Prepaid Card Fees and Fraud

With the Consumer Financial Protection Bureau (CFPB) tackling a variety of issues, from confronting student loan abuses (See, CFPB Sues Corinthian) to new rulemaking on home mortgage disclosure, when will it finally turn to prepaid debit cards?  While the use of prepaid debit cards as alternatives to traditional checking accounts has often been associated with those with credit problems, the cards have grown in popularity with consumers wanting to avoid banking fees. Oh, and there has been the string of failed celebrity sponsored prepaid cards, often with high fees.  The CFPB hasn't exactly been quick to tackle issue with fees, card loss and fraud on these cards, though. 
Even though the CFPB is late to take up these issues, it has started accepting consumer complaints online with expectation that companies resolve complaints within 90 days.  The CFPB is working on draft regulations to keep consumers of pre-paid cards safer, specifically disclosure requirements. A lot of the pre-paid cards don't allow the consumer to understand the system of fees until after they have purchased the cards.  In particular, the CFPB is continuing with the CARD Act's popular tabular method for disclosure in the prepaid card arena. 

Only time will tell what type of regulations will be effective on the fee front, but the CFPB is not yet tackling the fraud front. While a consumer may have recourse for some frauds if they use their Debit or Credit Cards under the Truth in Lending Act or the Electronic Funds Transfer Act, victim of prepaid card fraud have little protections outside of criminal law.  While most of these losses are small in nature, some victims have lost substantial amounts of money through alleged tax collection, bill collection and lottery schemes.  While it never hurts to be informed, particularly when your money is involved, pure public awareness of fraud is not likely to protect vulnerable consumers.  Sometimes disclosure alone is insufficient.  Perhaps its time for the regulators to more aggressively pursue the card issuers?

- JSM (with Devon Locay, St. Thomas University J.D. expected 2016)

Consumer Financial Protection Bureau on the Move

The new Consumer Financial Protection Bureau (CFPB) has a website now that is running with the logo "Know Before You Owe" prominently displayed. Elizabeth Warren, Special Advisor to the Secretary of the Treasury for the Consumer Financial Protection Bureau, has a short video that doesn't speak directly to any particular changes the CFPB will make, but assures all that they are at work and listening to consumer responses.



Also on the website is Elizabeth Warren's testimony from May 24th before The Subcommittee on TARP, Financial Services, and Bailouts of Public and Private Programs Committee on Oversight and Government Reform in order to determine the accountability and oversight for the agency. You may remember the news about this hearing where Representative Patrick McHenry of North Carolina, accused Warren of lying during her March testimony, where Warren had previously appeared to answer questions concerning the CFPA and its function and power structure (See Decorum Breaks Down at House Hearing, New York Times).

Of course, both the CFPB and Warren herself have faced strong opposition from Republican lawmakers. It seems that this time around, the advances in consumer protections were not secured by simply passing the Consumer Financial Protection Act. Appropriations and confirming an official head of the CFPB remain open issues while the CFPB continues its organization. On the consumer front, I am pleased to note that the new website contains a number of consumer oriented videos and outreach to the banking community. Being a big fan of the power of information, it is a good sign that the CFPB has taken their first steps in reaching consumers in the electronic mediums. Oh, and you can even share the videos on Facebook or Twitter, for all you consumer rights junkies . . .

- JSM

Debt Collectors Go on the Offensive

The New York Times this weekend ran a piece that caught my eye, "Debt Collectors Ask to Be Paid a Little Respect." While the article first laments the rise in business that our struggling economy has brought them and the often rude response debt collectors get from consumers, the debt collectors seem to be on the offensive legally. Like the banking industry, the article notes the concern the debt collectors have about coming under the auspices of the Consumer Financial Protection Bureau (CFPB). After all, the Federal Trade Commission did not concern the debt collectors as the FTC did not have regulatory authority. The CFPB would, though, be able to write regulations to police the industry.

So, the debt collectors want some updating of their own to the Fair Debt Collection Practices Act. After all, why not? Who says consumer protection has to be just for consumers? The debt collectors are asking for access to consumers emails, cell phones and to use auto-dialers. After all, don't consumer's prefer this? My word, don't we all get enough robo-calls already on our cell phones? A robo-call system would seem to violate Section 806(5)'s prohibition on causing a telephone to ring repeatedly in any event. With the coming political season, though, perhaps the debt collectors are right that we all better get used to robo-messages on our cell phones anyways.

