CFPB Rules

By: Amy 

The CFPB is finally issuing its arbitration rule! I have not yet fully read the rule, but the substance seems to say the same as the proposed rule. It doesn’t make arbitration clauses unenforceable, just the use of arbitration clauses to preclude class actions.  Essentially, the press release read in part:

 

“Today’s rule prohibits banks and other consumer financial companies from including mandatory arbitration clauses that block group lawsuits in any new contracts after the compliance date. The rule does not bar arbitration clauses outright. For these new contracts, however, these clauses have to say explicitly that they cannot be used to stop consumers from banding together to pursue relief as a group. The rule includes the specific language that financial companies must use. By restoring the ability of consumers to file or join group lawsuits, the rule gives companies more incentive to comply with the law. And the deterrent effect of such cases can more broadly influence the business practices of other companies as well.

Our new rule also requires companies to submit their claims, awards, and other information about the arbitration of individual disputes to the Bureau. This will help us better monitor arbitrations to make sure the process is fair for individual consumers. The companies are required to scrub these materials of personal information, and starting in July 2019, we will also post them on our website. This will promote transparency and give consumers, providers, and other regulators more insight into how arbitration works. “

 

We do not know where this will lead but it is a new step in arbitration law.  Also, I again caution that the full rule is at:  http://files.consumerfinance.gov/f/documents/201707_cfpb_Arbitration-Agreements-Rule.pdf.

 

Congratulations to Professor Gely

By: Amy 

This is not a usual “consumer tips” posting, but I wanted to share this good news about someone making a difference for workers and consumers!

My colleague at the University of Missouri, Rafael Gely, just received the David Petersen Award from the National Academy of Arbitrators.  Rafael directs our Center for the Study of Dispute Resolution and is a fabulous colleague and leader.  Here’s the announcement of the award, which is extremely well deserved:

The National Academy of Arbitrators conferred upon Rafael Gely the David Petersen Award at its annual meeting in Chicago, Illinois. The David Petersen Award recognizes and honors individuals who have given invaluable service to the Academy.

 

The Academy conferred the Petersen Award because of Professor Gely’s instrumental role in the startup and continual maintenance of arbitrationinfo.com, the neutral website which is a joint venture of the National Academy of Arbitrators and the University of Missouri School of Law.  Through Professor Gely’s work as an editor of the site, he has written content on a regular basis, designed and updated the site, supervised student assistants, and crucially connected with journals both before and after articles are written.  The Academy notes the creation of the website provided a source of information and education regarding arbitration for journalists, professionals, and the public. The Academy believes that the website has immeasurably improved the discourse and understanding of labor and employment arbitration in both United States and Canada.

Filing Bankruptcy? Make Sure You Double-Check Debt Collectors’ Submitted Claims

By: Pamela Foohey 

Debt collection is a multi-billion dollar industry, and it is only growing. One of debt collectors’ tactics is to get people who owe long past due debts to pay those debts despite the fact that the debts cannot be collected as a matter of states’ statutes of limitations. Debt collectors do so in a variety of ways, including filing collection actions in state courts and hoping that debtors will not assert the statute of limitations as a defense. Fortunately, the Fair Debt Collection Practices Act (FDCPA) deems this tactic a misleading and unfair practice. Courts hold that debt collectors violate the FDCPA when they file debt collection actions in state courts on debts that they are barred from collecting under statutes of limitation. Based on the FDCPA, debt collectors have entered into consent decrees with the federal government and paid millions of dollars in restitution to debtors for trying to collect time-barred debts through state court debt collection proceedings.

The FDCPA also has pushed debt collectors to look to another venue to collect on time-barred debts: bankruptcy proceedings. When a person files bankruptcy, particularly chapter 13 bankruptcy, debt collectors file proofs of claim asserting a right to collect these debts. It seemingly is up to the debtor, or the trustee, to object to the claim on the basis that collection of the debt is barred by the applicable statute of limitations. In recent years, debt collectors have added to their business model specifically buying debts that will be collected through bankruptcy proceedings and then filing claims in hopes that the debtor, trustee, or another party will not object. The practice has the potential to be quite lucrative. About a million people file for bankruptcy every year. One-third of those cases are filed under chapter 13. And given that Americans owe trillions of dollars in consumer debt, many of those cases likely include time-barred debts. The questions thus becomes, is filing a proof of claim for a time-barred debt a violation of the FDCPA?

