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Chapter 41
CONSUMER PROTECTION
A. State and Federal Consumer Protection Agencies
1. State and Local Consumer Protection Agencies
2. The Federal Trade Commission
a. Standards
b. Remedies
3. The Consumer Product Safety Commission
4. Consumer Financial Protection Bureau
5. Other Federal Consumer Protection Agencies
B. Consumer Purchases
1. Federal Warranty Protection
a. Presale Disclosures
a. Credit Accounts
b. ARMs
c. Home Equity Loans
d. Billing Errors
e. Settlement Charges
f. Mortgage Disclosure
Improvement Act
g. Mortgage Reform and Anti-
Predatory Lending Act
3. Contract Terms
4. Consumer Credit Card Fraud
Cases in This Chapter
Federal Trade Commission v. Cyberspace.com LLC
Household Credit Services, Inc. v. Pfenning
Freeman v. Quicken Loans, Inc.
Jerman v. Carlisle, Mc-Nellie, Rini, Kramer
& Ulrich LPA.
Chapter Outcomes
After reading and studying this chapter, the student should be able to:
Describe the role of the Federal Trade Commission (FTC) and the major
enforcement sanctions that it may use.
Describe the role and workings of (1) the Consumer Product Safety
Commission (CPSC) and (2) the Consumer Financial Protection Bureau
(CFPB).
TEACHING NOTES
Some consumer protection statutes are enforced only by governmental
agencies, some by both the government and the consumer, and others by
only the consumer.
A. STATE & FEDERAL CONSUMER PROTECTION AGENCIES
State and Local Consumer Protection Agencies
These agencies typically deal with fraudulent and deceptive trade practices
and sales practices; may also help resolve consumer complaints about
defective goods or poor service. State attorneys generally enforce laws
*** Question to Discuss***
Discuss the role of the FTC and the major enforcement sanctions that it may use.
The Federal Trade Commission
The Federal Trade Commission Act (FTCA) of 1914 prohibits businesses
from engaging in unfair methods of competition and unfair or deceptive acts
or practices (such as fraudulent sales techniques) and created the Federal
Trade Commission (FTC) as the regulatory “watchdog” agency to issue
substantive “trade regulation rules” and to conduct appropriate
investigations and hearings. The FTC and the Antitrust Division of the
Department of Justice are responsible for antitrust enforcement at the
Federal level The agency also has the option to seek a cease and desist
order.
Standards —The FTC has issued three policy statements addressing the
meaning of unfairness:
CASE 41–1
FEDERAL TRADE COMMISSION v. CYBERSPACE.COM LLC
United States Court of Appeals, Ninth Circuit, 2006
453 F.3d 1196
http://scholar.google.com/scholar_case?case=4160583678645707830&q=453+F.3d+1196&hl=en&as_sdt=2,10
O’Scannlain, J.
[In the late 1990s, Ian Eisenberg and Chris Hebard formed Electronic Publishing Ventures,
LLC (EPV) and its four subsidiaries: Cyberspace.com, LLC, Essex Enterprises, LLC,
Surfnet Services, LLC, and Splashnet.net, LLC. Two offshore entities, French Dreams
Investments, N.V. (owned by Eisenberg) and Coto Settlement (controlled by Hebard) owned
EPV in equal (collectively EFO) parts. Between January 1999 and mid-2000, EPV’s four
subsidiaries mailed approximately 4.4 million solicitations offering Internet access to
individuals and small businesses. The solicitations included a check, usually for $3.50,
attached to a form resembling an invoice designed to be detached from the check by tearing
at the perforated line. The check was addressed to the recipient and the recipient’s phone
Eisenberg and Hebard were aware that the solicitation had misled some consumers.
The companies received complaints from recipients of the solicitations, which indicated that
some customers had deposited the solicitation check without realizing that they had
contracted for Internet services. Materials that Eisenberg and Hebard prepared in an attempt
to sell one of the subsidiaries in 1999 informed prospective buyers that “the Company
believes that a number of customers sign up for the [sic] without realizing that when they
deposit the check that they have ordered Internet service.”
for summary judgment on the issues of liability and consumer redress. After denying the
defendants’ motions for summary judgment, the district court granted the FTC’s motion in
part concluding that the proper amount of consumer redress was $17,676,897.]
Section 5 of the Federal Trade Commission Act prohibits “deceptive acts or practices in
or affecting commerce.” FTCA §5(a)(1), [citation]. As we have previously explained, a
practice falls within this prohibition (1) if it is likely to mislead consumers acting reasonably
under the circumstances (2) in a way that is material. [Citations.]
