Columbia University School of Law
Foundations of the Regulatory State
Law 6110, Section 2
Professor Avery Wiener Katz
Final Examination
May 14–15, 2003 (self-scheduled)
Instructions:
QUESTION 1: 50% of exam, 1000 word limit
Sports Utility Vehicles, or SUVs, continue to grow in popularity. Starting from a minuscule portion of the United States automobile market in the 1970s, they today account for almost 20 percent of the non-luxury automobile market and approximately half the luxury automobile market of vehicles priced over $30,000. As SUVs dominate the road with their larger height, width, and weight, they create an array of economic and social effects.
For the long struggling US auto industry, and particularly in often economically depressed Midwestern states, SUVs have been a savior of many jobs, of communities dependent on a manufacturing base, and of companies that have competed poorly in an increasingly international automobile market. The Midwestern states that dominate SUV production have a strong union presence and remain contested states in national presidential elections. In contrast to their success in the SUV markets, US companies continue to struggle in the car market, with drivers often choosing foreign automakers’ cars for their better gas mileage, reliability and more innovative styling. Foreign auto companies have recently begun to sell their own SUVs in the US market after the recent expiration of trade barriers left over from a non-auto related trade dispute in the 1970s, but they at this time have seized only a small percentage of the US SUV market.
How SUVs came to dominate the US auto market during a period when legislators and regulators were ostensibly trying to encourage reduced gas consumption, pollution, and greater auto safety is a long story, but includes several elements. First, customers responded to SUVs in the market and manufacturers met consumer demand. Customers have responded enthusiastically to SUVs due to a variety of factors. Massive and ongoing media campaigns by manufacturers emphasize the comfort, size, and off-road potential of SUVs. Advertisements frequently feature SUVs climbing mountains and fording streams, although reliable surveys reveal that only a tiny fraction of SUV drivers actually ever do any off-road driving or need features like four wheel drive or the higher SUV wheel base. A higher wheel base means SUVs have a larger distance or clearance from ground to the SUV wheel axles and body. Still, other surveys reveal that drivers respond in part to the potential promise of adventure, vacations, and outdoor activity. Some companies actually emphasize the aggressive attributes of SUVs, adding threatening front grills and bumpers, dark windows, and advertisements calling for others to “YIELD.”
Starting in the 1970s, as oil crises led to escalating gasoline prices at the pump and concerns about US dependence on oil from the Mideast, regulators began to require cars to meet increasingly stringent gasoline mileage requirements and to make significant pollution control and passenger safety improvements. The federal government periodically conducts crash tests, typically using testing protocols designed for cars, then makes public its test results. These government tests, and similar tests often conducted by insurance institutes and consumer groups, have led to car designs that typically now easily do well in federal tests, with most cars today having standard safety features in areas such as bumper strength and height and car body crumple zones that protect passengers in case of an accident. Automobile manufacturers also can and do run their own crash and safety testing, but often do not make test results public. While federal regulators at the National Highway Traffic Safety Administration (NHTSA) have authority to mandate safety features or compel recalls of automobiles discovered to be unreasonably dangerous, they have only sporadically used the regulatory power to mandate particular safety design features.
