Articles

Keeping America’s Economy Strong: Enforcing Consumer Protection Laws as Congress Intended

By Tom Domonoske

Beginning in 1969, Congress began passing important statutes designed to allow our free- market economy to function properly. These statutes are collected in the Consumer Credit Protection Act (CCPA), 15 U.S.C. §§1601-1693r. For instance, the Truth in Lending Act, Title I of the CCPA, was passed by Congress on May 29, 1968, P. L. 90- 321, "to assure meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him." 15 U.S.C. 1601. See Beach v. Ocwen, 523 U.S. 410, 413 (1998). The Act is designed to promote "the efficient functioning of a free economic system" by providing consumers with information that allows them to shop for the best possible credit terms. Mourning v. Family Publications Service, Inc., 411 U.S. 356, 363-64 (1973). When consumer lawyers enforce the CCPA, the lawyers are implementing the will of Congress to strengthen the economy by ensuring that accurate information is used in market decisions. In this way, effective enforcement of all parts of the CCPA, the Truth in Lending Act, the Fair Credit Reporting Act, the Equal Credit Opportunity Act, and the Fair Debt Collection Practices Act, is necessary to keep the American economy strong. As consumer lawyers, we are never merely advocating for our individual client's rights, we are in fact protecting the American way from the danger posed by inefficient markets.

The Basic Problem:
A Completely Unregulated Market Does Not Work

The basic premise of the market economy is that a knowledgeable seller and a knowledgeable buyer will come together and make a decision in their own interests. Under the market theory, the combined effect of the many millions of such decisions on all levels of the economy is an ever-increasing efficiency in the distribution of goods and services. The ever-increasing efficiency is to occur because, through innovation and creativity, sellers will be continually and necessarily motivated to "build a better mouse- trap." Although this system creates the possibility and the reality of large disparities in income and wealth, the inequalities of that disparity are accepted as a necessary by- product of the efficiencies and benefits of the market system.

In actual practice, certain controls and protocols are necessary to make a market perform properly. Financier George Soros has said, "The truth is that market fundamentalism is itself naive and illogical. Even if we put aside the bigger moral and ethical questions and concentrate solely on the economic arena, the ideology of market fundamentalism is profoundly and irredeemably flawed. To put the matter simply, market forces, if they are given complete authority even in the purely economic and financial arenas, produce chaos and could ultimately lead to the downfall of the global capitalist system." Consequently, even people like George Soros, who believe strongly in the power of the market, understand that the market forces must be directed to ensure the viability of the market system.

One of the important factors is honest information. If a seller misrepresents the value or nature of any type of goods or services, buyers will purchase from that seller rather than from a different seller who is actually providing better goods or services. In the same way that millions of separate transactions between a knowledgeable buyer and seller can produce a functioning economy, millions of separate transactions based on misinformation will pervert and fundamentally harm an economy.

This article explores the engines that work together to create an inefficient market.

Greed and the New Corporatists

Despite an attitude that gained acceptability in the 1980s, greed is not good. Unfortunately, because the market system allows the financial rewards of transactions to be distributed based on individual decisions, huge disparities of wealth are a reality of our system. "As wages fell for the typical worker, executive pay soared. From 1989 to 2000, the wage of the typical (i.e., median) chief executive officer grew 79.0%, and average compensation grew 342%. In 1965, CEOs made 26 times more than a typical worker; this ratio had risen to 72-to-1 by 1989 and to 310-to-1 by 2000. U.S. CEOs make about three times as much as their counterparts abroad." The State of Working America, Economic Policy Institute.

The potential to live like royalty in the midst of others who struggle daily is a lure too strong for many of weak moral fiber. The Enron debacle is a prime example of a whole system of managers and executives who found no problem in using misrepresentations to funnel millions of dollars into their own pockets. Whether the misrepresentation is made by a used car dealer about a car's accident history or made by a corporate executive about the debts and profits of the company, the fundamental fraud is the same: misrepresent value to illegally acquire dollars. Once the dollars are in a bank account, whether they were obtained honestly or dishonestly, does not alter the ability to spend those dollars freely.

