Unlock document.
This document is partially blurred.
Unlock all pages and 1 million more documents.
Get Access
Credit Reports
Accuracy of Credit Reports
A number of statutes, including the Fair Credit Reporting Act (FCRA), the Fair and Accurate Credit
Transactions Act (FACTA) and Dodd-Frank regulate credit reports. A consumer report is 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, or for any other legitimate business need.
Research: Credit Reports
If you asked students to obtain a credit report, you could now find out what they discovered.
General Questions:
Did anyone have any difficulty in obtaining a credit report?
Did anyone find inaccurate information in his or her report?
Question: What can you do if your credit report contains inaccurate information?
Answer: 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. The information
Debt Collection
Case: Bradley v. Franklin Collection Serv.
Facts: When Melvin Bradley sought treatment at North Alabama Urology, P.C. (Urology) he signed a
patient agreement, stating that: “In the event of non-payment . . . I agree to pay all costs of collection,
including a reasonable attorney's fee." He then incurred a bill for $861.96, which he failed to pay.
Urology referred his bill to Franklin Collection Service, Inc. and, in the process, added a $293.06
collection fee to Bradley's balance. The contract between Urology and Franklin provided that Urology
would add 331/3 percent to a debt prior to transferring the account to Franklin and then Franklin was
entitled to 30 percent of the total it collected.
Bradley challenged this fee, alleging that it violated the FDCPA. Both parties moved for summary
judgment. The district court granted Franklin's motion and Bradley appealed.
Issue: Did Franklin violate the FDCPA when it tried to collect a percentage-based collection fee?
Excerpts from the per curiam Decision:7
7 Per curiam is a Latin phrase that literally means “by the court.” In other words, the decision was unanimous
and no individual judge signed the opinion.
[The FDCPA] specifically prohibits “collection of any amount (including any interest, fee, charge, or
expense incidental to the principal obligation) unless such amount is expressly authorized by the
agreement creating the debt or permitted by law.”
Bradley argues that the collection fee he paid violates this section of the FDCPA because the fee was
really liquidated damages rather than the actual cost of collection. 1 We agree. When Bradley signed
Urology’s patient registration form, he only agreed to pay the actual costs of collection; his contractual
agreement with Urology did not require him to pay a collection agency's percentage-based fee where
that fee did not correlate to the costs of collection.
Franklin failed to direct this Court to any evidence that the 331/3% “collection fee”—which was
assessed before Franklin attempted to collect the balance due—bears any correlation to the actual cost
of Franklin's collection effort. As such, the 331/3% fee breaches the agreement between Bradley and
Urology, since, contractually, Bradley was only obligated to pay the “costs of collection.”
Urology and Franklin cannot alter Bradley's obligations by the terms of their subsequent agreement.
Because there was no express agreement between Urology and Bradley allowing for collection of the
331/3% fee, that fee violates the FDCPA.
This is not to say that Bradley and Urology could not have formed an agreement allowing for the
collection of the percentage-based fee. [Another court] suggested that the following contractual
provision may allow the imposition of a percentage-based collection fee when a delinquent account
was referred to a third-party collection agency: “You agree to reimburse us the fees of any collection
agency, which may be based on a percentage at a maximum of 33% of the debt, and all costs and
expenses, including reasonable attorneys’ fees, we incur in such collection efforts.” But, Bradley's
contract with Urology was not like [this one].
We therefore hold that Franklin violated the FDCPA when it collected from Bradley a debt that
included a 331/3% “collection fee” when Bradley only agreed to pay the actual costs of collection.
Question: On what basis did the Court side with Bradley regarding the fee?
Question: What contractual language did the court suggest would allow for recovery of the fee against
Bradley?
Answer: “You agree to reimburse us the fees of any collection agency, which may be based on a
Question: What does the FDCPA specifically prohibit?
Answer: “collection of any amount (including any interest, fee, charge, or expense incidental to the
Equal Credit Opportunity Act
The Equal Credit Opportunity Act (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.
1 You remember from Chapter 19 that a liquidated damages clause is used in a contract when it is difficult to
prove how much damage the injured party will suffer. A liquidated damages clause solves this problem by stating
in advance how much a party must pay if it breaches.
Case: Treadway v. Gateway Chevrolet Oldsmobile Inc.9
Facts: Gateway Chevrolet Oldsmobile (GCO), a car dealership, sent an unsolicited letter to Tonja
Treadway notifying her that she was “pre-approved” for the financing to purchase a car. In fact,
Treadway had recently filed for bankruptcy and was not eligible for credit, a fact GCO knew. GCO
promised to apply for a loan on Treadway’s behalf, but never did. Instead it told her she had to have a
cosigner. Her godmother, Pearlie Smith, agreed to cosign. When GCO presented Smith with the
papers, she did not read them, so she did not realize that she was in fact agreeing to purchase and pay
for the car herself. After Treadway made the first payment on behalf of Smith, both women refused to
pay more – Smith because she did not want a new car; Treadway because the car was not hers. The
financing company repossessed the car but continued to demand payment.
