Category: Consumer Protection
As usual, Florida is still undecided, a mess. According to NPR, though, it is leaning heavily toward Obama, despite the shenanigans of the state GOP in suppressing the vote.
I didn’t watch last night. Couldn’t. We went to bed early.
But then Donna got up around midnight and woke me by a whoop of joy that I briefly mistook for anguish.
To my small surprise and relief, Obama won.
I will not miss the constant electioneering, the radio ads, the tv spots, the slick mailers. I will not miss keeping still in mixed groups about my politics (something I am not good at, but this election cycle it feels more like holy war than an election). I will not miss wincing every time some politician opens his or her mouth and nonsense spills out. (This is, of course, normal, but during presidential years it feels much, much worse.) I will not miss…
Anyway, the election came out partially the way I expected, in those moments when I felt calm enough to think rationally. Rationality seemed in short supply this year and mine was sorely tasked. So now, I sit here sorting through my reactions, trying to come up with something cogent to say.
I am disappointed the House is still Republican, but it seems a number of the Tea Party robots from 2010 lost their seats, so maybe the temperature in chambers will drop a degree or two and some business may get done.
Gary Johnson, running as a Libertarian, pulled 350,000 votes as of nine last night. Jill Stein, the Green Party candidate, got around 100,000. (Randall Terry received 8700 votes, a fact that both reassures me and gives me shivers—there are people who will actually vote for him?)
Combined, the independent candidates made virtually no difference nationally. Which is a shame, really. I’ve read both Stein’s and Johnson’s platforms and both of them are willing to address the problems in the system. Johnson is the least realistic of the two and I like a lot of the Green Party platform.
More . . .
Interesting post by Jeff Sovern at the Public Citizen Law and Policy Blog. A lot of effort has gone into providing loan customers with the APR (which is somewhat different than the interest rate). But are consumers actually using/heeding that information? Sovern explains the quandary, and raises the issue of alternate approaches.
Yesterday I was honored to have the chance to speak to the Advisory Board of the CFPB (Consumer Financial Protection Bureau). Their first meeting ever was in my hometown of St. Louis. I was given only about 2 minutes to speak, so I lashed out against payday lenders and mandatory pre-dispute arbitration clauses.
The Consumer Financial Protection Bureau (CFPB) recently proposed “easier-to-use mortgage disclosure forms that will help consumers make informed decisions when shopping for a mortgage and avoid costly surprises at the closing table. The aim of the CFPB is to expand protections for “high-cost” mortgage loans.
Mortgage transactions are inherently complex, however. The CFPB has done some great work proposing the new forms. (to compare, here is a guide to the current version of the document many people struggle to understand, the real estate Settlement Statement — HUD-1). One might fairly ask whether it is even possible to make these forms (which are still not simple) any easier to read or comprehend. In fact, this is the question asked by Jeff Sovern in a NYT Op-Ed piece, “Help for the Perplexed Home Buyer.” Sovern applauds the excellent work of the CFPB, but then gives a brief tour of the proposed new forms:
The loan estimate, which consumers receive early in the application process, spans three pages and includes more than 100 disclosures about things like monthly payments and taxes. That’s a lot for consumers to take in, and if they use the information to comparison shop, as Congress intends, they will multiply the number of disclosures with every loan they consider. The closing disclosures, which include the final loan terms, are even longer, at five pages. . . The newest forms try to address overload by packing the most important information into the first page — but that first page includes more than 40 disclosures, and it still doesn’t tell borrowers the total amount they will pay over the life of the loan or the late payment penalty . . . There’s no way around it: mortgage transactions are complex and involve a tremendous amount of information.
Sovern suggests that written disclosures can only go so far, at least in complex transactions like these. He proposes that the problem can be lessened somewhat, but not completely cured, by making consumer counseling available.