As society is increasingly fragmented, corporations and the people that identify with corporations lose touch with average citizens. Unfortunately, a class of people has developed, called corporatists, who live, think, and act differently than ordinary citizens and even other corporate employees. This process can best be seen by the generational change since World II in military service. In World War II, powerful wealthy families commonly sent their sons into harm's way. Even future presidents like John Kennedy, were on the front lines, were living and mixing and risking death with other Americans from all walks of life. Currently, the idea of a corporatist’s son or daughter going to serve in combat in a place like Iraq not only seems unlikely but also seems somehow out of place. The background question created by such an idea is "why would they do that?" Well, the development of that question is the cultural change created by the corporatists, by gated communities where part of America lives without ever developing the ties that bind them to the rest of America.

Although this simplistic example is not meant as an explanative model for societal change, the effect of executive pay jumping from 26 times the average worker's pay to 310 times the average worker's pay is one measurement of the distance created between the executive class and the working class. The gap has increased over tenfold, and although dollars readily jump the divide in one direction, community ties nolonger cross it. The wide gulf that has opened up between the corporatists and the vast majority of the rest of the population is expressed by those corporations that exist merely to prey upon people and extract value from them.

“Generally Accepted Procedures” Instead of Honest Procedures

The distance between the corporatists and the average citizen has led to a complete breakdown of accountability to any community standards other than "generally accepted procedures." As long as the corporation follows "generally accepted procedures," its managers, lawyers, accountants, and other corporatists have convinced themselves that nothing else is required. Under "generally accepted procedures," many corporatists have allowed greed to dictate their actions. Viewed properly, their actions are many times simply fraud.

Many generally accepted procedures take an initially proper concept and twist it beyond the truth. The October 23, 2002, Washington Post reported in an article titled "Pension Reports Return to Haunt U.S. Companies” that under generally accepted procedures, large corporations report profit on pension plans as income to the corporation. Because the actual returns on the investments in the pension plans vary each year, large swings in profits on the pension plans may give a misleading appearance to a corporation's true profits. To decrease the volatility of such swings, the generally accepted procedure is for the corporations to use an estimated percentage return each year on the plans. The problem is that in the past few years many pension plans have not only been performing far below the historic estimate, but they have been losing money.

Consequently, some companies have been reporting an overall profit by using an estimated return of 8 or 9% on a pension plan, even though the pension plan actually lost money and the corporation overall actually lost money. Of the 50 largest U.S. companies in 2001, $54 billion of pension income was reported in this way even though the plans lost $38 billion. This single generally accepted procedure thus accounted for a $90 billion misrepresentation to all investors in these 50 companies.

This $90 billion misrepresentation was made to investors to use in deciding which companies to invest in and how much to invest. The best way to test any generally accepted procedure is to imagine an ordinary American utilizing the procedure. When a consumer applies for a loan, the consumer must disclose financial information in the same way corporations disclose financial information to investors. Imagine the consumer who fills out the credit application that asks net worth information. The consumer could use "generally accepted procedures" to estimate the value of her IRA account as if she received an 8% return last year when in fact she lost 35% over the last two years; she could put down that her IRA was worth over $116,000.00 rather than $65,000.00. The creditor who extended credit on such misinformation would scream “fraud” and perhaps seek criminal charges.

Through use of "generally accepted procedures" the corporatists truly believe that they and their corporations are no longer held to the standards of behavior applied to normal citizens. These procedures have poisoned the behavior of the corporations and, at all levels of the economy, introduced false information into market transactions.

Debt Is the American Way

Household debt grew much more rapidly than household income in the last decade. By 2001, total household debt exceeded total household disposable income by nearly 10%. Households in the middle of the wealth distribution absorbed the largest share of this run-up in debt. While low nominal interest rates have made it easier for households to carry the greatly expanded debt, many households appear to be straining. Recent government data show that 14% of middle-income households have debt-service obligations that exceed 40% of their income; 9% have at least one bill that is more than 60 days past due. Comparing household debt of 2002 to household debt of the previous decades shows a shocking change in the American economy. As of February 2002, household credit stood at approximately $1.75 trillion dollars; a dramatic increase from the $6 billion when the Truth in Lending Act was passed. Consumer spending is recognized as the engine that keeps our economy going, and consumer credit is the fuel for that engine.

If this fuel is impure, the engine can sputter or stall. Bankruptcies, both corporate and personal, rise as credit obligations exceed ability or desire to pay. Because credit that is granted based on imperfect or faulty information is imperfect or faulty fuel, misinformation in credit transactions will stall our economy.

Advertising Works

The huge advertising budgets and all the work by advertising firms are not wasted. Advertising, done properly, works and motivates people to want more than they have. A common idea is that almost everyone, regardless of income, believes that if they had $10,000 per year, then they could afford all they wanted. The level of income is merely a platform from which each person is targeted by advertisements for goods that are just beyond their current reach.

