Colston E. Warne Lecture: Consumer Protection 2.0—Protecting Consumers in the 21^st Century

Abstract

The consumer advocacy movement has achieved many successes in the past one hundred years or more but still faces pushback from powerful special interests, including preemption of state authority, and contractual limits, such as arbitration, restricting private enforcement. Further, since laws have not kept up with changes in the financial marketplace, new financial transaction protections are needed. This commentary proposes new approaches for improving consumer protection and giving new tools to consumer advocates, both on and off the Internet, and examines the battle to enact a Consumer Financial Protection Agency.

In my career as a consumer advocate, I try to communicate to my fellow consumer advocates and the public what all members of ACCI already know—and that is the importance of maintaining the legacy of Colston Warne and other early leaders of the consumer movement. I am keenly aware of the Dr. Warne's contributions, as an academic, as an activist and as an organization-builder. As a citizen-scholar and leader of the consumer cooperative, consumer testing and organizing movements, he is without peer.

Although I have now spent 35 years as a consumer advocate and community organizer, I am too young to have worked with Colston. But, although I never knew Colston himself, I have been privileged to work with many, many leaders that he mentored and can only hope I can in some small way carry on his tradition of leadership by example.

When I first came to Washington, in 1989, I received a phone call from one of his peers. I was working late on the savings and loan bailout crisis in 1989 and the phone rang. At first I thought that it was a crank call, but it turned out that, like me, the caller was just cranky. I mean that in a good way.

“Hello, Ed, this is Professor Dick Morse calling from Manhattan, Kansas. Did you know that the banks are lying to their customers to the tune of millions of dollars a year in unpaid interest?” Banks lying? I was shocked, shocked. “Tell me more!” I said.

Professor Morse served on President John Kennedy's Consumer Advisory Panel and President Lyndon Johnson's Committee on Consumer Interests with Colston, worked on the Truth In Lending Act and is rightfully known as the father of the 1991 Truth In Savings Act.¹ That law forced banks to pay interest on all your money and tell the truth about the interest they were offering. Sounds simple, but in Washington, simple is never easy.

I learned three lessons from him. First, I learned that when you are right, and you are demanding justice, it does not matter if you are one guy on the end of a phone line from Manhattan, Kansas. You can get things done in Washington. Second, I learned from Dick about the first waves of the consumer movements, which started over a century ago. That knowledge was important to someone who had grown up primarily on Ralph Nader and the 1960s to 1970s consumer movement. I had gotten involved with the U.S. Public Interest Research Group (PIRG) after I saw Ralph Nader speak at the University of Connecticut in the early 1970s and, of course I knew all the important and groundbreaking aspects of his earlier work in the 1960s. And, finally, I learned from Dick that you can be an academic and still be relevant and play a critical role in the public policy debate.

From Dick I also learned about Colston Warne and Esther Peterson and the founding of Consumers Union, as well as more about the history of consumer co-ops, where I have also done some work. Dick's book (Morse 1993), an annotated edition of eight Colston Warne lectures delivered at Kansas State University on the history of the consumer movement, is an essential reading for any consumer advocate. I hope some day to visit Dick's other legacy, the Richard and Marjorie Morse Consumer Movement Archives at KSU.

While the consumer movement has had great successes, we have faced enormous pushback and still face big challenges. There remains some major work that we need to complete to protect consumers in the changing financial marketplace, work that is needed largely because that marketplace is changing, both on and offline. What I call Consumer Protection 2.0 is actually not just about using the Internet, but also using other democracy tools to re-boot the consumer movement. Just as threats to consumers occur both on and offline, so do the opportunities.

THE MOVEMENT'S SUCCESSES AND PUSHBACKS

Since the efforts in the 1890s to pass child labor laws and the early efforts to pass workplace safety and food safety laws, and then the organizing of Consumers Union—giving consumers their own “Test and Protest” organization (as coined by Silber 1983)—we have achieved a lot. Sometimes, as with food safety laws and then the banking and investor protections that followed the Great Crash of 1929, we had to suffer first. The consumer movement broadened and diversified in the 1960s, first with recognition by Presidents Kennedy and Johnson of consumers as a constituency with rights, especially following the 1962 Consumer Rights speech to Congress by Kennedy. This was followed by the establishment, with the assistance of Consumers Union, of the Consumer Federation of America in 1968 and the simultaneous pioneering projects of Ralph Nader.

Ralph had dozens of ideas for dozens of groups. First, his “Nader's Raiders” based in his DuPont Circle offices took on the Washington and corporate bureaucracies, with a series of reports. Then, he proposed a stunning infrastructure of advocacy organizations, from the state PIRGs to Public Citizen and the Center for Auto Safety and the Center for Science in the Public Interest. Forty years later, these and other Nader-inspired groups are all going strong.