* * *
Here, Hebard and EFO’s mailing created the deceptive impression that the $3.50 check
was simply a refund or rebate rather than an offer for services. The check was made out to
the individual or small business to whom it was sent, with the consumer’s phone number in
the “re” line. The portion of the document that resembled an invoice included columns
labeled “invoice number,” “account number,” and “discount taken,” implying a preexisting
business relationship for which a refund check was being offered. The front of the check and
invoice lacked any indication that by cashing the check, the consumer was contracting to
pay a monthly fee. As the district court reasoned, “[t]he receipt of a check, the perusal of
which would reveal no obvious mention of an offer for services, no product information, and
Our conclusion is bolstered by undisputed evidence indicating that Hebard and EFO’s
solicitation actually deceived nearly 225,000 individuals and small businesses. Hebard and
EFO billed each of these consumers for a service that less than one percent of them ever
attempted to use. It is reasonable to infer that most of the remaining 99 percent did not
realize they had contracted for internet service when they cashed or deposited the
solicitation check. Although “[p]roof of actual deception is unnecessary to establish a
product.” [Citation.] Here, the misleading impression the solicitation created—that the check
was merely a refund or rebate—clearly made it more likely that consumers would deposit
the check and thereby obligate themselves to pay a monthly charge for internet service.
In sum, the district court properly granted summary judgment to the FTC on the FTCA
* * *
AFFIRMED.
Remedies — In addition the FTC has employed three other remedies:
(1) a<rmative disclosure — requires certain information in an ad so that it is
not considered deceptive
(2) corrective advertising — requires an advertiser who has made a
deceptive claim to disclose in future ads that prior claims were untrue
(3) multiple product orders — require a deceptive advertiser to cease and
desist from any future deception in regard to all products sold by the
company
*** Question to Discuss***
Describe the role and workings of the Consumer Product Safety Commission .
The Consumer Product Safety Commission
In 1972 Congress enacted the Consumer Product Safety Act (CPSA), which
established an independent Federal regulatory agency, the Consumer
Product Safety Commission (CPSC). The purposes of the Consumer Product
Safety Commission (CPSC) are to: (1) protect the public against
unreasonable risks of injury from consumer products, (2) assist consumers
evaluate the comparative safety of consumer products, (3) develop uniform
safety standards for consumer products and to minimize con?icting state
the report. Information about product recalls is also available in the
database.
Consumer Financial Protection Bureau
In July 2010, President Obama signed into law the Dodd-Frank Wall Street
Reform and Consumer Protection Act (Dodd-Frank Act), the most signi7cant
change to U.S. financial regulation since the New Deal. The Dodd-Frank Act
establishes the Bureau of Consumer Financial Protection (BCFP), an
independent executive agency housed within the Federal Reserve, to
regulate the offering and provision of consumer financial products or services
under the existing Federal consumer financial laws. The primary goal of the
BCFP is to ensure that all consumers have access to markets for consumer
financial products and services and that markets for consumer financial
services and products are fair, transparent, and competitive.
Other Federal Consumer Protection Agencies
National Highway Tra3c Safety Administration (NHTSA) —
Established in 1966; sets motor vehicle safety standards; requires
manufacturers to report possible safety defects, and may seek auto recalls;
provides grants-in-aid for state highway safety programs and conducts
research on highway safety.
Food and Drug Administration (FDA) — Oldest federal consumer
protection agency (1906); enforces the Food, Drug and Cosmetic Act,
enacted in 1938, which authorizes the agency to regulate “adulterated and
misbranded” products; sets general standards for products; may require
premarket approval (usually for drugs and medical devices). The FDA is
electromagnetic radiation emitting devices, veterinary products, and
cosmetics.
Other Federal Consumer Protection Agencies —
•United States Postal Service (regulates mail and protects against
mail fraud)
•Securities and Exchange Commission (SEC) (protects against fraud
in sale of securities)
B. CONSUMER PURCHASES
Whenever a consumer purchases a product or obtains a service, certain
rights and obligations arise. Although a number of consumer protection laws
have been enacted in recent years, they still leave large areas of a
consumer’s rights and duties to state contract law.
*** Question to Discuss***
Explain the principal provisions of the Magnuson-Moss Act and
distinguish between a full and a limited warranty.
Federal Warranty Protection
The Magnuson-Moss Warranty Act was enacted in 1974 to insure that
warranties were made clear and understandable, as well as to insure that
sellers back any such guarantees made to the purchaser. The Act applies to
consumer products having written warranties.
Presale Disclosures — required by the act to prevent confusion and
deception and to enable purchasers to make educated product comparisons.
Labeling Requirements —For any product costing more than $10, a
warranty must be designated as either full or limited on the written warranty
State “Lemon Laws”
These laws attempt to provide new car buyers with rights similar to the full
warranties under the Magnuson-Moss Warranty Act. Most provide for the
buyer to collect attorney’s fees and expenses if the case must be litigated.
Some states also cover used cars and motorcycles.
Consumer Right of Rescission
State consumer protection statutes, FTC regulations, and the Federal
Consumer Credit Protection Act permits consumers to seek the remedy
of rescission for a period of time after signing a contract in some instances.
Door-to-door sales transactions are especially scrutinized by the states and
the FTC.
C. CONSUMER CREDIT TRANSACTIONS
In 1968, in response to concerns about consumer credit, Congress passed
the Federal Consumer Credit Protection Act (FCCPA), which requires
creditors to disclose finance charges (including interest and other charges)
and credit extension charges, and sets limits on garnishment proceedings.
