May 13, 2019
Unfair, Unlawful and Abusive
I signed on to a Memorandum in Support of a bill to amend New York’s consumer protection law to make it consistent with the laws of 39 other states and the federal government. St. John’s Gina Calabrese led this effort. The Memorandum opens,
STATEMENT OF SUPPORT: The undersigned consumer law professors support S.2407/A.679, which would expand the scope and improve enforcement of General Business Law §349 (“GBL 349”), New York’s statute prohibiting deceptive business acts and practices. By adding unfair, unlawful and abusive to the categories of prohibited conduct, this bill would make New York’s consumer protection policy consistent with the laws of 39 other states and the federal government, reflecting policies integral to a well-functioning marketplace.
BACKGROUND: Enacted almost 50 years ago, GBL 349 prohibits “deceptive” acts and practices. However, it does not currently prohibit unfair, unlawful, and abusive business acts and practices. Most states and the federal government recognize that unfair, unlawful, and abusive acts and practices cause great harm to the public. Traditional businesses have long-standing methods that take advantage of consumers. Modern business developments, products, and services have increased the public’s vulnerability to various harms that may not be encompassed by prohibitions against “deceptive” acts. Technology, collection of personal data, and complex business models (e.g., several entities handling different aspects of a transaction) all play a role. For example:
Wells Fargo opened millions of unauthorized bank accounts using customer data already in its possession. The Consumer Financial Protection Bureau fined Wells Fargo $100 million using its power to address unfair and abusive practices, not its power to punish deceptive practices.
New York’s law fails to prevent unfair tactics well-known to consumer experts, including high pressure sales tactics in automobile sales and illegal fees charged by mortgage servicers. Law school clinics have assisted elderly car buyers who were persuaded to relinquish their keys to car dealership staff then detained for hours until they were “worn down” and bought cars or add-ons they didn’t want or need with expensive financing.
Dozens of other states already prohibit unfair practices, such as New York’s neighbors Connecticut, Pennsylvania, and Massachusetts. Even states like Mississippi, Georgia, Tennessee and West Virginia permit consumers to sue for unfair practices. Contrary to fears stoked by business groups, there is no evidence that that has led to an explosion of litigation. And the federal Dodd-Frank Act proscribes abusive consumer financial practices. S.2407/A.679, is not a broad expansion of consumer rights, but more like having New York catch up.
The bill would eliminate the “consumer-oriented” requirement that the courts grafted onto the law. It does not appear in the text of GBL 349. It prevents consumers from holding businesses accountable because meeting the requirement often involves substantial pre-suit investigation. We know of no other state that requires “consumer-oriented” conduct before a court can impose liability.
The bill would improve compliance with and enforcement of GBL 349 because it increases the outdated $50 cap on statutory damages, codifies organizations’ standing to sue, permits class actions, and ensures that a successful plaintiff will be able to recover fees to pay her attorney. Very few consumers will bother to sue for $50, meaning that many bad actors do not have to fear private claims and the law will not be properly enforced. The bill would permit statutory damages of $2,000, which seems modest compared to penalties consumers can obtain under Kansas law of up to $10,000. Strengthening the ability of individuals and organizations to sue businesses for unfair, unlawful, deceptive, and abusive acts ensures that the public will be protected when government agencies do not act to stop illegal practices, whether the reason be different priorities, lack of resources, or lack of impact on a large number of people.
The bill would empower the Attorney General to ensure New Yorkers enjoy a fair and just marketplace and private persons to better protect themselves from unfair, unlawful, abusive, and deceptive practices engaged in by businesses with greater bargaining power and protect the public from ever-evolving anticompetitive and harmful business practices.
