Friday, June 19, 2009

ABA Consumer Protection conference, bureau directors and empirical evidence

The Bureau Directors’ Roundtable:

Moderator: Barry J. Cutler, Baker Hostetler, Washington, DC

J. Howard Beales III, George Washington University

How to decide whether to close cases? Well, where do you want to spend the resources? That varies with time. We wanted to focus on privacy, info security, dietary supplements, big infomercials. So you have to pull away from other cases that may or may not be violations.

Jodie Bernstein, Bryan Cave LLP, Washington, DC

Best recollection: closed a number of cases when she first arrived, such as cases dealing with laser surgery, where she thought the evidence was less than compelling and the FTC didn’t clearly have the expertise to take them on. Until we’d developed a strategic plan, we didn’t know what we needed to stress. The internet was coming in and we knew we needed to get on that. Systematic and organized plan was the most important goal.

Lydia B. Parnes, Wilson Sonsini Goodrich & Rosati, Washington, DC

Reiterated the importance of the strategic plan. Can use cases to talk to companies about new modes—issued closing letters that were a little more detailed than normal, to explain the agency’s thinking.

Beales: Strategic planning made a huge difference in closing practices. A lot of times in the 70s closing was about policy; the case had been about a particular policy that the FTC decided it didn’t want to pursue. Strategic planning got rid of those cases up front; closing meant now that the facts didn’t pan out in the expected way.

Cutler: remembers a case against a national financial institution; the law wasn’t clear, other institutions were doing the same thing, and they discontinued it. If we’d brought a complaint they would have been hit with a piggyback class action, and he thought it was unfair to single them out for a national practice. Perhaps the main factor he saw in the 70s was a change in the zeitgeist. Infomercials; 900 numbers; green advertising when he came in—these were imperatives by virtue of presence in the media, attention from Congress. What about the other folks?

Parnes: Absolutely there were outside pressures. Privacy took over/morphed the financial practices division. Data security became a very significant issue—some major breaches in the private sector, and the first major government breach to get a bunch of attention, the misplaced VA laptop. We were running on empty, especially in the financial arena—seeing cases we wanted to bring. So we split the financial practices division into one focused on privacy/ID theft and one on financial practices. It was tough because there were no additional resources, but 12-18 months later the divisions grew back to strength.

Bernstein: Establishing clear priorities, getting out in front of the internet: figure out what you want to do and stick with it.

Beales: It’s easy to get overwhelmed by the inbox; better to think about what you’d like to be in the inbox.

Cutler: Where he had the most discretion was what he calls the “dandelion theory”—boiler rooms were dandelions, and you needed to get to the root system to solve the problem—so he went after the money by going after the companies behind the boiler rooms, doing the credit card processing and putting together investment packages. We were the first to go after a creditor, not just a debt collector, under the Fair Debt Collection Practices Act. We had a debt collector sending out outrageous letters; heard from collectors saying the creditors were the problem—telling them “if you won’t engage in this behavior we’ll find someone else who will.” Going after the creditor sent a message not to do that. We did the same thing in coin/stamp investments and in other advertising. Going to the root of the problem: still useful for the FTC.

Cutler: There’s a relationship between civil and criminal cases; he’s always surprised by how few people take the Fifth in FTC investigations. The FTC has a paper culture, not a trial culture; investigations even today start with cartons of documents and very few investigational hearings, and he’d like to see that flip-flopped because hearings help you find out more, quicker. The shift to high tech right now seems like a shift from printout to disk. Asking questions allows the commission to figure out what the case is really about—there should be more subpoenas to testify. There’s a FTC bias against subpoenas, which require a commissioner’s signature; once that’s happened, the staff can’t close the investigation without going to the commission.

2/3rds of the subjects of consumer complaints made under Parnes didn’t exist when Cutler was the director. So, where is this going, and what’s the advice to David Vladeck?

Beales: We heard yesterday about rethinking privacy. He’s not sure behavioral advertising is really new—same sorts of tracking issues that disappeared when the dot-com bubble burst, back now. It’s more important today as we see more how the internet might actually sustain itself in the long run—where does behavioral advertising fit? You can’t have an ad-financed internet if consumers can opt out of the means of providing financial support. And allowing you to opt out of the most valuable advertising, leaving advertisers with useless ads, won’t work either. “On the internet, nobody knows you’re a dog”—but nobody wants to advertise to dogs; that’s a thin market.

Bernstein: Talk to a lot of people inside and out of the FTC before acting; consider workshops early on to bring the outside in more systematically.

Q: Clients have questions: they get a letter/inquiry, respond to it, and then after a long while they get a proposed complaint and consent agreement from the staff. Clients always want to know whether there’s any chance of turning around the decision to proceed. The division head has signed off, and so there’s really very little chance of changing that absent some serious factual misunderstanding. What to say to clients about the director?

Parnes: It’s surprising how nontransparent the process is to lawyers and to industry. When you get a proposed consent agreement, it’s coming from both the division and the bureau director, but meeting with the director isn’t meaningless, because until then the only dialogue the director has had was with the staff. There were times when she thought they had a terrific case and outside counsel created reservations/questions by meeting, and led to changes in the approach.