As a recent Saab ad stated, you are simply a boring person if you cannot spend $3,500 down, and $399 per month on a car. Despite the rational knowledge that all non-Saab owners are not really boring, people do tend to measure each other by public displays of material possessions. Advertising feeds on this measurement, and people can spend an enormous amount of time trapped by living according to this measuring stick.

The combination of effective advertising and easy availability of credit results in many impracticable credit purchases. When purchasers willingly enter into transactions that are not in their best interest, the market can never function properly.

The Result of These Factors

The result of the unmitigated greed, the substitution of generally accepted procedures in place of honesty, loss of community values, the acceptance of debt, and the effectiveness of advertising, have combined to create some disturbing statistics. The wealthiest 1% of all households control about 38% of national wealth, while the bottom 80% of households hold only 17%. This disparity in wealth then directly translates into disparity of political power.

In 2002, default rates on home loans were at historic highs when interest rates were at historic lows. That combination is a telling sign of an ailing economy. Across the country, people's retirements have been threatened by massive declines in the stock market, and large corporate bankruptcy filings dominate the news. The United State's foreign trade deficit continues to set new records. This article does not attempt to explain the link between all these events, but these events all show the need to develop the controls that are necessary to allow our market economy to perform properly.

The Controls Selected by Congress to Increase the Efficiency of the Market

Congress has already acted— the Truth in Lending Act (TILA), the Equal Credit Opportunity Act (ECOA), the Fair Credit Reporting Act (FCRA), the Fair Debt Collection Practices Act (FDCPA) all regulate the credit economy. They define the environment for credit transactions that is the only permissible structure within which individual credit decisions are to be made. Regarding the TILA, the Supreme Court has recognized that Congress created this "barrier between the seller and the prospective purchaser in the form of hard facts." Mourning, 411 U.S. 356, 377 (1973). Most important, it also stated that Congress changed "the philosophy of 'Let the buyer beware' to one of 'Let the seller disclose.'" Id.

A few simple principles are incorporated into these federal statutes:

TILA - tell them what the deal will be before they sign; ECOA - tell them what action was taken and why; FCRA - tell them what information was used and where it came from; and FDCPA - do not lie to collect anunpaid debt.

Under the TILA, each creditor is required to place accurate TILA disclosures in each consumer's possession before the consumer signs to accept the credit. Under the ECOA, within thirty days after receiving an application from a consumer, each creditor must accurately inform the consumer of the action taken on the application. Under the FCRA, a creditor must inform the consumer about the information that was used to evaluate the credit. Under the FDCPA, debt collectors must not lie to consumers to coerce them to pay an alleged debt.

These principles are focused to ensure that the market functions properly and that people have the information to make knowledgeable credit decisions. At their core, these are merely mandated honesty. The required disclosures are not invasive notices that mandate disclosure of trade secrets. The required disclosures are simply the information required by the underlying theory of the market that is necessary to have the market perform properly. Because an unscrupulous seller will want the buyer to have as little information as possible and thereby increase how much the buyer will pay, these statutes are necessary to ensure that an informed consumer can exist.

These principles are fundamentally designed to protect the business that "builds the better mouse trap." In theory, the consumers will choose to give their dollars to those businesses that are delivering better value or lower prices. The mandated honesty of these statutes gives the more efficient credit business the means to effectively compete with the less efficient credit business. The corporations that violate these statutes are stealing business from those that comply. To effectively enforce these statutes, every consumer lawyer should recognize and argue that really she is working on behalf of the honest creditors to curb anti-competitive behavior by those businesses that act in unlawful and even criminal ways.

Because these statutes were designed to strengthen the American economy, willful violations done as a matter of practice are efforts to weaken our economy. Consumer lawyers are truly acting in a national interest by enforcing these statutes. The phrase "private attorney general" describes the reality of these statutes. Judges will be motivated to enforce the statutes if the very important policies behind them are explained.

Countering the Argument That a Consumer With Debts is a Bad Person

The basic defense tried in most consumer credit cases is that the consumer is at fault for not paying all his bills. Let Congress explain the true picture:

One of the most frequent fallacies concerning debt collection legislation is the contention that the primary beneficiaries are "deadbeats." In fact, however, there is universal agreement among scholars, law enforcement officials, and even debt collectors that the number of persons who willfully refuse to pay just debts is miniscule. Prof. David Caplovitz, the foremost authority on debtors in default, testified that after years of research he has found that only 4 percent of all defaulting debtors fit the description of "deadbeat." This conclusion is supported by the National Commission on Consumer Finance which found that creditors list the willful refusal to pay as an extremely infrequent reason for default." Senate Report No. 95-382 on the FDCPA.