The answer to this question split courts. Some courts said no, the FDCPA does not apply, reasoning that bankruptcy affords debtors its own set of protections. Other courts said yes, the FDCPA applies, and a private party or the government can sue a debt collector for filing time-barred claims in bankruptcy, potentially winning sanctions. This split among courts was brought to the Supreme Court, which yesterday held (in a 5-3 opinion, Midland Funding LLC v. Johnson) that the FDCPA does not apply to proofs of claim filed by debt collectors for time-barred debts. The majority, in short, reasoned that the Bankruptcy Code and other rules provide a way for debtors and trustees to identify and respond to these claims, as well as the ability for bankruptcy judges to levy sanctions against debt collectors for filing time-barred claims. The dissent, in contrast, noted that the realities of bankruptcy practice make it so that trustees and other parties are short on both time and money, such that the protections built into the Code are not protections in reality. Instead, the bankruptcy claims process now sets a “trap for the unwary.”

If you want to read more about the decision itself, see my co-blogger Adam Levitin’s post on Credit Slips. The on-the-ground question for consumers now is, what can people do to protect themselves? There are a couple actions that debtors can take to make sure that they do not fall into that trap and that time-barred claims are not paid out through their chapter 13 bankruptcy cases. If they are represented, they can ask their counsel to examine claims submitted by debt collectors. Indeed, all debtors’ counsel now should be on notice that they must examine claims submitted by debt collectors. Regardless of whether they are represented, debtors should specifically inquire about claims submitted by debt collectors, either through their counsel or by themselves.

That debtors make sure to double-check debt collectors’ submitted claims is very important. As noted in the dissent, and as my co-authors and I have shown in our recent work, less than half of chapter 13 cases end with a discharge of debts. If a time-barred debt is included in a chapter 13 case, and the case is dismissed, that debt is reactivated, and the statute of limitations on collection begins anew. As Justice Sotomayor wrote in the dissent, debtors will “walk out of bankruptcy court owing more to their creditors than they did when they entered it.”

The Newhandshake: Online Dispute Resolution and the Future of Consumer Protection

By: Amy 

We used to buy goods and services in person.  We’d introduce ourselves, look each other in the eye, and negotiate the terms of the transaction.  If we thought it was a good deal, we’d seal it with a handshake.  That handshake was more than a kind gesture – it signaled that if any problem arose, both sides were committed to getting it resolved quickly and fairly.  That handshake was our personal trustmark.

Nowadays, it’s harder to close deals with a handshake.  We can buy items from all over the world with just a few swipes on our iPhones, but when problems arise (as they inevitably do) the next step is often unclear.  On the internet it is difficult, if not impossible, to tell the good merchants from the bad merchants, and the processes for resolving disputes are often confusing or hard to find.  Customer service can feel like a runaround (e.g. long hold times, unfair refund policies) and formal redress mechanisms that work in the face-to-face world, like the courts, are generally impractical for online purchases — especially when purchases are low value and cross several legal jurisdictions.

The New Handshake: Online Dispute Resolution and the Future of Consumer Protection focuses on this lack of trust and access to remedies for online transactions.  This groundbreaking book proposes a design for a “New Handshake” for the online world.  This New Handshake uses Online Dispute Resolution (ODR) to provide fast and fair resolutions for low-dollar claims, such as those in most B2C (Business-to-Consumer) contexts.  This revolutionary system is designed to operate independently of the courts, thereby eliminating procedural complexities and choice of law concerns.  Furthermore, it can be integrated directly into the websites where transactions take place. It would provide consumers with free access to remedies, while saving businesses from costs and complexities of court.  The New Handshake aims to rebuild trust in the B2C marketplace, and provide a blueprint for the future of online consumer protection.