I agree with this analysis and this approach, and I also applaud the work of the CFPB. I would add that one of these reasons that this issue of communicating financial information to consumers is that so many of them are afflicted with innumeracy. I’ve spoken with many consumers as part of my law practice, and I must report that many of them would struggle with 4th grade math. I’ve had clients who have no conception of how to calculate a simple interest rate (one client couldn’t tell me how much interest would accrue in one year based on $100 principal and 10% interest rate). I wish I could hold that hope that any written disclosures could solve this problem, but I assume my anecdote has already made it clear that the problem is multifaceted, involving consumer education and the policing of the mortgage industry.
The above discussion also makes me wonder whether we couldn’t simply the system much further, and whether path dependence keeps us in the mindset that all of these numbers need to be sprayed all over several pages. When you go to the grocery store, you ask for the price of box of cereal, and you are told a price. You are not told about all of the numbers that go into that price, such as transportation, handling, taxes, mid-level distributors, etc. I am not claiming that I have done any work on this issue of trying to simplify mortgage forms, but I wonder whether a solution might reside in forcing lenders or brokers to figure the many factors internally, and simply give the consumer a price. Then again, that is what the CPFB has done on the first page of the proposed new form. Perhaps my thinking is tainted by my conviction that many system are made to be complex in order to make them opaque to some people and profitable to others (those with teams of lawyers and accountants). Complexity is often not an accident or a necessity. It is often a tactic.
According to a new report by Pew Charitable Trusts, the median length of the list of disclosures that you will be presented when you open a new checking account is 69 pages.
Financial institutions do not summarize important policies and fee information in a uniform, concise, and easy-to-understand format that allows customers to compare account terms and conditions. The median length of bank checking account disclosure statements has decreased, but is still cumbersome at 69 pages. For credit unions, the median length is 31 pages. Although shorter, credit union disclosures often do not include information that would allow a customer to compare account fees, terms, and conditions.
On a related note, the Consumer Financial Protection Bureau (CFPB) will be making its complaint database public today. The Washington Post indicates the importance of this data:
Complaints are the primary way that most consumers interact with the new agency. The CFPB said it has received more than 45,000 in the year since the bureau was launched. How it handles those complaints — and how much it makes public — has been a source of tension between the agency and financial industry groups.
Fair Contracts (faircontracts.org) is a website dedicated to encouraging the use of only one type of contract: the kind that ordinary people can read and understand. Here, based on an excerpt from the Fair Contracts website, is the problem:
The Problem with Standard Form Contracts
Many businesses use standard form contracts, pre-printed contracts filled with fine print, in transactions with individual consumers. These contracts are usually “boilerplate,” “take-it-or-leave it,” non-negotiable contracts.
The problem presented by many of these contracts can be summed up as unequal bargaining power — between the consumer and the corporate entity that uses them.
Corporations use these contracts to have uniformity and efficiency by reducing the costs to them of negotiating with consumers on an individual basis. Consumers sign these kinds of contracts routinely — usually never reading, much less understanding, the fine print they contain. And there is the rub.
The party with superior power — the corporate entity that drafts the contract — can use the fine print, coupled with the knowledge that the consumer rarely, if ever, reads the terms, to take advantage of the unsuspecting consumer in the underlying transaction.
Consumers often make purchases based on price and quality, but there are a number of other factors in the fine print of these transactions that merit consumer attention: These provisions may, and often do, work against consumer interests. Though some say consumers can always walk with their feet or dollars and choose to not engage in these transactions, often the consumer, having not read the fine print, is completely unaware of these provisions until the corporation tries to enforce them against the consumer. Worse, often entire industries have contracts containing these unfair provisions, thereby leaving the consumer with no meaningful alternate choice. Even worse, businesses often reserve for themselves the right to modify or change the terms of the contract, making comparison shopping pointless if the contract or the prospective contract is always subject to change.
To add insult to injury, these contracts often contain forced arbitration, venue and/or choice-of- law provisions, so resolution of disputes no longer even takes place in a public courtroom forum, but in a private, business-dominated industry of arbitrators, who are neither required to follow the rule of law, nor are subject to its oversight. Contract law and a consumer’s day in court has been “privatized” to a process whose outcomes are often unknowable and unchallengeable.