Q: Complaints about debt collector practices are common. Where are the FTC resources going?

Parnes: Debt collection has been a big issue. The agency did workshops on this and report with legislative recommendations; the industry has changed so much that the current law doesn’t directly address practices in the market. If you look at almost any area that the agency is involved in, you could argue that all 250 lawyers could be focused on that issue—we have a huge list of issues and we attempt to bring cases with strategic impact. That may mean only a few cases per area, and that may feel insufficient to practitioners in that area.

Bernstein: Given the economic circumstances, she suspects there will be some shifting of resources given the opportunity to change the strategic plan.

Cutler: The fact that private practitioners are willing to file class actions in debt collection cases, and that AGs can also enforce the law, also leads the FTC to put debt collection lower compared to types of consumer-harming behavior that are not attracting the attention of private lawyers.

Consumer Research in Policymaking: Applying Recent Findings Regarding Consumer Literacy and Behavior

Moderator: August T. Horvath, Kelley Drye & Warren, New York, NY

Understanding disclosures is of particular importance in the current economic situation—the president’s proposals on consumer financial protection specifically call for empirical evidence validating consumers’ understanding of disclosures.

Pauline M. Ippolito, Deputy Director, Bureau of Economics, Federal Trade


Research is used in individual cases, guides, rulemakings. In future: more use for assessing remedies, making broader policy.

Use of research in ad cases—substantiation, copy testing; discrimination cases, involving statistical analysis of large datasets with loan info—screening work with home mortgage data to identify potentially discriminatory practices. Rules and guides: test alternative designs for labeling rules and investigate claim meaning: revised Applicance Labeling in 2007; green guide revision; light bulb labeling. Old energy guide label used kwh as the measure, and consumers didn’t necessarily know that; the new guide uses estimated yearly operating cost. (This was a subject of debate: should the lifecycle cost or the yearly cost be displayed? Ended up sticking with yearly cost.)

Policy issues: studies of food advertising; copy test studies of claims to convey different levels of scientific support for health claims; fraud and ID theft surveys; mortgage disclosures.

They had been working on some awful mortgage cases where people had lost their homes. Why did people get in this situation—why couldn’t they protect themselves? Current federal disclosures aren’t up to the job. We were very pleased to see a call in the president’s proposal for integrated, consolidated federal disclosure designed to communicate with real consumers—we’ll help any way we can no matter who’s in charge (but we hope we are).

So we conducted in-depth interviews with recent mortgage customers, checking what they told the interviewers against what was actually in their loan documents, then quantitative testing with over 800 mortgage customers, conducted between Sept. 2004 and Feb. 2005. Used both prime and subprime buyers.

Many consumers didn’t understand the terms of their mortgages—the lack of understanding was shocking.

Quantitative testing: two hypothetical mortgage loans, asked the consumers which would be best. Two loan-cost scenarios, simple and complex. Half the respondents were given the then-current disclosure forms, and the other half were given a new form, designed from scratch without reference to RESPA or TILA. The prototype form focused on the bottom line numbers: total loan amount, settlement costs, optional credit insurance, total up front charges, cash due at closing, and a couple others. (She put up pictures of forms and said “don’t even try to read these,” and Horvath pointed out that that’s what lenders say!)

Current forms have meaningless terms: the loan discount fee. Well, is it a discount or is it a fee? The info is there if you know exactly what to look for, but it’s not accessible. The RESPA form has subsequently been dramatically revised; the Bureau helped HUD with the revision and HAD used lots of consumer testing.

There is a lot of info to know in a mortgage; every time they tried to put it all on one page, they got really complicated forms. Solution: tiered disclosure. Start with the bottom line: your loan/our charges. Then two more pages disclosing specific aspects of the transaction.

Findings: then-current forms didn’t work. Better disclosures are feasible—we can do better even with complicated material. Both prime and subprime consumers had trouble, both performed similarly (and badly); subprime did a bit worse, but not as differently as the researchers had assumed. Improved disclosures provided the greatest benefit for more complex loans; holding prime/subprime nature of the mortgage constant, prime/subprime consumers did about the same, but subprime consumers are more likely to face complicated loans. Consumers didn’t know/couldn’t find whether there was a balloon payment, prepayment penalty, etc. The revised form made dramatic improvements—often by more than half—in the number of people able to extract the relevant info from the form.

We are open to any good research evidence. We take it seriously; we’re always looking for quality help from outside parties.

Alan Levy, Senior Scientist in the Consumer Studies Team at the Center for Food

Safety and Applied Nutrition, Food & Drug Administration

Labeling effects: how disclosures are understood and used by consumers. His background is food labeling.

