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Judge Rules Sprint Early Termination Fees Illegal
Antiglobalism writes to tell us that an Alameda County Judge has ruled against Sprint Nextel in a class-action lawsuit, awarding customers $18.2 million in restitution for early termination fees. "Though the decision could be appealed, it's the first in the country to declare the fees illegal in a state and could affect other similar lawsuits, with broad implications for the nation's fast-growing legions of cell phone users. The judge - who is overseeing several other suits against telecommunications companies that involve similar fees - also told the company to stop trying to collect $54.7 million from other customers who haven't yet paid the charges they were assessed. The suit said about 2 million Californians were assessed the fee."
Prorated termination costs seem reasonable, especially given the subsidies on the hardware. I was surprised to see that Sprint is the only company that doesn't prorate. I figured the wireless companies would avoid any change that makes it easier for customers to change providers. When selling a commodity it's essential to avoid the profit-killing, competing-on-price, race to the bottom.
This will be appealed, so I don't see anything changing in the short term. The figures on the $55 million in uncollected fees is impressive. It would be interesting to know how much of that would be profit after subtracting the depreciated cost of subsidized hardware.
The disappearance of the 1-year contract bugs me, but at least it's easier to move up and down in rate plans once you've signed up.
And yes, it would be nice to have the option to buy unlocked phones from any vendor and use them with any provider, but I'd bet that less than a quarter of the customer base would make use of this on a regular basis. TMobile comes closest to supporting this now, but I left them when I got an IPhone and really do miss dealing with them. Their customer service web site is far superior to AT&T's.
This sounds like a good time to get one of those $199 subsidized iPhones and walk away from the contract.
But isn't the whole mortgage crisis based on the same principle? People walking away from their contracts?
No, the mortgage crisis was caused by a combination of irresponsible lending practices by lenders and people attempting to live beyond their means. People walking away from the contracts was an effect, not a cause.
Surely EULAs are even less enforceable than signed contracts?
Because cell phone companies aren't willing to negotiate contracts with consumers, and the few cell phone companies that consumers can choose from all have equally evil contracts.
Also, contracts are only valid if there's a quid pro quo - if there's no prorating, the judge may take that into account.
In the end, contracts are only binding if they are legal - you can't sell yourself into slavery, you can't contract out a hit on someone, etc etc.
According to this article, it was a violation of California's unfair business practices act:
http://www.baltimoresun.com/business/bal-bz.sprint30jul30,0,2416808.story
"Wireless carriers say early termination fees are necessary so the companies can recover the cost of mobile phones, which they subsidize when customers sign long-term service contracts.
But the judge in her ruling said the contracts were "implemented primarily as a means to discourage customers from leaving" and that the company gave little regard to the cost of broken contracts."
And remember, in the United States, just because something is clearly stated in a contract doesn't mean the contract is enforceable. For instance, a contract to make yourself a slave will not be enforced by a court.
There are two key points in the article (couldn't the actual opinion) hitting these points:
Interesting; because judges are usually very reluctant to over-ride decisions made by juries. Generally, juries make findings of fact and the Judge makes the finding of law. Here, the Judge said that the Jury clearly erred in finding the contracts valid. Which makes me think that the Jury instructions were extremely poorly written, or that the Judge feels very strongly that the plaintiffs made the legal side of their case so well that "no reasonable jury" would have returned the decision that it did. (Also, I note that the Jury appears to have awarded damages despite finding that the contracts were valid -- this semi-contradictory result may have persuaded the judge to go in the direction she did.)
The second interesting argument:
YES! It is a founding principle of contract law that the non-breaching party's damage recovery is limited to its actual losses and its cost to make up the breaching party's violation of the agreement. Traditionally, a contract that agreed to damages in excess of the non-breaching party's actual exposure (i.e., punative damages) were ruled invalid and "reformed" by the court into something reasonable.
However, the courts over the past few decades have been relunctant to follow this principle -- instead, most consumer contracts today contain a "liquidated damages" clause, where the parties agree ahead of time on an estimate of what the actual damages would be. To me, fundamental principles of contract law dictate that an agreement to excessive liquidated damages clauses (particularly in consumer contracts) should not be upheld. I'm glad to see a court finally moving in that direction.