Consumers now are protected by laws that guarantee the safety of drugs, cars and consumer products and foster competition in the marketplace, as well as agencies to enforce them. Yet, over the last 25 years, we have seen an assault on those laws and on the rights of consumers to defend themselves when these laws are broken.

So, today, I do find it somewhat of a Groundhog Day moment and somewhat odd that we are often fighting for the same things that the 19th century consumer pioneers, Colston Warne and the Consumers Union founders in the 1930s and Nader's Raiders in the 1960s all fought for, nothing more than the quality, reliability and safety of consumer products and fair marketplace practices.

Clearly, the price of consumer protection is eternal vigilance. We need long-distance runners, not sprinters who will burn out, in the fight to guarantee that consumers can get a fair deal and a safe deal at a fair price. While we have organized and institutionalized and learned, so have corporate special interests.

A few more examples of the challenges we face: Nearly 50 years after David Caplovitz's (1963)The Poor Pay More—a seminal early 1960s survey of predatory lending in Harlem—the fact is this: the poor still pay more. Tens of millions of Americans are unbanked. Predatory lending, once the province of sleazy ma-and-pa lenders, is now an entrenched big business. Payday loan stores are traded on the NASDAQ and hold fundraisers for US Senators. Previously, the best Congress had done to protect against them is to protect military families from usurious lending, because their bad debts were hurting military preparedness. The enactment of the new Consumer Financial Protection Bureau will protect everyone else.²

Although consumers have more widgets that they can buy, just lots and lots more stuff, middle-class families have had stagnant incomes for 20 years and it is harder and harder to join the middle class, or even to stay in it. Professor Elizabeth Warren, the nation's leading bankruptcy expert who has deservedly emerged as a leading champion for the American consumer against powerful interests after their wallets, tells Americans in her books (e.g., Warren and Tyagi 2003) and on “The Daily Show” about the economic problems American consumers and families face in a way that anyone can understand. She has told me that she has never been so concerned for the American family as she is today. My colleagues at the civil rights organizations, NAACP and National Council of La Raza, have written extensively on the problems that their constituents face in getting ahead. My organization, which was founded by college students, and others, such as Demos, have done work on the financial barriers that youth face as they grow up today in what twenty-something author Kamenetz (2006) called “Generation Debt.” Meanwhile, Draut (2007), said “20 and 30 somethings” were “strapped.”

Meanwhile, over on Wall Street, financial innovation merely means using legal legerdemain and mathematical algorithms to “invent” facile products that are more complex and more risky. Why has not financial innovation led to cheaper, easier-to-use and -understand, lower-risk financial products? Maybe one reason is that the reckless Wall Street bankers earn big bonuses whether they win their bets or lose their bets, as long as they just bet. It does not matter to them whether their efforts maximize social welfare for anyone else. There is something wrong with that system.

To be clear, I would not be in my job if I did not think we were making a difference. I just wanted to point out that consumer advocates will always have work.

Another reason we have had pushbacks is that powerful special interests have become adept at chopping away at the underpinnings of consumer protection that served us well for many years and have largely captured the Congress. A recent Supreme Court decision³ that says corporations are people and can make unlimited campaign donations probably offers the biggest threat to consumers and consumer protection ever. The Supreme Court threw out over 60 years of precedent when it decided that corporations should be treated in the same manner as ordinary citizens and be allowed to spend massive amounts of money on direct attack ads for or against members of Congress. As US PIRG's expert told me: “A corporation is not, nor has it ever been, a person with voting rights. Corporations are not your neighbors, they cannot get married, they cannot die, and a corporation is not part of ‘We the People’.”

My organization, which also works on pollution, has long had a saying that “We can't clean up the environment until we clean up Congress.” We have some short-term fixes to this case, which is about polluting Congressional campaigns with new floods of corrosive donations, but it will ultimately require a constitutional fix. Meanwhile, it makes it harder for us to pass new consumer laws.

It is never been easy. As an example, take credit cards. From 1989 when I came to Washington until 2002, I only recall two hearings on credit card practices. We could not even get a committee to hold a vote on reform, let alone lose one. As US Senator Dick Durbin said in 2009 about bank influence on Congress, “The banks frankly own the place.”

Historically, according to the Federal Reserve, credit cards have been the most profitable form of lending. But after the Wall Street boys took over the commercial bank culture with the 1999 deregulation known as the Gramm-Leach-Bliley Act,⁴ the banks began to seek even more profits while the regulators ignored their worst practices. So did Congress.

