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  Six Common Transactions That Cost Less Because of Class Actions• Press Release August 20, 2003• Corporate lobbyists have long argued that lawsuits increase the cost of products. There is a germ of truth to this claim as it pertains to injury lawsuits, because the threat of litigation prevents manufacturers from cutting corners on safety to save a few dollars. But when it comes to class action lawsuits to remedy fraudulent practices, there is no question that litigation reduces the prices that consumers pay. Most class actions are aimed at undisclosed fees, markups, kickbacks, and other overcharges that chisel consumers in small quantities. Often obscured by complicated billing statements, these hidden costs enable businesses to advertise one price, but secretly charge a higher amount. This undermines consumers’ ability to comparison shop, and benefits unscrupulous businesses at the expense of more honest competitors. A classic example is the use of hidden fees in mortgage transactions. Lender A may advertise a lower interest rate than Lender B, yet make up the difference through undisclosed markups. This practice has led to numerous class actions. The Bush Administration has responded by proposing that all mortgage closing fees be disclosed as a flat amount that would allow consumers to compare closing costs the same way they can compare interest rates. While this proposed rule would virtually eliminate an entire category of class actions, mortgage bankers and brokers have opposed it—they would rather take their chances in litigation than have to compete squarely! This analysis highlights six common transactions that demonstrably cost less to consumers due to the availability of class actions. Credit Cards Cost of "No Annual Fee" Credit Card Before Class Action: $35 FleetBoston Financial Corp. agreed to pay $5.5 million to settle a consumer class action filed under the Federal Truth in Lending Act. Paula E. Rossman of Oregon filed the lawsuit after Fleet notified her in June 2000 that she would be charged a $35 annual fee -- less than six months after she accepted Fleet’s offer of a "no-annual-fee Platinum MasterCard." The notice also stipulated that the interest rate would increase from 7.99 percent to 24.99 percent if Rossman cancelled her card while carrying a balance. In a unanimous decision, the Third Circuit U.S. Court of Appeals ruled that consumers were entitled to assume from Fleet's solicitation that there would be no annual fee for at least one year. "A statement, therefore, that a card has 'no annual fee' made by a creditor that intends to impose such a fee shortly thereafter, is misleading," the Appeals Court said. Telephone Service Cost of Long Distance Call Before Class Action: $2.87 MCI customers expecting a five-cent charge on their phone bill were surprised to see charges as high as $2.87 for a one-minute call after the company had widely advertised "Five Cent Sundays." Customers figured that this $2.82 overcharge was a mistake, but when they contacted MCI, they were told that the practice was perfectly legal under federal guidelines. In fact, MCI and other phone companies routinely charged subscribers a much higher "casual calling" rate. After being overcharged by thousands of dollars, one small business decided to challenge MCI. Lacking the resources to take on the nation's second largest residential long distance company, the small business initiated a class action representing all MCI customers. MCI eventually settled the case, agreeing to pay back its customers $90 million in cash. Class members could choose either a fixed award of $75 cash or a reasonable approximation of actual damages. As a result of the class action, MCI changed its internal polices so that no subscriber would ever be charged non-subscriber rates. For a one-minute call, this policy could save consumers as much as $2.82 per call. Car Purchase Cost of Auto Title and Registration Before Class Action: $154.00 A widespread rip-off in the consumer finance business is the padding of third-party fees. Lenders often misrepresent the amount of money they are collecting to pay for credit reports, recording fees, or in the case of Sumerwell v. Jim Coleman Honda, title, tags, and registration for a new car. This class action lawsuit revealed that the American Honda Finance Corp. and Toyota Motor Credit Corp. had inflated the fees required by the Maryland Motor Vehicle Administration by an average of $50 to an estimated 17,000 Maryland consumers. As a result of the suit, both companies agreed to halt the alleged illegal business practice and reimburse affected customers. Wire Transfers Cost of Wiring $300 to