Ch 40 - Consumer Law

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FTC (Federal Trade Commission)

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Created by Congress in 1915 to regulate business.

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The FTC has several options for enforcing the law

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1. Voluntary Compliance. When the FTC determines that a business has violated the law, it first asks the offender to sign a voluntary compliance affidavit promising to stop the prohibited activity.
2. Administrative Hearings and Appeals.If the company refuses to stop voluntarily, the FTC takes the case to an administrative law judge (ALJ) within the agency. The violator may settle at this point by signing a consent order. If the case proceeds to a hearing, the ALJ has the right to issue a cease and desist order, commanding the violator to stop the offending activity.
3. Penalties.

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The FTC can impose a fine for each violation of:

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1. a voluntary compliance affidavit
2. a consent order
3. a cease and desist order
4. and FTC rule
5. a cease and desist order issued against someone else.

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The FTC can file suit in federal court asking for damages on behalf of an injured consumer if

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1. The defendant has violated FTC rules
2. A reasonable person would have known under the circumstances that the conduct was dishonest or fraudulent.

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Section 5 of the Federal Trade Commission Act

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prohibits "unfair and deceptive acts or practices."

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Deceptive Acts or Practices

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Under the FTC Act, an advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer.

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Unfair Practices

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Prohibited by the FTC.

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The Commission considers a practice to be unfair if it meets all of the following three tests:

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1. It causes a substantial injury. This can mean physical or financial injury.
2. The harm of the injury outweighs any countervailing benefit.
3. The consumer could not reasonably avoid the injury.

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Bait and Switch

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FTC rules prohibit bait and switch advertisements: a merchant may not advertise a product and then disparage it to consumers in an effort to sell a different item.

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Bait

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An alluring offer that sounds to good to be true.

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Switch

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After the bait is set, the advertiser wants to switch consumers to another, higher priced product.

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The FTC has established the following guidelines on mail and telephone order merchandise:

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1. Mail-order companies must ship an item within the time stated or, if no time was given, within 30 days after receipt of the order.
2. If a company cannot ship the product when promised, it must send the customer a notice with the new shipping date and an opportunity to cancel. If the new shipping date is within 30 days of the original one, and the customer does not cancel, the order is still on.
3. If the company cannot ship within 30 days of the original date, it must send the customer another notice. This time, however, the company must cancel the order unless the customer returns the notice, indicating that he still wants the item.

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Unordered Merchandise

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Anyone who receives unordered merchandise in the mail can treat it as a gift.

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Door-to-Door Sales

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A salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the third business day thereafter.

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TILA applies to a transition only if all of the following tests are met:

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1. It is a consumer loan. That means a loan to an individual for personal, family, or household purpose but not a loan to a business.
2. The loan has a finance charge or will be repaid in more than four installments.
3. The loan is for less than $25,000 or secured by a mortgage on real estate.
4. The loan is made by someone in the business of offering credit.

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In all loans regulated by TILA

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1. The disclosure must be clear and in meaningful sequence.
2. The lender must disclose the finance charge. The finance charge is the amount, in dollars, the consumer will pay in interest and fees over the life of the loan.
3. The creditor must also disclose the annual percentage rate (APR). This number is the actual rate of interest the consumer pays on an annual basis.

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TILA requires additional disclosure for two types of loans

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Open-End Credit and Closed-End Credit.

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Open-End Credit

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A credit transaction in which the lender makes a series of loans that the consumer can repay at once or in installments.

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Closed-End Credit

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A transaction with only one loan and the borrower knows the amount and the payment schedule in advance.

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Home Equity Loans

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TILA provides additional consumer safeguards for home equity loans

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If a home equity loan:

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1. Has an APR that is more than 10 percentage points higher than Treasury securities
2. The consumer must pay fees and points at closing that are higher than 8 percent of the total loan amount, then
1. At least three business days before the loan closing the lender must notify the consumer that:
1. he does not have to go through with the loan (even if he has signed the loan agreement)
2. he could lose his house if he fails to make payments

2. Loans that are for less than five years may not contain balloon payments ( that is, a payment at the end that is more than twice the regular monthly payment.)