The credit card firms ratcheted down the thumbscrews on late pays, then on people they tricked into becoming late pays by making their bills due on a Sunday and mailing them only a bare 10 days or so earlier. Then, they got so greedy that they said a $39 late payment penalty no longer constituted liquidated damages and that they would also need to triple your interest rate if you were as little as one day late. Do the math: a 36% APR is a 3% monthly periodic rate. With a 2% minimum payment, at-risk consumers were losing ground as they racked up credit card debt. They imposed these penalty interest rates first on customers who were late to them. But that was not enough. To add to the pool of late pays, in a practice they called universal default they said even if you pay us on time, but are late to any other lender we will triple your rate to 36 percent APR or more. As the Joint Economic Committee pointed out the massive debt load harms the economy, not just consumers.⁵

But Congress and the Fed still did not act. What did it take? The banks decided to raise the rates on everyone else, even those who had never been late to anyone else. This was when they invoked the infamous “we can change the rules at any time, for any reason including no reason” clauses in most credit card contracts. Only after nearly every single credit card customer was at risk of tricks and traps, and thousands of them called Congress, did Congress finally take action.

We are justifiably proud of that new law, the Credit CARD Act,⁶ but it only bans the worst practices; it does not reinstate usury ceilings or impose caps on late fees. And we do not expect the current regulators to enforce it.

So, the long history of credit card companies tightening down the thumbscrews on consumers, using a “gotcha” business model (Sullivan 2007), is one example of Congress kow-towing to special interests instead of conducting oversight.

A second strategy of the powerful special interests has been to defund and defang the federal agencies that are supposed to protect consumers. The efforts that began in the Reagan administration never stopped. After twenty-plus years of neglect, the Consumer Product Safety Commission was only rescued two years ago after Congress realized that boatloads of dangerous toys and other poisoned products were arriving daily from China.

Third, through regulatory capture and the revolving door, other agencies were bent to the special interests' will. Most consumer financial advocates will point out that the worst of these captures has been of the Treasury Department's Office of the Comptroller of the Currency (OCC), the powerful but obscure supposed-regulator of national banks. You could make a case for its sister thrift regulator, Office of Thrift Supervision, but in their case it is largely incompetence, not aiding and abetting. At the OCC they do not simply sleep; they work actively alongside industry to eliminate consumer protections and fail to enforce the laws that remain.

The OCC, under both Clinton and Bush appointees, has been an active participant in a long-running corporate campaign that many powerful special interests have joined on an increasing basis. Firms ranging from the banks, car manufacturers and electric utilities to the credit bureaus, chemical manufacturers and many more have sought to shut down the fifty state laboratories of democracy and to take off the beat the state attorneys general who are our best consumer cops. Too many members of Congress look at preemption as an entitlement or birthright for industry (Mierzwinski 2004). Unfortunately, the federal bank regulators, led by the OCC, have historically not just gone along, but issued rules and regulations and gone to court supporting the corporate view that only one, weak, unenforced federal law should apply to them.⁷

By eliminating innovative legislative ideas by the states and taking state attorneys general off the beat, we are left with somnolent federal regulators as our primary line of consumer defense against predatory financial practices. How are they doing lately?

Only after the mortgage meltdown peaked did the Federal Reserve release 2008 rules to defend against predatory mortgages. Congress had given them the power to do so 14 years earlier, in 1994's Home Ownership and Equity Protection Act.⁸ The OCC meanwhile was ignoring unfair credit card practices at its banks; after all, it needed the staff resources to issue sweeping rules preempting state legislative authority and restricting state attorney general and bank superintendent enforcement over law violations by national banks and their nonbank subsidiaries. In recent testimony, Illinois Attorney General Lisa Madigan pointed out the societal costs of these misguided actions eliminating state authority.⁹

THE BATTLE FOR THE NEW CONSUMER AGENCY

When I gave this speech in April, we were locked in a fierce battle over whether Congress will stand with and protect Main Street families or again listen to the reckless Wall Street bankers whose greed wrecked the economy and left consumers with mortgages in flames and 401(k) retirement accounts that read like Stephen King novels. Now, in July, the President is about to sign strong legislation, the Wall Street Reform and Consumer Protection Act, which includes a new Consumer Financial Protection Bureau.

The battle over whether the reform law would include a new Consumer Financial Protection Agency (CFPA) was a critical watershed for the consumer movement.¹⁰ Only because US PIRG and other leading groups had the foresight to establish Americans for Financial Reform, a new and unprecedented coalition of labor, civil rights, small business, consumer and senior organizations, and because the President and Elizabeth Warren are providing Washington with the moral leadership it often lacks, do we have a chance to enact meaningful Wall Street reform. In planning meetings for the coalition, I reminded people of what Benjamin Franklin once said: “We must all hang together, or most assuredly, we will all hang separately.”

We were up against an industry making the Orwellian claim that we should preserve the system that failed to protect us. But in Washington, money talks. In just this Congress beginning in January 2009 the industry has spent one million dollars for each and every member of Congress—all 435 Representatives and 100 Senators—to defeat Wall Street reform. That is over $1.4 million a day.