This is not your typical “law” or “business” book.  Instead, is a collaborative effort of a business leader and a law professor.   The result is essential reading for:
Online merchants
Payment providers
Customer services
Lawyers
Judges
Law and business students
Consumer advocates
Policy makers
ODR systems designers
The New Handshake can be purchased on the ABA website here:
https://shop.americanbar.org/eBus/Store/ProductDetails.aspx?productId=267464824&term=5100032

More Evidence That Americans Want Payday Loans Regulated, and In Certain Ways

By: Pamela Foohey 

Payday loans are short-term loans that generally must be paid on the borrower’s next payday–typically, two weeks. These loans carry a fee of around $15 for every $100, payable at the end of those two weeks. But most borrowers are unable to pay within two weeks. Instead, they roll the loans over, sometimes multiple times, making these “small dollar loans” much more expensive, and APR a better gauge of actual borrowing cost. According to the Consumer Financial Protection Bureau (CFPB), the typical two-week payday loan carries an APR of 400%. In response to the inability of borrowers to pay such high interest rates, some states have regulated these types of law, and the CFPB has proposed rules to regulate payday and auto title loans. For instance, New Mexico’s governor recently signed a bill that outlaws small dollar loans with terms less than 120 days and caps interest rates on small dollar loans at 175%.

In light of the national attention that payday loans continue to receive, what does the American public think about them and various proposed reforms? Last week, Pew Charitable Trusts released the results of its recent survey of 1,205 American adults that aimed to assess public sentiment about proposed reforms. Highlights of the study include three key findings.

First, 70% of respondents indicated that they think payday loans should be more regulated. Second, in determining whether a loan is effective, respondents focused on the pricing of the loan, rather than the process by which the loan was issued–that is, interest and fees versus whether the borrower’s credit report is pulled. Finally, third, 70% of respondents wanted to see banks offer small dollar loans to people with poor credit, so much so that 70% of respondents indicated they would view banks more favorably if they offered small dollar, lower-cost loans. And lower-cost does not mean loan. Lower-cost includes a $400 loan, due in three months, for a $60 fee.

This finding comports with respondents answer to another question about banks offering an alternative to payday loans. 75% of respondents indicated that it would be a “good thing” if banks offered small dollar loans with APRs higher than credit cards, but lower than current payday loans. Overall, this new survey’s findings should be kept in mind as states and the CFPB continue shaping payday loan regulations.

Can You Believe That Free Credit Score?

By: Pamela Foohey
I have a couple credit cards, and for more than a year, both have provided me with a free credit score (FICO score), updated about once a month. From what I know about the computation of credit scores,they seemed more or less accurate. Nonetheless, they are hard to compare because each credit card company’s FICO score is on a different scale. One is out of a maximum of 900, and the other tops out at 850. Which made me wonder if one was more accurate than the other, or if either reflected the score that lenders would use to evaluate my credit worthiness. The answer to the latter question, according to a recent legal settlement from the Consumer Financial Protection Bureau, is (most likely) no.

As reported by the Washington Post, the only credit score that matters is the one that lenders use to evaluate customers. And, importantly, that score might not match the “random” scores customers received from their credit card companies or free websites, such as Experian, Equifax, and TranUnion. Although those scores may be interesting, they ultimately have little bearing on the interest rate a customer is quoted, or when a customer’s application will be approved. This is because lenders use different models to calculate a customer’s credit score than Experian or credit card companies. And, perhaps not surprisingly, lenders’ models tend to calculate lower credit scores for customers than customers found online.

In short, don’t rely on the free credit scores you receive, or even those you pay for, to assess your ability to pay for the mortgage or car loan you are considering. Instead, build in a cushion. What lenders use may vary markedly from the credit score you used to benchmark loan payments, resulting in monthly payments $100 or more higher than anticipated. But, importantly, if the credit score your lender uses seems unduly low as compared to the score given to you by your credit card company, inquiry with your lender about it by asking what model is being used to generate your score.

Welcome to Guest Blogger Professor Pamela Foohey!

By: Amy

I would like to welcome Professor Pamela Foohey as a blogger to this site!  I am so very pleased to have her on board, to share her insights and research.  Professor Foohey teaches at Indiana University Maurer School of Law in Bloomington, Indiana, where her research centers on bankruptcy, commercial law, and consumer law. She has become a pioneer in her empirical studies of bankruptcy and related parts of the legal system, combining quantitative and qualitative, interview-based research. Her work in business bankruptcy focuses on non-profit entities, with a particular emphasis on how churches and other religious organizations use bankruptcy. The results of this research have been featured in media outlets such as the New York Times, Bloomberg, CBS News Moneywatch, and Reveal. Professor Foohey also is a co-investigator on the Consumer Bankruptcy Project, a long-term research project studying persons who file bankruptcy which has been the leading empirical study of consumer bankruptcy for the past 35 years.