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Credit card rules

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Under TILA, you are only liable for the first $50 in charges the thief makes before you notify the credit card company. If the thief just steals the CC numbers, you are not liable for any unauthorized charges.

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Debit Card Rules

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If reported lost before anyone uses your card, you are not liable for any unauthorized purchases. If reported within two days, liable up to $50. If after two days, up to $500. After 60 days, all loses are yours.

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Fair Credit Billing Act: Under the FCBA:

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1. If, within 60 days of receipt of a bill,a consumer writes to a credit card company to complain about the bill, the company must acknowledge receipt of the complaint within 30 days.
2. Within two billing cycles(but no more than 90 days) the credit card company must investigate the complaint and respond:
1. In the case of an error, by correcting the mistake and notifying the consumer
2. If there is no error, by writing to the consumer with an explanation.
3. Whether or not there was a mistake, if the consumer requests it, the credit card company must supply documentary evidence to support its position.
4. The credit card company cannot try to collect the disputed debt or close or suspend the account until it has responded to the consumer complaint.
Continue on next card..

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Continued from previous card. See back.

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5. The credit card company cannot report to credit agencies that the consumer has an unpaid bill until 10 days after the response. If the consumer still disputes the charge, the credit card company may report the amount to a credit agency but must disclose that it is a dispute.

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FCRA (Fair Credit Reporting Act)

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To ensure that consumer credit reports are accurate.

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Under the FCRA

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1. A consumer report can be used only for a legitimate business need, and a consumer reporting agency must be careful not to supply reports that will be used for any other purpose.
2. A consumer reporting agency cannot report obsolete information.
3. A consumer reporting agency cannot report medical information without the consumer's permission.
4. An employer cannot request a consumer report on any current or potential employee without the employee's permission.
5. Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the information.
6. Upon request from a consumer, a reporting agency must disclose all information in his file, the source of the information (except for investigative reports), the name of anyone to whom a report has been sent in the prior year (two years for employment purposes), and the name of anyone who has requested a report in the prior year.
See next card...

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Continue from previous card. See back.

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7. If a consumer tells an agency that some of the information in his file is incorrect, the agency must both investigate and forward the data to the information provider.

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Fair and Accurate Credit Transactions Act

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Established with the goal of reducing identity theft.

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Fair Debt Collection Practices Act

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The FDCPA states that "Abusive debt collection practices contribute to the number of personal bankruptcies, to marital instability, to the loss of jobs, and to invasions of individual privacy."

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The FDCPA Provides:

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1. That a collector must, within five days of contacting a debtor, send the debtor a written containing the amount of debt
2. The name of the creditor to whom the debt is owned
3. A statement that if the debtor disputes the debt, (in writing), the collector will cease all collection efforts until it has sent evidence of the debt.

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Under the FDCPA, collectors may not:

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1. Call or write a debtor who has notified the collector in writing that he wishes no further contact
2. Call or write a debtor who is represented by an attorney
3. Call a debtor before 8:00 AM or after 9:00 PM
4. Threaten a debtor or use obscene or abusive language
5. Call or visit the debtor at work if the consumer's employer prohibits such contact
6. Imply that they are attorneys or government representatives when they are not, or use a false name
7. Threaten to arrest consumers who do not pay their debts
8. Make other false or deceptive threats, that is, threats that would be illegal if carried out or which the collector has no intention of doing - such as suing the debtor or seizing property
9. Contact acquaintances of the debtor for any reason other that to locate the debtor (and then only once)
10. Tell acquaintances that the consumer is in debt.

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Equal Credit Opportunity Act

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The ECOA prohibits any creditor from discriminating against a borrower because of race, color, religion, national origin, sex, marital status, age (as long as the borrower is old enough to enter into a legal contract), or because the borrower is receiving welfare.

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Consumer Leasing Act

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CLA protects consumers when leasing a car. The CLA does not apply to the rental of real estate.