Mexico Before Class Action Lawsuit: $55.00 Money transfers from immigrants working in the United States to relatives in Mexico increased to a record $10 billion in 2002. This amount exceeds all U.S. foreign aid and is the second largest source of income for Mexico behind oil exports. The money received in Mexico is vital to their economic survival and provides currency necessary to purchase needed goods and services (frequently from the United States). Until recently, Western Union and MoneyGram dominated the market, handling 97 percent of all money transmissions. The advertised fee they charged for transfers ranged from 6 to 15 percent, but additional costs, namely hidden unfavorable exchange rates, often ran the cost to 20 percent or more. The companies got better exchange rates for pesos than they passed on to customers, pocketing the difference between the two rates on top of the service charge. In 1999, Mexican migrant workers in Illinois, Texas and California filed class-action lawsuits against Western Union and MoneyGram alleging the wire transfer companies had cheated them out of millions of dollars in undisclosed fees. The settlement of this suit requires companies to disclose the difference in exchange rates at which they purchase pesos and the rate they apply to their customers’ transactions. Exposure of this double whammy has led to more competition and lower prices for those sending money to loved ones in Mexico or elsewhere abroad. Health Insurance Patient’s 20% Co-payment for Surgery Before Class Action: $496.26 HMOs typically require a co-payment from patients for part of a received medical service. The co-payment may range from 10 to 20 percent, depending on the plan. As a result of several class action lawsuits around the country, it has been learned that many patients were paying more than the percentage stipulated in their policy. In fact, in one recent case, Corsini v. United Health Care, it was shown that many subscribers’ "20 percent co-payment" actually covered the entire cost of the care they received. United’s billings worked this way: United would determine that the "reasonable and customary" charge for a service might be $1000 and would require the patient to pay 20 percent, or $200. Meanwhile United would negotiate a substantial discount from the doctor that would reduce the actual price of that service to $700. A 20 percent co-payment applied to the true amount would be $140 (20 percent of $700), instead of $200. A court has ordered United to refund customer co-payments totaling $4,387,263 to approximately 55,000 subscribers. Several other class action lawsuits in other states have resulted in multimillion settlements from other health insurers. Now this practice has been discontinued. Fee for Preparing Closing Documents Before Class Action: $750.00 The large number of service providers involved in real estate transactions—and confusion as to what exactly they do—creates numerous opportunities for kickbacks and bill-padding. Vendors such as credit reporting agencies, title companies and law firms are selected by banks or mortgage brokers with no input from the consumer and no regard for keeping costs low. All too often these insiders mark up fees paid to third parties, pocketing the difference; or receive kickbacks in exchange for referrals. A recent class action lawsuit in New York uncovered a kickback scheme between Long Island Savings Bank and a law firm owned by the bank’s former head that cost borrowers millions of dollars in inflated legal fees. Instead of charging the typical fee to prepare closing papers of around $250.00, the bank saddled borrowers with charges of up to $750.00, with insiders profiting from the excess. Recent class actions have also addressed the practice by banks of holding mortgage payoff letters and releases "hostage" to exact unfair fees from property sellers. The cases used to illustrate typical savings were: Credit Card - Rossman v. Fleet Bank 280 F.3d 384 (U.S. Court of Appeals, Third Circuit, 2002). Telephone - In re MCI Non-Subscriber Telephone Rates Litigation, MDL Docket No. 1275, (U.S. District Court, Southern District of Illinois, 2000). Car Purchase - Sumerwell v. Jim Coleman Automotive Case No. 03-C-02-006298 (Maryland Circuit Court, 2000). Wire Transfer - In re Mexico Money Transfer Litigation 164 F.Supp.2d 1002 (U.S. District Court, Northern District of Illinois, 2000). Health Insurance- Corsini v. United HealthCare Corp. 51 F.Supp.2d 103 (U.S. District Court for Rhode Island, 1999). Home Purchase- Weil v. Long Island Savings Bank, 188 F.Supp.2d 265 (U.S. District Court, Eastern District of New York, 2002). more resources
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