ACA International, the trade union for collection agencies, posted a Blueprint for Modernizing Debt Collection on its website. The Blueprint does advocate that debt collectors be permitted to call consumer cell phones (despite the additional charges imposed by some carriers), text and email consumers and even leave pre-recorded messages on cell phones. The Blueprint expressly advocates that debt collectors be permitted to communicate by any method of communication available. How about a consumer's facebook page? Linked-In? What about email accounts that are accessible by a consumer's employer? Of course, there is more there in the Blueprint that troubles me, but this area is full of difficulty for protecting consumers.

Surely, I am skeptical about allowing debt collectors unfettered access to the digital mediums available for use by consumers. The risk and cost to consumers would surely increase, with little exposure to debt collectors who violate the law (currently up to $1000 in most cases). While I am sure that the debt collectors that the New York Times spoke with are genuinely the nicest of people, I had the experience last year of having one of the not so nice debt collectors call me erroneously about a medical bill that had long been paid. Of course, the hospital apologized for the mistake, and wasn't sure how the information even was referred to debt collector. Of course, the lack of documentation that persists the industry at present becomes the first issue to tackle before erroneous robo calls and auto-mated emails flood our accounts. Can I opt-out?

- JSM

So, What's in Your Wallet?

Katie Porter over at Creditslips did a piece on the cards that those who teach payment law might carry! It is an interesting read. See What's in Our Wallets?

As for me? As those who follow this blog know, I am not a fan of any cards. And, I mean that pretty much universally. From high interest rates to deceptive practices, I just don't like them. My recent dispute over an instance of credit card skimming has only increased my suspicions about card practices, even though the issuer finally capitulated and reversed the fraudulent
charge. Despite my widespread condemnation of cards, I find them necessary. Like others, I am not a fan of debt and prefer paying off balances whenever possible. Yet, having bought a home this summer, I've found a Lowe's card particularly useful! This card issued by GE Money Bank comes with many of the aspects like high interest rates that I dislike about cards. But, having a home that needs appliances and quite a bit of do-it-yourself initiative, Lowe's offers of no interest financing on many 6 and 12 month purchases is a plus. The risk is that if you don't pay off the amount in the time frame the interest is high, but for card users with discipline, the no interest deals are a nice way to spread out large home improvements over several months.

- JSM

Warren on the New Consumer Agency

Elizabeth Warren has been speaking about the new role of the Consumer Financial Protection Agency. Who should be scared? Businesses want to know whether they should be worried about her role. For those that are making money from tricking and trapping people, the new agency will be a problem for them. She's been reaching out to business to let them know that she wants to learn about what will work and wants to "get it right." Basically, we cannot re-build an economy where families cannot pay for goods and services. She's ready to get to work getting the agency up and running.

- JSM

Would you like some cadmium with your soft drink?

Yesterday, the Consumer Product Safety Commission (CPSC), in conjunction with fast-food giant McDonald’s®, voluntarily recalled about 12 million Shrek Forever After™ collectible drinking glasses sold or awaiting sale at McDonald’s® locations throughout the U.S. after someone in Representative Jackie Speier's (D-CA) office alerted the CPSC that the movie-character illustrations on the glasses contained cadmium, prolonged exposure to which may pose a serious long-term health risk.

Millville, NJ-based Durand Glass Manufacturing Co. (DGMC), a subsidiary of Arques, France-based Arc International, manufactured the movie-themed glasses, which another Arc International subsidiary, Millville-based Arc International North America, distributed exclusively to McDonald's. McDonald's locations nationwide sold the glasses in May and early June 2010.

McDonald's web site addresses the recall through a series of FAQs (and answers). (For the benefit of those with short attention spans, every answer to which the statement would be germane includes the statement "the CPSC has said the glassware is not toxic.") Arc International deployed a press release. Representative Speier posted a statement on her web site, which also includes a link to a Los Angeles Times article about the recall. Only DreamWorks™ appears to be mum on the subject -- so far, at least. (Perhaps the Shrek-iverse's creators didn't retain all of the product licensing-rights like George Lucas did, not so long ago and not so far away, with the original Star Wars™ trilogy or they made McDonald's pay a non-refundable lump sum to market the glassware.) Rumors of a replacement glass featuring an image of McDonald's CEO Jim Skinner that transmogrifies into a Shrek-alike when filled with any non-Coca-Cola® brand soft or sport drink appear to be completely unfounded.

All fun aside, why is a commercial law blog interested in allegedly cadmium-contaminated glassware products introduced into the stream of commerce without any warning about or disclaimer regarding the possibility that they might contain an alleged carcinogen?