The banks, the US Chamber of Commerce, with its Web site stopthecfpa.com and the OCC have led the fight against the new Consumer Financial Protection Agency that will have the independence from the financial industry that is needed to protect consumers. Our goal, that the agency will regulate all financial products no matter where you buy them, at a bank or nonbank, has largely been achieved. Critical work remains in watchdogging implementation and rulemakings. Additionally, the full Wall Street reform legislation also reins in hedge funds, derivatives and private equity funds that make up the shadow markets, reinvigorates the SEC to protect small investors and protects against the systemic risk that allowed banks to grow too big to fail.

As we go to press, both the House and Senate have passed versions of Wall Street reform that include strong versions of the new consumer agency (redesignated as an independent Consumer Financial Protection Bureau in, but not under, the Federal Reserve Board, in the final package), despite industry efforts. It is virtually certain that President Obama will sign this legislation; perhaps even more importantly for the consumer movement, which fought hard, it is also certain that a very strong version of the new consumer bureau, first proposed by Professor Warren (2008), will be incorporated in that new law, in a rare and stunning rebuke to the interests it will regulate. The bureau will be independent, it will have a large budget and it will have broad authority, with car dealers the only significant lenders exempted from the new bureau's full oversight, but in a last-minute change, new authority was granted to the Federal Trade Commission over car dealers. Overall, the new consumer bureau is a landmark reform that stands as a centerpiece of the new legislation. It is not hyperbole to call it the biggest consumer financial victory since the establishment of deposit insurance after the 1929 Great Crash.

But we should not have to wait for a crisis before we protect consumers, as even the spectacular Enron crisis was not enough to guarantee investor reform. If WorldCom had not also failed in the spring of 2002, the accountants and lawyers who aided and abetted Enron's robberies would have succeeded in killing the 2002 Sarbanes-Oxley Corporate Reform Act.

Even the spectacular Wall Street meltdown did not result in swift, guaranteed Congressional action. It has been over a year and a half since we bailed out the banks. Yet, because the Wall Street bankers succeeded in angering consumers and taxpayers to a massive level when their casino betting collapsed the economy, even their massive campaign contributions cannot stop reform, but they have unnecessarily slowed and weakened it.

CONSUMERS CANNOT ENFORCE THE LAWS

Yet another challenge we face is that powerful industry lobbyists have also managed to make it harder for consumers to defend laws themselves. You are aware that industry has engaged in a twenty-year-plus campaign to demonize consumer lawyers. They have also placed procedural barriers in the way of consumers seeking redress. Federal laws now rarely include a private right of action; worse, each time Congress considers a new federal law there is a fight over eliminating existing private rights of action and even enforcement by state attorneys general. In 2005, the so-called Class Action Fairness Act¹¹ made it harder to certify class actions, yet that retrograde law passed Congress overwhelmingly.

Powerful special interests have also used contract law to limit consumer rights. In the 1990s, banks led the way in the insertion of forced arbitration clauses in all consumer contracts. If you are wronged, you cannot go to court, only a one-sided kangaroo court. Look at your cell phone, HMO or credit card contract or any other take-it-or-leave-it contract to find out that your rights are limited by arbitration clauses. Arbitration is touted as efficient and low cost. Nothing could be further from the truth for consumers. Consumers face venue problems, cost problems and a decision without appeal, even if the arbiter acts foolishly. Of course, even if you did have a right of appeal, under arbitration rules, you would have no documents or records to build your case.

Fortunately, last summer, Lori Swanson, the attorney general of Minnesota, sued a large arbitration mill, the National Arbitration Forum (NAF), favored by the banks. The lawsuit alleged that the NAF worked behind the scenes to convince credit card companies and other creditors to insert arbitration provisions in their customer agreements and then appoint the NAF to decide the disputes. After she swiftly settled the case claiming that the NAF had a questionable relationship with a hedge fund whose business model was to use a network of debt collectors to collect through arbitration, the banks who were beneficiaries and partners and are now defendants have begun to eliminate forced arbitration clauses. Studies have shown that the biggest banks have used the NAF to collect from consumers who never had accounts but were simply identity theft victims. In response, the new consumer bureau, after completing a study, has been given the authority, to ban predispute forced arbitration clauses. These clauses perpetuate unfair practices. Why should a firm respond to consumer complaints if it knows an aggrieved consumer has no recourse?

So, even though we have had some victories over the last 120 years, I believe that we need a renewed effort to restore four pillars of consumer protection that have been pushed back by powerful special interests. We need Congressional oversight; we need strong federal agencies that enforce federal laws as a floor, buttressed by new laws from the states; we need strong enforcement from state consumer cops and we need restoration of the rights of consumers to defend themselves in court.

