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The Practical Limits of Consumer Protection Regulations: When Required Disclosures, Processes and Substantive Consumer Protection Requirements Collide with a Consumer’s Exercise of Free Will
By Elizabeth C. Yen

The Consumer Financial Protection Bureau (CFPB) and The Pew Charitable Trusts are embarked on well-publicized projects to simplify various disclosures and consumer agreements, to make them easier for consumers to understand and to facilitate comparison shopping.[1] Buzz words associated with these projects include the need for greater “transparency” and “simplicity” in core consumer financial services products, such as credit card and checking account agreements, in part by eliminating “fine print.” The CPFB has also expressed concern about borrowers’ tendencies to focus largely on the initial interest rate and initial monthly payment amount, and to downplay, underestimate, or otherwise fail to fully appreciate how rates, fees, and payments could increase in the future.[2] It is therefore understandable that the CFPB wants to strengthen pre-closing and post-closing disclosures to increase consumer awareness of such future increases, and to give consumers an opportunity to prepare for and react appropriately to such increases before they take effect.

Some consumer advocates have drawn analogies between model consumer financial services disclosures and our existing food nutrition labels. There might indeed be a slight resemblance between nutrition labels and the CFPB’s recent proposed integrated Regulation Z/RESPA disclosures. However, many public health scholars would probably agree that nutrition labels continue to be misunderstood and/or ignored by many members of the general public, as evidenced in part by national obesity trends, and that the continuing efficacy of nutrition labels requires ongoing, coordinated and multi-faceted public education campaigns.[3] There is also evidence that some consumers might deliberately ignore public education campaigns and “best practices” recommendations made by government agencies, believing themselves to be already sufficiently knowledgeable (or more of an expert than the average person) about the subject matter at hand.[4]

Since disclosures and public education campaigns by themselves do not effectively keep consumers from making certain choices and decisions that are disfavored by consumer advocates, some consumer advocates point to the Food and Drug Administration (FDA) and National Highway Traffic Safety Administration (NHTSA) as alternative consumer protection models. These agencies try to enforce basic safety standards, in part by attempting to keep certain inherently unsafe consumer products out of the marketplace. The CFPB has similarly indicated that one of its functions is to keep high risk, unsafe consumer financial services products out of the marketplace, in a manner not unlike the FDA and NHTSA. For example, the CFPB has recently proposed additional restrictions on “high cost” residential mortgages, including new restrictions on balloon payments and prepayment penalties.[5]

The greater challenge to the CFPB might be how to handle products that should continue to be available because they are potentially useful to some consumers, but that might require “black box” or similar warnings, and other special consumer-protective measures. For example, some medications require a physician’s prescription. Operating a motor vehicle on public roads requires a driver’s license. Access to certain consumer financial services products may similarly require a consumer to first successfully pass through various hurdles and meet special pre-closing requirements, such as financial counseling. But what types of hurdles and requirements will the general public tolerate in the consumer financial services sector?

Recent (and not-so-recent) national news about hurricanes and tropical storms, and individuals who deliberately chose not to comply with related government-mandated evacuations, could provide some useful examples of the limits of required disclosures, pre-closing counseling, and other consumer protection requirements generally. What part of a mandatory evacuation order due to a well-publicized approaching hurricane or tropical storm is subject to misunderstanding? However, despite clearly articulated serious risks to personal safety, government officials often must rescue a few individuals who choose not to comply with mandatory evacuation orders, under circumstances that place these officials at increased risk of personal harm and that potentially curtail public services available to other members of the public who complied with evacuation orders. Individual responses to evacuation orders provide graphic evidence that some consumers will deliberately ignore government mandates even in the face of an approaching disaster.