Due in part to their small slice of the US market, light trucks (including both pickup trucks and SUV progenitors like the pared down Jeep that had long been in military use) were given little attention by regulators during the 1970s and early 1980s. In addition, light trucks during this period were generally used for commercial and agricultural purposes where their truck-like features and higher wheel base were needed. As savvy manufacturers began to develop SUVs and discovered that consumer interest for ordinary passenger use of SUVs was growing, they sought and generally succeeded in having SUVs continue to be classified as light trucks and thereby escape costs associated with more stringent mileage, pollution, and safety requirements imposed on cars by federal legislation and regulation. Only a small number of SUVs offer safety features comparable to those in most cars, while virtually none meet car pollution and mileage limitations. To retain this favored treatment, SUV manufacturers have continued to be sure that SUVs have sufficient weight and height to be categorized as light trucks. Despite periodic consideration of ending this favored treatment for SUVs, neither major political party has confronted any aspect of the “SUV problem” apart from a modest improvement in gasoline mileage that will soon be required for SUVs. Even after the forthcoming regulatory change, SUVs will, due primarily to their weight, size and large engines, get far poorer gasoline mileage than do cars and emit far more pollution per mile traveled. Carbon dioxide, the gas most associated with global warming concerns, remains a chief pollutant emitted by gasoline combustion, with full size SUVs now emitting, on average, twice as much carbon dioxide per mile as an average car. SUVs also emit high levels of volatile organic compounds that contribute to ozone pollution problems. Many urban areas continue to struggle with ozone levels that exceed federal Clean Air Act National Ambient Air Quality Standards (NAAQS) and in their State Implementation Plans (SIPs) must devise strategies to maintain or seek to come into compliance with NAAQS.
Despite SUV advertising touting SUVs’ strength, they pose several safety issues that have become the focus of press coverage. As has long been known, SUVs pose a high risk of rolling when in an accident or taking evasive maneuvers, due primarily to their higher ground clearance and raised centers of gravity. Due to this risk, some SUVs now contain a rollover risk warning posted on the driver side windshield visor. Approximately 2000 fatalities per year are now attributed to SUV rollovers; rollovers also cause high rates of paralysis. Due to their height, weight and rigidity, SUVs also pose a substantial risk to other drivers, particularly drivers in cars. Due to frequent bumper height mismatches and SUV weight and power, SUVs in an accident will often ride up and over passenger cars, crushing the occupants. SUVs are expected to cause 2000 deaths per year in collisions with cars. Recent studies also find that SUV passengers are at higher risk than car passengers of head injury in any side impact accident. Side window air bags, offered in many cars, greatly reduce such head injury risk, but at this point are standard equipment on few SUVs.
All of this information about SUVs is on your desk in your capacity as a policy researcher for the American Insurance Institute (the AII), an umbrella organization that conducts research for an array of member insurance companies. AII also periodically shares its policy results with the public. Nearly all insurers are members of AII. The AII does not undertake its own lobbying efforts, but its periodic task force research projects often help AII members decide how to respond to issues that arise in their markets and in the political and regulatory arenas. AII task force researchers are expected to be scrupulously evenhanded in their analyses. Attention to issues of concern to AII is, of course, expected, but AII task force reports and deliberations are expected to be critical of any entity involved in creating a problem, even if that entity is an AII member or the insurance industry as a whole.
You have been appointed to an AII task force convened to analyze whether there are SUV problems that deserve new treatment by AII or others with power to influence SUV design, marketing or policy. AII members have a major stake in automobile insurance policies and, as with any business, would like to maximize profits and maintain a loyal customer base. AII members typically sell numerous lines of insurance besides automobile insurance. Although SUV-linked claims, both for car damages and personal injuries, have steadily increased as the numbers of SUVs on the road have grown, many AII members have been reluctant to alienate their wealthier customers. These wealthy customers often use one insurer for all of their insurance needs, including their now prevalent luxury SUVs. If SUVs were the subject of higher car-specific premiums, however, insurers fear that they might lose some of their customers. In the meantime, however, the high rate and cost of SUV damage and injury claims, both for harm to SUV owners and other automobile drivers or passengers harmed in a collision with an SUV, are putting pressure on AII members to do something about SUV safety.
Your task is to write a memorandum regarding SUV safety concerns and possible responses on behalf of the AII task force. Your memorandum here is for discussion and consideration of the AII task force in advance of an upcoming conference during which AII and diverse stakeholders interested in SUV issues will discuss implications of SUV market domination and, in particular, market or regulatory responses to the many types of SUV associated harms discussed above. This memorandum should suggest and assess your main talking points for your presentation at this conference.