THE FINANCIAL SERVICES MARKETPLACE

Next, I want to talk about some major work that we need to complete to protect consumers in the changing financial marketplace—both on- and offline. I believe, and I think others do, that the financial marketplace has a number of problems. Again, I believe a CFPA will help solve them. But here are the issues that I worry about:

I believe that the four important problems consumers face in the financial service marketplace are the following: (1) depending on your payment system, you have different levels of consumer protection; (2) some new payment systems are subject to no rules to speak of; (3) some firms, such as payday lenders and rent-to-own stores, have convinced states to exempt them from real protections. They comply only with “industry-approved” laws and (4) the concept of the transaction itself is changing, and that changes the balance between buyers and sellers.

Payment Systems and Different Levels of Consumer Protection

As Hillebrand (2009) and others have written about extensively, consumer protections in our payment system have not kept up with financial innovations. While credit cards offer the gold standard of consumer protection, debit/ATM cards are less protected and prepaid debit cards—both closed-loop gift cards and open-loop Visa or Mastercard branded cards—have even fewer protections. Depending on how a merchant clears your check through the system, you have three different levels of protection.

New Payment Systems Issues

But the problem is exacerbated. There are many other payment mechanisms, including PayPal and others on the Web and RFID payment mechanisms that may not be adequately or technologically protected against fraud or identity theft. Mobile payments, using cell phones to pay, are nothing new in other countries, and may even provide for low-cost micropayments that benefit the un- or under-banked. Yet mobile payment systems are only just emerging here (Rosenbloom 2010).

But, cell phones will soon be a combination payment mechanism, loyalty program instant coupon generator, search engine and more. So, for researchers and advocates, there are more questions than simply ensuring payment system consumer protections. The combination of locational GPS tracking and other smart phone attributes in cell phone payment systems raises real privacy concerns as well.

With the growing number of emerging payment system models, we also need to examine unfair practices that are facilitated by the new payment systems. These unfair practices include online payday lending, demand draft fraud and cell phone cramming. Demand draft fraud and online payday lending are emerging problems. Scammers take advantage of lax bank oversight of who they are doing business with. Wachovia Bank was making so much money as a merchant bank for crooks ripping off senior citizens that it ignored complaints not just from its own customers, but from other bankers calling about their customers snared by the crooks (Duhigg 2007). Where were the regulators? Wachovia did not have a regulator; it just had the OCC. With phone bill cramming, it is the same, but with the phone companies as aiders-and-abettors, not the banks. Consumers call to complain and the phone company says to take it up with the firm billing you. How do you complain to a scammer?

Banks routinely skim funds for overdraft fees from protected Social Security and other accounts. Further, consumers have no right to cancel electronic payments from their account for a single payment, which has accelerated the growth of online payday lending. These actors are already on the Web because they are hiding from bold new state laws limiting their practices in the physical world. Worse, we already have the problem that brick-and-mortar payday lenders and rent-to-own stores have convinced states to exempt them from consumer protections that apply to other lending transactions.

Now, marketers are pitching many of these un- and under-regulated products, from prepaid debit cards to online payday lending, to the vast number of un- and under-banked consumers. They are also pitching the technology to states and governments and companies, including banks and other firms, are seeking and have obtained contracts to deliver government benefits through prepaid debit cards (Electronic Benefits Transfer or EBT programs).

While some innovative debit products, including many targeting Latino and other communities, may help build a bridge for consumers to avoid payday lenders and eventually attain real bank accounts, banks should not be allowed to perpetuate a two-tiered financial system where some of their customers have full-service bank accounts but others do not get the benefits of asset-building opportunities and federal deposit insurance protection. This occurs partly because, in some cases, EBT cards may be provided through a nonbank subsidiary of the bank. In other cases, it may occur because the banks do not care about building a bridge to encourage those consumers to become fully banked.

Should states sign deals with banks that give benefits recipients fewer consumer rights and more fees for using cards than other consumers? Or should states use their procurement power to demand better contracts that give consumers full consumer protections and the right to use their cards without paying numerous ATM fees and that set them along a track to help them move toward full-service accounts?

Some Payment Systems Subject Only to “Industry-Approved” Laws

Recall that the way the rent-to-own stores and payday lenders advanced was to seek state laws that carved out exceptions from the Truth In Lending Act and other consumer laws for their triple-digit APR products (Mierzwinski 2008). In my view, a critical goal for consumer financial protection is that all financial products, no matter where you buy them, should be protected by the same laws and all payments should be created equal and subject to the same, harmonized upward rights. Laws should be written that anticipate new payment mechanisms and cover all products. Congress is an imperfect vehicle to achieve these reforms, but the CFPA could be the solution.

