The Bully Model of Consumer Finance and Litigation - Credit Slips

There's a fearful symmetry in the consumer finance world. It's a symmetry of bullies between overreaching financial institutions and plaintiff strike suits, as in both, litigation costs present a ceiling, under which there's a license to overreach.?

What does a bully do? ?A bully looks and acts tough and claims things to which s/he isn't legally entitled. But as we all know, if you push back against a bully, the bully is likely to back down; the bully doesn't actually want a fight. We see the bully model of consumer finance and the bully model of plaintiff litigation all too frequently. There's no sense, however, that we'd be better off eliminating both. Instead, interest groups look to eliminate one or the other, when the larger problem is in our adjudicative system, which imposes significant costs and delays substantive rulings.?

For example, a consumer finance company might deliberately overcharge a consumer or try to collect a debt that isn't owed, knowing that in 99 out of 100 cases the consumer will just acquiese rather than fight back. Fighting back is expensive--it takes time and energy and, depending on how far things go, money. It isn't worth spending an hour on the phone for a $5 overcharge, much less hiring an attorney. But from the financial institution's perspective, it's very cheap to tack on $5 to everyone's bill and collect an extra $495 from every 99 consumers, while apologizing to the 100th who pushes back and cancelling the fee. As Office Space taught us, you can make a lot of money stealing a fraction of a penny at a time from a lot of people. Being a bully pays.

Now for the symmetry. One of the bugbears of the financial services' industry is the plaintiffs' bar. Now, just as there are lots of good, legitimate services provided by financial services companies, so too are there lots of good legitimate services provided by plaintiffs' attorneys. But there's also a category of litigation that looks an awful lot like the bully model of consumer finance: ?the strike suit. The flavor de jure seems to be regarding ATM signage. The Electronic Funds Transfer Act requires that ATMs physically disclose the possibility of fees, as well as disclosing so on screen.

It isn't clear if the physical disclosure adds anything to the on-screen disclosure. We know that consumers are exquisitely sensitive to ATM fees in terms of no disclosure vs. on-screen disclosure. We don't know whether additional physical disclosure matters.

In any case, there have been a bunch of suits filed recently under the EFTA over missing signage (query whether there's also a possible UDAP suit). The EFTA has a good faith defense, but the burden of proof for the defense is on the bank. As it happens, no one is looking to see these suits get litigated to that stage. The banks?might well win the suit if it were to go to trial, but they'd still bear the costs of doing so. ?So they settle for a little more than the plaintiffs' attorneys' fees, as it is cheaper than the cost of litigating and winning. The banks lose in this sort of suit, but it's not clear that consumers win. The ATM signage suits illustrate how the bully model can be reversed and used against financial institutions, not just by them. ??

I'm not a fan of the bully model in either context. (Did the name give it away?) But I am more troubled by the lack of awareness of the bully system. Banks argue for legislative changes to limit strike suits (there are House and Senate bills proposing eliminating the physical ATM fee disclosure requirement, again, unclear if that would affect UDAP suits); consumer advocates push back against overcharges. I wonder, however, if we'd accomplish far more by concentrating on lowering the barriers to getting substantive justice--lowering the cost of pushing back against bullies. That's a set of civil procedure reforms that is far outside of my area of expertise, but until and unless we figure out a way to lower the transaction costs of getting justice, there's ample license for bullies. ?

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