May 13, 2019 | Permalink | No Comments
May 9, 2019
Financing The American Dream
I published Financing The American Dream in the May/June 2019 issue of the ABA’s Probate & Property magazine. it opens,
Two movie scenes can bookend the last hundred years of housing finance. In Frank Capra’s It’s a Wonderful Life (RKO Radio Pictures Inc. 1946), George Bailey speaks to panicked depositors demanding their money back from Bailey Bros. Building and Loan. This tiny thrift in the little town of Bedford Falls had closed its doors after it had to repay a large loan and temporarily ran out of money to return to its depositors. George tells them:
You’re thinking of this place all wrong. As if I had the money back in a safe. The money’s not here. Your money’s in Joe’s house…right next to yours. And in the Kennedy house, and Mrs. Macklin’s house, and a hundred others. Why, you’re lending them the money to build, and then, they’re going to pay it back to you as best they can.
Local lenders lent locally, and local conditions caused local problems. And in the early 20th century, that was largely how Americans bought homes.
In Adam McKay’s movie The Big Short (Plan B Entertainment 2015), the character Jared Vennett is based on Greg Lippmann, a former Deutsche Bank trader who made well over a billion dollars for his employer by betting against subprime mortgages before the market collapse. Vennett demonstrates with a set of stacked wooden blocks how the modern housing finance market has been built on a shaky foundation:
This is a basic mortgage bond. The original ones were simple, thousands of AAA mortgages bundled together and sold with a guarantee from the US government. But the modern-day ones are private and are made up of layers of tranches, with the AAA highest-rated getting paid first and the
lowest, B-rated getting paid last and taking on defaults first.
Obviously if you’re buying B-levels you can get paid more. Hey, they’re risky, so sometimes they fail. . . .
Somewhere along the line these B and BB level tranches went from risky to dog [excrement]. I’m talking rock-bottom FICO scores, no income verification, adjustable rates. . . dog [excrement]. Default rates are already up from one to four percent. If they rise to eight percent—and they will—a lot of these BBBs are going to zero.
After the whole set of blocks comes crashing down, someone watching Vennett’s presentation asks, “What’s that?” He responds, “That is America’s housing market.”
Global lenders lent globally, and global conditions caused global and local problems. And in the early twenty-first century, that was largely how Americans bought homes. This article provides an overview of the strengths and weaknesses of each aspect of the housing finance system in order to enable discussion of how to design a stronger system for the rest of the 21st Century. For a much more extensive treatment of this topic, see the author’s forthcoming book, Paying for The American Dream: How To Reform The Market for Mortgages (Oxford University Press, 2019).
May 9, 2019 | Permalink | No Comments
February 14, 2019
Housing Policy, Going Forward
The Hill published a column of mine, The Next Two Years of Federal Housing Policy Could Be Positive under Mark Calabria. it opens,
The Trump administration has been a nightmare for housing advocates. Housing and Urban Development Secretary Carson has stopped enforcing fair housing laws, with assists from Treasury Secretary Steven Mnuchin and Comptroller of the Currency Joseph Otting. Those two have been working to scale back fair lending enforcement and the Community Reinvestment Act.
Consumer Financial Protection Bureau Acting Director Mulvaney has gutted consumer protection in the mortgage market. I am more hopeful though when it comes to housing finance reform. The administration has nominated Mark Calabria to be the next director of the Federal Housing Finance Agency; the FHFA is Fannie Mae and Freddie Mac’s regulator.
There have been three types of leaders on Trump’s team that have been working on housing issues. First are those who seek to explicitly undermine the work of the agency they lead, like Mulvaney. Leaders like Mulvaney are generally proponents of a radical conservative ideology that has been way out of step with American political norms until the Tea Party movement swept through Congress. Second are those who pay some lip service to the agency’s mission, but work to undermine it, like Carson. And third are those who are clearly industry favorites, like Mnuchin and Otting. They primarily seek to address concerns of the industry they regulate at the expense of their agency’s broader public mission.
Calabria represents a fourth type of leader, one who is more likely to implement a more traditional Republican agenda for the housing sector. For the last couple of years, he has been serving as Vice President Pence’s chief economist.