Many of our assumptions are wrong and lead to ineffective regulations. Chief mistake: that consumers read labels to learn more about a product in hand. Flattering to regulators and decision theorists, but happens much less than we think. Happens primarily when a consumer has a specific question that could be answered by looking at easily available info—prices, specific nutrients. That presupposes already knowing quite a bit about your shopping constraints. The cognitive work has mostly already taken place; picking up the product means at most calculating the answer. Consumers mostly want to simplify shopping. There’s a lot of info, little time/energy to analyze it.

Primary function of claims on product labeling, as well as most informative advertising, is to ease consumers’ cognitive burden. But people’s sense of what constitutes a good decision is quite different from a search for truth or cost/benefit maximization. A good decision in shoping is one that is minimally adequate and that won’t be deeply embarrassing if you have to justify it to someone else. A product decision isn’t lifechanging; you might like the product and you can always get something different next time.

Product labels are convenient shortcuts to avoid arduous cognitive work. Claims aren’t factored into cost/benefit analysis, but are signals of valuable attributes—they’re convenient for making a satisficing decision. Consumers don’t buy low-fat because the label convinces them to buy low-fat, but because they already desire low-fat foods and the label convinces them that the product minimally satisfies that constraint.

First, ads and labels are usually seen by consumers to be about specific products, not about product categories. Broadly informational ads can be on billboards, but generally consumers don’t easily assume that product ads/labels are intrinsically educational. When consumers see claims about a product that apply equally as well to products of that type, they usually don’t assume that the claims generalize—consumers are not students seeking general principles. They don’t think of food labels as good places to learn about nutrition.

Consumers are looking for new/relevant info: best way to endear yourself to consumers is to provide that. Background/context matters a lot. For less familiar health claims, nutrient content claims are not helpful substitutes. Consumers don’t assume that claims are true, but do use them to satisfice, so they require claims to be reliable enough to use even though they are exquisitely aware of the advertiser’s intent to induce purchase. Striking finding: people say they are very skeptical of claims, and yet the claims are highly effective at influencing behavior.

Claims have to pass a tacit legitimacy test: plausibility/consistency with what consumers already know. Not a careful assessment of truth/good intent—the point is to save time/effort. But consumers are sensitive to discrepancies with what they already know/believe—don’t want to be fooled. This explains why a positive brand identity is important: it enables claims to pass the legitimacy test without too much thinking about the details.

Thus, disclaimers intended to remind consumers of limits/weaknesses of claim sometimes make the claim more effective, or are useless. “B”-rated health claims were actually more effective than the same claim without any qualifications—the consumers are reassured that the claim must be legit because it’s based on at least some research.

Consumers v. nutritionist/dieticians: consumers were more skeptical about health claims. But: disclaimers worked on nutritionists and dieticians and made consumers less skeptical.

Growing evidence that health claims truncate product search. When consumers have an opportunity to inspect nutrition facts, they’re more likely to do so if they haven’t already seen a health claim on the front of the package: reduces the perceived need to inspect the more detailed information.

Consumers willingly take these risks in satisficing. Emphasize here: these risks can’t be easily fixed by fixing something about the claim—changing words, adding disclaimers, standardizing terminologies are tactics to perfect communication in the claim. But the problem is that claims communicate too well; each product has a bunch of other features besides the claim at issue, and the decision frames and heuristic strategies consumers use to pick products overvalue the specific claims made.

Michael B. Mazis, American University

The medium matters: the effect of a disclosure depends on what medium you use to convey it. If people are looking where they can search at their own pace, disclosures are more effective; broadcast is likely to be less effective. Financial forms/food labels: greater chance of effectiveness.

Consumer motivations matter: People don’t acquire info for its own sake.

Marketing claims trump disclosures. If the disclaimer doesn’t have as much power as the claim, the claim will totally overwhelm it—that’s why it’s hard for disclaimers to work.

Video disclosures (supers) are completely ineffective. Audio and video is needed; success depends on prominence and lack of distraction—Listerine case, where there was an audio/video corrective statement, but also showed someone pouring Listerine into a glass, and the distraction meant that only 15% of consumers remembered the correction even though it was clear and conspicuous.

Disclosures in magazine/newspaper ads are likely to be less effective because they’re not usually searching for specific information, just general impressions.

Website disclosures have greater potential to be effective because people are more likely to be in search mode.

Proximity: disclaimer must be near claim; no scrolling required. Prominence: size, contrast. Avoid legalese—disclosures written by attorneys mean consumers think it’s said with a wink and a nod—“the lawyers made us put this in, but the claim is really true.”

Study for the FTC on testimonial guides. Do testimonial print ads communicate that the depicted results are typical? Do disclaimers moderate any such messages?

1600 respondents for 3 fictitious products: weight loss, dietary supplement, business opportunity. Tested 3 disclosures: (1) Standard “results not typical.” (2) “These testimonials are based on the experiences of a few people. You are not likely to have similar results.” (3) The average user loses 10 pounds (etc.). Also tested a condition in which no numbers were given at all.

Asked what was communicated, e.g., about the number of pounds users could expect to use. No statistically significant difference between no disclosure, (1), and (2). Only (3) helped.

People believe the testimonial claims are about typical product performance, even if they also reported skepticism.

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