ARM5-1 isn't a stupid loan. Its a low rate for 5 years. The idea is that before the 5 years are up you either sell, or refinance to avoid the higher rate (possibly to another 5-1, possibly not). It's actually a smart idea if you don't plan on living there 30 years. Now if you want a bad loan, look at interest only, 3 month ARMs, and negative amortization loans.
I still have more fans than freaks. WTF is wrong with you people?
You have it backwards. You aren't paying $30 less per month for being in a 2-year contract. People who aren't in a contract or who bought their own phones full price are paying $30 per month too much. The phone companies set up a pricing structure which included prorated charges and termination fees for subsidized phones, but didn't remove those charges for people whose phones weren't being subsidized. If I paid for my phone up-front or it's paid off, why should I be forced into a contract to get lower rates or be charged an early termination fee?
The way it should work is there should be a base monthly fee for phone service and only phone service. If you want the phone company to give you a phone for a no-money-down (or $50-$100 down), then it should be structured as a loan and added on to your bill. If you end your service before the loan is repaid, you're on the hook for the balance of the loan - that's your termination fee. Those of us with old or fully paid for phones shouldn't be paying extra just because the phone company's pricing structure assumes everyone's phone is subsidized.
I don't see where the "free ride" comes in. They lost the home, wiped out their savings, probably increased their debt, and (almost certainly) killed their credit rating. It will be a long time before they can attempt to own a home again, even if we assume they've learned from the experience.
Javascript + Nintendo DSi = DSiCade
It's a stupid loan if you do not foresee a collapse in property prices in your area due to near-future restrictions on easy credit. This is what happened to many tens of thousands of people, and why so many people are hammered by a negative equity situation. They cannot sell, because they owe more than the vlaue of their home and do not have cash reserves... and theycannot afford their ballooned payments.
Sure, the lender will (if they are smart) renegotiate with the borrower... but many borrowers find it a better proposition to walk away and declare bankruptcy.
Yes, IO 3 month ARMs are REALLY bad... unless you're just flipping the property. Negative amortisation loans, same deal. Either case, you better know what's going on in the housing market locally before you jump in.
"Trolls they were, but filled with the evil will of their master: a fell race..." -- J.R.R. Tolkien on Olog-hai
These people weren't given a loan, they applied for it. Now you can say that the lending institution shouldn't have given it to them, but they should have also known that they couldn't afford it. $5,000 net monthly would seem to be around $75,000 anually, $3,500 in monthly mortgage payments would be about a $600,000 mortgage. No rational set of human beings could begin to think that they could afford that. Undoubtedly they thought they could tough it out for a few years, make a huge return and move on. I feel absolutely no pity for them. They were idiotic and got exactly what they deserved. It shouldn't be the place of society to protect people from themselves.
I'm not not licking toads.
You think that's a free ride? Let's go over this again:
1. They have no home. Back to apartments for them.
2. They lost their savings.
3. They probably took on more debt.
4. Their ability to get new credit or make large purchases (e.g. a vehicle) is now stunted.
5. They have no hope of seeing another house for several years into the future.
6. Any long term plans they made are probably shot.
So how exactly is that a free ride? It sounds to me like they'll be paying a hefty price for quite a long time!
Javascript + Nintendo DSi = DSiCade
A dress? Really?
This is a perfect place for a car analogy and you went with a custom-tailored silk dress? I mean... Driving around for 6 months without making payments and getting the car repossessed ~= A free car rental with the credit penalty being the only downside. It's that easy.
A dress?
He's getting rather old, but he's a good mouse.
I'll add my spin on this one. I'll even go with your silly dress analogy (how on earth did you come up with this anyway?).
