juice concentrate.

This strikes me as much worse for consumers than the “absence labeling” in the milk context. But perhaps we should be willing to accept some questionable priorities now in exchange for First Amendment flexibility that permits future action on real food fraud.

The Fear Economy

missingclass.jpgMany commentators worried that the 2005 bankruptcy law would discourage entrepreneurs from taking risks. Now it appears to be accelerating the housing downturn:

A new bankruptcy law, approved by Congress in 2005 after years of debate, makes it much harder for households to get out from under their consumer debt. The result: More people being forced to walk away from their homes, leaving lenders holding the bag. Perversely, a law intended to help the financial industry may be damaging the housing sector, creditors and borrowers alike.

Another recent BusinessWeek article shows just how weak bankruptcy protections may be becoming in the wake of a voracious debt-collection business and slow-footed credit bureaus.

In the 1990s, businesses adept at tracking and trading consumer debt expanded their reach to dabble in accounts enmeshed in bankruptcy. That dabbling has grown into a robust market. Some of the trade in so-called bankruptcy paper involves debts that remain collectible. What’s troubling is that the market now also includes billions in discharged debts, which ought to have no dollar value. Owners of canceled liabilities can revive their value in two main ways: by directly pressuring consumers to cough up cash or by gaming the credit system. . . .

After Chapter 7 cases, “debtors expect their credit is going to become pristine,” [one commentator] notes. “But now you have people who buy the debts, even bankruptcy debts, and all of a sudden, new people are supplying information to the credit bureaus.” She adds: “The way the system is working now, it doesn’t give [debtors] that fresh start.”

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Why There’s No First Amendment Right to Sell Personal Data

There are a number of really interesting cases pending in the First Circuit and its lower federal courts that raise questions of confidentiality and free speech in the context of the commercial trade in prescription drug information. In New Hampshire, Maine, and Vermont, data mining companies have raised First Amendment challenges to state laws that restrict the ability of pharmacists to sell information about which doctors prescribed which drugs. More information about these cases from the AP can be found here. I’ve written about this phenomenon here, arguing that there are sound doctrinal, jurisprudential, and policy reasons to reject any idea that regulation of the commercial data trade raises any serious First Amendment problems.

These cases all involve laws passed by states concerned about the sale of prescription information to data mining companies, who buy information about which doctors prescribe which drugs from pharmacies and then massage the data for use in marketing and other industry purposes. The laws vary in their particulars, but basically forbid or regulate the ability of pharmacies to sell the information. In April, a federal district court in the New Hampshire case struck down New Hampshire’s law under the Central Hudson test as violating the companies’ free speech rights. The First Amendment argument can be boiled down as follows: because the laws stop pharmacies from telling other people about their customers, they violate the pharmacy companies’ free speech rights and are therefore unconstitutional.

I think this is a silly argument, as I explain after the jump.

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Should You Buy Divorce Insurance?

brokenheart1.jpgDivorce is catastrophic: it increases the rates of suicide and heart disease; can decrease overall well-being for both parents and children; and it significantly hurts the financial position of the parties, especially women.

But unlike almost all other catastrophic risks that we face, the costs of divorce can not be fully insured. Because of statutory requirements that limit insurance coverage to “fortuitous events”, and the perception that divorce is elected (at least by one of the parties to the marriage), you can’t buy a policy that will pay you for breach of the marriage contract. Such is the law.

I’m interested in this topic, and so I was quite intrigued to read about a new product being developed by an entrepreneur named John Logan, of the SafeGuard Guaranty Corporation: divorce insurance.

There has been significant enthusiasm for the concept. As some noted, you could imagine such insurance having a collateral-benefit: “risk matching” your perspective spouse (or even a first date) based on their premiums. But when you think about the concept a little bit, obvious objections present themselves:

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Pomegranate Juice and the War on Terror

purely juice.jpgThe blogs are abuzz this morning talking about the Times’ profile of Stephen Abraham, an Army reserve officer who filed a crucial affidavit in the latest Guantanamo litigation. The article explains Abraham’s unique role:

As an intelligence officer responsible for running the central computer depository of evidence for the hearings, he said, he saw many of the documents in hundreds of the 558 cases. He also worked as a liaison with intelligence agencies and served on one three-member hearing panel.