Consider, for example, evacuation warnings issued by the National Weather Service in September 2008 to residents of Galveston, Texas and the nearby Bolivar peninsula due to Hurricane Ike. At 7:56 p.m. on September 10 the National Weather Service announced a mandatory evacuation of Bolivar peninsula, beginning at 7 a.m. September 11, together with West Galveston Island. “Near total power loss is expected. Up to one half of all power poles will be knocked down ... and hundreds of transformers will pop. The availability of potable water will be diminished as filtration systems begin to fail.” At 11:17 p.m. on September 11, the National Weather Service included in its updated warning the statement that “[p]ersons not heeding evacuation orders in single family one or two story homes may face certain death. Many residences of average construction directly on the coast will be destroyed. Widespread and devastating personal property damage is likely elsewhere. Vehicles left behind will likely be swept away. Numerous roads will be swamped... some may be washed away by the water. Entire flood prone coastal communities will be cutoff. Water levels may exceed 9 feet for more than a mile inland. Coastal residents in multi-story facilities risk being cutoff. Conditions will be worsened by battering waves closer to the coast. Such waves will exacerbate property damage... with massive destruction of homes... including those of block construction. Damage from beach erosion could take years to repair.” The National Weather Service announced a mandatory evacuation order for all of Galveston island, starting at noon on September 12, and reminded residents of the Bolivar peninsula of the previously announced mandatory evacuation order. In the face of these warnings, press reports indicate that potentially 40 percent of Galveston’s 57,000 residents may have stayed in Galveston and weathered the storm there.[6] Some residents of the Bolivar peninsula who delayed evacuation until September 12 were caught up in a storm surge.[7] Hurricane Ike made landfall early morning on September 13, 2008.

Why do some individuals choose not to comply with flood-related mandatory evacuation orders? First of all, they are familiar and comfortable with the weather-related flood risk that is approaching, and know that they have successfully survived similar storms in the past. In addition, weather forecasts are notoriously inaccurate. In the consumer financial services world, we may similarly find a comfort level with consumer credit products - credit cards, mortgages, auto and student loans, and other common and widespread consumer credit products have clearly been used successfully in the past by many consumers, often (and perhaps typically) without any evident harmful consequences.

Second, there is a powerful desire to protect one’s property, whether from looters, thieves or rising floodwaters. Defying a mandatory evacuation order clearly puts one’s personal health and safety at risk, but that risk might be perceived as offset by potential benefits to property. (Interestingly, some Galveston residents who chose not to evacuate in September 2008 as Hurricane Ike approached were quoted in the New York Times as saying that, if the government had included more emphasis of post-storm conditions (including lack of electricity, potable water, and working toilets) instead of focusing warnings on storm damage, they might have evacuated.)[8] In the consumer financial services world, consumers are asked to balance such things as debt-to-income ratios, cash flow, emergency savings, and possible future reduction in income or increase in expenses (all of which could affect the longer-term ability of a consumer to continue to make loan payments) against the immediate tangible benefits of borrowing money.

So how might some consumers react to some of the new and proposed consumer-protective lending regulations coming down the pike? One reasonable reaction (particularly in view of the lack of public consensus about complying with governmental directives about evacuations and about government restrictions on public access to such things as highly-sugared “super-sized” beverages[9]) might be that an individual consumer should be allowed to make his or her own personal choices, whether good or bad, and that governmental interference with personal autonomy should be kept to a minimum. In the mandatory evacuation context, perhaps this means that government officials should allow individuals to make their own decisions about whether to comply with evacuation orders. There is clearly some risk associated with forcibly removing persons who disobey mandatory evacuation orders from their homes. For example, one individual who failed to follow a mandatory evacuation order during Hurricane Katrina and who was therefore arrested in her home and forcibly removed from her home sued the arresting officer for (among other things) assault and battery, excessive force, false imprisonment, intentional infliction of emotional distress, and aggravated kidnapping. (See Konie v. Louisiana, 2010 U.S. Dist. LEXIS 26716 (E.D. La 2010).)

Another possible reaction might be that, notwithstanding a lender’s full compliance with disclosure, notice, homeownership counseling, and other requirements, some borrowers who eventually default on their loans might blame the lender or other third parties. By way of analogy, in the context of a mandatory evacuation order during Hurricane Katrina, two co-borrowers sued a title insurance company for failing to disburse their mortgage loan refinancing proceeds immediately after the rescission period ended, but during the evacuation period (proceeds were scheduled to be disbursed on the day Hurricane Katrina made landfall – a day when the title insurance company was closed), claiming that the delay in disbursing loan proceeds caused a delay in renewing a homeowner’s insurance policy that had already lapsed prior to the loan closing. (See Bougere v. State Farm Fire & Cas. Co., 2008 U.S. Dist. LEXIS 90618 (E.D. La. 2008).)