If this were a tort law or products liability blog, we might opine about the inevitable class-action product liability lawsuit against some combination of McDonald's, Arc International, Arc International North America, Durand Glass Manufacturing Co., the as-yet undisclosed supplier(s) of the cadmium-contaminated paint or other ingredient Durand used to commemorate Shrek™, Fiona™, Donkey™, and Puss in Boots™ (okay, Puss is probably not trademarked, given that the character's name dates from the late Seventeenth century, but we want to minimize our exposure to IP liability because most of us teach at public universities and neither we nor our employers can afford, in the current fiscal climate, to defend any infringement claim that survives a Rule 12(b)(6) motion) on the glassware (and, perhaps, DreamWorks -- for making a movie about which McDonald's predicted sufficient interest that it undertook to procure the offending glassware for resale).

If this were a civil procedure blog we might weigh whether the terms and conditions (no doubt, conveniently located somewhere on the Internet) purportedly governing McDonald's sale of the collectible glassware unconscionably compel non-class arbitration (assuming facts not in evidence) in light of the Supreme Court's recent grant of certiorari in AT&T Mobility LLC v. Concepcion, No. 09-893 (cert. granted May 24, 2010), about which my friend and UNLV colleague Jean Sternlight and my friend and ContractsProf Blog colleague Meredith Miller have recently blogged here and here, respectively.

If this were a consumer law blog, we might wring our hands or cluck our tongues at yet another clear example of Corporate America's crass exploitation of our children and squeeze-the-last-penny sellers who outsource production of low-priced, lower-cost consumer goods to Third World outposts like ... New Jersey. (Just kidding, Jay.)

But, again, what's the commercial law angle on collectible glassware manufactured for and sold to McDonald's for resale to McDonald's retail customers?

It should go without saying that the most interesting legal issues arising out of this scenario involve (1) what express and implied UCC Article 2 warranties each seller in the chain from DGMC (or DGMC's ingredient supplier) to McDonald's made to anyone who purchased or used the glassware; (2) to what extent, if any, each seller in that chain may have disclaimed some or all of its warranty liability, limited the remedies available to the buyer, user, or other person affected by the glassware's use, or both; (3) whether one or more warranty-making sellers breached one or more warranties to one or more buyer, user, or other person affected by the glassware's use; and (4) what remedies Article 2 affords any person to whom any seller is liable for breach of warranty.

For those wanting to add some international spice to the mix, the CBC reports here that the recall has spread to include all Canadian McDonald's restaurants. Information from the Associated Press and Reuters, reported here, indicates that recalling the glassware sent to Canadian McDonald's restaurants raises the total number of recalled glasses to 13.4 million. Both the U.S. and Canada are parties to the U.N. Convention on Contracts for the International Sale of Goods (CISG). To the extent that the Canadian McDonald's restaurants purchased their Shrek Forever After™ collectible glassware from New Jersey-based DGMC or New Jersey-based Arc International North America, that transaction constituted a sale of specially-manufactured goods (CISG art. 3(1)), purchased for resale, rather than personal, family, or household use (CISG art. 2(a)), by a buyer located in one CISG "contracting state" from a seller located in a different "contracting state" (CISG art. 1(1)(a)). Therefore, unless the Canadian McDonald's buyers and New Jersey-based DGMC or New Jersey-based Arc International North America effectively opted out of the CISG (CISG art. 6), any breach of warranty claim the Canadian buyers might have (CISG art. 35), the extent to which any U.S. seller disclaimed any warranty or limited its liability for breaching any warranty (CISG arts. 6 & 35), and the available remedies (CISG arts. 45-52 & 74-78), will be matters for the CISG to resolve.

FunnyorDie.com Presidential Reunion

In case you've not seen it, former Presidents Bush, Clinton, Bush, Ford, Carter and Reagan wake up President Obama in the middle of the night to urge him to pass the Consumer Financial Protection Agency (CFPA). One of the funniest parts is President Bush commenting that he had no idea that when he put the Iraq war on his credit card, he'd be paying 28%! Here it is:

- JSM

New Credit Card Rules Go Into Action

Happily, the CARD act provisions are in full effect now. So, what to look for on your statements? I think the disclosure about how long it will take you to pay off your credit card if you only pay the minimum is helpful, especially when coupled with how much you need to pay in order to pay off the debt in just three years. But, consumers must actually read the statements to get the disclosure . . .

CNN has a good piece on credit card reform (click here, as I could not embed it). With card companies increasing rates, there has been a greater proliferation of high rate cards. First Premier has a card for high risk customers that carries a 59.9% interest rate! Yikes! Interestingly, the National Credit Union Administration caps credit unions at 18% interest on credit union cards by law, but private card companies have no such similar limit (See LA Times, Seattle Times). Of course, its all about access to credit, according to the American Banker's Association. While I can understand access to credit and the need for people to build credit, 59.9% is over-the-top and at that rate perhaps some people should not be getting credit, as the cost is too high. Perhaps there is a role for the traditional usury statutes again.