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Before signing a lease, the lessor must disclose the following in writing:

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1. All required payments, including deposits, down payments, taxes, and license fees
2. The number and amount of each monthly payment and how payments are calculated
3. Balloon payments (that is, payments due at the end of the lease)
4. Required insurance payments
5. The total amount the consumer will have paid by the end of the lease
6. Available warranties
7. Maintenance requirements and a description of the lessor's wear and use standards
8. Penalties for late payment
9. The consumer's right to purchase the leased property and at what price
10. The consumer's right to terminate a lease early
11. Any penalties for early termination

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Magnuson-Moss Warranty Act

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requires any supplier that offers a written warranty on a consumer product that costs more than $15 to disclose the terms of the warranty is simple, understandable language before the sale. The act does not require manufacturers or sellers to provide a warranty on their product.

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Required disclosure includes the following:

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1. The name and address of the person the consumer should contact to obtain warranty service
2. The parts that are covered and those that are not
3. What services the warrantor will provide, at whose expense, and for what period of time
4. A statement of what the consumer must do and what expenses he must pay

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Chapter Conclusion

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Virtually no one will go through life without reading an advertisement, ordering from a catalog, borrowing money, needing a credit report, or using a consumer product. It is important to know your rights.

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Chapter Review #1
The Federal Trade Commission (FTC) prohibits “unfair and deceptive acts or practices.” A practice is unfair if it meets the following three tests:

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1. It causes a substantial consumer injury.
2. The harm of the injury outweighs any countervailing benefit.
3. The consumer could not reasonably avoid the injury.

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Chapter Review #2

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The FTC considers an advertisement to be deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer.

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Chapter Review #3

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FTC rules prohibit bait and switch advertisements. A merchant may not advertise a product and then disparage it to consumers in an effort to sell a different item.

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Chapter Review #4

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The FTC prohibits telemarketers from calling telephone numbers listed on its do-not-call registry.

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Chapter Review #5

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Consumers may keep as a gift any unordered merchandise that they receive in the mail.

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Chapter Review #6

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Under the FTC door-to-door rules, a salesperson is required to notify the buyer that she has the right to cancel the transaction prior to midnight of the third business day thereafter.

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Chapter Review #7

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In all loans regulated by the Truth in Lending Act (TILA), the disclosure must be clear and in meaningful sequence. The lender must disclose the finance charge and the annual percentage rate.

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Chapter Review #8
In the case of a high-rate home equity loan, the lender must notify the consumer at least three business days before the closing that:

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1. he does not have to go through with the loan (even if he has signed the loan agreement)
2. he could lose his house if he fails to make payments.
3. If the duration of a high-rate home equity loan is less than five years, it may not contain balloon payments.

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Chapter Review #9

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Under TILA, consumers have the right to rescind a mortgage (other than a first mortgage) for three business days after the signing. If the lender does not comply with the disclosure provisions of TILA, the consumer may rescind for up to three years from the date of the mortgage.

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Chapter Review #10

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Under TILA, a credit card holder is liable only for the first $50 in unauthorized charges made before the credit card company is notified that the card was stolen. If, however, you wait more than two days to report the loss of a debit card, your bank will only reimburse you for losses in excess of $500. If you fail to report the lost debit card within 60 days of receipt of your bank statement, the bank is not liable at all.

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Chapter Review #11
In the event of a dispute between a customer and a merchant, the credit card company cannot bill the customer if:

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1. She makes a good faith effort to resolve the dispute
2. The dispute is for more than $50, and
3. The merchant is in the same state where she lives or is within 100 miles of her house.

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Chapter Review #12

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Under the Fair Credit Billing Act, a credit card company must promptly investigate and respond to any consumer complaints about a credit card bill.

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Chapter Review #13
Under the Fair Credit Reporting Act:

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1. A consumer report can be used only for a legitimate business need
2. A consumer reporting agency cannot report obsolete information
3. An employer cannot request a consumer report on any current or potential employee without the employee's permission, and
4. Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency that supplied the negative information.

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Chapter Review #14

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The Fair and Accurate Credit Transactions Act permits consumers to obtain one free credit report every year from each of the three major reporting agencies.

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Chapter Review #15

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Under the Fair Debt Collection Practices Act, a debt collector may not harass or abuse debtors.