The Concept of the Transaction Itself Is Changing

The concept of the transaction itself is changing, and that changes the balance between buyers and sellers. Many people have clicked on a “special offer” Weblink, and immediately clicked backward, only to find that the mere fact that they looked at a Web site for a millionth of a second constituted an agreement to buy. It can happen offline as well, when a bank gives your credit card number to a third marketer, who calls you on the phone and convinces you to accept a trial offer; a month later you found out you were being billed. Cox (2010) calls it pre-acquired account telemarketing (PAAT). He says, “Preacquired account marketing shifts the control of account charges from the consumer to the seller by circumventing short-hand methods used by consumers to signal assent to an account charge.”

In PAAT (also called “data pass”) you do not think you bought anything, because you did not pay with cash, you did not write a check, you did not use a credit card. Instead, your bank, or a Web site you did business with, gave your name and bank account number to its trusted third party, who could be trusted only to trick you into paying them for a worthless product. In recent testimony, Meyer (2009) added that “the sales methods are the cornerstone of a scheme in which firms seek to earn profits by luring customers into paying for memberships in programs that they would not subscribe to given their full awareness” (p. 3).

A common variant of PAAT is the “free-to-pay” scheme, where a firm that has already acquired your credit card number or checking account number bills you for a nearly worthless subscription product, such as credit monitoring, or a shoppers club with no value, just a few days after you have “failed” to take advantage of your “right” to cancel a so-called “free” offer. The worst of these so far, a subject of FTC enforcement, Experian's freecreditreport.com, warns you to buy their credit monitoring service or you will be stuck with bad credit and singing in a German restaurant. Of course, one reason you may have bad credit is that Experian itself has not accurately reflected it, or has allowed an identity thief to ruin your accounts.

The problem is exacerbated because PAAT is used to sell worthless products. So far it is not used for legitimate products. Much of the money spent in these schemes, so far, is for membership clubs that have no value. Fortunately, Senator Jay Rockefeller, chairman of the Senate Commerce Committee, has been looking closely at this scandal, which extends from the Internet to telephone call and other offline venues and was in fact pioneered by banks giving up their customers' information to telemarketing companies.¹²

I also worry that changing the concept of the transaction is worthy of study in other areas. When consumers can simply wave their cell phones over a bar code in a store, instead of carrying the product to the front and pulling out their wallets, the balance of power between buyer and seller will have shifted so dramatically that no claim of caveat emptor can be sustained.

CONSUMER PROTECTION 2.0

Consumer Protection 2.0 is actually not just about using the Internet, but also about using other democracy tools to re-boot the consumer movement. Just as threats to consumers occur both on and offline, so do the opportunities. If we are going to win strong consumer protections in Washington, DC and state capitols, we need to solve the problems I have identified above. We also need to rebuild and empower the consumer movement. The Internet offers tremendous opportunities to help build the consumer movement. But first, we have to solve some problems.

Along with others, we are ratcheting up our efforts to keep the Internet free and operating under principles of net neutrality. That is, we want the Internet to be free from gatekeepers. The telephone companies and cable companies that provide some of the pipes would prefer to control the speed of content and provide advantages to content that they own or control. The threat of monopolies running the Internet, which is our democratic and cultural commons, is real.

We also need digital consumer and privacy rights both on the Web and in mobile telecommunications. While America was once on the cutting edge of technology and access to information, we are now one of the slowest industrialized nations in terms of Internet speeds. Despite our spotty broadband coverage, throttled access and slow service, Americans still pay some of the highest rates for connections.

Companies are also preventing consumers from shopping around for better deals with the growing use of early termination penalties, first by cell phone companies and now by cable and ISP firms also. If you have a complaint, they can ignore it, because they know most consumers will not pay up to $200 to get out of an unfair contract. Further, in most of the world, mobile phone consumers can use almost any phone with any network. But in the United States, consumers are limited to a handful of offerings per network and locked into networks not just by punitive early termination fees but also by locked, proprietary handsets. As a result of our locked cell phone market, American consumers lose out on the newest innovative product or service.

One additional issue on the Internet combines payment mechanism issues with social networking. In virtual online worlds, people are spending real money on notional goods. One firm even allows children without bank accounts to make payments for food for their virtual pets or whatever at local convenience stores.

But the threat of an Internet without consumer control of their data, without privacy protection, is the one I am most concerned with. Information collection on the Internet has largely proceeded outside of regulation at all, let alone informed consumer consent. Over the past four years, we have collaborated with the Center for Digital Democracy, the Electronic Privacy Information Center and others on several complaints to the FTC on online marketing, digital surveillance and behavioral targeting of consumers.

In 2006, we filed a complaint on privacy on the Internet generally, then, in early 2009, on the mobile Internet privacy issues and, then, in April, on the instantaneous aggregation of on and offline data. The problem is growing.