The two cases cited above have interesting commonalties: In Konie, the plaintiff alleged unnecessary force was used to remove her from her home after she failed to comply with a mandatory evacuation order (such failure itself being a crime) – in other words, government should have been more solicitous of her personal well-being while attempting to extricate her from flood waters. In Bougere, the title insurance company conducting the refinancing mortgage loan closing knew in advance of closing that the borrowers’ homeowners’ insurance had already lapsed, and allegedly had a duty to the borrowers to take affirmative action to reinstate such insurance – the plaintiffs apparently believed the settlement agent should have been more solicitous of their home’s uninsured status, although evidence introduced in this case indicated that the insurer had notified the plaintiffs a month before their loan closing of the impending lapse of their homeowner’s insurance unless the renewal premium was paid (and one of the documents presented at the loan closing to the borrowers disclosed that their insurance policy had already expired).

These cases are perhaps extreme or outlier examples. However, drawing analogies from cases where individuals choose to disobey mandatory evacuation orders despite clear and present danger to their personal safety and well-being, perhaps we should focus somewhat less on pre-closing disclosures and procedures, and less on defining “qualified residential mortgages,” “higher risk mortgages” and similar loan types, and instead focus more on post-default disclosures and procedures, since some consumers’ pre-closing optimism will inevitably be followed by post-closing defaults, repossessions, and foreclosures – the downsides of borrowing that federal and state regulation will never be able to completely eliminate. Federal agencies also operate under an additional significant limitation on their ability to protect consumers who ultimately default on their residential mortgage loans, because state law will generally be more important than federal law when it comes to regulating default-related matters involving secured loans. Security interests in personal and real property, and how those security interests may be enforced, are matters that are largely governed by state law.

Elizabeth C. Yen is a partner in the Connecticut office of Hudson Cook, LLP. Elizabeth can be reached at 203-776-1911 or by email at ecyen@hudco.com.

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[1] See, e.g., “Still Risky: An Update on the Safety and Transparency of Checking Accounts,” The Pew Charitable Trusts (June 2012), copy available here and the CFPB’s prototype consumer credit card agreement, copy available here.

[2] See, e.g., 77 Fed. Reg. 51116, 51119 (August 23, 2012) (footnotes intentionally omitted), copy available here: “Consumers may underestimate the possibility that interest rates and payments can increase later on, or they may not fully understand that this possibility exists. They also may not appreciate other costs that could arise later, such as prepayment penalties. This focus on short term costs while underestimating long term costs may result in consumers taking out mortgage loans that are more costly than they realize.”

[3] See, e.g., Chapter 7 of Promising Practices in Chronic Disease Prevention and Control: A Public Health Framework for Action, U.S. Department of Health and Human Services (2003), copy available here (noting that “about 75% of Americans do not eat enough fruit, more than half do not eat enough vegetables, and 64% consume too much saturated fat” and discussing the national increase in obesity prevalence among adults); see also here.

[4] See, e.g., results of an April 2012 Massachusetts Office of Consumer Affairs and Business Regulation telephone survey of 500 Massachusetts residents, indicating that “while almost all Massachusetts consumers believe they are hands-on in managing their finances, many do not take basic steps to do so.” (See here.) More specifically, “[a]lthough 91% of residents say they manage their personal finances ‘very’ or ‘somewhat’ carefully, only about 52% of Massachusetts residents review their credit report at least once per year. Additionally, 76% of residents know they can obtain their credit report at least once per year for free. Unfortunately, not all of those who know this take advantage of it.” (See here.)

[5] See 77 Fed. Reg. 49090 (August 15, 2012), copy available here.

[6] See, e.g., J. McKinley and I. Urbina, “Huge Storm Slams Into Coast of Texas,” New York Times (September 12, 2008).

[7] See, e.g., S. Dewan, “Rescuers Fear for Those Stuck on Texas Peninsula,” New York Times (September 14, 2008).

[8] See, e.g., I. Urbina, “After Surviving Storm, Fleeing a Fetid, Devastated Galveston,” New York Times (September 14, 2008).

[9] See, e.g., R. Rabin, “Avoiding Sugared Drinks Limits Weight Gain in Two Studies,” New York Times (September 21, 2012) (copy available at here), noting “fervid criticism that New York City risks becoming a nanny state” because “city health officials this month banned the sale of supersize sugar-laden drinks in restaurants and movie theaters.”

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