GCO was running a scam. It would lure desperate prospects off the bankruptcy rolls and into the
showroom with promises of financing for a used car, and then sell a new car to their “co-signer” (who
was, in fact, the sole signer). Instead of selling a used car to Tonja Treadway, GCO sold a new car to
Pearlie Smith.
Treadway sued GCO, alleging that it had violated the ECOA by not notifying her that it had taken
an adverse action against her. The district court granted GCO’s motion for summary judgment on the
grounds that GCO had not committed an adverse action under the ECOA. This appeal followed.
Issue: Did Gateway violate the ECOA?
Holding: Judgment for GCO reversed. The term, “adverse action” includes “a denial or revocation of
credit.” By deciding not to send Treadway’s application to any lender, GCO effectively denied her
credit. Since GCO did not tell Treadway of its decision not even to apply for a loan on her behalf, it
would be difficult for her ever to determine that she was the victim of discrimination. Car dealers
could throw the credit report of every minority applicant in the “circular file” and none would be the
wiser.
Question: Did Treadway ever file a loan application?
Question: Then how could she claim that she had been denied credit?
Question: Did the court rule that GCO had discriminated?
Answer: No, but it ruled that failing to tell her the truth was an “adverse action”. The statute
Magnuson-Moss Warranty Act
The goal of the Magnuson-Moss Warranty Act is to provide more protection to consumers. Note,
however, that the Act does not require manufacturers or sellers to provide a warranty on their products.
Instead, the goal of the Act is to:
ensure that consumers understand the terms of a warranty before they buy a product,
enable consumers to compare warranty options before buying,
encourage sellers to compete on the basis of the warranties they provide (which has happened
in the auto industry), and
ensure that sellers abide by the terms of any warranties they offer.
</ Additional Case: Muchisky v. Frederic Roong2
Thomas Muchisky hired Frederic Roofing Company to re-roof his home. Their contract included a
12-year warranty guaranteeing the roof would be free from defects in workmanship and materials. The
2 838 S.W.2d 74, 1992 Mo. App. LEXIS 1287 Missouri Court of Appeals, 1992
roofing job was unsatisfactory, and Muchisky sued for damages. If the Magnuson-Moss Warranty Act
applied, then Muchisky was entitled to legal fees as well as damages.
Issues: Does the Magnuson-Moss Warranty Act apply in this case? Is the re-roofing of a home a
“consumer product” under the Act?
Holding: The Act does not apply to purchases and sales of real estate, but it does apply to consumer
products that become affixed to property, such as air conditioners and hot water heaters. The court
concluded that the roofing was a consumer product and awarded attorney’s fees to Muchisky.
Question: Does the Magnuson-Moss Warranty Act apply to all warranties?
Question: Is a house a consumer product?
Question: What about a product attached to a house, such as an air conditioner or hot water
heater?
Question: Is a new roof real estate or a consumer product?
Question: So where do you draw the line? What about new windows? Or a new carpet?
Consumer Product Safety
In 1969, the federal government estimated that consumer products caused 30,000 deaths, 110,000
disabling injuries, and 20 million trips to the doctor. Toys were among the worst offenders, injuring
700,000 children a year.
Ethics
Imagine that you are Robert Eckert, chairman and CEO of Mattel, Inc. Your company has sold
millions of Jeep Wrangler Power Wheels. These toys are designed for children as young as two
years old. You have just been notified that 150 of the cars have caught on fire, while thousands
of others have overheated. In some cases, these toys have burned so fiercely that they have
caught their garages on fire, endangering all of the home’s occupants. You know that under
CPSC rules, you are required to report toy defects within 24 hours. You also know that making
the required report could have a significant impact on Mattel’s profitability. What would you
do?
Mattel decided that it ought to figure out what the problem was before reporting anything to the
CPSC. In the end, it delayed months. Eckert was quoted as saying that the law was
unreasonable and the company would not follow it.3
Is Mattel’s stance ethical? What would Kant and Mill say? What Life Principle is he applying?
Is it ever ethical to violate the law?
Multiple Choice Questions
3Based on an article by Nicholas Casey and Andy Pasztor, “Safety Agency, Mattel Clash Over
Disclosures,” The Wall Street Journal, September 4, 2007, p. A1.
1. Dell sold computers online with a particular software. In fact, the software was not available
for several months. Instead, Dell sent customers a coupon for the software “when available.”
What did Dell do wrong?
I. Failed to offer buyers the opportunity to cancel their orders
II. Did not automatically cancel the orders
III. Did not ship the software within 30 days
(a) I and II
(b) I, II, and III
(c) I and III
(d) II and III
2.