That report also states that "[t]he Commission's findings are echoed in all major studies: the vast majority of consumers who obtain credit fully intend to repay their debts. When default occurs, it is nearly always due to an unforeseen event such as unemployment, overextension, serious illness, or marital difficulties or divorce."

The statutes in the CCPA were necessary to protect the economy because of the bad actions of certain industries. "The committee believes that the serious and widespread abuses in this area and the inadequacy of existing State and Federal laws make this legislation necessary and appropriate." Id. These are not just legislative history comments but can also be found in the express words of Congress regarding all of these statutes.

In 15 USC §1692, under the “Congressional Findings and Declaration of Purpose:”

(a) There is abundant evidence of the use of abusive, deceptive, and unfair debt collection practices by many debt collectors. Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy.

(b) Existing laws and procedures for redressing these injuries are inadequate to protect consumers.

(c) Means other than misrepresentation or other abusive debt collection practices are available for the effective collection of debts.

(d) Abusive debt collection practices are carried on to a substantial extent in interstate commerce and through means and instrumentalities of such commerce. Even where abusive debt collection practices are purely intrastate in character, they nevertheless directly affect interstate commerce.

(e) It is the purpose of this subchapter to eliminate abusive debt collection practices by debt collectors, to insure that those debt collectors who refrain from using abusive debt collection practices are not competitively disadvantaged, and to promote consistent State action to protect consumers against debt collection abuses.

The “Congressional Findings and Statement of Purpose” of the ECOA makes the same point:

The Congress finds that there is a need to insure that the various financial institutions and other firms engaged in the extensions of credit exercise their responsibility to make credit available with fairness, impartiality, and without discrimination on the basis of sex or marital status. Economic stabilization would be enhanced and competition among the various financial institutions and other firms engaged in the extension of credit would be strengthened by an absence of discrimination on the basis of sex or marital status, as well as by the informed use of credit which Congress has heretofore sought to promote. It is the purpose of this Act to require that financial institutions and other firms engaged in the extension of credit make that credit equally available to all creditworthy customers without regard to sex or marital status.

Under 15 USC §1601, the "Congressional Findings and Declaration of Purpose" for TILA is equally clear:

Informed use of credit

The Congress finds that economic stabilization would be enhanced and the competition among the various financial institutions and other firms engaged in the extension of consumer credit would be strengthened by the informed use of credit. The informed use of credit results from an awareness of the cost thereof by consumers. It is the purpose of this subchapter to assure a meaningful disclosure of credit terms so that the consumer will be able to compare more readily the various credit terms available to him and avoid the uninformed use of credit, and to protect the consumer against inaccurate and unfair credit billing and credit card practices.

Under 15 USC §1681, the FCRA "Congressional Findings and Statement of Purpose" explains how inaccurate credit information harms our economy:

(a) Accuracy and fairness of credit reporting

(1) The banking system is dependent upon fair and accurate credit reporting. Inaccurate credit reports directly impair the efficiency of the banking system, and unfair credit reporting methods undermine the public confidence which is essential to the continued functioning of the banking system.

(2) An elaborate mechanism has been developed for investigating and evaluating the creditworthiness, credit standing, credit capacity, character, and general reputation of consumers.

(3) Consumer reporting agencies have assumed a vital role in assembling and evaluating consumer credit and other information on consumers.

(4) There is a need to insure that consumer reporting agencies exercise their grave responsibilities with fairness,impartiality, and a respect for the consumer's right to privacy.

(b) Reasonable procedures

It is the purpose of this subchapter to require that consumer reporting agencies adopt reasonable procedures for meeting the needs of commerce for consumer credit, personnel, insurance, and other information in a manner which is fair and equitable to the consumer, with regard to the confidentiality, accuracy, relevancy, and proper utilization of such information in accordance with the requirements of this subchapter.

All of these statutory provisions make the same point. Congress has determined that to make the market perform properly, these statutes must be followed. To enforce these statutes, the Court and the defendant must fully understand the importance of compliance with the statutes. Because of the importance of these statutes, a consumer advocate must cite these provisions and connect the harm that violations pose to our national interest. Consequently, a consumer advocate is really working on behalf of the law-abiding businesses that are losing customers because of the anti-competitive action of the businesses that violate the statutes; the consumer advocate is also working on behalf of the country as a whole to sustain and support the life-blood of our economy.