Welcome to Professor Foohey!

AJS

Getting Car Insurance? Your Zip Code Matters

By: Pamela Foohey 

First, many thanks to Amy Schmitz for inviting me to guest blog on My Consumer Tips. I’m excited to share some of the consumer credit issues I’ve happened upon during my work. My research includes empirical studies of bankruptcy and consumer credit. (Read more about me here.) Along with my co-authors on some articles, I’ve written about racially disparate uses of consumer bankruptcy by families and business bankruptcy by churches. This research is part of a growing body of research finding that lower-income individuals and minorities pay more for goods and services and, on average, receive less. This week, ProPublica and Consumer Reports published a new study that adds auto insurance to the list of services for which minorities pay more.

Although I blogged about the study briefly over at Credit Slips, I want to spend more time discussing the findings here. The study analyzes car insurance premiums and payouts by zip code in four states, California, Illinois, Texas, and Missouri. It finds that major insurers charge up to 30 percent more for insurance in minority neighborhoods than white neighborhoods with the same risk (meaning with similar accident costs). To put some numbers to this finding, the report begins with the stories of Nash and Hedges. Nash lives in a neighborhood in Chicago that from a car insurance perspective is safer than the Chicago neighborhood where Hedges lives. Nash’s neighborhood is predominately minority, while Hedge’s neighborhood is predominately white. Nash is 26 and drives a 2012 Honda Civic LX. Hedges is 34 and drives an Audi Q5 Quattro SUV. Both Nash and Hedges are employed and both receive a good driver discount. Who pays more for car insurance?

If you guessed Nash, you’re right. But what is more interesting and perhaps unexpected is how much more Nash pays. He pays $191 a month. Hedges pays $55, almost four times less than Nash. Why does this matter? Nash’s story includes struggling to make that hefty monthly payment while support his wife and daughter by working two jobs. An extra $140 a month would go a long way to easing Norm’s mind about making ends meet.

Moving beyond these two stories, the study confirms what some consumer advocates have suspected for years: That auto insurers seem to be using zip code as a proxy for race, and charging minority neighborhoods more for insurance, despite the fact that these drivers are just as safer as drivers in white neighborhoods and despite the fact that cars “residing” in these neighborhoods are no more likely to cost insurers more in payouts than cars in other neighborhoods. Consumer advocates’ assumptions about auto insurance were based on prior knowledge that where someone lives matters to economic opportunity and mobility. Auto insurance premiums now can be added to the list of the ways in which lower-income individuals and minorities pay more, and which hinder their efforts to save and achieve economic security. Read the full study here.

Pay to Play in Consumer Arbitration

By: Amy
The AAA Consumer Arbitration Rules provide that after the consumer pays a $200 filing fee, the defendant must pay a $1500 filing fee, a $500 hearing fee, and $1500 arbitrator compensation per hearing day. The defendant may also have to pay the consumer’s $200 fee if the arbitration agreement provides the company will pay all costs.

Some companies that include predispute arbitration clauses in their contracts have refused to pay these arbitration costs as a defendant in consumer cases.  In the case of the AAA,  nonpayment of fees will result in the AAA refusing to administer the arbitration.  Additionally, consumer claimants in such cases can then raise the same dispute in court, arguing that the arbitration requirement no longer applies because of the defendant’s material breach.