In the last few years, data collection tools have grown so powerful that companies can now merge on and offline profiles of consumers in real-time—in hundredths of a second. From search engines to social networks, the Internet is being shaped to better serve advertisers. Increasingly, individuals are being electronically “shadowed” online, our actions and behaviors observed, collected and analyzed so that we can be “microtargeted.” The goal of interactive marketing is to use the awesome power of new media to deeply engage you in what is being sold: whether it is a car, a vacation, a politician or a belief.

It can also be used to discriminate against you, either by charging more than is charged someone else for the same item on the same Web page, or to offer a second rate or fewer products. While dynamic pricing may be fair if an airline sells a ticket at the last minute for more than an advance ticket, is it fair if the dynamic pricing is instead based on a secret predictive dossier collected about you by Web site marketers? The threat that the Internet will become just an engine for consumer microtargeting is real.

But the potential for the Internet to empower consumers is real, too. While companies are using social media to target consumers, we have a chance to use social media to empower consumers in the marketplace. Blogs, Facebook and Twitter are all improving or have the potential to improve consumer-to-consumer, citizen-to-citizen communication and offer networking opportunities. Of course, Facebook's potential is so far offset by its invasive advertising model, but one of the Facebook founders has moved on and is planning to launch Jumo.com, a volunteerism and social justice social networking site. Nothing prevents others from using similar software for good.

Web tools can also help build the consumer movement and improve consumer protection. We need to think of ways to get consumers to learn things on the Internet, and then to take real-world actions. The consumer movement has a chance to improve product quality by improving the accuracy of user rankings. Today, user rankings are nearly useless, since only people who hate or love products rank things, but no one with nuanced views does. Worse, people who happen to be acting as “sock puppets” for sites or manufacturers make fraudulent, ballot-stuffing votes that skew rankings.

One site that has had some rankings promise, Yelp.com, has even been accused by restaurants receiving bad rankings of selling its services as a kind of protection racket, “If you buy the ads, we can hide the bad reviews” (Ali 2010).

Perhaps the area that offers the greatest opportunity is to figure out how to use the Internet to organize consumers—not just our members—but all of the victimized consumers who have stories to tell. We need to encourage more individual consumers to make rankings, or make blog posts or create “mybanksucks.com” sites.

We then need to collect all those complaints and use them more effectively. We need to figure out how to organize those consumers into a political or marketplace force for change. Already, sites like Consumers Union's “consumerist.com” are experimenting with providing concierge complaint services to individual consumers—helping them get directly to corporate leadership. At a lesser level, so are sites that provide “secret” telephone voicemail trees, such as gethuman.com.

Imagine this: What if social networking tools could be used to give all those consumers a bigger megaphone so that they could work together? What if all the consumers who hated their cable company could be urged to call their Senators on the day of the vote on cable company reform? Flash mobs and meetup technology have both also shown promise for political organizing.

One area where I believe we have tremendous potential to use the Internet is to make it easier for consumers to shop around. Currently, price aggregator sites may be biased by paid rankings, or may exclude some sellers. In the area of regulated firms, such as banks, there is a tremendous chance to increase the availability of price and quality information by law to give consumers and consumer protectors more tools to level the playing field.

For example, numerous pre-Internet banking laws require fee disclosures to consumers on paper. This costs a lot of money and limits the ability to compare and shop around. Bank regulators should require that any pre-Internet disclosures that must already be distributed on paper to consumers be disclosed on the Web.

For example, why should not the Truth In Savings Act, which requires paper disclosure to prospective customers of deposit account fee disclosures—bounced checks, ATM transactions, monthly fees, etc.—have its information posted on the Internet?¹³ What about credit card fees and interest rates?¹⁴

Better yet, the regulators should require that these be posted in a searchable format, such as XML, so that other Web sites—including those of consumer groups—can easily query, download and aggregate the results and set up consumer shopping sites for bank accounts. Organizations already use such easily downloadable data available on Congressional votes and campaign donations to illuminate Congress; why not use the same tools to illuminate banking and, then, for example, retail grocery and other prices?

There are also some concepts that have been under-used in the real world that are worthy of rethinking; call it Consumer Protection 2.0 in real life (IRL).

Following a negative Supreme Court decision¹⁵ that has since been narrowed substantially, the idea of helping consumer groups build power by lowering their fund-raising costs as a condition of regulation has festered. The so-called consumer checkoff would require regulated companies to help ratepayers or bank customers or small investors raise funds by piggybacking their billing statements with membership inserts, vastly lowering the cost of fund-raising.

Yet, the one group that still uses a variant of this model, the Illinois Consumer Utility Board, or CUB, has tens of thousands of members and has saved Illinois ratepayers billions of dollars. Senator Chuck Schumer has proposed legislation to create such a BankCUB, or Financial Consumers Association. The late Paul Wellstone's last proposed bill was to establish a similar, but broader, bank consumer and shareholder protection association. Both these proposals allow the citizen group to piggy-back funding on the billing statements of the regulated firms, following more recent Supreme Court decisions that have re-opened the door to using this model.