[T]he modern-day reality with fine print in standard form contracts is that there is no mutuality of assent, and there is often no time for or inclination by the consumer to read the terms, or even an ability to cross comparison shop those terms. And even if the consumer did try to comparison shop, it wouldn’t do much good if the sellers can always change their terms and insulate their provisions from meaningful judicial review. This adds up to a fiction in the law of contracts and makes a mockery of the idea of consumer freedom in a free market.
Ralph Nader shares these concerns:
This problem of consumers failing to understand critically important contracts if rife in the field of real estate mortgages. Consider, for example, the findings reported by law professor Jeff Sovern, that “more than two-thirds of the brokers reported that less than 30% of their borrowers spent more than a minute with the disclosures.” From “Preventing Future Economic Crises Through Consumer Protection Law or How the Truth in Lending Act Failed the Subprime Borrowers,” p. 786. Here’s another excerpt:
The brokers were nearly unanimous in reporting that borrowers never withdrew from a loan after reading the final TILA disclosures at the closing and never used those disclosures for their stated purpose of comparison shopping for loans. In addition, brokers reported that many borrowers spent a minute or less with the disclosures, despite the fact that mortgage loans are among the largest, longest-term, and most complex obligations most consumers ever assume. It thus appears that many borrowers enter into their mortgages without comprehending the terms and the ramifications of those loans.
Sovern has many ideas for un-tilting the playing field. One of those ideas is for independent consumer agencies to review form contracts and to grade them for consumers. The current problem is that consumers have no incentive to read fine print contracts and businesses have no incentive to draft contracts in readable form.
I invite you to view a brand new 54-minute video (embedded below) titled “Mortgage Crisis in a Nutshell.” The presenter is John Campbell, a St. Louis attorney and educator. I work with John at the Simon Law Firm in St. Louis, Missouri. We gained much of our experience in this area of law by litigating numerous suits for mortgage fraud on behalf of homeowners, both individual suits and class actions. Also on behalf of homeowners, we’ve defended many unlawful detainer suits (attempts to evict homeowners). We’ve both become passionate about this work as a result of witnessing firsthand that many homeowners have been victimized by unscrupulous and unrepentant banks.
In this 53-minute video John presents the main aspects of the mortgage crisis that has devastated the U.S. housing market and the economy. Our goal is empower all who seek to better understand what went wrong with the American mortgage system. As you will see when you click on the above link, this video can be watched in chapters:
I. The Big Picture and its Many Parts (:55)
II. Banks Flood the Market with Subprime Mortgages (3:54)
III. Banks, Securitize their Mortgages (10:05)
IV. Banks Cry for a Bailout (13:57)
V. Wall Street Malfeasance (16:54)
VI. Foreclosures, Robo-Signing, Trustees and Conflicts of Interest (18:20)
VII. MERS (“Mortgage Electronic Registration System) (33:45)
VIII. The Mortgage System Used to Work (43:42)
IX. Credits and Further Readings (52:43)
We created this video because we were frustrated by the fact that it is difficult to find websites and other materials describing the modern mortgage system in terms that are accessible to both lawyers and non-lawyers. As a result, many of our friends and acquaintances (those outside of the mortgage law community) don’t understand the inter-relationships among subprime loans, ratings of mortgage-backed securities, MERS, the bailout and robo-signing.
The failure to understand these things is making it easy for the entities that caused this crisis to conduct business as usual. Because this system is so difficult to understand, too many people think the crisis was entirely caused by “irresponsible borrowers.” The result is that our national dialogue is obsessed with the alleged need for less regulation instead of discussing how to change the system to make sure this never again happens.
We’ve used simple terms and basic drawings in order to make an opaque system understandable. Though it is undoubtedly slanted toward our perspective as attorneys who represent homeowners, we’ve worked hard to keep it factual and fair-minded.
We ask only one thing in return for the link to this video. To the extent that you find it helpful to your understanding of the mortgage crisis, please consider forwarding this link to anyone else you know who would benefit from viewing it. Our aim is to spread this video widely through email, list serves, Facebook, Twitter, blogs, websites other social media.
We certainly invite comments, both at DI and at YouTube. If this video works for you (or if it doesn’t), please let us know. Thank you.