1. Chapter 20 Consumer Protection

2. 2 Chapter Objectives 1.Summarize the major consumer protection laws. 2. Indicate some specific ways in which consumers are protected against deceptive advertising and sales practices. 3. Explain how the government protects consumers who are involved in credit transactions. 4. List and describe the major statutes that protect consumer health and safety. 5. Identify state consumer protection laws.

3. 3 Deceptive Advertising One of the earliest—and still one of the most important—federal consumer protection laws was the Federal Trade Commission Act of 1914. The act created the Federal Trade Commission (FTC) to carry out the broadly stated goal of preventing unfair and deceptive trade practices, including deceptive advertising.

4. 4 Deceptive Advertising Defined Generally, an advertising claim will be deemed deceptive if it would mislead a reasonable consumer.

5. 5 Bait-and-Switch Advertising Advertising a lower-priced product (the “bait”) when the intention is not to sell the advertised product but to lure consumers into the store and convince them to buy a higher- priced product (the “switch”) is prohibited by the FTC.

6. 6 FTC Actions Against Deceptive Advertising Cease-and-desist orders  Require the advertiser to stop the challenged advertising. Counter advertising  Require the advertiser to advertise to correct the earlier misinformation.

7. 7 Case 20.1 FTC v. Pantron Pantron I claimed that its Helsinki Formula reduced hair loss and promoted hair growth. The FTC filed a suit claiming that this constituted a deceptive trade practice. The court concluded the product had a “placebo effect” and allowed Pantron to continue with some claims. The FTC appealed this order. What other government agencies might have taken action against Pantron and the Helsinki Formula, which is classified as a drug and sold through the mail?

8. 8 Telemarketing and Electronic Advertising The Telephone Consumer Protection Act of 1991 prohibits telephone solicitation using an automatic telephone dialing system or a prerecorded voice, as well as the transmission of advertising materials via fax without first obtaining the recipient’s permission to do so.

9. 9 Labeling and Packaging Laws Manufacturers must comply with labeling or packaging requirements for their specific products. In general, all labels must be accurate and not misleading.

10. 10 SalesSales Many of the laws that protect consumers concern the disclosure of certain terms in sales transactions and provide rules governing the various forms of sales, such as:  door-to-door sales  mail-order sales  referral sales  unsolicited receipt of merchandise

11. 11 Door-to-Door Sales The FTC requires all door-to-door sellers to give consumers three days (a “cooling-off” period) to cancel any sale. States also provide for similar protection.

12. 12 Telephone and Mail-Order Sales Federal and state statutes and regulations govern certain practices of sellers who solicit over the telephone or through the mails and prohibit the use of the mails to defraud individuals.

13. 13 FTC Regulation on Specific Industries The FTC has regulations that apply to specific industries, such as the used-car business and funeral homes.

14. 14 Real Estate Sales Various federal and state laws apply to consumer transactions involving real estate.

15. 15 Credit Protection Because of the extensive use of credit by American consumers, credit protection has become an especially important area regulated by consumer protection legislation.

16. 16 The Truth-in-Lending Act A disclosure law that requires sellers and lenders to disclose credit terms or loan terms in certain transactions, including:  retail and installment sales and loans  car loans  home improvement loans  certain real estate loans

17. 17 The Truth-in-Lending Act The TILA provides for the following:  Equal credit opportunity—Creditors are prohibited from discriminating on the basis of race, religion, marital status, gender, and so on.  Credit-card protection—Credit-card users may withhold payment for a faulty product sold, or for an error in billing, until the dispute is resolved; liability of cardholders for unauthorized charges is limited to $50, providing notice requirements are met; consumers are not liable for unauthorized charges made on unsolicited credit cards.  Consumer leases—The CLA of 1988 protects consumers who lease automobiles and other goods priced at $25,000 or less if the lease term exceeds four months.

18. 18 Case 20.2 Purtle v. Eldridge Auto Sales, Inc. Purtle purchased a Blazer from Eldridge and misrepresented her employment status. In the credit contract, Eldridge did not fulfill the TILA and its regulations. When Purtle defaulted and Eldridge repossessed the car, Purtle sued alleging violations of TILA. Court awarded Purtle damages and Eldridge appealed. Do you think that the greatest number of consumers are protected by strict enforcement of consumer laws?