The CUB idea, and the variant of funding consumer group expert participation in rulemaking through applications for intervener funding, which is used in a few states, are worthy of greater consideration. Rather than simply expanding or complicating regulation, government-chartered citizen groups can balance the power of regulated utilities and keep their regulators from being captured. By designing regulation so that it engages and informs citizens, facilitates organizing and puts citizens into direct encounters with the industry as well as with regulators, these policies energize citizenship, and they begin to redress the structural power imbalance between powerful special interests and the public interest.

CONCLUSION

The initial proposal from Elizabeth Warren for a Consumer Financial Protection Agency was a big idea. Many people told her, and then told me and my colleagues that big ideas were impossible to win and that incremental change is all that is left. Do not believe them. Keep thinking big ideas.

When you come up with a big idea, understand that you may then have a battle to achieve it, first, to sell it in the academic community and, then, to win it in the policy arena. Indeed, over the past year, the traditional consumer movement aligned itself with civil rights, labor, senior and other groups faced off against a phalanx of powerful special interests hell-bent on beating our big idea that consumers deserved an independent agency with only one job, protecting them from unfair financial practices. They lost. We won. It has been a battle, but defending the rights of consumers always has been. It is one worth fighting.

Footnotes

• 1

  Richard L. D. (“Dick”) Morse was given the ACCI Distinguished Fellow Award in 1980.

• 2

  Also see Lynn Drysdale & Kathleen Keest, The Two-Tiered Consumer Financial Services Marketplace: The Fringe Banking System and Its Challenge to Current Thinking About the Role of Usury Laws in Today's Society, 51 S.C. L. REV. 589, 618 (2000) for a detailed history of weakening of consumer protection laws that led to the rise of usury.

• 3

  Citizens United v. Federal Election Commission (558 U.S., 2010)

• 4

  Public Law 106-102.

• 5

  “The current recession poses a significant threat to the well-being of American families, who are likely to rely more heavily on their credit cards to make ends meet. As families find themselves under increasing burdens, practices by credit card companies could add to household financial distress,” at page 8, “Vicious Cycle: How Unfair Credit Card Practices Are Squeezing Consumers and Undermining the Recovery,” Report of the Joint Economic Committee, US Congress, May 12, 2009.

• 6

  Public Law 111-24.

• 7

  Arthur E. Wilmarth, Jr., (2004). The OCC's Preemption Rules Exceed the Agency's Authority and Present a Serious Threat to the Dual Banking System and Consumer Protection, 23 Ann. Rev. Banking & Fin. L. 225.

• 8

  Public Law 103-325.

• 9

  “In fact, in response to aggressive actions at the state level, federal regulators took unprecedented steps to shield national lenders and their subsidiaries from state enforcement and from the growing number of state antipredatory lending laws on the books. The states have been leaders in enacting legislation to address the worst abuses in the mortgage industry. More than thirty states enacted laws to combat predatory lending in the six or seven years immediately preceding the meltdown.” Testimony of Illinois Attorney General Lisa Madigan before the Financial Crisis Inquiry Commission, January 14, 2010.

• 10

  In negotiations, the agency was changed to the Consumer Financial Protection Bureau (CFPB), an independent bureau in, but not under, the Federal Reserve.

• 11

  Public Law 109-2.

• 12

  Perhaps in response to the Rockefeller hearings and to recently proposed legislation from Chairman Rockefeller (S. 3386, A bill to protect consumers from certain aggressive sales tactics on the Internet), Visa recently announced it is no longer participating in so-called “data pass” transactions where credit card or bank account numbers are provided to third parties. News release, April 27, 2010.

• 13

  Adding impetus to the need for more disclosure, a 2008 GAO report, “Bank Fees: Federal Banking Regulations Could Better Ensure that Consumers Have Required Disclosure Documents Prior to Opening Checking or Savings Accounts” (GAO-08-281 January 31, 2008), found that an unacceptable percentage of banks have failed to provide consumers with the modest account opening fee disclosure requirements required by the 1991 Truth In Savings Act. GAO investigators used a methodology previously used by US PIRG, with essentially the same results.

• 14

  As we go to press, the Federal Reserve is implementing a provision of the Credit CARD Act of 2009 requiring that credit card agreements be posted in an online database. In the short run, this information will primarily benefit researchers, not consumers. See www.federalreserve.gov/creditcardagreements. After the materials are analyzed, it should result in simpler, clearer more reasonable agreements (at least from some issuers who seek first-mover advantages with astute consumers).

• 15

  PG&E v. Public Utilities Comm'n, 475 U.S. 1 (1986).