Chapter 26

1. Chapter 26 Consumer Law

2. Quote of the Day Everyone lives by selling something.” Robert Louis Stevenson, Author of Treasure Island and Kidnapped

3. Federal Trade Commission • Created in 1915 to regulate business. • The FTC may enforce the law by: • Voluntary compliance • Administrative hearings and appeals • Penalties • Consumer Financial Protection Bureau – • Created in to regulate consumer financial products and services • Including mortgages, credit cards, and private student loans

4. Sales • Section 5 of the Federal Trade Commission Act (FTC Act) prohibits “unfair and deceptive acts or practices” • Deceptive acts or practices • Under the FTC Act, an advertisement is deceptive if it contains an important misrepresentation or omission that is likely to mislead a reasonable consumer

5. Sales • Unfair practices • The Commission considers a practice to be unfair if it meets all of the following three tests: • It causes substantial consumer injury • The harm of the injury outweighs any countervailing benefit • The consumer could not reasonably avoid the injury • In addition, the FTC may decide that a practice is unfair simply because it violates public policy, even if it does not meet these three tests

6. Additional Sales Rules • Bait-and-switch: A practice where sellers advertise products that are not generally available but are being used to draw interested parties in so that they will buy other products • 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

7. Additional Sales Rules • Merchandise bought by mail, telephone, or online • The FTC had established the following rules • Ordered items must be shipped when promised, or within 30 days • If a company cannot ship the product promised, it must send the customer a notice with the new shipping date and an opportunity to cancel • If the company cannot ship by the second shipment date it must send the customer another notice • This time, the company must cancel the order unless the customer returns the notice, indicating that he still wants the item

8. Additional Sales Rules • Telemarketing – FTC rules prohibit telemarketers from calling any telephone number listed on its do-not-call registry • Unordered merchandise • Under §5 of the FTC Act, anyone who receives unordered merchandise in the mail can treat it as a gift • Door-to-door sales – 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

9. Consumer Credit • Penalty for violating usury statutes varies among states • Depending upon the jurisdiction, the member may forfeit: • Interest above the usury limit • All of the interest • All of the loan and the interest

10. The Truth in Lending Act (TILA)—General Provisions • Application – TILA applies to a transaction only if all of the following tests are met: • It is a consumer loan • The loan has a finance charge or will be repaid in more than four installments • The loan is for less than $51,800 or secured by a mortgage on real estate, or is a private educational loan • The loan is made by someone in the business of offering credit

11. The Truth in Lending Act (TILA)—General Provisions • Disclosure - In all loans regulated by TILA: • The disclosure must be clear and in meaningful sequence • The lender must disclose the finance charge • The creditor must also disclose the annual percentage rate (APR)

12. The Truth in Lending Act (TILA)—General Provisions • Closed-end credit - Before finalizing the loan, the lender must disclose: • The cash price • The total down payment • The amount financed • An itemized list of all other charges • The number, amount, and dates of all payments • Total amount of payments • Late payment and pre-payment penalties • The lender’s security interest in the item purchased • Enforcement – FTC generally has the right to enforce TILA

13. Home Loans • Mortgage loans - TILA prohibits unfair, abusive, or deceptive home mortgage lending practices

14. Home Loans • TILA: • Requires lenders to make good-faith effort to determine whether a borrower can afford to repay the loan • Prohibits lenders from coercing or bribing an appraiser into misstating a home’s value • Bans prepayment penalties on adjustable rate mortgages • Subprime loan: A loan that has an above-market interest rate because the borrower is high-risk • Regulated by the TILA

15. Home Loans • If a home equity loans: • Has an APR that is more than 10 percentage higher than Treasury securities, or • The consumer must pay fees and points higher than 8% of the total loan amount • Then: • The lender must notify the consumer that he does not have to go through with the loan, and he could lose his house if he fails to make payments, and • Loans for less than five years may not have a balloon payment

16. Home Loans • Rescission - Under TILA, consumers have the right to rescind a mortgage for up to three business days after the signing

17. Summary of Major Provisions of TILA page 10

18. Credit Cards • Disclosure • TILA establishes disclosure rules for credit cards • Called open-end credit • In any advertisement or solicitation, the lender must disclose: • Credit terms • That the rate is introductory • Before establishing an open-end credit account, the lender must disclose to the consumer: • When a finance charge will be imposed • How the finance charge with be calculated

19. Credit Cards • In each monthly statement, the lender must disclose: • The amount owed at the beginning of the billing cycle • Amounts and dates of all purchases, credits, and payments • Finance charges and late fees • The date by which a bill must be paid to avoid these charges • Either the consequences of making the monthly minimum payment or a toll-free number that can be used to obtain such information

20. Credit Cards • Regulation of credit card debt • Many consumers struggled to pay their credit card bills during the economic crisis in 2008 • In response, Congress increased oversight of credit card companies by passing the Credit Card Act of 2009