Whose to blame for all this mess? Well, the Supreme Court had a part to play with its 1978 decision in Marquette vs. First Omaha Services making it legal under the National Bank Act for banks to locate in states without interest rate restrictions. Although the Court recognized that this would impair the effectiveness of state usury laws, the problem is "better addressed to the wisdom of Congress than to the judgment of this Court." Despite the passage of the CARD Act, Congress has not addressed the interest rate differential. Perhaps the increases in rates after the CARD Act might provide some impetus for changes to the extent banks overreach in their charging of customers.

- JSM

Fed Targets Gift Cards

The Federal Reserve is on a consumer protection roll. Last week, the Fed tackled overdraft fees on point-of-sale and ATM transactions (see Hooray for the New Overdraft Rules). Today, the Federal Reserve announced proposed rules concerning gift cards aimed at fees on the cards and expiration dates (see press release). The highlights are that providers cannot charge fees unless:

1. The card is inactive for one year;
2. No more than one fee is charged monthly; and
3. The provider gives notice of the fees to the consumer.

Moreover, cards cannot expire for at least five years after purchase or reloading of the card. Both store-specific and network based cards are covered by the rules.

- JSM

Phillip Keitel on Gift Cards

'Tis the season for gift cards! While this piece is from 2008, Phillip Keitel of the Philadelphia Branch of the Federal Reserve Bank has written The Laws, Regulations, Guidelines, and Industry Practices that Protect Consumers Who Use Gift Cards. Here's the abstract:

This paper discusses consumer protections available to gift-card users. Specifically, it examines the ways in which value loaded at the time of purchase is protected for future card use or returned to consumers when the card is not used or has expired. The consumer protection information included in this paper is derived from a number of sources, including several types of state statutes, Federal Trade Commission decisions, financial industry regulatory agency guidelines, and previous interviews with payments industry experts regarding practices concerning network-branded gift cards. This paper expands research begun by the Payment Cards Center in 2004 into prepaid cards generally and the protections available to consumers who use gift cards specifically.

Happy shopping!

- JSM

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

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

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

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

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

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

President Obama Announces Financial Regulation Reform

A couple of days late, but better than never! Obama hits all from consumer and financial institution overreaching to the lack of proper regulatory oversight. Obviously, leading to the current financial crisis. Where to go from this mess? Overhaul the financial regulatory system, of course. The biggest challenge is Obama's concept of encouraging innovation while guarding against risk. Easier said than done. We've found ourselves relatively effective at addressing past and current crises. The greater challenge, though, is foreseeing the next crisis around the corner. Particularly any crisis that threatens the "forest" as Obama refers to the financial system as a whole. The increased authority proposed for the Federal Reserve is sure to meet some industry resistance at a time when banks are attempting to escape government oversight by repaying TARP funds (see repayments by JP Morgan, American Express, Goldman Sachs, State Street). The elimination of the Office of Thrift Supervision in exchange for direct Federal Reserve involvement is sure to raise the ire of banking groups (see Financial Services Forum "Lobbyists Dig In As Obama Pushes Financial Overhaul").

Importantly, Obama plans the creation of a consumer watchdog. Long overdue, but we will need to wait to see the details. The authority granted this agency will be key to its effectiveness in a government system with established players . . . and established lobbyists. As a concept, I am all for it.

-JSM

Chairman Ben S. Bernanke on Financial Innovation and Consumer Protection!

Since I've been busy for a few weeks with exams and all, there is much to catch up on. Chairman Bernanke spoke on April 17, 2009 at the Federal Reserve System's Sixth Biennial Community Affairs Research Conference, Washington, D.C. Bernanke commented "financial innovation, it seems, has fallen on hard times" in that it is often now seen as the problem (for a transcript, see the Federal Reserve website). Bernanke made some important points about the potential link between complexity of financial products and the potential for "unfair and deceptive" practices. That is, even a diligent consumer may not be fully aware of the whole host of potential fees associated with each credit card they have. The complexity of financial products can reduce transparency either because the terms are hard to deduce or perhaps to understand.

When turning to the problems faced by the Federal Reserve in drafting regulations to enhance consumer education, Bernanke placed great emphasis on the benefits of consumer testing. The caution to testing, though, is that disclosure does not always lead to consumer understanding. Therefore, sometimes the Federal Reserve must prohibit certain practices, such as double-cycle billing. I couldn't agree more with some of these observations. Transparency cannot solve all ills in the financial industry. It is not enough to say that consumers should find another provider if all providers use the same practices or consumers do not fully understand the practices. In the end, the Federal Reserve must address both complexity and transparency.

- JSM