Also in 1968, the National Conference of Commissioners on Uniform State
Laws (the group that drafted the Uniform Commercial Code) proposed the
Uniform Consumer Credit Code (UCCC), to consolidate the regulation of
all consumer credit transactions.
Access to the Market
Businesses that extend credit may not discriminate based on race, color,
sex, marital status, religion, national origin, age or receipt of public
assistance. (Equal Credit Opportunity Act, 1974). When originally enacted,
the ECOA gave the Federal Reserve Board (Fed) responsibility for prescribing
the implementing regulation. The Fed issued Regulation B to implement
the ECOA. The Dodd-Frank Act transferred rule-making authority under the
ECOA to the Consumer Financial Protection Bureau. Applicants must be given
objective reasons for a denial of credit. The act allows for actual and
punitive damages, plus attorney’s fees.
The Home Mortgage Disclosure Act (HMDA) was enacted by Congress
along with the Community Reinvestment Act (CRA) to outlaw geographic
discrimination, or redlining, the process by which financial institutions refuse
to provide reasonable home financing terms to qualified applicants whose
homes are located in geographic areas of declining value.
In1989, Congress adopted a major banking bailout bill, the Financial
Institutions Reform, Recovery, and Enforcement Act (FIRREA), which
included amendments to the HMDA and the CRA. The amendments
In 2008, Congress enacted the Troubled Asset Relief Program (TARP), a
program that purchases assets and equity from financial institutions to
strengthen the U.S. financial sector. . As of December 31, 2012, the U.S.
Treasury had received over $405 billion in total cash back on TARP
investments, equaling nearly a non-in?ation-adjusted 97 percent of the $418
billion disbursed under the program.
*** Question to Discuss ***
Describe what information a creditor must provide a consumer
before the consumer incurs the obligation. Distinguish between open end and closed
end credit.
Disclosure Requirements
The Truth-in-Lending Act (TILA) is part of the FCCPA and provides
disclosure requirements for credit sales and consumer loan transactions. As
amended by the Dodd-Frank Act, this act has superseded State disclosure
The Fair Credit and Charge Card Disclosure Act of 1988 adds to the
Truth-in-Lending Act a new section requiring all credit and charge card
applications and solicitations to include extensive disclosures.
The Bankruptcy Abuse Prevention and Consumer Protection Act of
2005, discussed in Chapter 39, made a number of amendments to the
Truth-in-Lending Act.
Credit Accounts — A creditor must inform consumers who open revolving
or open-end credit accounts about how the finance charge is computed and
when it is charged, what other charges may be imposed, and whether the
creditor retains or acquires a security interest. In 2000, the Federal Reserve
Board published a rule requiring marketing material to display clearly a table
ARMs — The Adjustable Rate Mortgage (ARM) disclosure rules apply to loans
that are (1) closed-end consumer transactions, (2) secured by the
consumer’s principal residence, (3) longer than one year in duration, and (4)
subject to interest rate variation.
Home Equity Loans — A home equity loan is a loan for a 7xed amount of
money that is secured by the consumer’s home. A home equity line of credit
is a revolving line of credit using the consumer’s home as collateral for the
loan. Under a line of credit, payments are owed only on the amount actually
borrowed, not the full amount available. In 1988 Congress enacted the
Home Equity Loan Consumer Protection Act (HELCPA); requires
lenders to provide a disclosure statement and consumer pamphlet with an
application to a prospective borrower. The disclosure statement must state
that (1) a default on the loan may result in consumer’s loss of the dwelling,
(2) some conditions must be met, and (3) the creditor, under certain
Billing Errors — In 1975, the Fair Credit Billing Act went into effect; it
sets procedures for making complaints about billing errors and requires the
creditor to explain or correct such errors.
Settlement Charges — In 1974, Congress enacted the Real Estate
Settlement Procedures Act (RESPA), which requires advance disclosure to
home buyers and sellers of all settlement costs, including attorneys’ fees,
credit reports, and title insurance, and prohibits kickbacks and referral fees
and limits the amount required for escrow accounts. RESPA was
administered and enforced by the secretary of housing and urban
development until July 21, 2011, when these functions were transferred to
the CFPB.
Mortgage Disclosure Improvement Act —Enacted in 2008 as an
amendment to the TILA, the Mortgage Disclosure Improvement Act
(MDIA) seeks to ensure that consumers receive cost disclosures earlier in
the mortgage process. The MDIA requires creditors to provide good-faith
estimates of mortgage loan costs ("early disclosures") within three business
days after receiving a consumer's application for a mortgage loan and before
any fees are collected from the consumer, other than a reasonable fee for
obtaining the consumer's credit history. In addition, The Fed issued rules
Mortgage Reform and Anti-Predatory Lending Act —One of the many
stand-alone statutes included in the Dodd-Frank Act is Mortgage Reform
and Anti-Predatory Lending Act of 2010. It sets minimum underwriting