Let's say they promised a dressmaker $100 per month for a year for the dress, and then $1000 per month for the next 5 years afterwards (some more realistic numbers, since custom dresses usually cost many thousands of dollars, judging by what I've heard about bridal gowns). The dressmaker does a credit check, and finds that the buyer makes $15k/year working in fast food. The buyer can afford the $100/month, barely, but no way can she afford the $1000/month. The dressmaker decides to approve this financing for the buyer, knowing there's no way she can afford it after the first year. For the first year, the buyer pays the $100/month. Then, when the payments go up to 1k, she defaults. Dressmaker is outraged!
Who's the aggrieved party here? The one who stupidly made the loan, or the one who took advantage of the stupidity (ruining her credit in the process)? Personally, I think the blame falls on the lender, for making such a stupid decision. There's definitely times when people should be punished for taking advantage of the system, but this isn't one of those times. These lenders were absolutely corrupt and stupid for approving these loans, and they deserve to lose their businesses over them. The bad buyers are already getting punished, in a way; their credit is ruined, and they won't be buying a house again soon. That's punishment enough.
Also remember, the lenders never actually lost anything. The people borrowed money to buy these houses, and they used the houses as collateral. Remember that word? This means that the lenders agreed that these houses were worth what they were lending for them. When the buyers defaulted, the lenders repossessed the houses, and even kept all the mortgage payments already made. If the lenders can't get the same amount for those houses, that's their problem: they should have though about that first, instead of assuming that realty values always rise.
If you're going to lend money to people, it's up to you to make sure they're worthy of lending to. This is especially true for large financial institutions, who can easily afford to do all the necessary credit checks. The whole concept of the ARM is rooted in greed, and the lenders deserve to go out of business for making so many bad loans.
Yes, and that's why we shouldn't subsidize the risky loans. There's no way the financial institution would actually offer a loan that they know could not be repaid if the institution had to take the hit when the borrower walked away from the deal.
But instead of taking that hit, the lender lets the government bail them out of their stupid lending decisions so at the end, society is responsible for protecting people from themselves. We're protecting irresponsible lenders. The irresponsible borrowers take a bad credit hit which can have fairly nasty consequences, even to the point of making it difficult to get a job. The lender doesn't have to deal with those kind of consequences.
That bailout needs to go away. When Fannie Mae and Freddie Mac got into trouble, it almost did, but then the government bailed them out, so we're right where we always have been.
Perhaps you don't feel sorry for irresponsible borrowers, but they actually have an effect on the market that hurts everyone. If I want to get a 15 year mortgage at a decent interest rate, I have to remember that I will be placing competing bids with others who probably have 30 year loans, perhaps even interest-only loans with much lower payments. Those people will be easily able to outbid me, driving the price of the homes I am interested in beyond my means. In the end, I may be forced to take a different type of loan so that I don't end up in a dangerous neighborhood. The lenders love this, and will do everything they can to encourage it. The best way to discourage it is to make them pay for their own mistakes!
This is pure BS. Perhaps some played it as you describe, although it's incredibly stupid of them to have done and their credit is completely fucking shot now.
However, there's plenty of others that are completely devastated now. Like me. I told the loan agent up front what I could afford per month. I was told the home I was looking at would be less per month than I had set as a limit. So I agree, we get to the closing table, and I'm giving a totally different figure that's higher than what I had set as my limit. When I tried to back out, I was blindsided by a host of financial terms and figures that could only be described as pure fucking magic to my eyes, because none of those financial things are simple basic algebra. They shuffle money here and there and I'm told to just not worry about it, I wouldn't have been approved if I couldn't pay it.
Ok, I payed for almost 2 years on the home, struggling the whole way, only to have a major item go out and require replacing. One partial payment incurred a massive backlash of fees and they didn't even count my payment, and the next few payments didn't count either according to them. In the end, I've lost the home, couldn't get anyone to rent to me anymore because of it, my credit is completely shot and my savings is completely gone. Several loans I had to take out to cover major items in the home such as AC and water heater (you cannot live in the Midwest without AC, you die) I'm still on the hook for even though I don't even have the item anymore.
Now tell me, you callous asshole, that the past two years have been a fucking "free ride". I will now have to declare bankruptcy, I have no home, can't get anyone to rent to me so I'm stuck living with relatives, and all of my savings is gone. But that home did me such good, didn't it?