If you receive a product in the mail that you did not order:
(a) You must pay for it or return it.
(b) You must pay for it only if you use it.
(c)
You must throw it away.(d) You must return it, but the company must reimburse you for
3. Zach sells Cutco Knives door to door. Which of the following statements is false?
(b) (a) The buyer has three days to cancel the order.Zach must tell the buyer of her rights.
(c) Zach must give the buyer a written notice of her rights.
(e) (d) The seller can cancel orally or in writing.If the seller cancels, Zach must return her
money within 10 days.
4. Depending on state law, if a lender violates the usury laws, the borrower could possibly be
allowed to keep_______.
I. The interest that exceeds the usury limit
II. All the interest
III. All of the loan and the interest
(a) I, II, and III
(b) Only I
(c) Only II
(d) Only III
(e) Neither I, II, nor III
5. Companies must obtain permission from a consumer before charging for overdrafts on_____.
(a) debit cards
(b) credit cards
(c) neither
(d) both
6. On the first of every month, your monthly rent is automatically deducted from your bank
account. You are moving out and want to make sure the payments stop. What should you do?
(a) You must call the bank at least three days before the first of the month.
(b) You must write the bank at least three days before the first of the month.
(c) Either (a) or (b).
(d) You must have the landlord sign a form, which you then mail or deliver to the bank at least
three days before the first of the month.
Case Questions
1. You Be the Judge: WRITING PROBLEM Processed 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—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.
2. Josephine 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 . She told him that Medicare was supposed to pay the bill.
Shortly thereafter, Josephine 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?
Answer: The court held that Collections’ letter violated the Fair Debt Collection Practices Act.
3. Thomas worked at a Sherwin-Williams paint store that James managed. Thomas and James had
a falling out when, according to Thomas, “a relationship began to bloom between Thomas and
one of the young female employees, the one James was obsessed with.” After Thomas quit,
James claimed that Thomas owed the store $121. Sherwin-Williams reported this information
to the Chilton credit reporting agency. Thomas sent a letter to Chilton disputing the accuracy of
the Sherwin-Williams charges. Chilton contacted James who confirmed that Thomas still owed
the money. Chilton failed to note in Thomas’s file that a dispute was pending. Thereafter, two
of Thomas’s requests for credit cards were denied. Have James and Chilton violated the Fair
Credit Reporting Act?
Answer: Once Chilton received notice of the dispute, it was obligated to re-verify the
accuracy of the information. It was not enough simply to ask Schmidt, because Chilton knew
4. In October, Renie Guimond discovered that her credit report at TransUnion 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 TransUnion liable
for violating the Fair Credit Reporting Act?
Answer: Although Guimond was never denied credit, she had been deterred from even
5. Thomas Waldock purchased a used 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?
Answer: It depends on whom you believe. If, as Universal alleged, the damage was caused by
6. 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
refused to tell him. 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?
Answer: The Fair Credit Reporting Act required TNT to ask Drury’s permission before
Discussion Questions
1. Collecto, Inc. had a contract with the U.S. Department of Education to collect overdue student
loans. When student loan debtors filed bankruptcy proceedings, Collecto would send them a
letter with this language:
****ACCOUNT INELIGIBLE FOR BANKRUPTCY DISCHARGE**** Your account is NOT
eligible for bankruptcy discharge and must be resolved.
As you remember from the bankruptcy chapter, it is indeed very difficult to discharge student
loans because the debtor must show undue hardship. Did Collecto’s letter violate the FDCPA?
Answer: The court ruled that Collecto was in violation because the letter said it is possible for
2. ETHICS Should employers use check credit reports as part of the hiring process? Each year
retailers lose $30 billion a year from employee theft and $55 million because of workplace
violence . Those who commit fraud are often living above their means but there is no evidence
that workers with poor credit reports are more likely to be violent, steal from their employers,
or quit their jobs. And refusing to hire someone with a low credit score creates a sad Catch-22:
People have poor credit records because they are unemployed and because they have poor
credit records they continue to be unemployed. What is the right thing for an employer to do?
3. The fee on a debit card overdraft can be as high or higher than the amount taken out. Instead of
overdrawing their accounts, consumers would be much better off either not spending the
money, using a credit card, or paying cash. Typically, the people most likely to sign up for
overdraft “protection” are those who can least afford it—they have maxed out their credit cards
and used up any home equity. Is it ethical for a bank to offer an overdraft plan?
4. Go to youtube.com and watch the advertisements for freecreditreport.com. Although the
characters repeat the word, “free” over and over, in fact the reports are not free unless the
consumer signs up for the paid credit monitoring service. At the end of the ad, a voice quickly
says, “Offer applies with enrollment in Triple Advantage.” Are these ads deceptive under FTC
rules? Are they ethical according to your Life Principles?
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