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Chapter Review #16

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The Equal Credit Opportunity Act prohibits any creditor from discriminating against a borrower on the basis of race, color, religion, national origin, sex, marital status, age, or because the borrower is receiving welfare.

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Chapter Review #17

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The Magnuson-Moss Warranty Act requires any supplier that offers a written warranty on a consumer product costing more than $15 to disclose the terms of the warranty in simple and readily understandable language before the sale.

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Chapter Review #18

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The Consumer Product Safety Commission evaluates consumer products and develops safety standards.

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Practice Test #1

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In August, Dorothy Jenkins went to First American Mortgage and Loan Association of Virginia (the Bank) to sign a second mortgage on her home. Her first mortgage was with a different bank. She left the closing without a copy of the required Truth in Lending Act disclosure forms. Jenkins defaulted on her loan payments, and, the following May, the Bank began foreclosure proceedings on her house. In June, she notified the Bank that she wished to rescind the loan. Does Jenkins have a right to rescind the loan 10 months after it was made?

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Practice Test #2

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YOU BE THE JUDGE WRITING PROBLEM Process cheese food slices must contain at least 51 percent natural cheese. Imitation cheese slices, by contrast, contain little or no natural cheese and consist primarily of water, vegetable oil, flavoring, and fortifying agents. Kraft, Inc., makes Kraft Singles, which are individually wrapped process cheese food slices. When Kraft began losing market share to imitation slices that were advertised as both less expensive and equally nutritious as Singles, Kraft responded with a series of advertisements informing consumers that Kraft Singles cost more than imitation slices because they are made from five ounces of milk. Kraft does use five ounces of milk in making each Kraft Single, but 30 percent of the calcium contained in the milk is lost during processing. Imitation slices contain the same amount of calcium as Kraft Singles. Are the Kraft advertisements deceptive? Argument for Kraft: This statement is completely true— Continue on next Card.

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Practice Test #2 Continued..

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Kraft does use five ounces of milk in each Kraft Single. The FTC is assuming that the only value of milk is the calcium. In fact, people might prefer having milk rather than vegetable oil, regardless of the calcium. Argument for the FTC: It is deceptive to advertise more milk if the calcium is the same after all the processing.

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Practice Test #3

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Joel Curtis was two and his brother, Joshua, was three years old when their father left both children asleep in the rear seat of his automobile while visiting a friend. His cigarette lighter was on the dashboard of the car. After awaking, Joshua began playing with the lighter and set fire to Joel's diaper. Do the parents have a claim against the manufacturer of the lighter under the Consumer Product Safety Act?

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Practice Test #4

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Josephine Rutyna was a 60-year-old widow who suffered from high blood pressure and epilepsy. A bill collector from Collections Accounts Terminal, Inc., called her and demanded that she pay $56 she owed to Cabrini Hospital Medical Group. She told him that Medicare was supposed to pay the bill. Shortly thereafter, Rutyna received a letter from Collections that stated:You have shown that you are unwilling to work out a friendly settlement with us to clear the above debt. Our field investigator has now been instructed to make an investigation in your neighborhood and to personally call on your employer. The immediate payment of the full amount, or a personal visit to this office, will spare you this embarrassment. Has Collections violated the law?

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Practice Test #5

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Thomas Pinner worked at a Sherwin-Williams paint store that was managed by James Schmidt. Pinner and Schmidt had a falling out when, according to Pinner, “a relationship began to bloom between Pinner and one of the young female employees, the one Schmidt was obsessed with.” Pinner quit. Schmidt claimed that Pinner owed the company $121.71 for paint he had taken but not paid for. Sherwin-Williams reported this information to Chilton, who ran a credit reporting agency. Pinner's attorney sent a letter to Chilton notifying him that Pinner disputed the accuracy of the Sherwin-Williams charges. Chilton contacted Schmidt who confirmed that Pinner's account remained delinquent. Chilton failed to note in Pinner's file that a dispute was pending. Thereafter, Pinner was denied credit cards at two stores. Have Schmidt and Chilton violated the Fair Credit Reporting Act?

