Business Law Chapter 41 Homework Federal Consumer Financial Laws The Primary Goal

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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