Roach v. BM Motoring, LLC, 2017 WL 931430 (N.J. Mar. 9, 2017), provides an example of what happens when a defendant refuses to pay arbitration costs.  In that case, the New Jersey Supreme Court joined other courts that find the defendant’s refusal to pay arbitration costs waives the arbitration requirement by materially breaching the agreement. See e.g. Pre-Paid Legal Services, Inc. v. Cahill, 786 F.3d 1287 (10th Cir. 2015).  The defendant car dealership included an arbitration provision in its consumer contracts that required arbitration in accordance with AAA rules, but did not explicitly require arbitration before the AAA. Nonetheless, the defendant failed to pay the AAA’s filing fees and arbitrator compensation deposit when a consumer filed a complaint against the dealership with the AAA.   Indeed, the defendant ignored the AAA’s notices — leading the AAA to send  the parties a letter stating that because of this failure it would not administer the arbitration or any other consumer disputes involving the dealership.  The consumers then filed their claims in state court and the dealership moved to compel arbitration. The New Jersey Supreme Court concluded on appeal that the dealership was precluded from enforcing the arbitration agreement.

Confirmation of Pay to Play

The Roach court confirmed basic contract law:  when a party breaches a material term of an agreement, the non-breaching party is relieved of its obligations under the agreement. The court then concluded that the arbitration terms (by requiring use of AAA rules) permitted arbitration before the AAA, even if the AAA was not stated as the exclusive forum for the arbitration.  Accordingly,  the court would not disturb the consumers’ choice to arbitrate with the AAA. The dealership materially breached the agreement where the consumer paid the consumer’s filing fee and the dealer did not pay its fees.  Therefore, the consumers were then free to litigate their claims in court.

Missouri Takes a Strong Stance on Arbitration

By: chayter
Tamko Building Products, Inc. v. Hobbs is a big win for consumer protection. This case differs from others of its kind, as it provides consumers with protection from invasive arbitration agreements attached to a product’s packaging.

In 2005 and 2007 respectively, Lee Hobbs and the Jonesburg Methodist Church bought Heritage Series Shingles, which are manufactured by Tamko. On the outside of each bundle of shingles was a limited warranty that provided a remedy for damages caused by manufacturing defects and included a binding arbitration provision. Neither Hobbs nor Jonesburg saw the limited warranty or was made aware of the warranty.

Then, in 2013, the shingles they purchased started warping, curling, and beginning to fail.  In 2014, Hobbs and Jonesburg filed a class action complaint against Tamko alleging violations of the Missouri Merchandising Practices Act (MMPA), negligence, and entitlement to declaratory relief. Tamko responded with a motion to compel arbitration because of the binding arbitration provision slapped on to Tamko’s shingles packaging. The trial court denied Tamko’s motion, and Tamko appealed, arguing that the trial court erred because the parties had entered into a valid arbitration agreement. The court of appeals affirmed the judgment of the trial court, finding that the mere purchasing of the shingles did not create acceptance of the arbitration agreement; the plaintiffs had never signed any document agreeing to an arbitration clause. An appeal to the Missouri Supreme Court was denied, and a petition for certiorari is still pending before the Supreme Court of the United States.

First, Tamko argued that the plaintiffs accepted and agreed to the terms of the limited warranty because the plaintiffs kept and used the shingles. The court found this unpersuasive because there was no evidence that the consumers actually received the documentation; typically, shingles are a product that are not kept by the consumer after they are unbundled and used. Second, Tamko alleged that plaintiffs accepted the terms of the arbitration agreement by invoking their claims under the limited warranty. The court also rejected this argument; Hobbs and Jonesburg only became aware of the warranty after they had filed their claims with Tamko. The court took a firm stance: big business cannot bully consumers into arbitration.

As the law currently stands (and with the help of this case), the MMPA makes Missouri one of the most consumer friendly states in the nation. But, this is not the end of the story. A new bill, Senate Bill 5, was introduced in the Missouri legislature in the beginning of 2017. It amends the MMPA, stating that the MMPA does not apply to any business “regulated by the Federal Trade Commission or any other regulatory agency.” Passage of this bill would eliminate consumer protection in Missouri; almost every business is subject to regulation by the Federal Trade Commission or another regulatory agency. Consumers, unfortunately, would be left unprotected.

But as of now, Tamko provides some thread of hope for consumers who have been forced into arbitration clauses against their will. Simply attaching an arbitration agreement to a product’s packaging does not create a valid arbitration clause in Missouri. But Tamko still does not protect consumers who unknowingly enter into arbitration agreements in other contexts. The legislature, therefore, should be working to help all consumers fight back against abusive business practices rather than taking away the little protection they have now.