All of which has left Colonel Abraham, 46, a civilian business lawyer who has lately been busy with a lawsuit between makers of pomegranate juice, with a central role in the public debate over Guantánamo. His account has been widely discussed in Congress, the administration and the press. On Friday, a federal appeals court judge took note of it in describing what she said were problems with the Pentagon’s hearing process.

I thought I’d do some digging into that aspect of this story that will interest our non-constitutional readers: why are pomegranate juice sellers suing each other?

PACER searches disposed of the mystery quickly. POM Wonderful LLC v. Purely Juice, Inc. et al., CV 07-2633 (C.D. Ca.) was filed on April 20, 2007. POM lawsuit against Purely Juice alleges that Purely Juice violated the federal Lanham Act (and its state analogue) by falsely marketing its product as “all natural, consist[ing] of 100% pomegranate juice” with “NO added sugar or sweeteners.”

Abraham represents Purely Juice. Just a few days ago, his client won an important victory in the case. On July 11, 2007, Judge Christina Snyder denied POM’s TRO. The order itself (download the PDF here) is notable for its length and careful attention to the law. POM had independently tested Purely Juice’s product, and allegedly found that “it is clear that consumers of ‘Purely Juice . . .’ are not receiving the nutrients and antioxidant polyphenol health benefits that one would expect from 100% authentic pomegranate juice.” [Editorial comment: anytime you are asking a judge to make a claim about “antioxidant polyphenol health benefits” on a TRO, you seem likely to be in for a tough fight.] But, Abraham argued that, basically, the FDA hasn’t yet made clear what constitutes 100% pomegranate juice, and it was otherwise compliant with 21 CFR 101.30, regulating percent juice claims. The Court agreed with Abraham. As for the plaintiff’s claim that the “NO added sugar” was misleading, the Court found that there was insufficient evidence to find that defendant had added sugar, accepting Abraham’s defense that “the laboratory results could have been caused by the natural variation in the pomegranate fruit, growing conditions, harvesting, storage conditions or processing conditions.” (Notably, this seems like a non-denial denial to me.)

Abraham’s good lawyering saved his client a significant chunk of change. According to a declaration filed in the case, Purely Juice has 800,000 bottles in its inventory, each of which retails for $3.79. ($3.79! For juice!)

So what’s the moral here? You can be a busy commercial lawyer and a participant in the great issues of constitutional moment at the same time? Or, perhaps, as various players seek to control the last lucrative, non-commodity, juice market, the great Pomegranate Wars have begun.

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Consumer Time Travel

romecampodefiori.jpg(This is another in my series of dispatches from Rome. If you are getting tired of the concept, don’t worry: I’m coming home in a week.)

Two aspects of life here offer a nice comparative story about the way life in the United States used to be, and might become.

The first is the specialization of food shopping in Rome. Small shops for seemingly every type of food – cheese, meat, fruit, wine, cereals – line the streets in Rome’s old city center. In each shop, one (or two) employees dispenses food from behind a counter – it is not a self-service experience. It seems like these tiny shops, rather than the occasional small supermarket – are the primary way that citizens get their food. In a way, shopping here is like stepping back in time in the states to around 1940 or so. And there is something charming about the experience: the interactions (me in pantomime) are personal; the food is fresh and delicious; and you are less likely to slip and fall on a banana peel left on the ground. But the food is expensive, especially fruit, and if I were a busy citizen instead of a less-busy tourist, I’d find going to five different stores to complete my shopping to be a daily irritant.

Why does this specialization persist? I know less than I should about the risk of supermarkets in the United States, but I’ve a few preliminary thoughts. The first explanation denies that Italians shop at small stores outside of the cramped confines of City Centers. That is, just in the States, it is difficult for supermarkets to obtain purchase and economies of size in expensive urban cores. So, maybe, most Italian citizens do go to supermarkets, just not in places that tourists spend their time.

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