In your memorandum, you should frankly evaluate the anticipated responses of other players and institutions to any proposals you suggest AII should advocate. You can assume the presence at this conference of consumer and environmental groups, foreign and domestic automobile manufacturers, an array of politicians and regulators from all levels and arms of government, lawyers, doctors, and an assortment of academics. While in your talking point memo you may discuss issues not directly related to SUV safety, you should only do so if you find them relevant to suggesting responses of AII or anticipating concerns and responses of others to SUV accident cost issues that have provoked AII member concerns.
QUESTION 2: 50% of exam, 1000 word limit
Each year, more than nine million Americans consult credit counseling agencies (CCA's) for advice in managing their household budgets and in dealing with financial distress. These agencies typically assist debt-burdened consumers by negotiating better terms with creditors — typically credit-card companies such as Visa and MasterCard — and by designing payment schedules that will pay off a consumer's debt over a period of time. Credit-industry experts estimate that there are as many as 2,500 CCA's nationwide, almost 40% of which belong to the main industry trade association, the National Foundation for Credit Counseling (NFCC), founded in 1951.
While they are typically funded in part or whole by creditors, and often take payment in the form of a percentage of amounts recovered from consumers under negotiated payment plans, most CCA's are organized as non-profit entities. But as non-profits, they are generally allowed to use their facilities to refer clients to or to sell the services of related for-profit companies such as loan consolidators, and many CCA's cover a part of their costs by collecting fees from their consumer clients. The relative importance of these alternative sources of revenue has shifted in recent years, as the share of CCA costs provided by creditors has fallen. Traditionally, creditors have paid CCA's something on the order of 15 percent of the debt they recover through CCA-arranged payment plans, but in 2002, that figure dropped to about 8 percent.
Consumer use of CCA's has also increased in recent years, following a significant expansion in consumer credit between 1988 to 1996 which has been variously attributed to a growing economy, increased competition in financial intermediation services, and lender decisions to extend credit to borrowers who would previously have been denied it. Whatever the cause, the result was an appreciable rise in the number of consumers who could not pay their bills. Consumer bankruptcy filings rose to an all-time high of 1.6 million in 2002. and the number of people visiting CCA's rose accordingly.
In this context, a new and more entrepreneurial breed of CCA's began to market their services more aggressively, using TV, radio and Internet advertisements and computerized telemarketing calls to build their client base. The rise of these new CCA's has created some tension with longer-established members of the industry, and some of their practices have attracted criticism from regulators and consumer advocates. For instance, some new firms, in contrast to longer-established CCA's, make a practice of seeking up-front contributions from their consumer clients at a time when they are struggling financially. Other new CCA's have paid sizable fees to outside for-profit firms tied to or controlled by CCA management — an arrangement that has produced accusations of improper self-dealing. There have also been allegations that some firms have failed to disclose their fees to consumers, or have deceptively claimed that their fees are voluntary. A recent study commissioned by two consumer advocacy groups reports that the number of complaints against CCA's received by the Better Business Bureau rose to 1,480 in 2002, as compared with 261 complaints in 1998.
The CCA industry has also attracted increased attention because recent proposals to reform the U.S. Bankruptcy Code have included provisions that would require consumers to consult with a federally accredited CCA as a precondition for filing for bankruptcy. Both the House and Senate passed bills last year that would have amended the Bankruptcy Code to make it more difficult for consumers to file for bankruptcy and to shield their assets from creditors. These bills were opposed by consumer advocacy groups, but were strongly supported by credit card companies, who earn a significant share of their profits from late fees and penalties assessed against debtors who cannot pay off their balances within a regular monthly cycle. , The bills failed to become law only because a House-Senate conference committee could not agree on how to treat debts incurred in connection with abortion clinic protest activity. Similar legislation, minus the abortion-protest language, was introduced earlier this year and was passed last month in the House.
Under the mandatory counseling provision of the pending bill, individual debtors would be ineligible for relief under the Bankruptcy Code unless they had received credit counseling within 180 days of a bankruptcy filing. The counseling would have to be through a service approved by the United States trustee or bankruptcy administrator. Exceptions would be made for bankruptcy districts in which adequate services were unavailable, and for debtors in exigent circumstances. The bill would also require CCA’s applying for accreditation to provide their services without direct charge to any consumer client who could not afford to pay for counseling. Specific standards for determining ability to pay, as well the specific services to be prescribed, would be left to be filled in by subsequent administrative regulations.
