Consumers May Buy Less Halloween Candy

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!

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%

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

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

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

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"

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

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

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

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

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

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

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

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?

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.