The Congressional Record can also be used to put a citation to all of these important truths. Regarding the FCRA and the importance of accurate credit information "[i]f these reports are not accurate, or if they are distributed without a legitimate purpose, then our whole society suffers. Consumers may be unfairly deprived of credit, employment, and their privacy. And businesses may lose out on the opportunity to gain new customers." 140 Cong. Rec. H9809, September 27, 1994, Statement of Rep. Kennedy.

Real Individual Harm Results From Violations of These Statutes

After ensuring that a judge understands that the policies and purposes of these statutes, the consumer advocate must explain the real individual harm that results from violations. In passing each of these statutes, Congress documented those harms. Under the FCRA, "[t]he credit reports they compile determine whether a consumer will obtain a mortgage, a car or business loan, a job, and even an apartment.” 16 USC §1681.

A common problem in the credit reporting industry is inaccurate information flowing from identity theft, and anyone who has been subject to such a problem will know the frustration that results. At the hearing before the Subcommittee on Social Security Of the Committee on Ways and Means (House of Representatives, One Hundred Sixth Congress Second Session, July 17, 2000, Delray Beach, Florida, Serial No 106-43) Representative Mark Foley related his own experience.

And it was clearly insulting having a collection agency calling you constantly at home, leaving messages, when you get a live person on the phone, threatening you if you didn't pay your bill that you'd be listed as a deadbeat. It was mind-numbing. . . . The collection agency, even after I reached Target, consistently tried to call and disrupt me at all hours of the day.

I can only imagine the senior citizen who has had their card stolen having fear of these type of tactics on the phone, threatening that they would lose their home, that they'd lose their credit, that they'd be taken seriously. And some may even pay the bill that they did not owe simply to get rid of harassers.

This testimony from Representative Foley is not unique in content but is rather unique in the first person from an elected member of Congress. If more members of Congress were similarly abused by corporate practices, then we could see even better statutory protections for both the economy and for individual consumers. For instance, if Representative Foley had been a victim of a consumer fraud and then forced into arbitration as a result of small print clause on the back of the fourth page of a form contact, then perhaps the Federal Arbitration Act would be amended to protect consumers.

Information is power and, to the extent that a consumer is denied information, the consumer loses power. Although the loss of that power is hard to value, it is always a loss. Especially when the federal government has given the consumer an automatic right to that information, no defendant can credibly claim the information is not important. Late delivery of the TILA disclosures is the main problem under the TILA in the context of retail sales. A barrier to full compliance of the TILA is that consumers do not know about the creditor's obligation to deliver the TILA disclosure prior to signing. Thus, they do not know that the disclosures are to be used to shop for credit. Most consumers are not even aware of the vital information being withheld from them.

A final important fact about all these statutes is that they were developed in close consultation with the regulated industry. Each statute is fine tuned for ease of compliance and lack of barriers to legitimate business practices. Consumer advocates also need to show how the statutes work together and are easy to comply with. If a judge believes a statute is a barrier to a business rather than a benefit to the market, the judge will probably be more reticent to enforce it.

As consumer lawyers become better at explaining and enforcing these statutes, the industry will respond. The response can be compliance or it can be an effort to allow non-compliance to continue. Mandatory pre-dispute binding arbitration clauses are one of the most prevalent shields that some corporations have recently adopted to avoid changing practices that violate the law.

Conclusion

The basic principles of the federal consumer statutes are easy to state and make sense. Mandated honesty and required disclosures create an informed consumer public and protect honest businesses.

The statutes of the CCPA are designed to keep our economy strong, and strong enforcement of them is in the national interest. Without honest and accurate information in the market, the market misfires. The Enron and Worldcom debacles, are examples of the tremendous harm that occurs when market decisions are manipulated by false information. Truth in individual decisions is important for the overall effect when those decisions are summed.

By linking the violation of each statute to the purposes of the statute, we can clarify the issues and enforce the statutes as intended. The reason to do so is simple. "No one has the right to take for granted his own advantages over others in health, in talents, in ability, in success, in a happy childhood or congenial home conditions. One must pay a price for all these boons. What one owes in return is a special responsibility for other lives." Albert Schweitzer, "Reverence for Life."