21. Credit Cards • Liability • Stolen cards – Under the TILA, you are liable only for the first $50 in charges the thief makes before you notify the credit card company • Disputes with merchants - In the event of a dispute between a customer and a merchant, the credit card company cannot bill the customer if: • She makes a good faith effort to resolve the dispute • The dispute is for more than $50 • The merchant is in the same state where she lives or is within 100 miles of her house

22. Credit Cards • Disputes with the credit card company – The Fair Credit Billing Act (FCBA) provides additional protection for credit card holders • And for holders of revolving charge accounts

23. Fair Credit Billing Act • Under the FCBA: • Credit card companies must acknowledge receipt of a complaint from a cardholder • Credit card company must investigate complaints and respond: • In case of error, by correcting the mistake and notifying the consumer • If there is no error, by writing to the consumer with an explanation

24. Fair Credit Billing Act • If the consumer requests it, the company must supply documentation of the transaction in question • The company may not try to collect the disputed debt while it is in investigation • The company cannot report to credit agencies that the consumer has an unpaid bill until 10 days after the response

25. Debit Cards • Liability • Liability from a stolen debit card is much greater • Fees • Traditionally, banks would charge a flat fee of $20 to $30 each time cardholders overdrew their bank account • Under new rules, banks are not allowed to overdraw an account and charge the fee unless the consumer signs up for an overdraft plan

26. Credit Reports • Accuracy of credit reports • Consumer reporting agencies: Businesses that supply consumer reports to third parties • Consumer report: Any communication about a consumer’s creditworthiness, character, general reputation, or lifestyle that is considered as a factor in: • Establishing credit • Obtaining insurance • Securing a job • Acquiring a government license • Any other legitimate business need

27. Credit Reports • Under the FCRA: • A consumer reporting agency cannot report obsolete information • An investigative cannot be ordered without first informing the consumer • Investigative report: Discusses character, reputation, or lifestyle and becomes obsolete in three months • A consumer reporting agency cannot report medical information without the consumer’s permission • An employer cannot request a consumer report on any current or potential employee without employee’s permission

28. Credit Reports • Anyone who makes an adverse decision against a consumer because of a credit report must reveal the name and address of the reporting agency • A reporting agency must make a consumer’s report available upon request • A reporting agency must investigate and forward the data to the information provider any content reported to be inaccurate

29. Credit Reports • Access to credit reports and credit scores • Under Fair and Accurate Credit Transactions Act (FACTA), consumers are entitled by law to one free credit report every year from each of the three major reporting agencies: • Equifax • Experian • Trans Union • Consumer advocates recommend that you do check your credit reports every year to make sure: • They are accurate • No one else has been obtaining credit in your name

30. Credit Reports • Identity theft – A fraudster steals the victim’s personal information • Such as social security number, credit card information, etc. • FACTA created National Fraud Alert System • Permits consumers who feel they may be the victim of identity theft to place an alert in their credit files

31. Debt Collection • Under Fair Debt Collection Practices Act (FDCPA), collectors may not: • Call or write a debtor who has notified the collector in writing that he wishes no further contact • Call or write a debtor who is represented by an attorney • Call a debtor before 8:00 a.m. or after 9:00 p.m. • Threaten a debtor or use obscene or abusive language • Call or visit the debtor at work if the consumer’s employer prohibits such contact

32. Debt Collection • Imply that they are attorneys or government representatives when they are not • Threaten to arrest consumers who do not pay their debts • Make other false or deceptive threats that would be illegal if carried out • Contact acquaintances of the debtor for any reason other than to locate the debtor (and then only once) • Tell acquaintances that the consumer is in debt

33. Equal Credit Opportunity Act • 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) • Because the borrower is receiving welfare

34. Consumer Leasing Act • Before a lease is signed, the lessor must disclose the following in writing: • All required payments, including deposit, down payment, taxes, license fees • The number and amount of each payment and how the payments are calculated • Balloon payments • Required insurance payments • Annual mileage allowance • The total amount the consumer will have paid by the end of the lease

35. Consumer Leasing Act • Available warranties • Maintenance requirements and a description of the lessor’s wear and use standards • Penalties for late payments • The consumer’s right to purchase the leased property, and at what price • The consumer’s right to terminate a lease early • Any penalties for early termination

36. Magnuson-Moss Warranty Act • Does not require: • Manufacturers or sellers to provide a warranty on their products • Any supplier that offers a written warranty on a consumer product that costs more than $15 to disclose the terms of the warranty in simple understandable language before the sale

37. Consumer Product Safety • Consumer Product Safety Act – Prevents injuries in the first place • Created the Consumer Product Safety Commission (CPSC) that • Evaluates consumer products and develops safety standards

38. “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.”