February 14, 2019 | Permalink | No Comments
January 25, 2019
Protecting Small Businesses
Students in my Community Development Clinic and I have a column in the New York Law Journal, Small Business Jobs Survival Act May Have Opposite Effect. It reads,
The New York City Council is considering a bill, the Small Business Jobs Survival Act, that it claims will protect small businesses even though the Act contains no protections tailored to them. Instead, the Act would implement a new lease renewal arbitration system that treats all commercial tenancies the same, allowing businesses as large as Amazon to benefit.
The Act would create a bureaucratic process that works contrary to its stated goals. The Act is meant to “create a fair negotiating environment, which would result in more reasonable and fair lease terms to help small businesses survive and encourage job retention and growth.” The Act actually creates a system under which big businesses will benefit the most. Furthermore, the process is overly complex for mom and pop businesses owners who are not familiar with the legal system. To avoid exacerbating the advantages that big businesses currently enjoy in the rental market, the City should consider policy alternatives that are tailored to the needs of small businesses.
Although the Act is supposed to protect small businesses, it does not define what a small business is. By not distinguishing between big and small tenants, the Act gives businesses of all sizes the same rights to negotiate a lease renewal. For large businesses like Amazon with an in-house legal department, the new system is business as usual. Amazon does not need to worry about additional costs to negotiate a lease renewal. For mom and pop business owners, the system starts to feel like a tax simply to stay in business because they will need to increase their costs relative to big businesses.
The Act’s arbitration provision sets forth about a dozen factors that an arbitrator must consider when setting the rent. Those factors can then be supplemented by “all other relevant factors.” Such a complex and vague standard will lead to inconsistent and unpredictable results. Two arbitrators determining rents for similar businesses located near each other are likely to arrive at different rents for these businesses because of the broad set of criteria they can consider. Additionally, an arbitrator’s decision would be final and non-reviewable.
The City’s property tax system offers a cautionary tale. The system is complex, many of its decisions are unreviewable, and its results are arbitrary and unfair. One consequence has been that property owners in wealthier neighborhoods often pay lower property taxes than those in less affluent neighborhoods, a state of affairs leading to a high-profile lawsuit and a Mayoral push to reconsider the entire system.
In addition to a costly process, the proposed lease renewal system is not easily navigable for mom and pop business owners. These mom and pop shops would face a new world of legal processes not familiar to them and that have nothing to do with their businesses. The Act almost requires that small commercial tenants hire lawyers to guide them through a system that might begin to feel like the soul-crushing New York City Housing Court, where tenants and landlords spend countless hours and often obtain results as perplexing as the problems that brought them there in the first place. Unrepresented tenants, in particular, face steep odds against the confusing and impersonal system. They are often unaware of their rights and how the system works, leading to temporary relief that does not do much more than postpone the date of their eviction. If the Act is enacted, small business tenants who either can’t or don’t hire lawyers would face as many, if not more, obstacles than they do in the current system.
Given that the Act in its current form does not serve its intended goals, the City should consider policy alternatives like formula business restrictions, which may be a more effective way of targeting and protecting small businesses. The formula business restriction serves to prevent retail and fast food chains from operating in particular neighborhoods in order to protect their social fabric. These restrictions aim to protect the unique character of city neighborhoods that have yet to feel the full effects of gentrification and mall-ification. These restrictions will incentivize leasing to new small businesses while protecting existing ones that are at risk of losing their space to commercial chains.
Companies like Amazon should not be the principal beneficiaries of a “Small Business Jobs Survival Act.” Rather, the City should focus on targeted approaches like formula business restrictions that assist new and existing small businesses more directly.
David Reiss is a Professor at Brooklyn Law School, the director of the Community Development Clinic and the research director of the Center for Urban Business Entrepreneurship. Areeb Been Khan, Robert Levy and Juliana Malandro are legal interns in the Brooklyn Law School Community Development Clinic. They were recently invited to testify at a New York City Council hearing regarding the Small Business Jobs Survival Act.
January 25, 2019 | Permalink | No Comments
December 14, 2018
Last Chance to Vote for REFinBlog!
REFinBlog has been nominated for The Expert Institute’s Best Legal Blog Contest in the Education and Law School category. Click on the badge below to vote.
December 14, 2018 | Permalink | No Comments