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Practice Test #6

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Kathleen Carroll, a single woman, applied for an Exxon credit card. Exxon rejected her application without giving any specific reason and without providing the name of the credit bureau it had used. When Carroll asked for a reason for the rejection, she was told that the credit bureau did not have enough information about her to establish creditworthiness. In fact, Exxon had denied her credit application because she did not have a major credit card or a savings account, she had been employed for only one year, and she had no dependents. Did Exxon violate the law?

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Practice Test #7

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In October, Renie Guimond discovered that her credit report at TransUnion Credit Information Co. incorrectly stated that she was married, used the name “Ruth Guimond,” and had a credit card from Saks Fifth Avenue. After she reported the errors, TransUnion wrote her in November to say that it had removed this information. However, in March, TransUnion again published the erroneous information. The following October, TransUnion finally removed the incorrect information from her file. Guimond was never denied credit because of these mistakes. Is Trans-Union liable for violating the Fair Credit Reporting Act?

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Practice Test #8

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The National Coalition for Consumer Education and MasterCard International created the following quiz to help consumers find out how smart they are about buying on credit:
1. What's the best way to correct a mistake on your credit card bill?
1. Call your credit card issuer immediately and explain the mistake.
2. Circle the mistake in red and return the bill to your card issuer.
3. Immediately write a letter to your credit card issuer and clearly describe the problem.

2. How should you handle an unauthorized charge (a purchase that you didn't make) if you see one on your credit card statement?
1. Write a letter to the company that accepted your card for payment to absolve yourself of any liability.
2. Call your credit issuer immediately to alert them.
3. Note the error on your credit card bill and refuse to pay it.

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Practice Test #9

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Thomas Waldock purchased a 1983 BMW 320i from Universal Motors, Inc. It was warranted “to be free of defects in materials or workmanship for a period of three years or 36,000 miles, whichever occurs first.” Within the warranty period, the car's engine failed and upon examination was found to be extensively damaged. Universal denied warranty coverage because it concluded that Waldock damaged the engine by over-revving it. Waldock vehemently disputed BMW's contention. He claimed that, while being driven at a low speed, the engine emitted a gear-crunching noise, ceased operation, and would not restart. Is Universal in violation of the law?

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Practice Test #10

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GET ENOUGH BROADLOOM TO CARPET ANY AREA OF YOUR HOME OR APARTMENT UP TO 150 SQUARE FEET CUT, MEASURED, AND READY FOR INSTALLATION FOR ONLY $77. GET 100% DUPONT CONTINUOUS FILAMENT NYLON PILE BROADLOOM. CALL COLLECT
When customers called the number provided, New Rapids Carpet Center, Inc., sent salespeople to visit them at home to sell them carpet that was not as advertised—it was not continuous filament nylon pile broadloom, and the price was not $77. Has New Rapids violated a consumer law?

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Practice Test #11

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ETHICS After TNT Motor Express hired Joseph Bruce Drury as a truck driver, it ordered a background check from Robert Arden & Associates. TNT provided Drury's Social Security number and date of birth, but not his middle name. Arden discovered that a Joseph Thomas Drury, who coincidentally had the same birth date as Joseph Bruce Drury, had served a prison sentence for drunk driving. Not knowing that it had the wrong Drury, Arden reported this information to TNT, which promptly fired Drury. When he asked why, the TNT executive merely stated, “We do not discuss these matters.” Did TNT violate the law? Whether or not TNT was in violation, did its executives behave ethically? Who would have been harmed or helped if TNT managers had informed Drury of the Arden report?

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Practice Test #12

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Advertisements for Listerine mouthwash claimed that it was as effective as flossing in preventing tooth plaque and gum disease. This statement was true, but only if the flossing was done incorrectly. In fact, many consumers do floss incorrectly. However, if flossing is done right, it is more effective against plaque and gum disease than Listerine. Is this advertisement deceptive? Does it violate §5 of the FTC Act?

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Practice Test #13

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ROLE REVERSAL Prepare a short-answer question that focuses on deceptive advertisements. Include a sample ad in the question (either a real ad or one that you have made up.)