19. 19 Consumer Abuse of TILA In essence, the TILA is a “strict liability” statute (this is generally true of most consumer protection statutes). Intention normally is irrelevant in determining whether a consumer protection statute has been violated. In your opinion, should the court give more weight to the circumstances surrounding a transaction and the intent factor in deciding cases involving alleged TILA violations? Why or why not?

20. 20 Case 20.3 Federal Deposit Insurance Corp. v. Medmark, Inc. Merchants Bank asked Bruce Shalbert to sign a guaranty of repayment for a loan to his company, Medmark, Inc. Later, for another loan, the bank required his wife Mary, who had nothing to do with Medmark, to sign the guaranty. When the bank failed, FDIC filed a suit to recover the amount of the loans. Shalberg filed a motion for summary judgment contending that the bank had violated the ECOA. Why does the ECOA prohibit lenders from requiring a spouse’s signature on a credit application if the applicant independently qualifies for the credit?

21. 21 Fair Credit Reporting Act Entitles consumers to request verification of the accuracy of a credit report and to have unverified information removed from their files.

22. 22 The Growing Problem of Identity Theft Common forms of ID theft  Credit card fraud—54%  Fraudulent communication services—28%  Bank fraud—17%  To obtain false documents—1% The FTC established the Identity Theft Data Clearinghouse to receive and process consumer complaints. The FTC also established an ID theft hotline and website. Congress is currently considering a bill designed to prevent ID theft. “ID theft is a natural consequence of living in an electronic age and there is little that government can do to effectively control it.” Analyze this statement.

23. 23 Case 20.4 Guimond v. Trans Union Credit Information Co. Guimond notified Trans Union of inaccuracies in her credit file and was assured they would be corrected. When it was not corrected for a year, Guimond filed a suit to recover damages. Trans Union countered that Guimond had no claim because she had not been denied credit before the information was corrected. The court agreed and Guimond appealed. How do the policies underlying the FCRA support the court’s interpretation of the statute in Guimond’s case?

24. 24 Fair Debt Collection Practices Act Prohibits debt collectors from using unfair debt-collection practices, such as contacting the debtor at his or her place of employment if the employer objects or at unreasonable times, contacting third parties about the debt, harassing the debtor, and so on.

25. 25 Case 20.5 Snow v. Jesse L. Riddle, P.C. Alan Snow paid for merchandise with a check with insufficient funds at a Circle-K store. The store sent the returned check to its attorney, Jesse L. Riddle, P.C., for collection. Riddle sent a letter to Snow informing him that he must pay the check amount and the $15 service fee within 15 days or a suit will be filed. Snow paid the check and filed a suit against Riddle alleging the letter violated the FDCPA. Riddle filed for a motion to dismiss and the court granted it. Should those who write bad checks to pay for consumer goods or services be protected by the FDCPA?

26. 26 Consumer Health and Safety Laws discussed earlier regarding the labeling and packaging of products go a long way toward promoting consumer health and safety. Laws include:  Federal Food, Drug and Cosmetic Act  Consumer Product Safety Act

27. 27 Federal Food, Drug and Cosmetic Act The FFDCA of 1938, as amended, protects consumers against adulterated and misbranded foods and drugs. The act establishes food standards, specifies safe levels of potentially hazardous food additives, and sets classifications of food and food advertising.

28. 28 Consumer Product Safety Act The Consumer Product Safety Act of 1972 seeks to protect consumers from risk of injury from hazardous products. The Consumer Product Safety Commission has the power to remove products that are deemed imminently hazardous from the market and to ban the manufacture and sale of hazardous products.

29. 29 State Consumer Protection Laws State laws often provide for greater consumer protection against deceptive trade practices than do federal laws. In addition, the warranty and unconscionability provisions of the Uniform Commercial Code protect consumers against sellers’ deceptive practices. The Uniform Consumer Credit Code, which has not been widely adopted by the states, also provides credit protection for consumers.

30. 30 For Review 1.When will advertising be deemed deceptive? 2. How does the Federal Food, Drug and Cosmetic Act protect consumers? 3. What are the major federal statutes providing for consumer protection in credit transactions? 4.How does the Consumer Product Safety Act protect consumers? 5. What are the major state statutes that protect consumers?