In the absence of bankruptcy reform, the CCA industry remains subject to the jurisdiction of a variety of state and federal regulatory agencies. The Federal Trade Commission has investigated the industry under its overall statutory mandate to regulate unfair trade practices; in 1997 the FTC reached agreement with the NFCC on a new policy under which consumers who seek help from any of NFCC’s member organizations will be provided with certain standard disclosures, including (1) the fact that CCA’s receive funding from creditors; (2) the fact that CCA’s do not act as consumers' agents, but instead recommend debt management plans designed to meet the dual needs of consumers and of the funding creditors; and (3) a reliable estimate of how long it will take to pay off their debts under an NFCC debt management plan. This agreement does not bind the majority of CCA’s that are not members of the NFCC, however; and there are reports indicating that even many NFCC members are not yet in compliance.
Some consumer advocates have argued that these efforts are insufficient to ensure that CCA’s truly act as consumers’ advisors, and not as the effective collection agents of their creditors. Although courts have on occasion imposed common-law fiduciary duties on CCA's, most jurisdictions have no case law on this point. These advocates have accordingly recommended that formal fiduciary obligations be imposed on CCA’s by statute, as a way to safeguard consumer expectations of a confidential and trusting relationship.
You are chief legislative counsel to a centrist U.S. senator who has supported consumer protection legislation on some occasions in the past, but who has also accepted campaign contributions from and has sometimes voted for proposals backed by creditor interests. For example, your boss voted for the version of the bankruptcy reform bill that passed the Senate last year, although she was not one of the bill’s major backers and she did not cooperate with all of the parliamentary tactics employed by the bill’s managers.
You have just been asked to provide advice on a proposed bill being circulated by Senator Blog, a colleague who often cooperates with your boss on legislative matters, but who represents a more liberal constituency and who is usually associated with a more staunchly pro-consumer position. This bill would, among other provisions:
A second proposal being circulated by a prominent consumer advocacy group, Consumers for Debt Relief (CDR), would impose stricter regulations on CCA's. Beyond the above requirements, this second proposal would also:
- require CCA’s to disclose to consumer clients all funding arrangements under which the CCA’s receive payment from creditors, as well as their non-profit or non-profit status;
- require all advertisements, communications, and agreements promulgated by CCA’s to describe the CCA’s dual role as agent for creditors and debtors,
- require CCA’s to present consumer clients with objective information on the advantages and disadvantages of a variety of alternative debt management options;
- require CCA’s to provide certain services without direct charge to consumer clients as a condition of eligibility for tax-exempt or non-profit status (with the list of services to be filled in by subsequent regulation).
Your boss has asked for a brief memo analyzing the merits of Senator Blog's proposal, and offering advice on whether she should support the proposal, oppose the proposal, or put forward a proposal of her own. In addition, your boss has an upcoming meeting scheduled with representatives of CDR, whose support she has valued in the past. She expects to be lobbied on the CCA issue at this meeting. In your memo, therefore, you should also identify the main arguments that CDR representatives are likely to make in favor of their competing proposal , and assess factors the senator should consider in responding to CDR's concerns.
- Require consumers seeking advice from CCA’s to be provided with specific information regarding the advantages of filing for bankruptcy and of the option of paying some creditors in full while paying others only in part.
- Prohibit non-profit CCA’s from acting as sales or marketing agents for the services of for-profit firms;
- Prohibiting credit-card companies from soliciting business from or issuing credit cards to customers who have filed for bankruptcy within the previous twenty-four months, or who are currently in delinquent status on existing credit-card accounts.
In writing your memo, keep in mind that the issue of bankruptcy reform will be coming up later in the term, so that any important interactions you might see between this proposal and the bankruptcy bill should be considered.